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**UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWASHINGTON,  DC 20549****FORM  10-K**

(Mark One)             X     **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES                 EXCHANGE ACT OF 1934**

**For the fiscal year ended September 30, 2003**

**OR**

 

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

**For the transition period from _________________  to______________________Commission File Number  001-16385** |
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**NUI CORPORATION**(Exact name of registrant as specified in its  charter)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| **New Jersey**(State of incorporation)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | **22-3708029**(IRS employer identification no.) |
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| **550 Route 202-206, P. O. Box 760,  Bedminster, New Jersey  07921-0760**(Address of  principal executive offices, including zip code)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
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| **(908) 781-0500**(Registrant's  telephone number, including area code)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
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| Securities registered  pursuant to Section 12(b) of the Act:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
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| Title  of Each Class:  Common Stock, No ParValue  Preferred Stock Purchase Rights                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Name of each  exchange on which registered:New York Stock  Exchange  New York Stock Exchange |
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| Securities registered  pursuant to Section 12(g) of the Act:   None                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |

Indicate by check mark whether the registrant: (1)has filed all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days:

Yes X                No 

Indicate by check mark if disclosure of delinquentfilers, pursuant to Item 405 of Regulation S-K is not contained herein, andwill not be contained, to the best of the registrant's knowledge, in definitiveproxy or information statements incorporated by reference to Part III of thisForm 10-K or any amendment to the Form 10-K:

X

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

Yes X                No 

The aggregate market value of 16,269,561 shares ofcommon stock held by non-affiliates of the registrant calculated using the$14.60 per share closing price on March 31, 2003 was $237,535,591

The number of shares outstanding for each of theregistrant's classes of common stock, as of April 30, 2004: 

Common Stock, No ParValue:  15,968,345 shares outstanding.

Documents incorporated by reference: None.

**NUI Corporation**

**Annual Report on Form10-K For TheFiscal Year Ended September 30, 2003**

**TABLE OF CONTENTS**

                                                                                                                                              Page

PART I
| Item 1. | Business                                            | 1  |
|---------|-----------------------------------------------------|----|
| Item 2. | Properties                                          | 23 |
| Item 3. | Legal Proceedings                                   | 24 |
| Item 4. | Submission of Matters to a Vote of Security Holders | 30 |

PART II
| Item 5.  | Market for Registrant's Common Equity and Related Stockholder  Matters                  | 31 |
|----------|-----------------------------------------------------------------------------------------|----|
| Item 6.  | Selected Financial Data                                                                 | 32 |
| Item 7.  | Management's Discussion and Analysis of Financial Conditions  and Results of Operations | 34 |
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk                              | 57 |
| Item 8.  | Financial Statements and Supplementary Data                                             | 58 |
| Item 9.  | Changes in and Disagreements with Accountants on Accounting and  Financial Disclosure   | 59 |
| Item 9A. | Disclosure Controls and Procedures                                                      | 59 |

 

PART III
| Item 10. | Directors and Executive Officers of the Registrant             | 61 |
|----------|----------------------------------------------------------------|----|
| Item 11. | Executive Compensation                                         | 65 |
| Item 12. | Security Ownership of Certain Beneficial Owners and Management | 74 |
| Item 13. | Certain Relationships and Related Transactions                 | 76 |
| Item 14. | Principal Accounting Fees and Services                         | 77 |

 

PART IV
| Item 15. | Exhibits, Financial Statement Schedules, and Reports on Form  8-K | 79 |
|----------|-------------------------------------------------------------------|----|

 

**NUI Corporation**

**Annual Report on Form10-K for theFiscal Year Ended September 30, 2003**

**PART I **

**Item 1.  Business**

*Company Background*

NUI Corporation (NUI and, together with its subsidiaries, thecompany or we) was incorporated in New Jersey on February 8, 2000.  On March 1, 2001, NUI reorganized as aholding company that is exempt from registration under the Public UtilityHolding Company Act of 1935. NUI was originally incorporated in New Jersey in1969, as National Utilities and Industries Corp. 

As part of the holding company reorganization on March 1, 2001,the company's regulated gas distribution utility operations became a subsidiaryof NUI and were renamed NUI Utilities, Inc. (NUI Utilities), while the entitiesproviding the company's non-utility services were reorganized as subsidiariesof NUI Capital Corp. (NUI Capital). The company's local utility operationsserve more than 367,000 customers in four states along the eastern seaboard ofthe United States.  During fiscal 2003,the company's utility operations were carried out by NUI Utilities and itsoperating divisions as well as through Virginia Gas Distribution Company, asubsidiary of Virginia Gas Company (VGC). NUI Utilities' operating divisions are comprised of Elizabethtown GasCompany (New Jersey), City Gas Company of Florida, Elkton Gas (Maryland), andValley Cities Gas and Waverly Gas (VCW). VGC is also engaged in otheractivities, such as pipeline operation and natural gas storage. During fiscal2002, NUI Utilities also operated North Carolina Gas (NC), which was sold inSeptember 2002.  The company sold VCW inNovember 2002 and certain subsidiaries of VGC in October 2001 and March2002.  During fiscal 2003, the company'sutility operations accounted for 94 percent of the company's total operatingrevenues.  

During fiscal 2003, the company's non-regulated businessesincluded: NUI Energy, Inc. (NUI Energy), an energy retailer subsidiary; NUIEnergy Brokers, Inc. (NUI Energy Brokers), a wholesale energy portfolio andrisk management subsidiary; Utility Business Services, Inc. (UBS), ageospatial, billing and customer information systems and services subsidiary;OAS Group, Inc. (OAS), the company's digital mapping operation, which prior toSeptember 30, 2003, was part of UBS; NUI Telecom, Inc. (NUI Telecom), anon-facilities based telecommunications services subsidiary; and TIC Enterprises,LLC (TIC), a sales outsourcing subsidiary which sold wireless and networktelephone services.  The company'swholly-owned subsidiary, NUI Saltville Storage, Inc. (NUISS), is afifty-percent member of Saltville Gas Storage Company, LLC (SSLLC). SSLLC is ajoint venture with Duke Energy Saltville Gas Storage, LLC that is developing anatural gas storage facility in Saltville, Virginia.  During fiscal 2003, the company sold NUI Environmental, Inc. (NUIEnvironmental), an environmental project development subsidiary, and thecompany discontinued the operations of NUI Energy and TIC, and began seeking abuyer for NUI Telecom.  During January2004, the company began to wind down the trading operations of NUI EnergyBrokers and discontinued trading operations at NUI Energy Brokers in March2004.  

On September 26, 2003, NUI's Board of Directors announced it waspursuing the sale of the company.  Thecompany has engaged two investment banks to serve as financial advisors toassist in the sale.

The principal executive offices of NUI are located at 550 Route202-206, Box 760, Bedminster, New Jersey 07921-0760; telephone: (908) 781-0500.

The company recently has faced a number of challenges andexperienced significant events, including:

--     the settlementof issues relating to the focused audit and regulatory orders issued by the NewJersey Board of Public Utilities (NJBPU); 

--     theinvestigations of transactions at NUI Energy Brokers;

--     new creditfacilities at NUI and NUI Utilities;

--     the gas supplycontract with Cinergy Marketing and Trading, LP (Cinergy);

--     changes in theBoards of Directors of NUI and NUI Utilities and changes in management; 

--     the pursuit ofthe sale of the company; and

--     additionalsales of non-core businesses. 

*Settlement of Issues Relating to Focused Audit andRegulatory Orders Issued by the NJBPU*

As a result of NUI's and NUI Utilities' credit downgrades during2003, as well as concerns raised during a routine competitive services audit ofElizabethtown Gas by the NJBPU, in March 2003, the NJBPU ordered a focusedaudit of NUI, NUI Utilities and Elizabethtown Gas in six key areas:  (1) strategic planning; (2) affiliatetransactions; (3) financial structure and interaction; (4) accounting andproperty records; (5) corporate governance; and (6) executivecompensation.  The NJBPU retained TheLiberty Consulting Group (Liberty) as the auditors for the focused audit. 

On March 17, 2004, the NJBPU released the final report of thefocused audit, which, among other things, cited weaknesses in each of theforegoing six areas.  On March 26, 2004,the company filed its response to Liberty's final report.

On April 14, 2004, the company announced that NUI, NUI Utilitiesand Elizabethtown Gas Company had entered into a settlement agreement with theNJBPU on all issues related to the focused audit, and on April 26, 2004, theNJBPU issued a Final Order accepting and adopting the settlementagreement.  Pursuant to the settlementagreement, NUI Utilities agreed to refund $28.0 million plus interest toElizabethtown Gas ratepayers and to pay a $2.0 million penalty to the State ofNew Jersey over five years.  The refundand penalty increased the company's net after-tax loss for fiscal 2003 by approximately$18.6 million, or $1.16 per share.

The NJBPU also issued a series of orders to NUI, NUI Utilities,and Elizabethtown Gas during calendar 2003 and 2004, concerning, among otherthings, a number of the issues which were the subject of the focusedaudit.  These regulatory orders arediscussed in more detail below under Distribution Services Segment.

For a description of the focused audit ordered by the NJBPU andfocused audit report of Liberty, the company's response thereto and thesettlement agreement, see Item 3.  LegalProceedings-NJBPU Focused Audit and Regulatory Orders. 

*Investigations of Transactions at NUI Energy Brokers*

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

The Attorney General of the State of New Jersey is conducting acriminal investigation relating to NUI Energy Brokers.  In connection with this investigation, NUIreceived subpoenas issued by the New Jersey State Attorney General'sOffice.  In addition, the U.S. Securitiesand Exchange Commission (SEC) has commenced an informal inquiry relating to NUIEnergy Brokers.  NUI is fullycooperating with these investigations.

For a description of the investigations of NUI Energy Brokers,see Item 3.  LegalProceedings-Investigations of NUI Energy Brokers.  

*New Credit Facilities at NUI and NUI Utilities*

On November 24, 2003, NUI and NUI Utilities each entered into aseparate credit facility with a syndicate of banks.  NUI obtained a $255 million term loan facility and NUI Utilitiesobtained a $150 million credit facility comprised of a $50 million term loanfacility, a $50 million revolving credit facility and a $50 million delayeddraw term loan facility, which delayed term loan facility may only be used torepay NUI Utilities' 8.35 percent medium term notes.  Both the NUI and NUI Utilities credit facilities expire onNovember 22, 2004, and each may be extended for one 364-day term, subject tocertain conditions. 

The delay in delivering audited financial statements for fiscal2003 and unaudited financial statements for the fiscal quarter ended December31, 2003, resulted in events of defaultunder NUI's and NUI Utilities' credit agreements.  On January 26, 2004, NUI and NUI Utilities obtained waivers ofsuch defaults from the lenders under their respective credit agreements.

Pursuant to these waivers, the deadline for the delivery of NUI'sannual report and financial statements for its fiscal quarter ended December31, 2003 was extended until March 1, 2004. On March 12, 2004, NUI and NUIUtilities received a further waiver of such defaults from the lenders and suchlenders otherwise deferred their rights to exercise remedies in respectthereof.  NUI and NUI Utilitiessubsequently entered into amendments on May 10, 2004 to their respective creditagreements which:

(i) extended the delivery datefor the aforementioned financial statements (as well as for the financialstatements for the fiscal quarter ended March 31, 2004) until June 15, 2004, 

(ii) consented to the NJBPUsettlement, 

(iii) modified financialcovenants contained in the credit agreements to take into account theSettlement with the NJBPU and the recent andexpected future performance of the company,

(iv) permitted the acquisition byNUI Utilities of approximately $350,000 worth of gas pipeline, 

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

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

(vii) increased the interest rate on NUI Utilities' delayeddraw term loan (if drawn) by one percent until a purchase agreement is executedto sell NUI or NUI Utilities to an unaffiliated third party.

For a description of NUI's and NUI Utilities' credit agreements,including the amendments referred to above, and other debt instruments anddefaults thereunder, see Item 7. Management's Discussion and Analysis of Financial Condition and Resultsof Operations-Liquidity and Capital Resources.

*Gas Supply Contract with Cinergy*

NUI Utilities has selected Cinergy to provide a full requirementsgas supply contract with least-cost dispatch rights.  The contract covers the period from April 1, 2004 through March31, 2005.  The gas supply contract withCinergy requires NUI Utilities to pre-pay, in varying amounts, for its gasrequirements on a monthly basis over the contract period, until NUI regainsinvestment grade ratings.  Cinergy willpay NUI Utilities a fixed amount for the use of NUI Utilities' gas anddeliverability assets for the twelve months ended March 31, 2005. 

For a description of the gas supply contract with Cinergy and theimpact of the pre-payment requirement thereunder, see Distribution ServicesSegment-Gas Supply and Operations below and Item 7.  Management's Discussion and Analysis of Financial Condition andResults of Operations-Liquidity and Capital Resources.

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

*NUI*

On January 28, 2004, the Board of Directors of NUI announced thatit had appointed Craig G. Matthews as the President and Chief Executive Officerof NUI and as a member of its the Board of Directors and that it had appointedSteven D. Overly as the Vice President, General Counsel and Secretary ofNUI.  Mr. Matthews replaced A. MarkAbramovic, who retired and who had previously been appointed President of NUIafter John Kean, Jr. stepped down in September 2003.  Mr. Overly replaced James R. Van Horn, the former ChiefAdministrative Officer, General Counsel and Secretary of NUI.  In addition, on February 24, 2004, Robert P.Kenney was appointed to the Board of Directors of NUI.  James J. Forese was appointed Chairman ofthe Board of Directors of NUI on April 1, 2004, replacing John Kean, whoremains as a director of NUI until his retirement later in 2004.  

In October 2003, NUI announced the appointment of Dan Scouler asChief Financial Officer on an interim basis. Mr. Scouler replaced Mr. Abramovic as Chief Financial Officer upon Mr.Abramovic's appointment in September 2003 as President of NUI. Mr. Scouler isthe managing member of Scouler Andrews International, LLC (Scouler Andrews) andwas previously a Senior Managing Director of FTI Consultants, which the companyemployed in October 2003 to manage its financial operations and develop newliquidity forecasts.

*NUI Utilities*

In October 2003, NUI Utilities expanded its existing Board ofDirectors to include Robert P. Kenney, Barbara Harding, Duncan Ellsworth,Stephen Schachman and Victor A. Fortkiewicz. In February 2004, Craig G. Matthews was appointed to the Board ofDirectors of NUI Utilities.  Mr. Kean isthe current Chairman of the Board of Directors of NUI Utilities.  In September 2003, Victor Fortkiewicz wasappointed President of NUI Utilities and Mary Patricia Keefe was appointed VicePresident, General Counsel and Secretary of NUI Utilities, replacing James R.Van Horn.  Nancy J. Sobelson wasappointed Vice President, Business and Technical Services in November2003.  Peter E. Maricondo was namedChief Financial Officer of NUI Utilities in December 2003, and replacing him asController of NUI Utilities was Donald R. Guarriello.  In addition, Elaine A. Kloss was appointed Treasurer of NUIUtilities in January 2004, replacing Charles N. Garber who left the company inNovember 2003, and Mr. Abramovic retired as Vice President of NUI Utilities inJanuary 2004.

*Sale of the Company*

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

The company is continuing to work with its financial advisors onthe sale process for the company and hopes to enter into a definitive agreementwith a purchaser during the third quarter of calendar 2004.  For a discussion of factors that couldprevent or delay the sale of the company, see Risk Factors-The sale of NUI maynot be consummated.

*Additional Sales of Non-Core Businesses *

On December 15, 2003, the company completed the sale of NUITelecom for approximately $2 million.  

See Sales of Non-Core Businesses below for a further discussion.

**Business Segments**

Thecompany's operations are organized and managed under three primary segments:Distribution Services, Energy Asset Management (formerly Wholesale Energy Marketingand Trading), and Retail and Business Services.  The company also has corporate operations that do not generateoperating revenues.  During fiscal 2003, the company realigned itsreportable business segments as follows: the appliance service businesses in New Jersey and Florida, previouslyreported within the Retail and Business Services segment, are now includedwithin the Distribution Services segment; off-system sales made by NUI EnergyBrokers on behalf of the utility operations, previously reported within theEnergy Asset Management segment, are now included within the DistributionServices segment; NUI Telecom, previously reported within the Retail andBusiness Services segment, was being held for sale at September 30, 2003, andis now reported within discontinued operations; the operations of TIC are beingwound down by the company and have also been reported as discontinuedoperations; and the operating results of NUI Environmental, previously reportedwithin discontinued operations, are now included as part of the Retail andBusiness Services segment.  The changefor NUI Environmental, which was sold in September 2003, was due to thecompany's potential future involvement in this business under certain ancillaryagreements entered into by the company on the date of the sale.  Reference is made to Note 21 of theNotes to the Consolidated Financial Statements for a discussion regarding thebusiness segments of the company. See also Item 6. Selected FinancialData-Summary Consolidated Operating Data for summary information by customerclass with respect to operating revenues, gas volumes sold or transported andaverage number of utility customers served. A discussion of the business of each segment follows. 

**Distribution Services Segment**

***Products and Services***

The company's Distribution Services segment consists of theoperations that distribute natural gas through the company's regulated utilityoperations, conduct appliance services and engage in off-system sales.  In fiscal 2003, the businesses in theDistribution Services segment included Elizabethtown Gas, City Gas, Elkton Gasand VCW.  Since the 2002 fiscalyear-end, the company has sold its VCW utility operations.  See Valley Cities Gas and Waverly Gasbelow.  

During fiscal 2003, the Distribution Services segment distributednatural gas in five states through the company's regulated utility operations,including utilities in two states which were sold during the fiscal year.  These distribution services are regulated asto price, rate of return and safety by the regulatory commissions of the statesin which the company operates (see Regulation below). During fiscal 2003, theDistribution Services segment served more than 374,000 customers, of which 70percent were in New Jersey and 30 percent were in other states (this includesapproximately 6,500 customers of discontinued operations).  Most of the company's utility customers areresidential and commercial customers that purchase gas primarily for space heating.  Distribution Services' operating revenuesfrom continuing operations were $615.5 million in fiscal 2003, $484.8 millionin fiscal 2002, and $616.4 million in fiscal 2001.  In fiscal 2003, this segment represented 94 percent of the totaloperating revenues of the company. Of this amount, 73 percent was generated byutility operations in New Jersey and 27 percent was generated by utilityoperations in other states.  Gas volumesare measured in Mcf (a basic unit of measurement for natural gas comprising1,000 cubic feet of gas), MMcf (a basic unit of measurement for natural gascomprising 1,000 Mcf of gas), and Bcf (a basic unit of measurement for naturalgas comprising one million Mcf of gas). Total utility gas volumes sold or transported by continuing operationsin fiscal 2003 amounted to 81.8 Bcf, of which 86 percent was sold ortransported in New Jersey and 14 percent was sold or transported in otherstates. Distribution Services' operating revenues from discontinued operationsduring fiscal 2003 amounted to approximately $0.6 million. Gas volumes sold ortransported by discontinued operations in fiscal 2003 amounted to 0.2 Bcf.  A description of each of the company'sutility operations follows. 

The company has appliance service businesses in New Jersey andFlorida that complement NUI's natural gas utility service in those states.  The appliance service businesses hadpreviously been reported within the Retail and Business Services segment.  These businesses sell and install heatingunits, such as furnaces and gas boilers, air conditioners and water heaters, aswell as repair and install gas-fired appliances such as ranges, grills, poolheaters and gas lamps.  The New Jerseydivision offers service contracts that cover the cost of repairs for most ofthese types of appliances.  In addition,the Florida appliance business also provides leasing and financing for gasappliances.  The appliance groupgenerated operating revenues of $15.4 million in fiscal 2003, $14.4 million infiscal 2002, and $13.3 million in fiscal 2001. The appliance service businesses had operating margins of $5.7 millionin fiscal 2003, $5.2 million in fiscal 2002, and $4.0 million in fiscal 2001.

The Distribution Services segment also utilizes assets undercontract from interstate pipelines to make off-system sales to non-jurisdictionalcustomers.  Such assets includeinterstate pipeline and storage capacity. During fiscal 2003, NUI Energy Brokers served as agent for NUI Utilitiesand arranged the off-system sales on behalf of the utility operations.  Pursuant to state regulatory orders, thecompany is able to retain a portion of the margins from these off-system salesin percentages that vary by state. Off-system sales margins retained by the company totaled $1.3 million infiscal 2003, $1.6 million in fiscal 2002 and $0.9 million in fiscal 2001.

NUI Utilities terminated its agency contract with NUI EnergyBrokers in accordance with an NJBPU Order dated December 11, 2003, in which theNJBPU directed Elizabethtown Gas to cease purchasing gas from its affiliate,NUI Energy Brokers.  In a NJBPU Orderdated January 14, 2004, the NJBPU approved a plan by NUI Utilities toenter into a Gas Asset Management Agreement with New Jersey Resources, Inc.(NJRES) to serve as NUI Utilities' agent for purchasing gas and managing itsgas supply assets.  However, in itsJanuary 14, 2004 Order, the NJBPU also directed Elizabethtown Gas to conduct acompetitive bid for the procurement of gas supply management services for theperiod commencing April 1, 2004 through March 31, 2005.  NUI Utilities entered into an agreement withNJRES to serve as NUI Utilities' gas purchasing agent for a term ending March31, 2005, subject to a right of early termination.  NUI Utilities conducted a competitive bidding process in Februaryand March 2004 as directed by the NJBPU. As a result, NUI Utilities terminated its contract with NJRES effectiveMarch 31, 2004, and contracted with Cinergy to procure the gas supplyrequirements necessary to fulfill NUI Utilities' public utility obligations forthe period commencing April 1, 2004 through March 31, 2005.  For a discussion of the impact of thisagreement on the company's liquidity see Item 7.  Management's Discussion and Analysis of Financial Condition andResults of Operations-Liquidity and Capital Resources.

***Elizabethtown Gas Company (Elizabethtown Gas)*.**  Elizabethtown Gas, which began operations in1855, provides natural gas service to approximately 260,000 customers infranchised territories within seven counties in central and northwestern NewJersey. Elizabethtown Gas' service territories cover approximately 1,300 squaremiles and have a total population of approximately 1.1 million.  Most of Elizabethtown Gas' customers arelocated in densely populated central New Jersey, where increases in the numberof customers primarily result from conversions to gas heating from alternativeforms of heating. In the rapidly growing northwest region of the state, newcustomer additions are driven primarily by new construction.

Elizabethtown Gas' regulated gas volumes sold or transported andcustomers served for the past three fiscal years ended September 30 were asfollows:

**      Regulated Gas Volumes Sold or Transported (in thousandsof Mcf)**
|                                             | **2003** | **2002** | **2001** |
|---------------------------------------------|----------|----------|----------|
| Firm Sales:                                 |          |          |          |
|    Residential               | 23,357   | 17,994   | 21,475   |
|    Commercial and Industrial | 8,652    | 6,440    | 8,897    |
| Interruptible  Sales                        | 9,721    | 9,905    | 12,641   |
| Transportation  Services                    | 28,883   | 29,893   | 26,459   |
| Total                                       | 70,613   | 64,232   | 69,472   |

**                    Utility Customers Served (twelve-month average)**
|                                               | **2003**                 | **2002**                 | **2001**                 |
|-----------------------------------------------|--------------------------|--------------------------|--------------------------|
| Firm Sales:                                   |                          |                          |                          |
|    Residential  - Heating | 187,615                  | 184,224                  | 180,605                  |
|    Residential - Non-heating   | 52,508                   | 53,694                   | 54,563                   |
|    Commercial and Industrial   | 17,939                   | 17,609                   | 17,243                   |
| Interruptible  Sales                          | 20                       | 21                       | 25                       |
| Transportation  Services                      |     2,304 |     2,333 |     2,475 |
| Total                                         | 260,386                  | 257,881                  | 254,911                  |

Gas volumes sold to Elizabethtown Gas' firm sales customers(i.e., those that are covered by base rates) are sensitive to the weather inNew Jersey. In fiscal 2003, the weather in New Jersey was 12 percent colderthan normal and 36 percent colder than the prior year. Additionally, weather infiscal 2002 was 23 percent warmer than normal and 21 percent warmer than fiscal2001. While the effect of variations in weather conditions impacts sales toheating customers, Elizabethtown Gas' tariff contains a weather normalizationclause that is designed to help stabilize the company's results by increasingamounts charged to customers when weather has been warmer than normal anddecreasing amounts charged when weather has been colder than normal. As aresult of weather normalization clauses, operating margins were approximately$6.1 million lower in fiscal 2003, and $8.5 million higher in fiscal 2002, thanthey would have been without such clauses. For a further discussion onvariations in revenues, see Item 7. Management's Discussion and Analysis of Financial Condition and Resultsof Operations-Results of Operations. 

*Determination of RatesCharged to Customers *

Elizabethtown Gas' customers currently have the ability toutilize transportation service from the company and purchase their gas fromother suppliers.  The rate charged totransportation customers remains regulated as to price and returns.  Tariffs for transportation service have beendesigned to provide the same margins as bundled sales tariffs.  Therefore, except for the regulatory risk offull recovery of gas costs, Elizabethtown Gas is financially indifferent as towhether it transports gas or sells gas and transportation together. 

On November 22, 2002, the company settled Elizabethtown Gas' 2002base rate case with the NJBPU. Under the terms of this settlement,Elizabethtown Gas immediately received an annual base rate increase ofapproximately $14.2 million. The new rate level provides for an allowed returnon equity of 10.0 percent and an overall rate of return of 7.95 percent. In itsDecember 11, 2003 Order, the NJBPU stated that it was re-examining thissettlement in light of the events surrounding NUI's use of proceeds received inits 2002 equity offering.  The company'ssettlement with the NJBPU on April 14, 2004 resolved all issues related to the2002 rate case.

On September 16, 2003, Elizabethtown Gas received approval fromthe NJBPU to increase its Basic Gas Supply Service (BGSS) rates on aprovisional basis by $28.8 million and on October 10, 2003, Elizabethtown Gaswas granted approval to increase its Societal Benefits Charge (SBC) byapproximately $8.0 million.  The BGSScovers the cost of natural gas supplies that Elizabethtown Gas purchases forits customers, while the SBC allows Elizabethtown Gas to recover the cost ofmandated energy efficiency, low-income assistance, energy education andenvironmental remediation programs. Both of these charges represent thepass-through of costs on which the company does not earn a profit. The NJBPUstated that it would re-examine the provisional rates approved by the NJBPUpursuant to Elizabethtown Gas' petition for an increase in BGSS rates.  The company's settlement with the NJBPU onApril 14, 2004 resolved all issues related to this BGSS proceeding.

In response to the federal 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 required New Jerseygas utilities to continue offering basic gas supply service through December2002 for those customers not choosing an alternate supplier.  On January 17, 2002, the NJBPU issued anOrder that continued the obligation of all New Jersey gas utilities to providebasic gas supply service until the NJBPU has had an opportunity to fullyinvestigate major policy issues relating to pricing structure and gas supplyreliability.  No timetable has been establishedfor completion of such a review.  As ofSeptember 30, 2003, only six residential customers in Elizabethtown Gas'service territory were receiving gas from an alternate gas supplier.

Elizabethtown Gas' interruptible customers have alternative energysources and use gas on an as available basis. Variations in the volume of gassold or transported to these customers do not have a significant effect on thecompany's earnings because, in accordance with New Jersey regulatoryrequirements, 80 percent of the margins that otherwise would be realized on gassold or transported to interruptible customers are credited to firm customers. 

*Recovery of Purchased GasCosts*

On March 30, 2001, the NJBPU issued an Order allowingElizabethtown Gas to begin recording interest on its under-recovered gas costbalance, and to establish a new Gas Cost Under-recovery Adjustment (GCUA) torecover the gas cost under-recovery balance as of October, 31, 2001 over athree-year period from December 1, 2001 through November 30, 2004. In addition,pursuant to the Order, the company was required to make a filing on November15, 2001, to establish a new BGSS rate designed to recover purchased gas costsfor the period November 1, 2001 through September 30, 2002. In that filing, thecompany requested approval to decrease its BGSS rate and implement its GCUArate, with a net effect representing a decrease of 12.7 percent in residentialcustomer bills.  The NJBPU approved thecompany's request and these changes became effective on December 1, 2001.

***City Gas Company of Florida (City Gas)*.**  City Gas is the second largest natural gasutility in Florida, supplying gas to more than 101,000 customers in Miami-Dade,Martin, Broward and Palm Beach Counties in south Florida, and in Brevard,Indian River and St. Lucie Counties in central Florida.  City Gas' service areas cover approximately3,000 square miles and have a population of approximately 2.3 million.

City Gas' regulated gas volumes sold or transported and customersserved for the past three fiscal years ended September 30 were as follows:

**     Regulated Gas Volumes Sold or Transported (in thousandsof Mcf)**
|                                             | **2003** | **2002** | **2001** |
|---------------------------------------------|----------|----------|----------|
| Firm Sales:                                 |          |     |     |
|    Residential               | 1,767    | 1,738    | 1,930    |
|    Commercial and Industrial | 1,827    | 1,836    | 2,323    |
| Interruptible  Sales                        | 7        | 30       | 66       |
| Transportation  Services                    | 6,377    | 6,098    | 5,156    |
| Total                                       | 9,978    | 9,702    | 9,475    |

**                  Utility Customers Served (twelve-month average)**
|                                             | **2003**                 | **2002**                 | **2001**                 |
|---------------------------------------------|--------------------------|--------------------------|--------------------------|
| Firm Sales:                                 |                     |                     |                     |
|    Residential               | 95,846                   | 96,085                   | 95,963                   |
|    Commercial and Industrial | 3,789                    | 3,762                    | 3,992                    |
| Interruptible Sales                         | 1                        | 3                        | 5                        |
| Transportation  Services                    |     1,703 |     1,656 |     1,313 |
| Total                                       | 101,339                  | 101,506                  | 101,273                  |

City Gas' residential customers purchase gas primarily forheating water, drying clothes and cooking. Some customers, principally in central Florida, also purchase gas to providespace heating during the relatively mild winter season.

City Gas' commercial and industrial customers consist primarilyof schools, businesses and public facilities. As with its residential markets, the company is seeking to maximize theutilization of its existing mains by emphasizing marketing efforts towardpotential commercial businesses along these lines.

Certain commercial and industrial customers have changed theirnatural gas service from a supply and transportation basis to only transportation.City Gas' transportation tariff provides margins on transportation servicesthat are substantially the same as margins earned on gas sales.  Therefore, except for the regulatory risk offull recovery of gas costs, City Gas is financially indifferent as to whetherit transports gas or sells gas and transportation together. 

*Determination of RatesCharged to Customers*

On January 16, 2001, City Gas received approval from the FloridaPublic Service Commission (FPSC) to increase its annual base rates by $5.13million to cover the cost of service enhancements and reliability improvementssince City Gas' last base rate increase in 1996.  This rate level provided for an allowed return on equity of 11.5percent and an overall rate of return of 7.88 percent.

On October 7, 2003, City Gas received approval from the FPSC toincrease its base rates by $2.9 million. The increase represents a portion of the company's request for a totalrate increase of $10.5 million to recover the costs of investments in itscustomer service and system maintenance and growth, increases in operatingexpenses, and the impact of the continuing sluggish economy.  On January 20, 2004, City Gas receivedapproval from the FPSC to increase its base rates by $6.7 million, effectiveFebruary 23, 2004. This includes the interim rate increase of $2.9 millionapproved in October.  This new ratelevel provides for an allowed return on equity of 11.25 percent and an overallallowed rate of return of 7.36 percent. 

City Gas recovers all of its gas costs through a Purchased GasAdjustment charge (PGA).  The PGArecovery period is the twelve-month period beginning January 1 and endingDecember 31 of each year.  Gas costs andrecoveries are reconciled on an annual basis with any imbalance charged orcredited in the following year. Interest is added to both over-recovered and under-recoveredbalances.  In May 2004, City Gas expectsto file for an over-recovery imbalance of approximately $800,000, includinginterest, under its purchased gas adjustment recovery clause covering the 2003calendar year.

***Elkton Gas (Elkton)*.**  Elkton provides gas service to approximately 5,400 customers infranchised territories comprising approximately 14 square miles within CecilCounty, Maryland.  During fiscal 2003,Elkton sold approximately 974,000 Mcf of gas as follows:  30 percent sold to residential customers and70 percent sold to commercial and industrial customers.  The current rates and tariffs for Marylandwere authorized in June 1992.  

***Valley Cities Gas and Waverly Gas (VCW)*.**  The company sold its VCW utility operationson November 7, 2002.  VCW provided gasservice to approximately 6,500 customers in franchised territories comprising114 square miles within Bradford County, Pennsylvania and the Village ofWaverly, New York and surrounding areas. During fiscal 2003, the regulatedoperations of VCW sold or transported approximately 239,000 Mcf of gas asfollows:  8 percent sold to residentialcustomers, 6 percent sold to commercial and industrial customers, and 86 percenttransported to commercial and industrial customers.  The rates and tariffs for the Pennsylvania and New Yorkoperations during fiscal 2003 were authorized between October 1988 andSeptember 1995.

***Gas Supply and Operations***

In recent years, the gas industry has been undergoing structuralchanges designed to increase competition in response to policies of the FederalEnergy Regulatory Commission (FERC) and state regulatory commissions.  Traditionally, interstate pipelines werewholesalers of natural gas to local distribution companies and generally didnot provide separate transportation or other services for specific customers.In 1992, the FERC issued Order No. 636 that, among other things, mandated theseparation or "unbundling" of interstate pipeline sales, transportation andstorage services and established guidelines for capacity management effectivein 1993. In fiscal 1995, the NJBPU unbundled the services provided and therates charged to New Jersey commercial and small industrial customers and in calendar2001, the NJBPU approved a stipulation that extended unbundled transportationservices to all retail customers.  Thetransition to more competitive rates and services has the effect of increasingthe opportunity for local gas distribution companies, and customers, topurchase natural gas from alternative sources, while increasing the potentialbusiness and regulatory risk borne by a local gas distribution company withrespect to the acquisition and management of natural gas services. 

The company endeavors to utilize its pipeline capacityefficiently by matching capacity to its load profile to the extentfeasible.  To this end, the company hashad a broad unbundled service tariff for certain of its customers since1987.  The company continues to avail itselfof opportunities to improve the utilization of its pipeline capacity bypursuing broad-based customer growth, including off-peak markets and utilizingcapacity release and off-system sales opportunities afforded by Order No. 636when operationally feasible. 

The company's gas supply for its utility operations during fiscal2003 came from the following sources: approximately 7 percent from long-termpurchase contracts; approximately 78 percent from seasonal or monthly purchasecontracts; and approximately 15 percent from daily purchases made in the spotmarket.  The company manages its gassupply portfolio with the aim of assuring a diverse, reliable and secure supplyof natural gas at the lowest reasonable cost. In fiscal 2003, the company's largest single supplier accounted forapproximately 14 percent of the company's total gas purchases. 

The company has a long-term gas purchase contract for the supplyof natural gas for its New Jersey system. Under this contract, the company has a right to purchase, on a firmyear-round basis, up to 3.7 Bcf of natural gas annually with a maximum ofapproximately 10,000 Mcf per day.  Thecompany is committed to purchase, at market-related prices, minimum quantitiesof gas that total approximately 2.1 Bcf per year.  In the event that the company does not purchase the minimumquantity in a given year, the company has until the next contract year to makeup the difference or risk a reduction in the contracted daily deliveryquantity.  During the fiscal year endedSeptember 30, 2003, the company's continuing utility operations purchased atotal of 50.1 Bcf, and accordingly the company expects that minimum demand onits systems for the duration of this contract will continue to exceed thisminimum purchase obligation.  Thecompany also has seasonal and monthly firm supply contracts and access to spotmarket gas through the interstate pipeline system to supplement or replace, ona short-term basis, portions of its long-term gas purchase contracts when suchactions can reduce overall gas costs or are necessary to supply interruptiblecustomers.  In fiscal 1995, the company,along with seven other Northeastern and Mid-Atlantic gas distributioncompanies, formed the East Coast Natural Gas Cooperative LLC (the Co-op).  The Co-op was formed with the goal ofjointly managing certain portions of the members' gas supply portfolios, toincrease reliability and reduce costs of service to customers, and to improvethe competitive position of the member companies.  The company terminated its membership in the Co-op effectiveMarch 31, 2004 as part of the discontinuation of NUI Energy Brokers' tradingoperations.  

In order to have available sufficient quantities of gas duringthe heating season, the company stores gas during non-peak periods andpurchases supplemental gas, including propane, liquefied natural gas (LNG), andgas available under contracts with certain large cogeneration customers, as itdeems necessary.  The storage contractsprovide the company with an aggregate of 9.9 Bcf of natural gas storagecapacity and the right to receive a maximum daily quantity of 176,636 Mcf.  The contracts with cogeneration customersprovide 22,600 Mcf of daily gas supply to meet peak loads by allowing the companyto take back capacity and supply that otherwise is dedicated to serve thosecustomers. 

The company has a LNG storage and vaporization facility in NewJersey for handling peak gas demand.  Ithas a daily delivery capacity of 24,200 Mcf and storage capacity of 131,000Mcf.  The company's maximum dailysendout in fiscal 2003 was approximately 408,000 Mcf in New Jersey, includingapproximately 89,000 Mcf delivered by third party suppliers for transportationcustomers, and 59,300 Mcf in its other service territories combined.  The company maintains sufficient gas supplyand delivery capacity for a maximum daily sendout capacity for firm sales forNew Jersey of approximately 400,000 Mcf and approximately 75,000 Mcf for theother service territories combined.

The company has long-term gas delivery contracts with seveninterstate pipeline companies.  Underthese contracts, the company has a right to deliver, on a firm year-roundbasis, up to 80.9 Bcf of natural gas annually with a maximum of approximately235,000 Mcf per day. Both the price and conditions of service under thesecontracts are regulated by the FERC.

Certain of the company's long-term contracts for the supply,storage and delivery of natural gas include fixed charges that amounted toapproximately $60.1 million in fiscal 2004 (this amount includes the company'sobligations under two twenty-year agreements to pay annual demand charges forthe firm transportation and storage of natural gas).  The company currently recovers, and expects to continue torecover, a majority of such fixed charges through its purchased gas adjustmentclauses. 

During fiscal 2003, NUI Energy Brokers served as NUI Utilities'agent for gas supply procurement and asset management.  Pursuant to the December 11, 2003 NJBPUOrder, NUI Utilities terminated its agency relationship with NUI EnergyBrokers.  NUI Utilities contracted withCinergy to procure the gas supply requirements necessary to fulfill NUIUtilities' public utility obligations and to manage its gas supply and deliverabilityassets from April 1, 2004 through March 31, 2005.

The company distributes gas through approximately 6,200 miles ofsteel, cast iron and plastic mains.  Thecompany has physical interconnections with five interstate pipelines in NewJersey and a single interstate pipeline in both Maryland and Florida.  Common interstate pipelines along thecompany's operating system provide the company with greater flexibility inmanaging pipeline capacity and supply, and thereby optimizing systemutilization.

***Sales of Non-Core Businesses***

The company's growth strategy did not achieve the results thatthe company had anticipated.  As aresult, the company experienced increasing significant losses and write-offs inits non-utility businesses during fiscal years 2001, 2002 and 2003.  In late fiscal 2002, a series of defaultsunder the then-existing credit facilities of NUI and NUI Utilities resulted inthe refinancing of such debt and the company began exploring the sale of itsnon-core businesses as a means of raising capital and cutting costs.

In October 2001 and March 2002, the company sold certainsubsidiaries of VGC for an aggregate sales price of approximately $4.6million.  On September 30, 2002, thecompany sold NC for approximately $24 million, and on November 7, 2002, thecompany completed the sale of VCW for approximately $15 million.  NUI Environmental Group was sold onSeptember 3, 2003 for one dollar, to a former officer of NUI.  During July 2003, the company announced itwas seeking a buyer for NUI Telecom. The company had discontinued two of the four product lines of TIC inJuly 2002 and also announced in July 2003 that the remaining operations of TICwould be wound down.  On December 15,2003, the company completed the sale of NUI Telecom for approximately $2million.  In addition, in May 2003, thecompany announced it was exiting the retail energy business, and subsequentlypaid Houston Energy Services Company, LLC and Amerada Hess Corporation $3.8million to assume the majority of NUI Energy's contracts for retail sales ofgas to customers and is winding down its operations.  The operating results of certain of these entities have beenclassified as Discontinued Operations in the Consolidated Statements of Income,as applicable.  The assets andliabilities of certain of these entities have been classified as Assets Heldfor Sale and Liabilities Held for Sale in the Consolidated Balance Sheets, asapplicable. See Note 11 of the Notes to the Consolidated Financial Statementsfor a further discussion about these operations.

***Regulation***

The company is subject to regulation with respect to, among othermatters, rates, service, accounting and the issuance of securities.  The company's natural gas distributionoperations are subject to regulation by the public utility commissions of thestates in which it operates.  Thecompany is also subject to regulation by the United States Department ofTransportation under the Natural Gas Pipeline Safety Act of 1968, with respectto the design, installation, testing, construction and maintenance of pipelinefacilities. Natural gas purchases, transportation service and storage serviceprovided to the company by interstate pipeline companies are subject toregulation by the FERC (See Distribution Services Segment-Gas Supply andOperations) for a further discussion. In addition, the company is subject to federal, state and local laws andregulation with respect to employee health and safety and environmental mattersincluding, but not limited to, water quality, air quality and solid wastemanagement.  At present, the company isworking with the New Jersey Department of Environmental Protection and theNorth Carolina Department of Environment and Natural Resources underAdministrative Consent Orders and/or Memoranda of Agreement with respect toproperty remediation matters.

The company's tariffs for each state in which it operates containadjustment clauses that enable the company to recover purchased gas costs.  The adjustment clauses provide for periodicreconciliations of actual recoverable gas costs with the estimated amounts thathave been billed.  Under- orover-recoveries at the reconciliation date are recovered from or refunded tocustomers in subsequent periods.  

For a discussion of the orders issued by the NJBPU relating torates charged by Elizabethtown Gas, the recovery of purchased gas costs byElizabethtown Gas and to the provision of services by Elizabethtown Gas tocustomers choosing an alternative natural gas supplier, see DistributionServices Segment-Elizabethtown Gas Company above.

For a discussion of the orders issued by the NJBPU relating tothe focused audit and related matters see Item 3.  Legal Proceedings-NJBPU Focused Audit and Regulatory Orders.

For a discussion of the decisions made by the FPSC relating torates charged by City Gas, see Distribution Services Segment-City Gas Companyof Florida above.  

***Franchises***

The company holds non-exclusive municipal franchises and otherconsents which enable it to provide natural gas in the territories it serves.The company intends to seek the renewal of these franchises and consents asthey expire.

***Seasonal Aspects***

Sales of gas to some classes of customers are affected byvariations in demand due to changes in weather conditions, including normalseasonal variations throughout the year. The demand for gas for heating purposes is closely related to theseverity of the winter heating season. Seasonal variations affect short-term cash requirements.  In addition, the company recognizesproportionately higher revenues in the winter months.  For a further discussion of our seasonal cash needs and risksrelated to seasonal demand, see Risk Factors below. 

The effect of weather that is above or below normal is partiallyoffset in New Jersey through a weather normalization clause contained in thetariffs in that jurisdiction.  Theweather normalization clause is designed to help stabilize the company'sresults by increasing amounts charged to customers when weather has been warmerthan normal and decreasing amounts charged when weather has been colder thannormal.

***Competition***

The company competes with distributors of other fuels and formsof energy, including electricity, fuel oil and propane, in all portions of theterritories in which it has distribution mains.  In addition, in 1992, the FERC issued Order No. 636 that, amongother things, mandated the separation or "unbundling" of interstate pipelinesales, transportation and storage services and established guidelines forcapacity management effective in 1993. See Distribution Services Segment-Gas Supply and Operations above for afurther discussion.  Subsequently,initiatives were sponsored in various states, the purposes of which were tounbundle or separate into distinct transactions, the purchase of the gascommodity from the purchase of transportation services for the gas.  To that end, several of the company'sutility operations have unbundled residential, commercial and industrial gaspurchase and transportation rates.  

The unbundled sale of gas to customers is subject to competitionfrom unregulated marketers and brokers, which generally do not bear theobligations or costs related to operating a regulated utility.  Tariffs for transportation service havegenerally been designed to provide the same margins as bundled salestariffs.  Therefore, except for the regulatoryrisk of full recovery of gas costs, the company is financially indifferent asto whether it transports gas, or sells gas and transportation together.  The company also faces the risk of loss oftransportation service for large industrial customers, which may have theability to build connections to interstate gas pipelines and bypass thecompany's distribution system.  Gasdistributors can also expect increased competition from electricity asderegulation in that industry decreases prices and increases supplysources.  Alternatively, opportunitiesmay increase for gas service to fuel generators for large industrial customers,replacing electric utility service.

***Environment***

Reference is made to Item 7. Management's Discussion and Analysisof Financial Condition and Results of Operations-Capital Expenditures andCommitments and Note 22 of the Notes to the Consolidated Financial Statementsfor information regarding environmental matters affecting the company.

**Energy Asset Management Segment (formerly WholesaleEnergy Marketing and Trading)**

***Products and Services***

The Energy Asset Management segment reflects the operations ofthe company's NUI Energy Brokers and VGC subsidiaries.  Together, this segment offers wholesaleenergy sales, energy portfolio management, risk management and utility assetmanagement.  In addition, this segmentincludes the equity income and losses of NUISS, the company's subsidiary whichis a fifty-percent member of SSLLC, a joint venture with a subsidiary of DukeEnergy. SSLLC was formed in 2001 to develop a natural gas storage facility inSaltville, Virginia.  Total operatingrevenues for the Energy Asset Management segment were $27.1 million in fiscal2003, $28.1 million in fiscal 2002 and $19.1 million in fiscal 2001. In fiscal2003, this segment represented 4 percent of the total operating revenues ofNUI.

NUI Energy Brokers was formed in 1996 to provide wholesalenatural gas supply and trading, brokering, and risk management services.  As a result of the NJBPU Order on December11, 2003, NUI Utilities terminated its gas procurement arrangement with NUIEnergy Brokers and, in April 2004, entered into a full requirements gas supplycontract with Cinergy.  In March 2004,the company discontinued the trading operations of NUI Energy Brokers.  Prior to it being discontinued, NUI EnergyBrokers traded physical natural gas in four geographic regions: the Northeast,Southeast, Gulf Coast, and Mid-Continent. In addition, NUI Energy Brokerstraded natural gas futures, options and swaps on the New York MercantileExchange and the over-the-counter market. The risk associated with trading activities was closely monitored on adaily basis and controlled in accordance with the company's Risk ManagementPolicy.  As in any commodity brokerageactivity, however, there are risks pertaining to market changes and creditexposure that can be managed but not eliminated.  For this reason, the earnings from NUI Energy Brokers have thepotential to be more volatile than the company's utility distribution business.NUI Energy Brokers' operating margins were $17.4 million in fiscal 2003, $19.5million in fiscal 2002, and $19.4 million in fiscal 2001.  For a further discussion of the risks andactivities of NUI Energy Brokers see Item 7A. Quantitative and Qualitative Disclosures About Market Risk.  On November 19, 2003, the company announcedthat an independent investigation into certain questionable transactionsinvolving NUI Energy Brokers had been initiated by NUI's Audit Committee.  For a discussion of the investigation seeItem 3.  LegalProceedings-Investigations of NUI Energy Brokers.

VGC is a natural gas storage, pipeline, and distribution companywith principal operations in Southwestern Virginia. VGC operates two storagefacilities, one a high-deliverability salt cavern facility in Saltville,Virginia and the other a depleted reservoir facility in Early Grove, Virginia.Combined, the facilities have approximately 2.6 Bcf of working gas capacity.VGC also owns and operates a 72-mile intrastate pipeline. VGC currently servesas the construction and operations manager for NUI's joint venture with DukeEnergy to initially develop 5.3 Bcf of storage at the Saltville facility.  For a further discussion see NUISS below andItem 7.  Management's Discussion andAnalysis of Financial Condition and Results of Operations-Capital Expendituresand Commitments-Joint Venture with Duke Energy.  This new storage facility will serve, through new interstateinterconnections, the Mid-Atlantic region, an area of high demand growth due topopulation increases and power generation. All of VGC's businesses are regulated by the Virginia State CorporationCommission except for SSLLC, which is regulated by the FERC.  VGC, which was acquired by NUI on March 28,2001, had operating margins of $8.7 million in fiscal 2003, $9.0 million infiscal 2002 and $2.6 million in fiscal 2001.

VGC, through Virginia Gas Distribution Company (VGDC), providesgas service to approximately 300 customers in franchised territories withinBuchanan and Russell Counties, Virginia. During fiscal 2003, VGDC soldapproximately 240,300 Mcf of gas, of which 4 percent was sold to residentialcustomers and 96 percent was sold to commercial and industrial customers.

NUISS is a fifty-percent member of SSLLC.  SSLLC plans to expand the present Saltvillestorage facility from its current capacity of 1 Bcf to approximately 12 Bcf inseveral phases.  The Saltville facilityconnects to Duke Energy Gas Transmission's (DEGT) East Tennessee Natural Gasinterstate system and DEGT's Patriot pipeline and features fast-injection andfast-withdrawal capabilities.  AfterPhase I of the expansion, the Saltville storage field will be able to deliverup to 500 million cubic feet per day of natural gas to area markets and will beable to store approximately 6.0 Bcf of working gas.  Phase I is expected to be completed by fiscal 2008.  The market demand for additional storagewill dictate the timing of the other phases of the expansion.  In an Order issued September 11, 2003, theFERC reversed prior rulings and determined that SSLLC does not qualify for astatutory exemption from FERC Natural Gas Act regulation.  SSLLC was permitted to continue service onan interim basis but was ordered to submit applications for FERC approval toconstruct and operate its facilities and to provide service subject toapplicable FERC law and regulations. SSLLC is proceeding to comply with thisOrder, and has filed its application for various FERC authorizations onNovember 10, 2003. NUISS contributed approximately $0.1 million of equityearnings to NUI in fiscal 2003.

**Retail and Business Services Segment**

***Products and Services***

During fiscal 2003, the Retail and Business Services segmentincluded the operations of the company's NUI Energy, UBS and OAS subsidiaries.  Prior to September 30, 2003, the operationsof OAS were included in UBS.  Theoperations of NUI Telecom, as well as the operations of the network servicesand wireless divisions of TIC previously reported in this segment, have beenreclassified to discontinued operations, and in December 2003 NUI Telecom wassold.  See Note 11 of the Notes to theConsolidated Financial Statements.  Theappliance services business previously reported in this segment is now reportedas part of the Distribution Services segment. Operating revenues for this segment, exclusive of discontinuedoperations, were $9.8 million in fiscal 2003, $7.0 million in fiscal 2002, and$10.4 million in fiscal 2001. 

NUI Energy was formed as a full-service energy marketing companyserving industrial and commercial clients. During May 2003, the company announced it was exiting the retail energybusiness and subsequently sold the majority of NUI Energy's contracts and beganwinding down its operations.  NUI Energyoffered energy commodity pricing options at competitive rates, secureddelivery, and provided account balancing and reconciliation for itscustomers.  NUI Energy Brokers, thecompany's energy trading and portfolio management affiliate, handled supplyacquisition for NUI Energy.  Operatingrevenues and margins for NUI Energy were $2.4 million in fiscal 2003, ascompared with $2.5 million in fiscal 2002, and $5.9 million in fiscal 2001.

UBS provides customer information systems and services toinvestor-owned and municipal utilities, as well as third-party providers in thewater, wastewater, and gas markets. Wins CIS®, a premiere customer informationsystem developed and maintained by UBS, is presently serving approximately 50clients with state-of-the-art capabilities in support of more than 1.5 millioncustomers.  United Water, the largestnon-affiliated Wins CIS® client for UBS, accounts for approximately 40 percentof UBS' revenue.  In addition togenerating over 12 million bills in fiscal 2003, UBS continues to assistclients in related areas such as automatic meter reading, payment processing,and account recovery.  UBS' operatingrevenues were $6.1 million in fiscal 2003, $3.5 million in fiscal 2002, and$4.0 million in fiscal 2001.  UBS hadoperating margins of $3.6 million in fiscal 2003, $1.9 million in fiscal 2002,and $2.7 million in fiscal 2001.  Inaddition, UBS provides billing and payment processing services to NUI Utilitiesunder a service agreement that was approved by the NJBPU in the focused auditsettlement agreement.  In June 2003, thecompany had approved a plan to sell UBS.  However, the September 2003 decision to sell the company reducedthe probability that a sale of UBS would occur, given that NUI Utilities isUBS' largest customer and there was no guarantee that NUI Utilities wouldmaintain a long-term relationship with UBS after the company was sold.  As a result, as of September 30, 2003, theassets and liabilities of UBS are no longer classified as "held for sale" on theConsolidated Balance Sheets and its results of operations have been included inIncome from Continuing Operations on the Consolidated Statements of Income. 

OAS, the company's digital mapping operation, currently providesservices to eight clients that include geospatial information system (GIS)mapping, pipe network modeling, and work management.  Effective April 1, 2004, OAS has subcontracted all of itsexisting services to a third party engineering firm.  OAS has notified its customers that upon expiration of theircurrent contracts, their relationship with OAS will terminate. OAS's operatingrevenues were $1.3 million in fiscal 2003, $1.0 million in fiscal 2002, and$0.6 million in fiscal 2001.  OAS hadoperating margins of $0.5 million in fiscal 2003, $1.0 million in fiscal 2002,and $0.6 million in fiscal 2001.

NUI Telecom is a non-facilities-based, full service telephonecompany that provides its customers with a single service solution for alltheir telecommunications requirements. NUI Telecom, formerly reported within the Retail and Business Servicessegment, was being held for sale at September 30, 2003 and has been reported asdiscontinued operations.  In December2003, NUI Telecom was sold.   NUITelecom's operating revenues were $45.4 million in fiscal 2003, $28.0 millionin fiscal 2002, and $11.0 million in fiscal 2001.  NUI Telecom generated margins of $14.2 million in fiscal 2003,$7.9 million in fiscal 2002, and $3.3 million in fiscal 2001. 

During July 2002, the company ceased the operations of TIC'stelephone equipment and United States Postal Service product lines and hadclassified the operating results of these two product lines as discontinuedoperations in the Consolidated Statements of Income.  TIC's operating revenues were $5.0 million in fiscal 2003, $17.5million in fiscal 2002, and $11.9 million in fiscal 2001.  TIC generated margins of $2.2 million infiscal 2003, $7.3 million in fiscal 2002, and $3.0 million in fiscal 2001.

**Other NUI Operations**

NUI Environmental was formed in fiscal 1996 to develop amethodology for treating dredged materials from the New York/New Jersey harborto increase the accessibility of the harbor to commercial shippingtraffic.  During September 2002, thecompany began seeking a buyer for NUI Environmental.  In September 2003, the company sold NUI Environmental for onedollar to a former officer of NUI.  Inaddition, NUI has the ability to repurchase shares of NUI Environmental andreceive a portion of the proceeds from any sale of NUI Environmental during thefive years following the sale.  NUI alsoentered into a license agreement with the buyer of NUI Environmental, wherebythe buyer must pay royalties to NUI for the use of proprietary technology untilthe earlier of January 3, 2022 or the occurrence of certain events.  Because of the license agreement, theoperating results of NUI Environmental have not been included withindiscontinued operations on the Consolidated Statements of Income.  See Note 11 of the Notes to the ConsolidatedFinancial Statements. 

**Persons Employed**

As of September 30, 2003, the company employed a total of 1,081persons.  In New Jersey, 260 employeeswere represented by the Utility Workers Union of America (Local 424) and 54employees were represented by the Communications Workers of America (Local1023).  In addition, 79 employees inFlorida were represented by the Teamsters Local 769 and 385.  The Utility Workers Union of Americacollective bargaining agreement with the New Jersey union became effectiveNovember 21, 2001, and expires on November 20, 2005.  The collective bargaining agreement in Florida, which wasnegotiated on March 31, 2001 and originally was to expire on March 31, 2004,has been extended through March 31, 2005. The Communications Workers of America contract became effective May 1,2003 and expires on April 30, 2006. 

Persons employed as of September 30, 2003 by segment were asfollows:  Distribution Servicessegment-794 persons; Energy Asset Management-87 persons; and Retail andBusiness Services-64 persons.  Inaddition, the corporate office of NUI employed a total of 111 persons, whichemployees primarily work in shared services for the entire corporation.  The majority of these shared servicesemployees were transferred to NUI Utilities during the first quarter of fiscal2004.  As of September 30, 2003,operations being held for sale employed 25 persons.

**Available Information**

The company files annual, quarterly and current reports, proxystatements and other information with the Securities and Exchange Commission(SEC).  Any document the company files withthe SEC may be read or copied at the SEC's public reference room at 450 FifthStreet, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on thepublic reference room.  The company'sSEC filings are also available at the SEC's Web site at http://www.sec.gov orthe company's Web site at http://www.nui.com. The information on NUI's Web site is not incorporated by reference intoand is not made a part of this report.

Risk Factors

**As a holding company, NUI depends almost entirely on paymentsand dividends from its subsidiaries to meet its debt and other contractualobligations and to pay dividends.**

Under NUI's holding company structure, NUI has no independentoperations and conducts substantially all of its operations through itssubsidiaries.  As a result, NUI dependsalmost entirely on the earnings and cash flows of, and dividends ordistributions (including the settlement of intercompany balances) from, NUIUtilities and its other subsidiaries to provide the funds necessary to meet itsdebt and other contractual obligations. Furthermore, substantially all of NUI's consolidated assets, earningsand cash flows are derived from the operations of NUI's regulated utilitysubsidiaries, whose authority to pay dividends or make other distributions toNUI is subject to regulation by state regulatory authorities and is alsosubject to limitations contained in the NUI Utilities amended credit agreementand the Standby Bond Purchase Agreement, dated June 12, 2001, between NUI Utilitiesand The Bank of New York.  NUI receivespayments from NUI Utilities to reimburse NUI for certain amounts expended byNUI on behalf of NUI Utilities, such as amounts for shared services andoverhead costs, through the settlement of outstanding intercompanybalances.  NUI's ability to meet itsobligations depends in part on NUI's receipt of funds from NUI Utilities.  There are no restrictions on the settlementof intercompany balances in NUI's or NUI Utilities' financing agreements.

Currently, the terms of the Standby Bond Purchase Agreementrestrict the payment of dividends by NUI Utilities to NUI to an amount based,in part, on the earned surplus of NUI Utilities, which has been reduced by theNJBPU settlement.  There is no capacityunder this covenant for further dividends at this time or for the foreseeablefuture.  For a description of thisrestrictive covenant, see Item 7. Management's Discussion and Analysis ofFinancial Condition and Results of Operations-Liquidity. In the eventthat NUI Utilities is unable to obtain a waiver of this covenant, NUIUtilities would not be able to provide funds to NUI (except to settle monthlyintercompany balances), and NUI may not be able to meet certain of itsobligations.   

**The ability of NUI and NUI Utilities to meet their liquidityobligations depends upon various factors, including their ability to obtainextensions of their existing credit facilities, to procure additional financingfor the upcoming winter heating season and to complete the sale of NUI in atimely manner.**

In light of, among other factors, the requirement that NUIUtilities must prepay its gas requirements under its agreement with Cinergy andits other gas supply, distribution and storage agreements and the obligation tomake payments pursuant to its settlement with the NJBPU, management of thecompany believes it will need additional financing in order to assure that thecompany's liquidity needs can be met during the upcoming winter heatingseason.  There is no assurance that anynecessary additional financing can be obtained or that the approval of theNJBPU, which is necessary to obtain such financing, will be forthcoming.  In addition, the financing, if obtained,could have terms which have a material adverse effect on the company.

Each of the $255 million existing term loan facility of NUI and the $150 millionexisting credit facility of NUI Utilities expires on November 22, 2004 and eachmay be extended for one 364-day term, subject to certainconditions.

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

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

In the event the conditions to extension are not satisfied and thelenders are unwilling to waive such conditions, NUIand NUI Utilities will be required to refinance all of theindebtedness under such facilities.  Inthe event these facilities are required to be refinanced in November 2004 or in the event these facilities are extended until November2005 and are required to be refinanced in November 2005, there is no assurancethat NUI and NUI Utilities willbe able to refinance these facilities or that the approval of the NJBPU, whichis necessary to obtain such refinancing, will be forthcoming.  In addition, the refinancing, if available,could have terms which have a material adverse effect on the company.  

In theevent the company is unable to reach an agreement to sell the company, it islikely to make it more difficultto obtain additional financing for the upcoming winterheating season and to make it more difficult to refinance the credit facilitieswhen necessary.

**The sale of NUI may not be consummated.**

On September 26, 2003, NUI announced its intention to sell thecompany.  Although our managementcurrently hopes to enter into an agreement to sell the company in the thirdquarter of calendar 2004, the sale of the company is subject to numerousuncertainties, in particular:

--     the company maynot locate a buyer;

--     the bids received by the company may have insufficient value orcontain terms which the company is unable to agree to; 

--     even if a buyer is located, the company may be unable tonegotiate a definitive agreement with such buyer;

--     the sale may be delayed or prevented by the need to make filingswith and/or obtain approval from regulatory authorities, including the SEC andthe utility commissions of the states in which NUI conducts its business; and

--     our shareholders may not approve the sale.

In addition, under the terms of NUI's and NUI Utilities' creditfacilities, the sale of the company is subject to the approval of the lenders,unless the credit facilities are repaid in connection with such sale.  

**Because NUI and NUI Utilities no longer maintain investmentgrade credit ratings, counterparties might require NUI and NUI Utilities toprovide increasing amounts of credit support, such as the prepayment of gasprocurement obligations.**

As a result of credit rating downgrades, NUI Utilities' gassuppliers subject it to prepayments for gas supply and pipeline demand charges.If NUI Utilities is unable to meet any capital calls made by its gas suppliers,NUI Utilities may not be able to obtain sufficient gas to service itscustomers. Furthermore, NUI's transactions in each of its businesses,especially in its Distribution Services segment, will require greater creditassurances, both to be given from, and received by, NUI to satisfy creditsupport requirements. Additionally, certain market disruptions or a furtherdowngrade of NUI's or NUI Utilities' credit ratings might further increasetheir respective cost of future borrowing or further impair their respectiveability to obtain additional liquidity or extend the maturity of theirrespective existing indebtedness or refinance their respective existingindebtedness. Such disruptions could include:

--     capital market conditions generally;

--     market prices for natural gas;

--     terrorist attacks or threatened attacks onour facilities or those of other energy companies; or

--     the overall health of the energy industry,including the bankruptcy of energy companies.

**Results of pending and possible future legal proceedings andinvestigations could have a material adverse effect on our financial condition,results of operations and liquidity.**

On March 3, 2003, the NJPBU initiated a focused audit of NUI, NUIUtilities and Elizabethtown Gas.  Inconnection with the focused audit, certain questionable transactions at NUI EnergyBrokers, the company's wholesale energy trading subsidiary, were identified.The Audit Committee of the company has conducted an investigation of thesequestionable trading practices at NUI Energy Brokers.  The Attorney General of the State of New Jersey is conducting acriminal investigation relating to these matters, and NUI has receivedsubpoenas in connection with this investigation.  The SEC is conducting an informal inquiry relating to NUI EnergyBrokers.

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, which actions have since beenconsolidated into a single action.  Theplaintiffs allege, among other things, that the company and two of its formerpresidents violated federal securities laws by issuing false statements andfailing to disclose information regarding the company's financial condition andcurrent and future financial prospects in its earnings statements, press releasesand in statements to analysts and others. 

We are cooperating fully with those investigations and aredefending the civil lawsuits filed against us. However, we cannot predict whenthese investigations or legal proceedings will be completed or the likelyoutcome of any of the investigations or legal proceedings. It is possible thatthey could lead to criminal charges, civil enforcement proceedings, additionalcivil lawsuits, settlements, judgments and/or consent decrees against us (andour subsidiaries), and that, as a result, we will be required to pay fines anddamages, consent to injunctions on future conduct, lose the ability to conductbusiness or suffer other penalties, each of which could have a material adverseeffect on our financial condition, results of operations and liquidity. 

For a further discussion of these legal proceedings andinvestigations, see Item 3.  LegalProceedings.

In addition, we may be obligated to indemnify our current andformer directors, officers and employees, as well as those of some of oursubsidiaries, for fines, liabilities, fees or expenses that they may face as aresult of the pending and possible future litigation and investigations, and toadvance to or reimburse such persons for defense costs, including attorneys'fees. 

The effects and results of these various investigations and legalproceedings, including the ultimate determination regarding our indemnityobligations and the extent of our insurance coverage, could have a materialadverse effect on our financial condition, results of operations, cash flowsand liquidity. 

**A review of our public filings by the SEC may result in theamendment of our periodic reports, which could have a material adverse effecton the trading price of our common stock and our ability to access the capitalmarkets.**

The investigations by the NJPBU and the investigation by theAudit Committee of NUI of certain questionable transactions at NUI EnergyBrokers, the company's wholesale energy trading subsidiary, have led to a delayin the filing of this annual report and our first quarter fiscal 2004 report onForm 10-Q.  Due to the investigation bythe Audit Committee, the company was not able to complete its financialreporting process and its audited financial statements for inclusion in itsfiscal 2003 Form 10-K by December 29, 2003, the deadline for filing the Form10-K. The SEC may provide us with comments on this filing or on the delayedquarterly report after such reports have been filed, which could require us toamend previously filed periodic reports. If we are required to amend our periodic filings, investor confidencemay be reduced, our stock price may substantially decrease and our ability toaccess the capital markets may be seriously limited.

**Further downgrading of NUI's andNUI Utilities' credit ratings could make it more difficult and expensive tofinance their respective operations and their future operating income could bediminished as a result.**

Since September 9, 2002, Moody's has downgraded NUI's debt ratingfrom Baa-1 to Caa-1 and the debt rating of NUI Utilities from A-3 to B-1 andhas indicated they would monitor the company's liquidity position as well asits progress in selling non-core assets. Since September 26, 2003, Standard & Poor's Rating Services(S&P) has lowered its corporate credit rating for NUI Utilities from BBB toBB and placed its rating on CreditWatch with developing indications. 

NUI and NUI Utilities may be subject to further downgrades in thefuture.  None of NUI's or NUI Utilities'current credit facilities or other debt instruments contain direct events ofdefault that are triggered by such downgrades. However, additional downgrades by either S&P or Moody's couldexacerbate liquidity concerns, increase NUI's and NUI Utilities' respectivecosts of future borrowing, result in NUI Utilities being unable to secureadditional financing for the upcoming winter heating season or to refinanceNUI's and NUI Utilities' respective existing credit facilities as they becomedue and could affect their respective ability to make payments on outstandingdebt instruments and comply with other existing obligations, which could have amaterial adverse effect on their respective financial condition, results ofoperations and liquidity.  

For a further discussion of the downgrades, please see thediscussion included in Item 7. Management's Discussion and Analysis ofFinancial Condition and Results of Operations-Liquidity and CapitalResources-Credit Rating Actions of this annual report.

**Risks related to the regulation of our businesses, includingenvironmental regulation, could affect the rates we are able to charge, ourcosts and our profitability. The operation of our businesses might be adverselyaffected by changes in these regulations or in their interpretation orimplementation.**

Our businesses are subject to regulation by federal, state andlocal regulatory authorities. In particular, our natural gas distributionoperations are subject to regulation by the regulatory commissions of thestates in which the company operates and the United States Department ofTransportation and limited regulation by the FERC. These authorities regulatemany aspects of our distribution operations, including construction andmaintenance of facilities, operations, safety, and the rates that we can chargecustomers and the rate of return that we are allowed. Our ability to obtainrate increase supplements to maintain our current authorized rate of returndepends upon regulatory discretion, and there can be no assurance that we willbe able to obtain rate increases that are necessary to earn our currentauthorized rate of return. 

In addition, our operations and properties are subject toextensive environmental regulation pursuant to a variety of federal, state andlocal laws and regulations. These environmental regulations impose, among otherthings, restrictions, liabilities and obligations in connection with storage,transportation, treatment and disposal of hazardous substances and waste and inconnection with spills, releases and emissions of various substances in theenvironment. Environmental laws also require that facilities, sites and otherproperties associated with our operations be operated, maintained, abandonedand reclaimed pursuant to applicable regulatory requirements. Our current coststo comply with these laws and regulations are significant to our results ofoperations and financial condition. In addition, claims against us underenvironmental laws and regulations could result in material costs andliabilities. With the trend toward stricter standards, greater regulation, moreextensive permit requirements and an increase in the number and types of assetsoperated by us subject to environmental regulation, our environmentalexpenditures may increase in the future.

Public and regulatory scrutiny of the energy industry and of thecapital markets has resulted in increased regulation being either proposed orimplemented.  Existing regulations mightbe revised or reinterpreted, new laws and regulations might be adopted orbecome applicable to us, or our facilities, and future changes in laws andregulations might have a detrimental effect on our business. For example, in1992, the FERC issued Order No. 636 that, among other things, mandated theseparation or "unbundling" of interstate pipeline sales, transportation andstorage services and established guidelines for capacity management effectivein 1993. Subsequently, initiatives were sponsored in various states, thepurposes of which were to "unbundle" or separate into distinct transactions,the purchase of the gas commodity from the purchase of transportation servicesfor the gas. To that end, several of the company's utility operations haveunbundled residential, commercial and industrial gas purchase andtransportation rates.  The unbundledsale of gas to customers is subject to competition from unregulated marketersand brokers, which generally do not bear the obligations or costs related tooperating a regulated utility. Tariffs for transportation service havegenerally been designed to provide the same margins as bundled sales tariffs.Therefore, except for the regulatory risk of full recovery of gas costs, thecompany is financially indifferent as to whether it transports gas, or sellsgas and transportation together. The company also faces the risk of loss oftransportation service for large industrial customers, which may have theability to build connections to interstate gas pipelines and bypass thecompany's distribution system. Gas distributors can also expect increased competitionfrom electricity as deregulation in that industry decreases prices andincreases supply sources. Alternatively, opportunities may increase for gasservice to fuel generators for large industrial customers, replacing electricutility service.

Certain restructured markets have recently experienced supplyproblems and price volatility. These supply problems and volatility had beenthe subject of a significant amount of press coverage, much of which has beencritical of the restructuring initiatives. In some of these markets, proposalshave been made by governmental agencies and other interested parties tore-regulate areas of these markets which have previously been deregulated. Wecannot assure you that other proposals to re-regulate will not be made or thatlegislative or other attention to the gas utility restructuring process willnot cause the deregulation process to be delayed or reversed. If the currenttrend towards competitive restructuring of the wholesale and retail powermarkets is reversed, discontinued or delayed, our business models might beinaccurate and we might face difficulty in accessing capital to refinance ourdebt and funding for operating and generating revenues in accordance with ourcurrent business plans.

**Our gas sales, transportation and storage operations aresubject to government regulations and rate proceedings that could have anadverse impact on our ability to recover the costs of operating our pipelinefacilities.**

Our distribution services are regulated as to price, safety andrate of return by the regulatory commissions of the states in which the companyoperates. In addition, the wholesale gas sales of, and the transmission andstorage operations provided to, our Distribution Services segment are subjectto the FERC's rules and regulations in accordance with the Natural Gas Act of1938 and the Natural Gas Policy Act of 1978. In the event that FERC's rules and regulations significantly change theopportunity for us to recover costs in the future, such occurrence could have amaterial impact on the operations and profitability of our businesses.

**We might be adversely affected by legal proceedings andgovernmental investigations related to the energy asset management segment.**

Natural gas markets continue to be subject to numerous andfar-reaching federal and state proceedings and investigations because ofallegations that wholesale price increases resulted from the exercise of marketpower and collusion of the power generators and sellers such as our EnergyAsset Management segment. Discussions by governmental authorities andrepresentatives in several states have ranged from threats of re-regulation tosuspension of plans to move forward towards deregulation. The outcomes of theseproceedings and investigations might create corporate liability for thecompany, and directly or indirectly affect our creditworthiness and ability toperform our contractual obligations as well as other market suppliers'creditworthiness and their ability to perform their contractual obligations.

**We encounter significant competition in the businesses inwhich we operate. If we are unable to successfully compete in our businessmarkets, our results of operations will be adversely affected.**

We face competition in each of our business segments. Our distributionservices businesses compete with distributors of other fuels and forms ofenergy, including electricity, fuel oil and propane, in all portions of theterritories in which we have gas distribution mains.  Some of our competitors have greater financial resources andaccess to larger supplies of natural gas than those available to us.  These resources could allow thosecompetitors to price their services more aggressively than we do, which couldcause us to lose existing customers or to be unable to attract and acquire newcustomers.

We expect increased competition in natural gas distribution fromparticipants in the electricity industry as deregulation in that industrydecreases prices and increases supply sources. Furthermore, the unbundled sale ofnatural gas to customers is subject to competition from unregulated marketersand brokers, which generally do not bear the obligations or costs related tooperating a regulated utility. We also face the risk of loss of transportationservice for large industrial customers that may have the ability to buildconnections to interstate gas pipelines and bypass our distributionsystem.  The renewal or replacement ofthe existing long-term contracts with our natural gas customers at ratessufficient to maintain current revenues and cash flows depend upon a number offactors beyond our control, including:

--     competition from other fuels;

--     the price of, and demand for, natural gas in markets served; 

--     the viability of our expansion projects; and

--     the general economic impact on the industries we serve.

Our storage operations are subject to seasonality.

Our storage operations have benefited from large price swings andpeaking resulting from seasonal price sensitivity through increased withdrawalcharges and demand for non-storage hub services. There can be no certainty thatthe market for natural gas will continue to experience volatility and seasonalprice sensitivity in the future at the levels previously seen. If volatilityand seasonality in the natural gas industry decrease, because of increasedstorage capacity throughout the pipeline grid, increased production capacity orotherwise, the demand for our storage services and, therefore, the prices thatwe will be able to charge for those services, may decline.

We experience quarter-to-quarter fluctuations in our financialresults because our natural gas sales and pipeline throughputs are affected bychanges in demand for natural gas, primarily because of the weather. Inparticular, demand on our Elizabethtown Gas system in New Jersey fluctuates dueto weather variations because of the many seasonal heating customers that areserved by that system.  As a result, weare subject to seasonal variations in working capital because we purchase andstore natural gas supplies in the summer months for the upcoming winter heatingseason; however, we do not generate significant cash flows from the sale ofthis gas until the winter months when demand for natural gas is at itspeak.  

**Our natural gas operations are subject to all of the risksgenerally associated with the transportation and storage of natural gas, and wecould experience losses not covered by insurance if there is any injury ordamage as a result of any accident or other incident.**

Natural gas is a volatile product, and our gas operations aretherefore subject to a variety of risks, including personal injuries and damageto storage facilities, pipelines, related equipment and surrounding propertiescaused by hurricanes, weather and other acts of God, fires and explosions,subsidence, as well as leakage of natural gas. Our storage facilitiesincorporate certain primary and backup equipment, which, in the event ofmechanical failure, might take some time to replace. Any prolonged disruptionto the operations of our distribution and storage facilities, whether due tomechanical failure, labor difficulties, destruction of or damage to suchfacilities, severe weather conditions, interruption of transportation orutilities service or other reasons, could have a material adverse effect on ourbusiness, results of operations and financial condition. Additionally, some ofour storage contracts may obligate us to indemnify a customer for any damage orinjury occurring during the period in which the customer's natural gas is inour possession. In order to minimize the effects of any such incident, wemaintain insurance coverage which includes property, general liability,professional liability, and business interruption insurance; however, there isno assurance that the proceeds of any such insurance would be paid in a timelymanner or be in an amount sufficient to meet our needs if such an event were tooccur.

**We rely on interstate pipelines and third-party natural gasproduction and any interruption of service or production could affect ourability to supply our customers or store natural gas.**

To obtain natural gas, our distribution and storage businessdepends on the pipelines to which it has access. Many of these pipelines areowned by parties not affiliated with us. Any interruption of service on thosepipelines or any adverse change in the terms and conditions of service couldhave a material adverse effect on our ability (and the ability of ourcustomers) to transport natural gas to and from our facilities and a correspondingmaterial adverse effect on our revenues. In addition, the rates charged by those interconnected pipelines fortransportation to and from our facilities may affect the utilization and valueof our services.  Significant changes inthe rates charged by those pipelines or the rates charged by other pipelineswith which the interconnected pipelines compete could also have a materialadverse effect on our revenues.

**Our debt payments are subject to variations in interest rates,which we may not be able to manage.**

We are exposed to changes in interest rates as a result of ourissuance of variable-rate debt and our short-term bank credit facilities. As aresult, our future interest payments may increase significantly if interestrates rise.

**Our business is subject to manyhazards from which our insurance may not adequately provide protection orcoverage.**

Our operations are subject to manyhazards.  These hazards include:

--     damage topipelines, related equipment and surrounding properties caused by hurricanes, floods,fires and other natural disasters;

--     inadvertentdamage from construction and farm equipment;

--     leakage ofnatural gas and other hydrocarbons;

--     fires andexplosions; 

--     acts of waror terrorism; and 

--     otherhazards, including those associated with natural gas, that could also result inpersonal injury and loss of life, pollution and suspension of our operations. 

Although we have insurance to protect against many of theseliabilities, this insurance is capped at certain levels and does not providecoverage for all liabilities. Therefore, it is possible that our insurance maynot be adequate to cover all losses or liabilities that we might incur in ouroperations. Moreover, there is no assurance that we will be able to maintaininsurance at adequate levels or at reasonable rates, and particular types ofcoverage may not be available in the future. Should catastrophic conditionsoccur that interrupt delivery of gas for any reason, such occurrence could havea material impact on the profitability of our operations.

**Forward-Looking Statements**

Certain statements contained in this annual report are"forward-looking statements" within the meaning of federal securities laws. Thecompany intends that these statements be covered by the safe harbors createdunder those laws.  These statementsinclude, but are not limited to:

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

--     statements asto NUI's and NUI Utilities' expected liquidity needs during fiscal 2004, fiscal2005 and beyond and statements as to the sources and availability of funds tomeet the liquidity needs of NUI and NUI Utilities;

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

--     statements asto the company's possible settlement with the FPSC;

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

--     statements asto expected rates, gas volumes, gas sales, revenues, margins, expenses andoperating results;

--     statements asto industry forecasts in markets in which the company has operations;

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

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

--     statements asto the timing for seeking regulatory approval for its Florida East-WestPipeline project;

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

--     statements asto the safety and reliability of the company's equipment, facilities andoperations;

--     statements asto the sales process for the company, including with respect to the time framefor entering into an agreement for the sale of the company;

--     expectations asto the impact of lawsuits filed against the company and the impact of ongoingand completed legal and regulatory investigations and proceedings, includingthose described under Item 3. Legal Proceedings;

--     statements asto financial projections;

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

--     statements asto expected level of demand on the company's systems for natural gas during theterm of the company's gas procurement contracts;

--     estimates asto the amount of the write-off of the company's net regulatory assets atSeptember 30, 2003;

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

--     statements asto the ability of NUI and NUI Utilities to pay dividends;

--     statements asto the company's plans to renew municipal franchises and consents in theterritories its serves;

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

--     statements asto whether the company's internal control weaknesses were addressed bymanagement;

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

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

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

--     statements asto trends;

--     statements asto whether the company's accrued tax liabilities are adequate and as to whetherany settlement related to the examination of NUI's Federal income tax returnsfor 2000 and 2001 by the Internal Revenue Service will have a material impacton NUI's consolidated statement of operations, financial position or cash flow;

--     statements asto the amount of the over-recovery balance under City Gas' purchased gasadjustment recovery clause;

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

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

--     expectations asto the company's growth, cash flows and capital expenditures.

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

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

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

--     the impactand outcome of ongoing investigations and lawsuits;

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

--     the effectsof general economic conditions;

--     increases incompetition in the markets served by the company;

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

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

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

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

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

--     theavailability and price of insurance;

--     theavailability of adequate supplies of natural gas;

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

--     actions takenby government regulators, including decisions on base rate-increase requests;

--     actions takenby credit rating agencies;

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

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

--     fluctuationsin energy commodity prices;

--     weathervariations and other natural phenomena;

--     acts of waror terrorism; and

--     other factorsdiscussed elsewhere in this annual report.

Many of these factors are beyond the company's ability to controlor predict. Given these uncertainties, readers are cautioned not to place unduereliance on any forward-looking statements, which only speak as of the date ofthis annual report. The company does not undertake any obligation to releasepublicly any revisions to these forward-looking statements to reflect events orcircumstances after the date of this annual report or to reflect the occurrenceof unanticipated events, except as may be required under applicable securitieslaws.

**Item 2.  Properties**

The company's utility plant includes approximately 6,200 miles ofinstalled steel, cast iron and plastic gas mains, together with gate stations,meters and other gas equipment in the states where it distributes natural gas.In addition, the company owns peak-shaving plants, including its LNG storagefacility which is located in Elizabeth, New Jersey.  

The company also owns real property in Union, Middlesex, Mercer,Morris, Warren, Sussex and Hunterdon counties in New Jersey, and in Miami-Dade,Broward, Brevard, Palm Beach, Martin, Indian River and St. Lucie counties in Florida,portions of which are under lease to others. The company's properties includeoffice buildings in Hialeah and Rockledge, Florida that serve as the principaloperating offices for the Florida operations. The company also owns variousservice centers in New Jersey, Florida, and Maryland from which the companydispatches service crews and conducts construction and maintenance activities. 

The company leases office space in Bedminster, New Jersey thatserves as its corporate headquarters, and leases certain other facilities inNew Jersey, Florida, Maryland and Virginia that are operated as customerbusiness offices or operating offices. The company also leases approximately200,000 square feet in an office building in Union, New Jersey.  

Virginia Gas owns approximately 5 acres and SSLLC owns 595 acres,which in total comprise the Saltville facility.  The Early Grove Field is situated on land not owned by thecompany. 

Subject to minor exceptions and encumbrances, all other propertymaterially important to the company and all principal plants are owned in feesimple, except that most of the mains and pipes are installed in public streetsunder franchise or statutory rights or are constructed on rights of wayacquired from the apparent owner of the fee.

**Item 3.  Legal Proceedings**

***Class Action Litigation***

Between October 28, 2002 and December 20, 2002, fivesubstantially similar civil actions were commenced in the United StatesDistrict Court for the District of New Jersey, in which the plaintiffs allegethat the company and two of its former presidents violated federal securitieslaws by issuing false statements and failing to disclose information regardingthe company's financial condition and current and future financial prospects inits earnings statements, press releases, and in statements to analysts andothers.  By orders dated December 19,2002, January 22, 2003, and February 3, 2003, the five actions wereconsolidated into one action captioned In re NUI Securities Litigation.  The five consolidated lawsuits include: (1)an action captioned 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 subsequently plaintiffs were granted leave to file aSecond Amended Consolidated Complaint, which was filed on July 17, 2003. TheSecond Amended Complaint, brought on behalf of a putative class of purchasersof NUI's common stock between November 8, 2001 and October 17, 2002, assertsclaims under Section 10(b), including Rule 10b-5 promulgated thereunder, andSection 20(a) of the Exchange Act against the company, and two of its formerpresidents.  Specifically, the SecondAmended Complaint alleges that the defendants (i) failed to disclose materialfacts that would impair the company's current and future earnings, including(a) the allegedly accurate amount and explanation of the company's bad debts,(b) a purportedly illegal practice by the company in "re-terminating"intrastate calls, (c) alleged accounting improprieties in connection withpurportedly unearned revenue, and (d) allegedly inaccurate earnings per shareinformation, and (ii) inflated the company's earnings materially by (a)allegedly making misleading statements concerning, and failing to properlyrecord, bad debt costs, (b) allegedly attributing the company's rising costs toincorrect and immaterial factors, and (c) purportedly pursuing illegaltelecommunications billing practices. The Second Amended Complaint seeksunspecified monetary damages on behalf of the class, including costs andattorneys fees. On October 14, 2003, defendants moved to dismiss the SecondAmended Complaint under, inter alia, the Private Securities Litigation ReformAct. Opposition papers to the motion to dismiss were served on December 19,2003, and reply papers were filed on February 23, 2004. The motion was heard onMarch 15, 2004.  By decision and orderdated April 23, 2004, the district court granted in part and denied in partdefendants' motion to dismiss.  Thedistrict court dismissed the Section 10(b) claims against the individualdefendants and dismissed all claims against the company concerning the alleged"reterminating" scheme. The district court denied the motion to dismiss withrespect to certain allegations that the company made misleading misstatementsconcerning the accurate level of bad debt and earnings and denied the motion todismiss the Section 20(a) claims against the individual defendants. 

No discovery has occurred and defendants' time to answer thecomplaint has not yet run.  Although thecompany intends to vigorously defend these lawsuits, it is not possible at thistime to determine a likely outcome.

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

The plaintiffs, James Greiff and TIC Enterprises, Inc., sued thecompany and three other company related entities, NUI Sales Management, Inc. (NUISales), NUI Capital Corp. and TIC, for breach of contract and fraud arising outof the company's purchase of Greiff's interest in TIC Enterprises, LLC. Theplaintiffs allege they are entitled to payment on a $3 million promissory noteand have made claims arising from the defendants' alleged breach of a 2001purchase agreement for $22 million in punitive damages for the defendants'alleged fraud and $3 million plus interest and punitive damages for thedefendants' alleged fraudulent transfers. The plaintiffs have also alleged a tortious interference claim for $3million, which the court previously dismissed. The company and the remainingdefendants are vigorously defending the lawsuit and deny any liability to theplaintiffs. NUI Sales and defendant TIC have a four-count counterclaim againstboth plaintiffs for more than $3 million. They are for: (1) breach of the 2001 Purchase Agreement; (2) breach ofthe 1997 Amended and Restated Limited Liability Company Agreement; (3) fraud inthe inducement; and (4) unjust enrichment. This case, originally filed in the Northern District of Georgia, wasrecently transferred on defendants' motion to the District of Delaware.  

The parties are in the midst of discovery,and have exchanged written responses and objections to discovery requests alongwith numerous documents. The parties have also begun taking depositions of theparties and fact witnesses.  On May 2,2004, NUI proposed a settlement to the plaintiffs in which the company agreedto pay the plaintiffs $1.4 million to completely satisfy NUI's obligation underthe note, as well as to resolve all other claims that the company and theplaintiffs had brought against each other. On May 5, 2004, NUI received the plaintiffs' written acceptance of thecompany's settlement proposal, and the plaintiffs requested that NUI preparethe appropriate settlement documents for review.  As a result, the company reduced the amount payable under thenote from $3.0 million to $1.4 million on the September 30, 2003 ConsolidatedBalance Sheet, and recorded a gain of $1.6 million in other income on theConsolidated Statement of Income for fiscal 2003.

***FlintEnergy Construction Co., Inc. and Virginia Gas Pipeline Company Litigation***

Flint Energy Construction Co., Inc. sued Virginia GasPipeline Company (VGPC) on a contract claim for amounts billed to VGPC for workperformed by Flint Energy as general contractor on the extension of VGPC's P-25pipeline.  VGPC is counter-suing Flintfor breach of contract.  The case hasmoved to the deposition phase and is expected to be brought to trial in June of2004.  Flint originally billed VGPC $2.2million, which represents the disputed amount. At this time, the company is unable to determine the likely outcome.

***SpecificCruise Systems, Inc. and Frigette, Inc. d/b/a SCS/Frigette, Inc. v. TIC, NortelNetworks, Inc. and Sherry Hutto Walton.***

Plaintiffs, Specific Cruise Systems, Inc. andFrigette, Inc. d/b/a SCS/Frigette, Inc., filed a Petition in Texas state courtagainst TIC, one of TIC's former employees, Sherry Walton, and Nortel Networks,Inc. on November 5, 2002 for alleged damages relating to lost profits andreplacement services arising out of their claims for breach of contract,fraudulent inducement, and breach of warranty, as well as for an offset/creditin connection with the sale by TIC of telephone equipment.  TIC denies that it made such representationsand is relying upon the contracts entered into between the parties.  TIC seeks payment for the balance duerelating to the sale in the amount of approximately $83,000.  If the provisions of the contract are notenforceable, the plaintiffs may be entitled to lost profits resulting from thealleged delay in the installation of the system and the alleged interferencewith their business resulting from defects in the system.  If the contract is deemed enforceable, aprovision in the contract providing a limitation on liability may precluderecovery by plaintiff on certain issues. On June 11, 2003, TIC filed a Motion to Compel Arbitration; no decisionhas been rendered on the motion. Discovery is continuing.  At thistime, the company is unable to determine the likelihood of an outcome.

The company is also involved in various other claimsand litigation incidental to its business. In the opinion of management, none of these other claims and litigationwill have a material adverse effect on the company's results of operations orits financial condition.

***NJBPU Focused Audit and Regulatory Orders***

As a result of NUI and NUI Utilities' credit downgrades during2003, negative credit rating comments and concerns raised during a routinecompetitive services audit of Elizabethtown Gas conducted by the NJBPU, inMarch 2003 the NJBPU ordered a focused audit of NUI, NUI Utilities andElizabethtown Gas in six key areas:  (1)strategic planning; (2) affiliate transactions; (3) financial structure andinteraction; (4) accounting and property records; (5) corporate governance; and(6) executive compensation.  The NJBPUretained The Liberty Consulting Group (Liberty) as the auditors for the focusedaudit.  On March 17, 2004, the NJBPUreleased the final report for the focused audit, which, among other things,cited weaknesses in each of the foregoing six areas.  Described below under the heading Focused Audit Report is asummary of the final report filed with the NJBPU by Liberty and a summary ofthe terms of the settlement agreement entered into on April 13, 2004 among NUI,NUI Utilities, Elizabethtown Gas and the NJBPU regarding the issues raised inthe focused audit.  

In addition, the NJBPU also issued a series of regulatory ordersto NUI, NUI Utilities, and Elizabethtown Gas during calendar 2003 and 2004,concerning, among other things, a number of the issues which were the subjectof the focused audit.  These arediscussed in more detail below under the heading Regulatory Orders.  

*Focused Audit Report*

OnDecember 17, 2003, Liberty published an interim audit report which presentedthe auditors' description of key events and activities, as well as theirfindings and conclusions through that date. The final audit report was acceptedand released by the NJBPU on March 17, 2004. NUI filed responsive comments on March 26, 2004. 

The audit report cites weaknesses and areas of concern.  However, the report also points out thatElizabethtown Gas consistently provided safe and reliable service to itscustomers during the period under audit. 

***Strategic Planning***.  The audit report states that NUI was too aggressive in planningfor non-utility growth, with overly optimistic goals for earnings growth,return on equity and revenues.  NUI'sdecision to enter into various non-utility services areas, in particulartelecommunications and environmental, were alleged to be too optimistic andbased on incorrect assumptions given the economic climate of the applicableindustries, and resulted in significant losses and write-downs.  The report also states that NUI did notexercise sufficient control over capital budgeting and reporting for its non-utilityinvestments, that management did not keep directors sufficiently informed aboutdeveloping financial problems, and that delays and changes to capital andexpense budgets adversely affected the management of Elizabethtown Gas.

***Affiliate Transactions***.  The audit report states that the non-utility operations of NUIrelied inappropriately on the utilities for funding of operation and supportcosts.  It also discusses problems withthe allocation of costs, including costs associated with owned and leasedproperties; the lack of arms-length negotiations and agreements with affiliatesor analysis of marketplace alternatives; the incorrect classification ofintercompany accounts and notes payable; and the failure to memorialize orproperly document various service agreements or file any such agreements withthe NJBPU, as required by the March 1, 2001 holding company order.

The audit report also describes certain questionable transactionsinvolving NUI Energy Brokers, which was the focus of the independentinvestigation by NUI's Audit Committee, as described below. 

***Financial Structure and Interaction***.  The audit report's analysis of NUIUtilities' credit rating problems states that, despite the profitability andstability of NUI Utilities' operations, the lack of proper insulation of NUI'sutility businesses from the non-utility businesses caused NUI Utilities' creditratings to decline, as the result of NUI's non-utility company problems.  The audit report states that NUI Utilities'cash had been inappropriately pooled with the cash of other business units ofNUI.  Also, it states that the companyfailed to document intercompany cash transfers and failed to settle balancesbetween companies on a regular basis, leading to problems with reconciliationand unreasonable loans from NUI Utilities and its operating divisions tonon-utility operations, all in violation of the NJBPU's holding company order.The audit report states that NUI used funds derived from NUI Utilities' creditagreements to fund non-utility investments and operations.  In addition, the audit report states thatNUI's senior notes placed limitations on NUI Utilities' operating ability andthat the various amendments to and refinancing of NUI's credit agreements,which led to onerous provisions in NUI Utilities' credit agreements, were notnecessary.  The audit report notes thatNUI has since reengineered its cash management structure to separate the cashof NUI Utilities from non-utility cash, and has begun to operate under this newstructure.

The audit report is generally critical of NUI's weakness in cashforecasting and its general liquidity handling.  The audit report also questions NUI's actions surrounding its2002 equity sale, stating that NUI used the funds therefrom as a means to fundnon-utility operating losses and that such funds were inappropriately includedin Elizabethtown Gas' capital structure ahead of a base rate hearing, mostlikely affecting the outcome.

***Accounting and Property Records***.  The audit report states various accountingconcerns and weaknesses, in particular:

--     Inappropriateand inaccurate treatment of intercompany payable and receivable balances,

--     Inappropriateuse of a common cash pool,

--     Lack of aformal cash management agreement,

--     Weaknesses ininternal controls for accounts payable and receivable,

--     Lack offormal or appropriate policies and procedures in certain accounting functions,and

--     The need to audit procedures for fixed asset and continuingproperty records functions.

***Corporate Governance***.  The audit report states that the Board's committee structurereflects a reasonable division of authority and responsibility for the variousBoard functions, and a review of committee activities indicates that there hasbeen a focus on relevant matters; Board members have a reasonably substantiatedtime commitment to NUI matters; director attendance of Board and committeemeetings has been good and directors received information to prepare formeetings with sufficient time; and the Audit Committee's practices andprocedures were generally in keeping with the requirements or proposedrequirements of the Sarbanes-Oxley Act and the securities exchanges.  The audit report also notes certainweaknesses: retention of the Board's records has been deficient; the Board wastoo small and lacked appropriate utility operating and regulatory experienceand focus; until recently the Board lacked formal nominating procedures andpolicies; the Board was not sufficiently informed about Elizabethtown Gas'operations; the oversight of subsidiary boards could have been improved; andthe Board relied too heavily on management for evaluating new ventures and forensuring compliance with the holding company order, which led to severalinstances of non compliance.  Inparticular, the report states that NUI failed to comply with key provisions ofthe holding company order and that NUI has demonstrated a lack of understandingof what such order entails.

***Executive Compensation***.  The audit report finds that the structure and administration ofexecutive compensation have been reasonable and the change in controlagreements are representative.  However,the audit report states that NUI's executive and director compensation has beenbased on an inappropriate peer group, and as a result compensation became toohigh.  In addition, the audit reportfinds that the Board has at times overridden the terms of incentive programsand paid bonuses to executives when goals have not been met. The audit reportfurther states that the Board's fees are too high, and the company's consultingagreement with its Chairman, a former NUI executive, which ended on March 31,2004, has remained in place too long. In addition, the audit report states that Elizabethtown Gas bears toomuch of executive compensation costs, while compensation of Elizabethtown Gas'advisory board members should be increased. Furthermore, the audit report notes that the company's policy of payingdirectors in stock instead of cash and requiring directors and executives toown specified minimum amounts of company stock is desirable and helps align theinterests of directors and executives with those of stockholders.  

***Company Response***.  The company filed its response to the final audit report on March 26,2004.  As indicated in its response,although NUI did not agree with many of the statements and findings in thereport, NUI has implemented a number of important changes in areas examined bythe audit report including:

--     engaging in acomprehensive process to re-engineer its cash management operations; 

--     implementingcash segregation policies and practices as of September 1, 2003 so that thecash of NUI Utilities is no longer pooled with that of NUI's non-utilitysubsidiaries;

--     conductingmonthly reconciliation and payment of intercompany balances, which included therepayment by NUI, in full, on November 24, 2003 of the $85 million intercompanyreceivable owed to NUI Utilities;

--     strengtheninginternal controls for accounts payable and receivable;

--     creating acash management policy with formal policies and procedures in the accountingfunction; and 

--     entering intonew credit facilities which eliminated certain provisions limiting NUIUtilities' operating flexibility. 

NUI Utilities has expanded its Board and increased itsresponsibilities to strengthen the independence of the utilitiesoperations.  Both NUI and NUI Utilitieshave also implemented significant changes in senior management.

*Summary of Settlement Agreement with the NJBPU*

On April 14, 2004, the company announced that NUI, NUI Utilitiesand Elizabethtown Gas Company had entered into a settlement agreement with theNJBPU on all issues related to the focused audit, and on April 26, 2004, theNJBPU issued a Final Order accepting and adopting that settlementagreement.  Pursuant to the settlementagreement, NUI Utilities agreed to refund $28 million plus interest toElizabethtown Gas ratepayers and to pay a $2 million penalty to the State ofNew Jersey over five years.  The $28million will be credited to ratepayers as follows:  $7 million in NUI's fiscal year 2004, $6 million in NUI's fiscalyear 2005 and $5 million in each of NUI's fiscal years 2006, 2007 and2008.  The $2 million penalty shall bepaid in $400,000 annual installments in each of NUI's fiscal years 2004 through2008.  The company has the option tomake a balloon payment of all outstanding amounts due under the terms of thesettlement agreement at any time.  Inaddition, upon the close of a sale of the company, any outstanding balance isrequired to be paid in full by the company within a period to be determined bythe NJBPU.  The refund and penaltyincreased the company's net after-tax loss for fiscal year 2003 byapproximately $18.6 million, or $1.16 per share.

In addition to the required monetary refund and penalty, NUIagreed to file a plan with the NJPBU for implementing the recommendations ofthe Liberty report, as modified by the settlement.  The settlement agreement also contains a number of otherprovisions, including, without limitation:

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

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

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

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

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

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

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

The terms of the settlement agreement (1) do not prohibit thepayment of dividends to NUI or the settlement of monthly intercompany balances,(2) do not waive or alter the requirements of any existing Order of the NJBPUand (3) are not binding on any purchaser of the company, except that, uponclosing of the sale, any outstanding refund and penalty balance are required tobe paid in full by the company within a period of time to be determined by theNJBPU.  The company's agreement to theterms of the settlement is not an acknowledgement of non-compliance with anylaw, regulation or NJBPU Order or requirement. The settlement agreement resolves all issues identified in the finalLiberty audit report without acknowledgement or admission by the company as tothe correctness of any issue or that any specific issue forms the basis or anypart of the basis for the payments described above.  The settlement provides that no further civil action shall betaken by the NJBPU.  The NJBPU retainsthe authority to impose any requirements or conditions on a purchaser upon apetition for approval of a sale of the company.  

*Regulatory Orders*

On September 16, 2003, the NJBPU, in connection with its approvalof a provisional increase in Elizabethtown Gas' BGSS rate, ordered NUI toprovide (1) written assurances that the approved revenues would be used solelyfor Elizabethtown Gas and (2) an acceptable plan whereby NUI and any othersubsidiaries would repay Elizabethtown Gas for any money owed to it. Inaddition, NUI and NUI Utilities were ordered to continue to cooperate with thefocused audit, participate in weekly meetings to review their financialintegrity and comply with existing NJBPU Orders, and NUI Utilities was orderedto refrain from issuing any special dividends (i.e., extraordinary dividendsnot in accordance with the historical practices of the Board of Directors ofNUI Utilities) without the prior approval of the NJBPU. After the September 26,2003 announcement by NUI of its intention to sell the company, the NJBPU issuedan Order dated October 30, 2003, ordering NUI to: (1) provide information tothe NJBPU concerning its compensation packages; (2) provide assurances thatElizabethtown Gas' immediate and short-term liquidity needs would be met; (3)provide the NJBPU with all information necessary to assess the sufficiency offunding of NUI's pension and other post-retirement plans; and (4) present adetailed plan and schedule for preparing the company for sale, for operatingduring the sale process and for conducting sale activities in order to assurethe NJBPU that the process of selling NUI would be transparent, independent,and timely. In addition, the NJBPU ordered NUI to protect the utility employeesof Elizabethtown Gas during the sale process, inform the NJBPU of the progressof the 2003 fiscal year-end audit of the company's financial statements beingconducted by PricewaterhouseCoopers LLP (PwC) and amend its consultingagreement with FTI Consultants. In October 2003, the company employed FTIConsultants to manage its financial operations and develop new liquidityforecasts.  

Pending its review of the interim focused audit report, onDecember 11, 2003, the NJBPU issued an Order in which NUI Utilities andElizabethtown Gas were directed to cease purchasing gas from NUI Energy Brokersupon approval of a new gas supply procurement and energy asset management plan,which was to be submitted to the NJBPU by January 2, 2004 for the NJBPU toapprove by January 8, 2004. Further, per the Order, NUI Utilities is prohibitedfrom issuing special dividend payments (i.e., extraordinary dividends not inaccordance with the historical practices of the Board of Directors of NUIUtilities); and Elizabethtown Gas shall not pay any allocated costs of anyagreements, retainers or arrangements for professional services and otherexpenditures incurred in connection with, or as a result of, the focused auditand/or financial difficulties of NUI unless approved by the NJBPU. 

In its Order dated January 14, 2004, the NJBPU accepted the plansubmitted by NUI Utilities and Elizabethtown Gas which transferred themanagement of NUI Utilities' and Elizabethtown Gas' gas supply assets to NJRESthrough March 31, 2004. The NJBPU further directed NUI Utilities to file aprocedure with the NJBPU for the competitive procurement of gas supplymanagement services for the period commencing April 1, 2004 through March 31, 2005.In the event NJRES was not selected to continue to provide services to NUIUtilities as a result of the bid process, the NJBPU directed NUI Utilities topay an early termination fee. 

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

***Investigations of NUI Energy Brokers***

Through January 2004, NUI Energy Brokers served as NUI Utilities'and Elizabethtown Gas' agent for purchasing gas and managing their utilizationof their pipeline, storage and peaking contracts and assets. NUI Energy Brokersand Elizabethtown Gas were also parties to a contract pursuant to whichElizabethtown Gas purchased certain firm gas supplies from NUI Energy Brokers.NUI Energy Brokers also arranged financial transactions on behalf ofElizabethtown Gas relating to its gas procurement needs.  

In early November 2003, as the result of the focused auditconducted by Liberty, the Board of Directors of the company became aware ofallegations of inappropriate conduct by employees of NUI Energy Brokers.  Some employees of NUI Energy Brokersallegedly had engaged in activities that improperly benefited NUI EnergyBrokers at the expense of Elizabethtown Gas. The Audit Committee of the Board retained an independent outside counselto assist it in conducting an independent investigation into the allegationsand report the findings and conclusions to the Audit Committee.

As a result of its investigation, the independent counselconcluded that while NUI had established NUI Energy Brokers with internalcontrols designed to protect Elizabethtown Gas' assets, NUI Energy Brokerstraders often ignored or circumvented these controls.  The NUI Energy Brokers bonus/commission plan created an incentivefor NUI Energy Brokers traders and other NUI employees who participated in thebonus/commission plan to engage in conduct that favored NUI Energy Brokers overElizabethtown Gas or to remain silent if they observed conduct that allowed NUIEnergy Brokers to benefit at Elizabethtown Gas' expense.  The independent counsel concluded that themaximum amount of lost margin to Elizabethtown Gas as a result of NUI EnergyBrokers' failure to obtain for Elizabethtown Gas NUI Energy Brokers' best orweighted average price of the day for comparable transactions was approximately$6.5 million over a five year period. The independent counsel also concluded that NUI Energy Brokers recordedas income a discount of $1.3 million that a counterparty gave for an earlysettlement of a deferred payment transaction. In addition, the independent counsel concluded that the maximum amountof lost margin to City Gas as a result of NUI Energy Brokers' failure to obtainfor City Gas the best or weighted average price of the day for comparabletransactions was approximately $2.6 million, for which amount the company hasrecorded a pre-tax reserve at September 2003.  The independent counsel also reached conclusions with respect tothe conduct of various employees.  Basedupon these conclusions, the Audit Committee recommended that the Board ofDirectors of NUI take certain personnel actions, which recommendation the NUIBoard of Directors effected. 

The Attorney General of the State of New Jersey is conducting acriminal investigation relating to NUI Energy Brokers.  In connection with this investigation, NUIreceived subpoenas issued by the New Jersey State Attorney General'sOffice.  NUI is cooperating fully withthe New Jersey Attorney General's Office. 

In November 2003, the SEC advised the company that it isconducting an informal inquiry relating to NUI Energy Brokers.  On March 1, 2004, the SEC requested NUI toproduce voluntarily certain documents in furtherance of its informalinquiry.  NUI is fully cooperating withthe SEC.  At this point, the companycannot predict whether or not the SEC will initiate a formal investigation intothis matter.  

**Item 4.  Submission of Matters to a Vote ofSecurity Holders**

No matter was presented for submission to a vote of securityholders through the solicitation of proxies or otherwise during the lastquarter of fiscal 2003.

**PART II **

**Item 5.  Market for Registrant's CommonEquity and Related Stockholder Matters**

**(a)          Market Information**

NUI common stock is listed on the New York Stock Exchange and istraded under the symbol "NUI". The quarterly cash dividends paid and thereported price range per share of NUI common stock for the two years endedSeptember 30, 2003, were as follows:
|                   | **Quarterly Cash** | **                          Price Range** |
|-------------------|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                   | **Dividend**       | **High**                                                                                                                                                          | **Low** |
| **Fiscal  2003:** |               |                                                                                                                                                              |   |
| First Quarter     | $0.245             | $22.25                                                                                                                                                            | $9.65 |
| Second Quarter    | 0.245              | 17.40                                                                                                                                                             | 13.13 |
| Third Quarter     | 0.245              | 17.17                                                                                                                                                             | 13.20 |
| Fourth Quarter    | 0.245              | 17.40                                                                                                                                                             | 14.60 |
|                   |               |                                                                                                                                                              |   |
| **Fiscal  2002:** |               |                                                                                                                                                              |   |
| First Quarter     | $0.245             | $24.40                                                                                                                                                            | $20.18 |
| Second Quarter    | 0.245              | 25.00                                                                                                                                                             | 21.35 |
| Third Quarter     | 0.245              | 27.50                                                                                                                                                             | 24.24 |
| Fourth Quarter    | 0.245              | 27.45                                                                                                                                                             | 15.87 |

**(b)          Approximate Number of Holders of Common Stock**

There were 4,721 shareholders of record of NUI common stock atApril 30, 2004.

**(c)          Dividends**

NUI's dividend policy is reviewed on an ongoing basis and isdependent upon NUI's expectation of future earnings, cash flow, financialcondition, capital requirements and other factors. On November 25, 2003, NUI'sBoard of Directors indicated its intention to permanently reduce the dividendrate on NUI's common stock by 47 percent beginning with the March 2004 dividendpayment.  On this basis, the quarterly dividendon NUI's common stock would be $0.13 per share, representing an annual dividendrate of $0.52 per share following the reduction.  However, under the amendment to NUI'scredit facility entered into on May 10, 2004, NUI is prohibited frompaying any cash dividends during any fiscal quarter in which NUI's consolidatedtotal debt represents more than 60 percent of its total capitalization,measured (i) at the last day of the immediately preceding fiscalquarter and (ii) pro forma at the time such dividend is made.  As a result of these restrictions, NUI isprohibited from paying any dividends at this time and expects to be unable topay dividends for the foreseeable future.

**(d)          Sale of Unregistered Securities**

**Common Stock Issued in Conjunction with Acquisitions**.Pursuant to the Stock Purchase Agreement between the company and Mr. H.A.Street and Mrs. Edith Street (the Streets), on October 5, 2001, the companyissued to each of the Streets 72,324 (144,648 total) unregistered shares of NUIcommon stock as partial consideration for each of the Streets' respective 25percent ownership of VGDC and VGSC. The shares were issued under a privateplacement pursuant to an exemption from the registration requirements of theSecurities Act of 1933 under Section 4(2) and/or Rule 506 of Regulation D ofthe Securities Act of 1933. The company did not issue any shares ofunregistered securities during fiscal years 2003 or 2001.

**Item 6.  Selected Financial Data**

**Selected ConsolidatedFinancial Data(in thousands, except per share amounts)**
|                                                            | **Fiscal Years  Ended September 30,** |
|------------------------------------------------------------|---------------------------------------|
|                                                            | **    2003**           | **   2002** | **   2001** | **  2000** | **  1999** |
| Operating Revenues                                         |   $652,377                       | $519,872 | $646,006 | $494,763 | $435,757 |
| Income (Loss) from Continuing                              |                                  |   |   |   |   |
|     Operations                              | $(11,317)                             | $16,051 | $27,454 | $19,483 | $23,271 |
| Net Income (Loss)                                          | $(45,149)                             |  $(15,888) | $  16,313 | $20,558 | $24,560 |
| Basic and Diluted Income (Loss) from Continuing Operations |                                  |   |   |   |   |
| Per Share                                                  | $(0.71)                               | $  1.08 | $2.05 | $1.51 | $1.83 |
| Basic and Diluted Net Income (Loss)                        |                                  |   |   |   |   |
|     Per Share                               | $(2.82)                               | $(1.06) | $1.22 | $1.59 | $1.93 |
| Dividends Paid Per Share                                   | $0.98                                 | $  0.98 | $0.98 | $0.98 | $0.98 |
| Total Assets                                               | $1,020,763                            | $1,038,982 | $1,146,391 | $911,268 | $844,226 |
| Capital Lease Obligations                                  | $9,798                                | $10,743 | $3,188 | $4,191 | $2,599 |
| Long-Term Debt                                             | $309,053                              | $309,017 | $308,989 | $268,947 | $268,911 |
| Common Shareholders' Equity                                | $230,115                              | $288,252 | $274,727 | $250,896 |  $237,318 |
| Common Shares Outstanding                                  | 16,025                                | 15,990 | 13,755 | 12,983 | 12,750 |

**Notes to the Selected Consolidated Financial Data:**

Net loss for fiscal 2003 includes impairment charges to adjustthe carrying value of assets being held for sale in conjunction with thecompany's decision to sell its NUI Telecom subsidiary, which decreased netincome by approximately $25.5 million (after-tax), or $1.59 per share, and acumulative effect of a change in accounting charge due to the adoption of EITF02-03, "Issues Involved in Accounting for Contracts Under EITF 98-10," whichdecreased net income by $5.9 million (after-tax), or $0.36  per share. The net loss also includescharges recorded in connection with the settlement of the focused auditconducted by the NJBPU, which decreased net income by approximately $18.6million (after-tax), or $1.16 per share. The company has established a reserve of $1.6 million (after-tax), or$0.10 per share, in anticipation of a similar settlement with the FloridaPublic Service Commission.

In fiscal 2002, the company adopted Statement of FinancialAccounting Standards No. 144, "Accounting for the Impairment and Disposal ofLong-Lived Assets."  Accordingly, theresults of operations of those NUI entities that have been or will be disposedof and meet the applicable accounting criteria have been reported asdiscontinued operations for all years presented.  See Note 11 of the Notes to the Consolidated Financial Statementsfor a further discussion of discontinued operations.

Net loss for fiscal 2002 includes a cumulative effect of a changein accounting charge due to the adoption of Statement of Financial AccountingStandards No. 142, "Goodwill and Intangible Assets," which decreased net incomeby $17.6 million (after tax), or $1.18 per share.

During fiscal 2002, the company adopted the net basis reportingprovision of EITF 02-03, "Accounting for Contracts Involved in Energy Tradingand Risk Management Activities."  SeeNote 1 of the Notes to the Consolidated Financial Statements.

Net income for fiscal 2000 includes a gain on the sale of assets,which increased net income by $1.7 million (after tax), or $0.13 per share.

Net income for fiscal 1999 includes a pension settlement gain andother non-recurring items.  The effectof these items increased net income by $2.3 million (after tax), or $0.18 pershare.

**SummaryConsolidated Operating Data**
|                                                     | **Fiscal Years Ended September 30,** |
|-----------------------------------------------------|--------------------------------------|
|                                                     | **2003**                             | **2002** | **2001** | **2000** | **1999** |
| **Operating  Revenues (Dollars in thousands)**      |                                      |  |  |  |  |
| Firm Sales:                                         |                                      |  |  |  |  |
| Residential                                         | $272,582                             | $231,698 | $272,446 | $208,440 | $197,799 |
| Commercial and  Industrial                          | 112,995                              | 91,872 | 128,007 | 94,686 | 90,979 |
| Interruptible Sales                                 | 62,636                               | 41,339 | 80,804 | 63,370 | 49,110 |
| Unregulated Sales                                   | 123,536                              | 101,236 | 135,610 | 96,296 | 65,464 |
| Transportation Services                             | 48,675                               | 47,195 | 40,737 | 41,594 | 37,634 |
| Telecommunications, Customer Service and Other      |     82,864            |     75,114 |     46,063 |     24,271 |     18,351 |
| Total Revenues                                      |   703,288                  | 588,454 | 703,667 | 528,657 | 459,337 |
| Revenues by Discontinued Operations                 |    (50,911)           |    (68,582) |    (57,661) |    (33,894) |    (23,580) |
| Operating Revenues from  Continuing Operations      | $652,377                             | $519,872 | $646,006 | $494,763 | $435,757 |
| **Gas Sold or Transported (MMcf)**                  |                                 |   |   |   |   |
| Firm Sales:                                         |                                 |   |   |   |   |
| Residential                                         | 25,449                               | 21,183 | 25,148 | 23,167 | 22,064 |
| Commercial and  Industrial                          | 11,342                               | 9,982 | 12,984 | 12,269 | 12,642 |
| Interruptible Sales                                 | 9,790                                | 10,975 | 13,380 | 15,929 | 16,420 |
| Unregulated Sales                                   | 86,759                               | 103,718 | 94,972 | 145,642 | 168,748 |
| Transportation Services                             |   35,464                        |   39,558 |   35,205 |   35,235 |   32,602 |
| Total Gas Sold or Transported                       | 168,804                              | 185,416 | 181,689 | 232,242 | 252,476 |
| Gas  Sold or Transported by Discontinued Operations |       (239) |    (6,790) |    (6,863) |    (8,042) |       (7,839) |
| Gas Sold or Transported by Continuing Operations    | 168,565                              | 178,626 | 174,826 | 224,200 | 244,637 |
| **Average  Utility Customers Served**               |                                      |  |  |  |  |
| Firm  Sales:                                        |                                      |  |  |  |  |
| Residential                                         | 346,860                              | 356,933 | 353,397 | 348,626 | 344,448 |
| Commercial and  Industrial                          | 22,982                               | 24,322 | 24,111 | 23,727 | 23,574 |
| Interruptible Sales                                 | 30                                   | 40 | 47 | 45 | 56 |
| Transportation Services                             |     4,065             |     4,064 |     3,854 |     3,787 |     3,535 |
| Total Average Utility Customers Served              | 373,937                              | 385,359 | 381,409 | 376,185 | 371,613 |
| Average Utility Customers Served by                 |                                 |   |   |   |   |
|     Discontinued  Operations         |    (6,548)                 |  (20,716) |  (20,637) |  (20,068) |  (20,294) |
| Average Utility Customers Served by                 |                                 |   |   |   |   |
|     Continuing Operations            | 367,389                              | 364,643 | 360,772 | 356,117 | 351,319 |
|                                                |                                 |   |   |   |   |
| **Degree Days in New Jersey**                       | 5,421                                | 3,973 | 5,036 | 4,579 | 4,381 |
| **Employees (year-end)**                            | 1,081                                | 1,144 | 1,599 | 1,078 | 1,049 |
| **Ratio of Earnings to Fixed Charges**              | 0.66(a)                              | 1.85 | 2.29 | 2.30 | 2.58 |

(a)       For the fiscal year ended September 30,2003, the company's pre-tax earnings were inadequate to cover its fixed chargesfor the year.  The amount of suchearnings deficiency for the year was $10.5 million pre-tax.
**Item 7.  Management's Discussion andAnalysis of Financial Condition and Results of Operations**
The following discussions of the company's historical results ofoperations and financial condition should be read in conjunction with thecompany's consolidated financial statements and the related notes.

**Overview**

The company is a diversified energy company that is primarilyengaged in the sale and distribution of natural gas through its local utilitycompanies. Its local utility operations are carried out by NUI Utilities andits operating divisions, as well as through a subsidiary of Virginia GasCompany (VGC). NUI Utilities is comprised of Elizabethtown Gas Company (NewJersey), City Gas Company of Florida, and Elkton Gas (Maryland). VGC is alsoengaged in other activities, such as pipeline operation and natural gasstorage. The company is also engaged in several non-regulated businessesthrough NUI Capital and its subsidiaries, which in fiscal 2003 included NUIEnergy, NUI Energy Brokers, NUI Environmental, UBS, NUI Telecom and TIC. Inaddition, through NUISS, the company is a fifty-percent member of SSLLC, ajoint venture with a unit of Duke Energy that is developing a natural gasstorage facility in Saltville, Virginia.

The company's growth strategy has not produced the results thecompany had anticipated and, as a result, the company experienced significantlosses and write-offs in its non-utility businesses during fiscal years 2001,2002 and 2003. After a series of defaults under the then existing creditfacilities of NUI and NUI Utilities and the resulting refinancing of such debtin early fiscal 2002, the company began selling off or discontinuing theoperations of certain non-core businesses as a means of generating liquidityand cutting costs.  In February 2003,NUI and NUI Utilities entered into new revolving credit agreements, which wereamended in August 2003 as a result of certain defaults.  

During fiscal 2003, the company considered several alternatefinancing plans aimed at restoring the credit worthiness of the company, butnone of these plans were deemed viable. The company also sold or announced itsintention to sell most of its non-core businesses in an attempt to raisecapital and reduce losses. Finally, on September 26, 2003, the company's Boardof Directors announced it was pursuing the sale of the company. The company hasengaged two investment banks to serve as financial advisors to assist it in thesale. 

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

As described below in Liquidity and Capital Resources, NUI andNUI Utilities are likely to have additional liquidity needs beginning in the2004-2005 winter season, as a result of, among other things, the pre-paymentrequirements of NUI Utilities' gas supply, delivery and storage requirementsand the NJBPU settlement.  In addition,NUI and NUI Utilities will be required to refinance or extend their respectiveexisting bank indebtedness in November 2004. Even if NUI and NUI Utilities are able to extend their respectiveexisting bank indebtedness in November 2004, NUI and NUI Utilities would stillhave to refinance their respective existing bank indebtedness in November 2005.

**Discussion of Critical Accounting Policies andAssumptions**

In preparing our financial statements, the application of certainaccounting policies requires difficult, subjective and/or complex judgments.The circumstances that make these judgments difficult, subjective and/orcomplex have to do with the need to make estimates about the impact of mattersthat are inherently uncertain. Actual effects on our financial position andresults of operations may vary significantly from expected results if thejudgments and assumptions underlying the estimates prove to be inaccurate. Thecritical accounting policies requiring such subjectivity are discussed below.

***Valuation of Goodwill.***  NUI records goodwill on purchase transactions, representing theexcess of acquisition cost over the fair value of net assets acquired. Intesting for goodwill impairment under Statement of Financial AccountingStandards (SFAS) 142 "Goodwill and Other Intangible Assets," significantreliance is placed upon a number of estimates regarding future performance thatrequire broad assumptions and significant judgment by management. A change inthe fair value of our investments could cause a significant change in thecarrying value of goodwill. The assumptions used to measure the fair value ofour investments are the same as those used by us to prepare yearly operatingsegment and consolidated earnings and cash flow forecasts. In addition, theseassumptions are used to set yearly budgetary guidelines. 

NUI currently has $8.1 million of goodwill, all of which isrecorded at VGC. As permitted under SFAS 142, we can rely on our previousvaluations for the annual impairment testing provided that the followingcriteria are met: (a) the assets and liabilities of VGC have not changedsignificantly since the most recent fair value determination; and (b) the mostrecent fair value determination resulted in an amount that exceeded thecarrying amount by a substantial margin and there is no economic indicationthat the carrying value of goodwill may be impaired. In the case of VGC, theabove criteria have been met and therefore, there was no impairment to goodwillin fiscal 2003. 

In determining the fair value for its investment in VGC, anincome valuation and discounted cash flow valuation approach was used to estimatethe fair market value for VGC. Under the income valuation approach, the fairvalue of a company is obtained by discounting the sum of (i) the expectedfuture cash flows of the company; and (ii) the terminal value of a company. Thediscount factor used in the discounted cash flow calculation is the company'sweighted-average cost of capital. NUI was required to make certain significantassumptions in the income approach, specifically the weighted-average cost ofcapital, short and long-term growth rates and expected future cash flows. 

As a result of our valuation, management has determined that thefair value of the assets of VGC adequately exceeds their carrying value and noimpairment charge is necessary. Management will continue to review and focus onour overall strategy for this business unit and accordingly will continue toevaluate the related carrying value of the goodwill. While we believe that ourassumptions are reasonable, actual results, however, may differ from ourprojections.

***Accounting for the Effects of Rate Regulation on GasDistribution Operations.***  Thefinancial statements of the company's regulated gas utility operations reflectthe ratemaking policies and orders of the public utility commissions of thestates in which the company operates. The regulated gas utilities are subjectto the provisions of SFAS 71, "Accounting for the Effects of Certain Types ofRegulation." This statement recognizes the actions of regulators, through theratemaking process, to create future economic benefits and obligationsaffecting rate-regulated companies. SFAS 71 allows for the deferral of expenses and income on theconsolidated balance sheet as regulatory assets and liabilities when it isprobable that those expenses and income will be allowed in the rate settingprocess in a period different from the period in which they would have beenreflected in the consolidated statements of income of an unregulated company.These deferred regulatory assets and liabilities are then recognized in theconsolidated statement of income in the period in which the amounts arereflected in rates.

Rate regulation is undergoing significant change as regulatorsand customers seek lower prices for utility service and greater competitionamong energy service providers. In the event that regulation significantlychanges the opportunity for us to recover costs in the future, all or a portionof our regulated operations may no longer meet the criteria for the applicationof SFAS 71. In that event, a write-down of our existing regulatory assets andliabilities could result. If we were unable to continue to apply the provisionsof SFAS 71 for any of our rate regulated subsidiaries, we would apply theprovisions of SFAS 101 "Regulated Enterprises-Accounting for the Discontinuationof Application of FASB Statement No. 71." We estimate that the write-off of ournet regulatory assets at September 30, 2003 would result in a charge to netincome of approximately $39.3 million or $2.45 per share, which would beclassified as an extraordinary item. In management's opinion, our regulatedsubsidiaries that currently are subject to the provisions of SFAS 71 willcontinue to be subject to SFAS 71 for the foreseeable future.

***Pension and Other Postretirement Benefits.***  As discussed in Note 20 to the ConsolidatedFinancial Statements, "Retirement and Other Benefits," NUI participates in bothnon-contributory defined benefit pension plans, as well as otherpost-retirement benefit (OPEB) plans (collectively postretirement plans). NUI'sreported costs of providing pension and OPEB benefits are dependent uponnumerous factors resulting from actual plan experience and assumptions offuture experience. Postretirement costs are impacted by actual employeedemographics, the level of contributions made to the plans, earnings on planassets, and health care cost trends. Changes made to the provisions of theseplans may also impact current and future postretirement costs.  Postretirement costs may also besignificantly affected by changes in key actuarial assumptions, including,anticipated rates of return on plan assets and the discount rates used indetermining the postretirement costs and benefit obligations.  For example, holding all other assumptionsconstant, a one-half percent decrease in the expected return on assets wouldincrease pension expense by approximately $0.5 million.  Likewise, a one-half percent decrease in thediscount rate would increase pension expense by $1.3 million.  Actual results that differ from ourassumptions are accumulated and amortized over ten years. The company's gasdistribution operations are subject to SFAS 71, and, as a result, changes inpostretirement expenses are deferred for future recovery.

For fiscal 2003, the assumed long-term rate of return on ourpostretirement plans' assets was 9.25 percent (pre-tax), net of expenses. Thisis an appropriate long-term expected rate of return on assets based on NUI'sinvestment strategy, asset allocation and the historical performance of equityinvestments over long periods of time. The company's pension fund assets areinvested approximately 70 percent in publicly traded equity securities andapproximately 30 percent in publicly traded debt securities.

The fiscal year-end September 30, 2003 assumed discount rate usedto determine postretirement obligations was 6.0 percent. Our discount rateassumption is based upon the current investment yield associated with ratingagency indices that have high quality long-term corporate bonds.  

Our health care cost trend assumptions are developed based onhistorical cost data, the near-term outlook and an assessment of likelylong-term trends. The salary growth assumptions reflect our long-term outlook. 

***Valuation of Derivative Instruments.***  The company's NUI Energy Brokers subsidiarymarks-to-market through the income statement all trading positions, includingforward sales and purchase commitments for energy-related contracts that meetthe definition of a derivative under SFAS 133. This subsidiary records operating revenues net of purchased gas costs inaccordance with the provisions of EITF 02-03. See Note 1 to the Consolidated Financial Statements-New AccountingStandards for further discussion of EITF 02-03.

For those derivative instruments designated as cash flow hedgesunder SFAS 133, changes in the market value are recorded in other comprehensiveincome on the Consolidated Balance Sheet, (in line with effectivenessmeasurements) and are recorded through earnings at the time of settlement.Hedge effectiveness is dependent upon various factors such as the use of hedgecontracts with market points that are different from the underlyingtransaction, and to the extent hedge contracts are deemed ineffective, thatportion will impact earnings.  AtSeptember 30, 2003, there was no hedge ineffectiveness recognized in earnings.

Elizabethtown Gas utilizes derivative financial instruments toreduce cash flow variability associated with the purchase price for a portionof future natural gas purchases for our regulated gas distribution activities;the accounting for such derivative instruments is subject to SFAS 71. Changesin the market value of these derivative instruments are recorded as regulatoryassets and liabilities, as appropriate, on the Consolidated Balance Sheet. 

When available, quoted market prices are used to record aderivative contract's fair value. However market values for certain derivativecontracts may not be readily available or determinable. If no active marketexists for a commodity, a specific contract type, or for the entire term of acontract's duration, fair values are based on pricing models. Such modelsemploy matrix pricing based on contracts with similar terms and risks,including pricing based on broker quotes and industry publications. NUI EnergyBrokers validates its internally developed fair values by using forecastedmarket information and mathematical extrapolation techniques. In addition, forhedges of forecasted transactions, NUI Energy Brokers estimates the expectedfuture cash flows of the forecasted transactions, as well as evaluates theprobability of occurrence and timing of such transactions. Changes in marketconditions or the occurrence of unforeseen events could affect the timing ofrecognition of changes in fair value of certain hedging derivatives.

See Note 18 of the Consolidated Financial Statements and Item7A.  Quantitative and QualitativeDisclosures About Market Risk for a further description of all our derivativeinstruments.

***Commitments and Contingencies.*** During the normalcourse of business, the company is subject to proceedings, lawsuits and otherclaims related to environmental, labor and other matters. The company isrequired to assess the likelihood of any adverse judgments or outcomes to thesematters as well as potential ranges of probable losses. A determination of theamount of liability to be recorded, if any, for these contingencies is madeafter careful analysis of each individual matter. The liability recorded maychange in the future due to new developments in any of such matters.

**Effects of Inflation**

The company's tariffs associated with its utility operatingdivisions provide purchased gas adjustment clauses through which rates chargedto customers are adjusted for changes in the cost of gas on a reasonablycurrent basis.  Increases in other utilitycosts and expenses not otherwise offset by increases in revenues or reductionsin other expenses could have an adverse effect on earnings due to the time lagassociated with obtaining regulatory approval to recover such increased costsand expenses, and the uncertainty of whether regulatory commissions will allowfull recovery of such increased costs and expenses.

**Results of Operations**

***Consolidated Review of Results of Operations***

The following discussion is intended to provide an overview ofconsolidated results for fiscal years 2003, 2002 and 2001. Following thisdiscussion is a more detailed overview of the results for NUI's three businesssegments.

**Net Income (Loss)**. NUI incurred a net loss for fiscal 2003 of $45.1 million, or $2.82 pershare, as compared with a net loss of $15.9 million, or $1.06 per share infiscal 2002, and net income of $16.3 million, or $1.22 per share, in fiscal2001. The higher net loss of approximately $29.2 million during fiscal 2003, ascompared to fiscal 2002, was due to reduced income from continuing operationsof $27.4 million, primarily due to the company recording a charge of $30.0million as a settlement of a focused audit conducted by the NJBPU (see Item 3.Legal Proceedings), a charge of $2.6 million as an estimate of amounts to berefunded to customers in Florida as a result of the investigation of thecompany's NUI Energy Brokers subsidiary (see Item 3. LegalProceedings-Investigations of NUI Energy Brokers), and increased losses fromdiscontinued operations of approximately $13.7 million, primarily as a resultof non-cash charges to write-down the carrying value of assets being held forsale to their fair market value, in conjunction with the company's decision tosell its NUI Telecom subsidiary (see additional discussion of DiscontinuedOperations which follows and Notes 9, 10 and 11 to the Notes to theConsolidated Financial Statements). During fiscal 2003, the company hadincreased operations and maintenance costs of approximately $31.0 million, ascompared to fiscal 2002, which was partially offset by increased operatingmargins of $24.2 million, primarily as a result of the factors discussed underIncome from Continuing Operations. Lower charges for changes in accounting ofapproximately $11.8 million during the current fiscal year period partiallyoffset the increased net loss (see Notes 1 and 9 of the Notes to theConsolidated Financial Statements).  

The decrease in net income of $32.2 million during fiscal 2002,as compared to fiscal 2001, was due to the company's adoption of Statement ofFinancial Accounting Standards No. 142, "Goodwill and Intangible Assets," whichresulted in a one-time, non-cash transitional impairment charge of $17.6million (after-tax), or $1.18 per share (see Note 9 to the Notes to theConsolidated Financial Statements), reduced income from continuing operationsof approximately $11.4 million (which is discussed further below), and higherlosses by discontinued operations of approximately $3.2 million, primarily as aresult of losses incurred by certain product lines within TIC. 

**Income (Loss) from Continuing Operations**. Loss fromcontinuing operations was $11.3 million, or $0.71 per share, compared withincome from continuing operations of $16.1 million, or $1.08 per share, infiscal 2002, and $27.5 million, or $2.05 per share, in fiscal 2001. Thedecrease in income from continuing operations of $27.4 million for fiscal 2003,as compared to the prior fiscal year, was primarily a result of the $30.0million charge the company recorded in settlement of the focused auditpreviously discussed, and increased operations and maintenance costs ofapproximately $31.0 million, which primarily resulted from higher costs duringthe current fiscal year associated with increased labor, severance and benefitcosts (approximately $5.6 million); customer bad debt reserves (approximately$6.1 million); pension costs (approximately $4.6 million); professional feesfor auditing, legal, and those related to addressing the requirements of theSarbanes-Oxley Act (approximately $4.3 million); bank fees (approximately $2.1million); payments made to the purchasers of certain assets of NUI Energy(approximately $3.8 million); the $2.6 million charge recorded for theestimated amount to be refunded to customers in Florida previously discussed;and insurance costs (approximately $1.8 million). These decreases in incomewere partially offset by increased operating margins by the company'sDistribution Services segment of approximately $25.4 million, mainly due to theeffects of weather that was 36 percent colder than fiscal 2002 (approximately$7.4 million); the base rate increase by the company's natural gas distributioncompany in New Jersey (approximately $13.2 million), and customer growth(approximately $4.8 million). The increased margins of the DistributionServices segment were partially offset by a $0.3 million decrease fromoff-system sales. These increases in operating margins were also partiallyoffset by reduced operating margins by NUI Energy Brokers (approximately $2.0million) as a result of the substantially reduced trading opportunitiesfollowing the multiple downgrades of the company's credit ratings throughoutthe fiscal year. 

The company expects that in fiscal 2004, pension expense willincrease from approximately $4.1 million to approximately $6.8 million,reflecting changes in actuarial assumptions, including a lower return on theplan assets assumption. During fiscal 2003, the company made cash contributionsof $3.3 million to the pension plan. At this time, the company believes that itmay be required to make a cash funding contribution in fiscal 2004, howeverthis will be dependent on the investment returns on the plan assets during thefiscal year, and accordingly, the company is unable to determine what itspotential future funding requirements for fiscal 2004 will be at this time. 

The company began winding down the trading operations of NUIEnergy Brokers in January 2004 and discontinued trading operations at NUIEnergy Brokers in March 2004. This, coupled with the reduction of tradingopportunities for NUI Energy Brokers through March 2004, will negatively impactoperating margins throughout fiscal 2004. 

Due to certain projects that began during fiscal 2003 and thatwill continue during fiscal 2004, such as addressing the requirements of theSarbanes-Oxley Act, and the increased costs to be incurred related to sellingthe company and the various investigations and proceedings, management expectsthe amount of professional fees for the coming year to be higher than those offiscal 2003.  Bank fees and interestexpense are also expected to increase as a result of the company's new creditfacilities entered into November 24, 2003, and higher average borrowings duringthe coming fiscal year. The company is likely to require additional funds inorder to meet its obligations during fiscal 2005; however, such funds may notbe available and, if they are available, would likely be at higher interestrates than the company is currently paying, and the company could incursubstantial fees in order to arrange for any such funds.  For a further discussion of fundingrequirements and risks thereto, see Liquidity and Capital Resources and Item 1.  Business-Risk Factors. 

Income from continuing operations for fiscal 2002 decreased byapproximately $11.4 million, or 41 percent, to $16.1 million as compared to$27.5 million in fiscal 2001. The decrease in income from continuing operationswas primarily a result of increased operations and maintenance costs of approximately$9.6 million (primarily resulting from higher costs during fiscal 2002associated with a $3.8 million lower pension credit), as well as increases inprofessional fees for auditing and legal services (approximately $1.9 million),labor and employee benefits (approximately $1.0 million), bad debts(approximately $1.0 million), insurance expenses (approximately $0.9 million)and bank fees (approximately $0.7 million). The operating results for fiscal2002 were also adversely affected by the significantly warmer weather in NewJersey, which was 21 percent warmer than fiscal 2001. The company also recordeda restructuring cost of $1.2 million in fiscal 2002, related to severance costsas a result of workforce reductions. See Note 12 of the Notes to the Consolidated Financial Statements.

As further discussed in Note 20 of the Notes to the ConsolidatedFinancial Statements, the company's pension credit included in operations andmaintenance expenses declined significantly from $4.3 million in fiscal 2001 to$0.5 million in fiscal 2002. The decrease in the pension credit from fiscal2001 to fiscal 2002 was primarily due to a significant decline in the marketvalue of the pension fund assets from $131.3 million at September 30, 2000 to$92.4 million at September 30, 2002, as well as the impact of lower discountrates and actuarial losses.

Earnings per share for fiscal years 2002 and 2001 reflect theeffects of dilution as a result of increased shares outstanding. During fiscal2002, NUI completed a 1.725 million common stock offering and also issuedshares related to certain acquisitions and benefit plans.  See discussion below of Business SegmentReview of Results of Operations and Liquidity and Capital Resources. Sharesoutstanding increased during fiscal 2001 primarily due to shares issued toacquire Virginia Gas.

**Interest Expense**. Net interest expense in fiscal 2003increased by $0.7 million to $22.1 million, as compared to $21.4 million infiscal 2002, primarily due to less interest recovered on the company'sunder-collection of gas costs in New Jersey as compared to the prior fiscalyear.  

As discussed previously, interest expense is expected to increaseduring fiscal 2004 as a result of the company entering into new creditfacilities on November 24, 2003 at higher rates, and higher average borrowingsduring the coming fiscal year. 

Net interest expense in fiscal 2002 decreased by $0.8 million to$21.4 million, as compared to $22.2 million in fiscal 2001, primarily due tolower interest rates on short-term borrowings, and a full year's interestrecovery on the company's under-collection of gas costs in New Jersey.  See Item 1. Business-Regulation. 

**Income Taxes**. Changes in income tax expense (credit) in each offiscal 2003, 2002 and 2001 were primarily due to the level of pre-tax income(loss).  The tax benefit for fiscal 2003 was impacted by the increasedvaluation allowance against certain deferred tax assets.  The company did not record a tax benefit for $2 million of the NJBPUsettlement costs accrued by NUI since this amount is deemed to be a penalty.Income taxes are also included within the net results of discontinuedoperations and the change in accounting.   See Note 19 of the Notes to the ConsolidatedFinancial Statements for a further discussion of the company's Federal andstate income taxes.

**Discontinued Operations**. After-tax losses from discontinued operations during fiscal 2003 were$28.0 million, or $1.75 per share, compared to after-tax losses of $14.3million, or $0.96 per share during fiscal 2002. The higher losses during fiscal2003 were primarily due to non-cash charges of approximately $25.5 million,after-tax, or $1.59 per share, to write-down the carrying value of assets beingheld for sale to their fair market value, in conjunction with the company'sdecision to sell its NUI Telecom subsidiary. These additional losses werepartially offset by reduced losses by TIC as a result of the closure of TIC'stelephone equipment and United States Postal Service lines of business duringthe previous fiscal year. The non-cash charges recorded to adjust the carryingvalue of assets being held for sale to their fair market value were based onestimates.  See Notes 11 and 24 of theNotes to the Consolidated Financial Statements for a further discussion ofdiscontinued operations.

After-tax losses from discontinued operations during fiscal 2002were $14.3 million, or $0.96 per share, compared to losses of $11.1 million, or$0.83 per share, during fiscal 2001. The higher losses during fiscal 2002 wereprimarily due to approximately $2.0 million of higher after-tax losses by TICmainly as a result of weakness with its telephone equipment and United StatesPostal Service lines of business and approximately $1.2 million of higherafter-tax losses by NUI Telecom as a result of costs incurred to support alarger customer base as compared to the prior fiscal year.

***Business Segment Review of Results of Operations***

The following is a discussion of the company's business segmentresults of operations and is presented based on Income from ContinuingOperations before Taxes. Included in operations and maintenance expenses foreach of NUI's business segments are allocations of corporate costs related toshared service functions such as human resources, legal, accounting andinformation technology, which are allocated based on the company's cost allocationpolicy. In addition, the company's corporate and non-segment operationsincurred pre-tax operating expenses of $5.5 million, $7.6 million and $4.4million in fiscal years 2003, 2002, and 2001, respectively, principally relatedto the company's investment in various business ventures, which have not earnedrevenues. Fiscal 2003 also includes a $2 million penalty to be paid to theState of New Jersey as a result of the final settlement of the focused auditinitiated by the NJBPU. These costs are not allocated to our business segmentresults.

**Distribution Services Segment**

The company's Distribution Services segment distributes naturalgas in three states through the company's regulated natural gas utilityoperations. These operations are Elizabethtown Gas, City Gas and Elkton Gas.This segment also includes the company's appliance leasing, repair, maintenanceoperations and service business as well as off-system sales. The companyrecently sold three of its natural gas utility operations: NC was sold in September2002, and VCG (Pennsylvania) and Waverly Gas (New York) were sold in November2002 (see Note 11 of the Notes to the Consolidated Financial Statements). Theresults for these three operations are reflected in Discontinued Operations inthe Consolidated Financial Statements for fiscal 2003, 2002 and 2001. TheIncome from Continuing Operations before Taxes for the segment is as follows:
| *(Dollars in thousands)*                              | **Fiscal 2003** | **Fiscal 2002** | **Fiscal 2001** |
|-------------------------------------------------------|-----------------|-----------------|-----------------|
| **Operating Revenues**                                | $615,524        | $484,834        | $616,457        |
| Purchased Gas and Fuel                                | 402,668         | 299,962         | 425,389         |
| Cost of sales and services                            | 9,662           | 9,225           | 9,349           |
| Energy Taxes                                          |    12,914  |    10,719  |    12,907  |
| **Operating Margins**                                 | 190,280         | 164,928         | 168,812         |
| **Operating  Expenses:**                              |            |            |            |
| Operations  & Maintenance Expenses                | 113,992         | 87,255          | 83,044          |
| Regulatory  Settlement Costs                          | 28,000          | ---             | ---             |
| Depreciation  & Amortization                      | 31,119          | 28,457          | 25,865          |
| Taxes Other  than Income                              | 5,230           | 5,993           | 6,284           |
| **Total  Operating Expenses**                         | 178,341         | 121,705         | 115,193         |
| **Pre-Tax  Operating Income**                         |   11,939   |   43,223   |   53,619   |
| Other Income  & (Expense)                         | 505             | (84)            | 5               |
| Net  Interest Charges                                 |   15,626   |  14,863    |  18,751    |
| **Pre-Tax  Income (Loss) from Continuing Operations** | $(3,182)        | $28,276         | $34,873         |
|                                                  |                 |                 |                 |

**Operating Revenues.** Operating revenues include amountsbilled for the cost of purchased gas pursuant to purchased gas adjustmentclauses utilized by the company's utility operations. Such clauses enable thecompany to pass through to its utility customers, via periodic adjustmentsduring the year to customers' bills, changes in costs incurred by the companyfor purchased gas without affecting operating margins. These purchased gasadjustments are authorized by regulatory authorities in the states in which thecompany operates. Since the company's utility operations do not earn a profiton the sale of the gas commodity, the company's level of regulated operatingrevenues is not necessarily indicative of financial performance. 

Distribution Services' operating revenues increased by $130.7million, or 27 percent, to $615.5 million during fiscal 2003, as compared to$484.8 million in fiscal 2002. The increase in revenues was primarilyattributable to the effects of weather in New Jersey, which was 12 percentcolder than normal and 36 percent colder than the same period in fiscal 2002;the effect of a base rate increase in New Jersey which went into effect onNovember 22, 2002 (see Item 1. Business-Distribution Services Segment);increased off-system sales as a result of higher natural gas prices; andcustomer growth.   

On January 20, 2004, City Gas received approval from the FPSC toincrease its base rates by $6.7 million. With the exception of the favorableeffect of the City Gas base rate increase and demand fluctuations caused bychanges in weather, the company does not anticipate any significant changes inthe economic outlook for natural gas sales in this segment during fiscal 2004. 

Distribution Services' operating revenues decreased by $131.6million, or 21 percent, to $484.8 million during fiscal 2002, as compared to$616.4 million in fiscal 2001. The decrease in revenues was primarilyattributed to lower gas prices charged under purchased gas adjustment clausesduring fiscal 2002 (see Item 1. Business-Distribution Services Segment), lowernatural gas usage as a result of weather in New Jersey that was 23 percent warmerthan normal and 21 percent warmer than the 2001 period, and the impact of thesluggish economy on all customer classes, but especially the commercial andindustrial classes in both New Jersey and Florida. These factors were partiallyoffset by an increase in revenues due to customer growth. 

***Operating Margins***. Operating margins increased by$25.4 million, or 15 percent, to $190.3 million in fiscal 2003 as compared to$164.9 million in fiscal 2002. Of the factors previously discussed in operatingrevenues, the impact on operating margins of the colder weather contributedapproximately $7.4 million, the base rate increase in New Jersey contributedapproximately $13.2 million, and customer growth contributed approximately $4.8million. Operating margins realized from off-system gas sales were $1.3 millionand $1.6 million for the fiscal years ended September 30, 2003 and 2002,respectively. The company has a weather normalization clause in its New Jerseytariff, which is designed to help stabilize the company's operating results byincreasing amounts charged to customers when weather has been warmer thannormal and by decreasing amounts charged when weather has been colder thannormal. As a result of weather normalization clauses, operating margins wereapproximately $6.1 million lower and $8.5 million higher in the fiscal 2003 and2002 periods, respectively, than they otherwise would have been without suchclauses. Historically, the company's weather normalization clause in New Jerseywas based on a 30-year weather average. As a result of the new base rate increase in New Jersey referred toabove, the weather normalization clause was adjusted to a 20-year weatheraverage to better reflect current weather trends and should provide morestability of operating results and improved cash flows for NUI's New Jerseyutility on an ongoing basis. However, as previously noted, with the exceptionof demand caused by changes in weather, the company does not anticipate anysignificant changes in the economic outlook for natural gas sales in thissegment in fiscal 2004.

Operating margins decreased by $3.9 million, or 2 percent, to$164.9 million in fiscal 2002 as compared to $168.8 million in fiscal 2001,mainly as result of the impact of the warm weather experienced during fiscal2002 and the weakened economy. As a result of weather normalization clauses,operating margins were approximately $8.5 million and $0.6 million higher inthe fiscal 2002 and 2001 periods, respectively, than they otherwise would havebeen without such clauses. 

***Operating Expenses***. Operation and maintenanceexpenses increased by approximately $26.8 million, or 31 percent, to $114.0million in fiscal 2003, as compared with $87.2 million in fiscal 2002. Theincrease was mainly due to increases in labor costs, wage increases, andadditional personnel (approximately $3.4 million); bad debt expenses(approximately $2.9 million); pension expenses due to lower discount rate andasset return assumptions (approximately $2.6 million); insurance costs forgeneral liability (approximately $3.2 million); legal and other professionalfees incurred in conjunction with the focused audit conducted by the NJBPU(approximately $2.5 million); a charge for the estimated amount to be refundedto customers in Florida as a result of the investigation of NUI Energy Brokers($2.6 million); costs for utility programs such as energy conservation andcustomer education (approximately $0.8 million); and increased allocatedcorporate expenses (approximately $8.3 million).

Regulatory settlement costs of $28 million represent the amountto be refunded to customers in New Jersey as a final settlement of the focusedaudit undertaken by the NJBPU.

Depreciation expense increased approximately $2.7 million, to$31.1 million in fiscal 2003, as a result of additional assets placed inservice during the current fiscal year and a full year of depreciation onadditions that were placed in service during fiscal 2002.

Taxes, other than income taxes, decreased approximately $0.8million, to $5.2 million during fiscal 2003, as a result of a regulatoryassessment during the current fiscal year.

Operations and maintenance expenses increased by $4.2 million, or5 percent, to $87.2 million in fiscal 2002 as compared with $83.0 million infiscal 2001. The expense increase during fiscal 2002 was mostly due to a lowerpension credit in fiscal 2002 as previously discussed (approximately $2.6million), higher bad debts as a result of the weakened economy (approximately$0.6 million), and expenses associated with energy conservation programs andthe New Jersey base rate case (approximately $0.9 million). These costincreases were partially offset by reduced operations expenses as a result ofthe warmer than normal weather discussed previously. 

**Energy Asset Management Segment**

The Energy Asset Management segment (formerly Wholesale EnergyMarketing and Trading) includes the operations of the company's NUI EnergyBrokers subsidiary, and the distribution, storage and pipeline operations ofVGC. VGC was acquired by NUI on March 28, 2001 (see Note 3 of the Notes to theConsolidated Financial Statements). This segment also includes the company's 50percent share of the net income and losses of SSLLC. Off-system gas sales,which were previously reported in this segment, have been included within theDistribution Services segment for all years presented.
| *(Dollars in  thousands)*                           | **    Fiscal 2003**       | **    Fiscal 2002**       | **Fiscal 2001**                         |
|-----------------------------------------------------|------------------------------------------|------------------------------------------|-----------------------------------------|
| **Operating  Revenues**                             | $27,059                                  | $28,071                                  | $19,121                                 |
| Purchased Gas  and Fuel                             | 903                                      |  (369)                              |  (2,873)                           |
| Energy Taxes                                        |        --- |        --- |        11 |
| **Operating  Margins**                              | 26,156                                   | 28,440                                   | 21,983                                  |
| **Operating  Expenses:**                            |                                     |                                     |                                    |
| Operations  & Maintenance Expenses              | 10,390                                   | 10,965                                   | 7,601                                   |
| Depreciation  & Amortization                    | 2,040                                    | 2,507                                    | 697                                     |
| Taxes Other  than Income                            |      838             |      760             |     422                  |
| **Total  Operating Expenses**                       | 13,268                                   | 14,232                                   | 8,720                                   |
| **Pre-Tax  Operating Income**                       | 12,888                                   | 14,208                                   | 13,263                                  |
| Other Income  & (Expense)                       | 639                                      | 286                                      | 1,180                                   |
| Net Interest Charges                                |   2,748                             |   3,496                             |      762            |
| **Pre-Tax Income from Continuing Operations ** | $10,779                                  | $10,998                                  | $13,681                                 |
|                                                     |                                     |                                     |                                    |

***Operating Revenues***. As further discussed in Note 1of the Notes to the Consolidated Financial Statements, operating revenues forNUI Energy Brokers are recorded according to the provisions of Emerging IssuesTask Force (EITF) Opinion 02-03, "Issues Involved in Accounting for ContractsUnder Issue 98-10," which requires that all energy companies that previouslyfollowed the accounting under EITF 98-10 to reflect their operating revenues ona net basis.  In previous periods, NUIEnergy Brokers included both the cost of purchased gas and the operating marginearned on all of its physical energy transactions (i.e., 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 ConsolidatedStatements of Income. Historically, NUI Energy Brokers had recorded only theoperating margin component for all of its financial trades (e.g. futures,options, swaps) and had classified these amounts as a component of purchasedgas and fuel on the Consolidated Statements of Income. Adopting the July 2002netting provision of EITF 02-03 had no net effect on these transactions otherthan to reclassify them and to present total margins earned as operatingrevenues rather than purchased gas and fuel. The adoption of net-basisreporting resulted in no change to total operating margins.

The operating revenues of the Energy Asset Management segmentdecreased approximately $1.0 million, or 4 percent, to $27.1 million for fiscal2003, as compared to $28.1 million in fiscal 2002. The decrease was due toreduced trading opportunities during the fiscal year as a result of themultiple downgrades of the company's credit ratings during the fiscal year(approximately $5.7 million) and a significant reduction in the mark-to-marketvaluation of a large storage contract in the NUI Energy Brokers portfolio(approximately $0.9 million).  Partiallyoffsetting these decreases were margins recorded by NUI Energy Brokers relatedto the closing of financial hedged positions associated with forward physicalsales contracts by NUI Energy (approximately $5.4 million) and increased VGCoperating revenues from its distribution company due to an increase in the costof natural gas during fiscal 2003, as compared to fiscal 2002 (approximately$0.3 million). 

In January 2004, the company began winding down the tradingoperations of NUI Energy Brokers, and, in March 2004, trading operations werediscontinued.  This, and reduced tradingopportunities through that date, will result in a substantial reduction ofoperating revenues for this segment during fiscal 2004.

Operating revenues in fiscal 2002 increased approximately $9.0million, or 47 percent, to $28.1 million as compared to $19.1 million in fiscal2001, primarily as a result of a full year's inclusion of VGC, as compared tosix months in fiscal 2001. The company also acquired the remaining 50 percentit did not already own of VGSC and VGDC on October 4, 2001 (see Note 3 of theNotes to the Consolidated Financial Statements), and began consolidating theirresults on that date. Operating revenues for NUI Energy Brokers in fiscal 2002were comparable to fiscal 2001.

***Operating Margins***. Operating margins decreasedapproximately $2.3 million, or 8 percent, to $26.1 million for fiscal 2003, ascompared to $28.4 million in fiscal 2002. This decrease was primarilyattributable to the effects of the factors discussed above in operatingrevenues as well as increased gas costs of approximately $0.5 million for VGCduring fiscal 2003. Despite increased volatility of natural gas prices, marketconditions in the energy trading industry have been dampened due to fewercreditworthy trading partners. Also, the downgrades of the company's creditratings during fiscal years 2003 and 2002 have increased the collateralrequirements of NUI Energy Brokers, as well as adversely affected thewillingness of counterparties to enter into transactions, which decreasedoperating margins during fiscal 2003. See - Liquidity and Capital Resources. 

The company expected that these factors would continue throughoutfiscal 2004, and subsequent to the December 11, 2003 NJBPU Order discussed inItem 3. Legal Proceedings-NJBPU Focused Audit and Regulatory Orders, thecompany has discontinued the trading operations NUI Energy Brokers. This willresult in a substantial reduction of operating margins for this segment duringfiscal 2004. 

Operating margins increased approximately $6.4 million, or 29percent, to $28.4 million for fiscal 2002, as compared to $22.0 million in the sameperiod in fiscal 2001. The increase in operating margins is attributable tohaving a full year's results for VGC and the acquisition of VGSC and VGDC asdiscussed above. Operating margins for NUI Energy Brokers in fiscal 2002 werecomparable to the prior fiscal year. 

***Operating Expenses***. Operations and maintenanceexpenses, depreciation and amortization, and taxes other than income decreasedapproximately $1.0 million, or 7 percent, to approximately $13.2 million duringfiscal 2003, as compared to $14.2 million in fiscal 2002. This decrease isprimarily due to reduced labor expenses for commissions (approximately $2.3million) and bank fees (approximately $0.3 million). This decrease waspartially offset by increases in pension expenses due to lower discount rateand asset return assumptions (approximately $0.4 million); insurance costs forgeneral liability (approximately $0.4 million); as well as increased allocatedcorporate expenses (approximately $1.0 million).

Operations and maintenance expenses, depreciation andamortization, and taxes other than income all increased in fiscal 2002 ascompared to fiscal 2001 due to the inclusion of VGC for a full year.

***Other Income and Expense***. Other income and expensein fiscal 2001 includes the income from VGC's 50 percent ownership interest inVGDC and VGSC. In October 2001, VGC completed the acquisition of the remaininginterest in these entities, which results have been consolidated since thatdate. 

**Retail and Business Services Segment**

The Retail and Business Services segment includes the operationsof the company's NUI Energy and UBS subsidiaries and OAS, the company's digitalmapping business, which used to be part of UBS. NUI Telecom, as well as theoperations of the network services and wireless divisions of TIC previouslyreported in this segment, have been reclassified to discontinued operations.The appliance services business is now reported as part of the DistributionServices segment for all periods presented. 
| *(Dollars in  thousands)*                            | **Fiscal 2003**              | ** Fiscal 2002**        | ** Fiscal 2001**  |
|------------------------------------------------------|------------------------------|------------------------------|------------------------|
| **Operating Revenues**                               | $9,794                       | $6,967                       | $10,428                |
| Cost of Sales and Services                           | 3,280                        | 1,606                        | 1,275                  |
| **Operating Margins**                                | 6,514                        | 5,361                        | 9,153                  |
| **Operating Expenses:**                              |                         |                         |                   |
| Operations & Maintenance Expenses                | 13,005                       | 5,303                        | 4,264                  |
| Depreciation & Amortization                      | 1,395                        | 1,230                        | 591                    |
| Taxes Other than Income                              |      410 |     332       |    432       |
| **Total Operating Expenses**                         | 14,810                       | 6,865                        | 5,287                  |
| **Pre-Tax Operating Income (Loss)**                  |  (8,296)                |  (1,504)                | 3,866                  |
| Other Income & (Expense)                         |  (710)                  | ---                          |  (56)             |
| Net Interest Charges                                 |    1,159           |      877 |     598 |
| **Pre-Tax Income (Loss) from Continuing Operations** |  $(10,165)              |  $(2,381)               | $3,212                 |
|                                                 |                         |                         |                   |

Operating revenues decreased by approximately $3.4 million, or 33percent, to $7.0 million in fiscal 2002 from $10.4 million in fiscal 2001. Thisdecrease was due to decreased revenues by NUI Energy of approximately $3.4million due to warmer weather and lower average natural gas prices duringfiscal 2002 as compared to fiscal 2001, which suppressed customer demand forentering into long-term contracts for future gas supplies. The combinedoperating revenues of UBS and OAS for fiscal 2002 were comparable to those offiscal 2001.

The company has wound down most of the trading operations of NUIEnergy and does not expect material activity during fiscal 2004.  Effective April 1, 2004, the company hasoutsourced the operations of OAS, and has informed the customers of OAS that astheir existing contracts expire, their relationship with OAS will terminate.Accordingly, the company likely will have reduced operating revenues from OASduring fiscal 2004.

***Operating Margins***. Retail and Business Servicesoperating margins increased by approximately $1.2 million, to $6.5 million forfiscal 2003 from $5.3 million in fiscal 2002. The increase in operating margins was primarily attributable toapproximately $1.7 million of increased operating margins at UBS, whichresulted from the increased volume of bills produced during the current fiscalyear.  Partially offsetting the increasewere lower operating margins at OAS of $0.5 million.  

Operating margins decreased by approximately $3.8 million, to$5.3 million in fiscal 2002 from $9.1 million in fiscal 2001.  This was primarily a result of a decrease inoperating margins of approximately $3.4 million by NUI Energy, which resultedfrom changes in the natural gas marketplace and warmer weather in the NortheastUnited States during fiscal 2002. As a result, NUI Energy sold excess gassupply back to the marketplace at a loss. During fiscal 2001, natural gasprices had climbed to unprecedented highs early in that fiscal year, and whennatural gas prices began to decline to more normal levels in the summer of2001, NUI Energy's customers signed up for longer-term contracts and NUI Energywas able to recognize increased margins. During fiscal 2002, natural gas priceswere relatively flat, causing customers to wait to renew their long-termcontracts and led to lower operating margins being recorded during that fiscalyear.  The combined operating margins ofUBS and OAS decreased by approximately $0.4 million during fiscal 2002, ascompared to fiscal 2001, primarily as a result of a one-time price adjustmentto a large customer of UBS, which was partially offset by increased operatingmargins due to a higher volume of customer bills produced during the fiscal2002, as compared to fiscal 2001.

***Operating Expenses***. Operations and maintenanceexpenses, depreciation and amortization, and taxes other than income increasedin total by $7.9 million, to $14.8 million during fiscal 2003, as compared with$6.9 million in fiscal 2002. This was primarily a result of payments made forthe purchase of certain NUI Energy assets (approximately $3.8 million),increased bad debt reserves (approximately $3.0 million), labor and benefits,including pension (approximately $1.2 million), legal and professional fees(approximately $0.7 million), and costs related to NUI Energy's billing system(approximately $0.5 million). These increases were partially offset by reducedallocated corporate expenses (approximately $1.5 million) as compared to fiscal2002. 

Operations and maintenance expenses, depreciation andamortization, and taxes other than income increased by approximately $1.6million in fiscal 2002, as compared to fiscal 2001, primarily as a result ofincreases in legal and professional costs (approximately $0.7 million) and baddebt reserves (approximately $0.3 million). Depreciation and amortizationincreased by approximately $0.6 million during fiscal 2002, as compared tofiscal 2001, as a result of additional assets placed in service by UBS duringthe fiscal year.

**Liquidity and Capital Resources**

***Overview***

As a result of the various factors discussed in this annualreport, NUI and NUI Utilities have experienced and expect to continueexperiencing significant liquidity problems. Liquidity needs for NUI Utilities generally are driven by factors thatinclude: prepayments for its natural gas requirements; natural gas commodityprices; the impact of weather on customer bills; lags in fully collecting gascosts from customers under the BGSS charge; both discretionary and requiredrepayments of short- and long-term debt; capital spending; and working capitalrequirements, such as administrative expenses and taxes.  Liquidity needs at NUI and NUI's non-utilityoperations generally are driven by required repayments of short-term debt andworking capital requirements.

The company first seeks to meet its capital requirements throughcash provided by operating activities and external financings.  External financing, depending on theparticular company, as discussed below, may consist of public and privatecapital market debt and equity transactions, bank revolving credit and termloans, and/or project financings. The availability and cost of external capitalis affected by many factors, including, but not limited to, the performance ofNUI and its subsidiaries, their respective credit ratings and conditions in thecompany's industry in general. In addition, the NJBPU's holding company orderrequiring NUI to maintain a certain degree of separation between its utilityand non-utility subsidiaries could impact affiliate ratings on consolidated andunconsolidated credit quality. Compliance with applicable financial covenantswill depend upon future financial position and levels of earnings and cashflows, as to which no assurances can be given. 

In addition, at times NUI utilizes intercompany dividends fromNUI Utilities and amounts realized from the settlement of intercompany balancesto satisfy various subsidiary needs and to manage short-term cash needs.Historically, NUI Utilities has paid dividends of up to 75 percent of itsannual net income to NUI.  The StandbyBond Purchase Agreement entered into in connection with the Variable Bonds,which, as described below, are a series of gas facility revenue bonds issued bythe New Jersey Economic Development Authority (NJEDA), restricts the payment ofdividends by NUI Utilities to NUI to an amount based, in part, on the earnedsurplus of NUI Utilities, which has been reduced by the NJBPU settlement.  As a result of this restriction, there is nocapacity for further dividend payments by NUI Utilities to NUI at this time orin the foreseeable future. The company intends to seek an amendment to the SBPAto permit the payment of dividends.  Inaddition, under the amendment to NUI Utilities' credit facility dated May 10,2004, NUI Utilities is prohibited from paying dividends exceeding $35 millionin the aggregate while the credit facility is outstanding.  There are no contractual restrictions on thesettlement of intercompany balances in NUI's or NUI Utilities' financingagreements.

On a consolidated basis, the company had cash provided byoperating activities of $54.1 million in fiscal 2003, compared to $60.1 millionin fiscal 2002, and net cash used in operating activities of $26.7 million infiscal 2001. The decrease in the amount of cash provided by operatingactivities during fiscal 2003 was primarily due to a substantial increase infuel inventories.  This decrease was partially offset by additional cash collected fromcustomer receivables and the under-recovered gas costs and associated interest.  The increase in cash provided by operatingactivities in fiscal 2002, as compared with fiscal 2001, was primarily due tosubstantial decreases in fuel inventories, a reduction of the amount of margincollateral provided to trading partners, and collections of under-recovered gascosts as a result of the company's ability to collect the large under-recoveredgas balance that existed at September 30, 2001 over a period of three years.Included in the cash used by operations for fiscal 2001 was a significantincrease in under-recovered gas costs due to the increase in the price ofnatural gas experienced during the fiscal year. 

In February 2003, NUI and NUI Utilities each replaced theirrespective previous credit agreements with new revolving agreements.  In November 2003, each of NUI and NUIUtilities refinanced the February 2003 facilities and entered into creditagreements for new 364-day credit facilities. NUI's delay in delivering audited financial statements for fiscal 2003resulted in defaults under such credit agreements.  On January 26, 2004, NUI and NUI Utilities both obtained waiversof such defaults from the lenders under their respective credit agreements and(i) received an extension to March 1, 2004 of the delivery date for NUI'saudited financial statements for fiscal 2003 and unaudited financial statementsfor the first fiscal quarter of 2004 and (ii) amended the credit agreements toclarify certain technical provisions. Subsequently, on March 12, 2004, NUI and NUI Utilities obtained a limitedwaiver from the lenders under their respective credit agreements furtherwaiving the defaults described above. These credit facilities were amended as of May 10, 2004 to furtherextend these deadlines.  See Sources ofLiquidity - Short Term Debt below for a further description of the February andNovember 2003 credit facilities.

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

--     Upon renewal of NUI's revolving creditfacility, NUI is required to prepay, on or about November 22, 2004, an interest reserve account for the benefitof the lenders under NUI's credit agreement in the amount of approximately $20million.

--     Under the terms of NUI Utilities' naturalgas asset management contract with Cinergy, NUI Utilities is required to pay inadvance, in varying amounts, for its gas requirements on a monthly basis overthe contract period.  As a result of theprepayment obligations, in addition to the renewal of its credit facility, NUIUtilities may require additional funds in early fiscal 2005 in orderto meet its continuing obligations. Further, in order for NUI Utilities to obtain such additional funds, itis required to obtain the approval of its lenders and the NJBPU.

--     On September 26, 2003, the Board ofDirectors of NUI announced its intention to sell the company.  If we are unable to sell the company, or ifa sale is not completed in a timely manner, this could materially adverselyaffect NUI's and NUI Utilities' financial condition, results of operations andliquidity.

As noted above, based uponcurrent anticipated cash flows, the company believes it will have sufficientliquidity to meet its financial obligations through the end of fiscal yearending September 30, 2004 and the company also believes it will remain incompliance with all covenants under its various debt agreements for theremainder of the year ending September 30, 2004.  The companyplans to address its liquidity concerns by: successfully completing the sale ofthe company; extending its existing credit facilities beyond the currenttermination date of November 22, 2004; and obtaining additional financing toensure NUI Utilities' ability to, among other things, meet its gas purchaseprepayment requirements under its natural gas asset management contract withCinergy.  If the company is unsuccessfulin its efforts to effectively resolve its liquidity concerns, it may need toreorganize its operations and restructure its debt financing.  For a further discussion about risksrelating to NUI Utilities' liquidity, see Item 1. Business-Risk Factors.

Because the company's business is highly seasonal, short-termdebt is used to meet seasonal working capital requirements.  NUI also borrows under its bank lines ofcredit to finance portions of its capital expenditures. As of September 30,2003, NUI had drawn $31.7 million and NUI Utilities had drawn $132.4 millionunder their respective short-term credit facilities and the company had overnight cashinvestments of about $23.1 million. 

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

On January 31, 2002, the company filed a shelf registrationstatement on Form S-3 with the SEC, which enables the company to issue varioustypes and combinations of securities, including common stock, preferred stockand debt, from time to time, up to an aggregate of $150 million. The companysold 1.725 million shares of common stock under the shelf registrationstatement for net proceeds of approximately $37.0 million during March 2002.The proceeds from the sale were used to pay down short-term debt. As a resultof the company's announcement to hold itself for sale, management has no futureplans to utilize the remaining $113 million available under the shelfregistration statement to raise additional funds.

As discussed previously, the company is pursuing the sale ofvarious non-core businesses.  Thecompany completed the sale of its NC subsidiary on September 30, 2002, forapproximately $24 million (see Note 11 of the Notes to the ConsolidatedFinancial Statements) and completed the sale of its VCW subsidiaries onNovember 7, 2002, for approximately $15 million (see Capital Expenditures andCommitments-Sale of Valley Cities Gas and Waverly Gas).  The company also completed the sale of itsVirginia Gas Propane Company subsidiary on October 11, 2001, for approximately$3.8 million (see Sources of Liquidity-Assets and Liabilities Held for Sale),and completed the sale of its Virginia Gas Exploration Company and Virginia GasMarketing Company subsidiaries on March 1, 2002, for approximately $0.8 million(see Sources of Liquidity-Assets and Liabilities Held for Sale).  The proceeds of these transactions were usedto reduce short-term debt.

The company's assets being held for sale are subject toimpairment losses if market values are less than carrying values. The companycompleted the sale of NUI Telecom for $2.0 million on December 15, 2003. As aresult of charges in fiscal 2003 totaling approximately $25.5 million,after-tax, which reduced the carrying values of the assets of NUI Telecom (seeNote 11 of the Notes to the Consolidated Financial Statements), the completionof this transaction was immaterial to NUI's results for the first quarter offiscal 2004.

During August 2002, the company completed a sale/leasebacktransaction related to gas meters at City Gas, which raised approximately $9million. This transaction, which was recorded as a capital lease, bearsinterest at 4.98 percent and will be repaid over 10 years. The proceeds wereused toward the repayment of the $20 million of medium-term notes bearinginterest at 7.125 percent that matured on August 1, 2002.

The company's off-balance sheet arrangements include commitments underoperating leases, guarantees, letters of credit and gas procurement contracts,all of which are normal to the company's operations.  The company is a 50percent member of a joint venture that is developing natural gas storage assetsand is required to provide funding toward the development of these assets fortheir intended purpose.  See CapitalExpenditures and Commitments-Joint Venture with Duke Energy below for furtherdiscussion.  

In addition, as of September 30, 2003, approximately $85 millionwas owed by NUI to NUI Utilities, which was repaid on November 24, 2003, withthe proceeds of a new credit facility entered into on that date.  Among other things, this payment addressedone of the findings of the focused audit. See Sources of Liquidity-Short-Term Debt discussion which follows.  

***Credit Rating Actions***

During fiscal 2002, 2003, and 2004, Moody's Investors' Service(Moody's) downgraded NUI's credit rating from Baa-1 to Caa-1 and downgraded NUIUtilities' credit rating from A-3 to B-1. As described below, the downgrade of NUI Utilities is tied directly tothe losses at NUI and the lack of differentiation between the company's utilityand non-utility finances. Late in calendar 2003, Standard & Poor's RatingServices (S&P) lowered its corporate credit rating for NUI Utilities fromBBB to BB citing the impending sale of the company, liquidity concerns and theNJBPU investigation as its primary factors.

On June 6, 2002, Moody's placed the debt ratings of NUI and NUIUtilities on review for possible downgrade. Moody's cited that it would assessNUI's prospects for improving its debt coverage ratios and its financialposition as the company redeploys cash from the sales of its utility operationstoward debt reduction and toward achieving operating efficiencies. Moody's alsoindicated that it would monitor progress being made by NUI Utilities'Elizabethtown Gas division in obtaining approval from the NJBPU for a base rateincrease the company filed for during April 2002. Additionally, Moody'sindicated that it would monitor the progress made by NUI toward selling its TICEnterprises subsidiary, and in improving the profits and cash flows of itsnon-utility subsidiaries.  

On September 9, 2002, Moody's downgraded NUI's debt rating fromBaa-1 to Baa-2. Moody's also downgraded the debt rating of NUI Utilities fromA-3 to Baa-1 with negative outlook. As a result of this downgrade, NUI's costof borrowing under its short-term credit facilities increased 12.5 basis pointsor 0.125 percent and the cost of borrowing for NUI Utilities increased 10 basispoints or 0.10 percent.

On October 21, 2002, Moody's again placed the debt ratings forNUI and NUI Utilities on review for possible downgrade.  Moody's cited that it would assess the ratecase decision of NUI's Elizabethtown Gas division, which at the time wasexpected toward the end of calendar 2002; the results of the three-year audit;and management's decisions regarding the future of under-performing non-utilitybusinesses.

On February 3, 2003, Moody's further downgraded NUI's debt ratingfrom Baa-2 to Baa-3. Moody's also downgraded the debt rating of NUI Utilitiesfrom Baa-1 to Baa-2. Moody's cited the impact of unfavorable results from mostof the company's unregulated businesses (i.e. those in the company's Retail andBusiness Services segment) during fiscal 2002 and their concerns regardingthese operations' potential adverse impact on the company's future performanceas factors influencing their rating action. As a result of these downgrades,NUI's cost of borrowing under its short-term facilities increased 12.5 basispoints or 0.125 percent and the cost of borrowing for NUI Utilities increased12.5 basis points or 0.125 percent. 

On March 10, 2003, Moody's further downgraded NUI's debt ratingfrom Baa-3 to Ba-2. Moody's also downgraded the debt rating of NUI Utilitiesfrom Baa-2 to Baa-3. Moody's cited the impact of unfavorable results from mostof the company's unregulated businesses during fiscal 2002, the company'sdisclosure of defaults under the Note Purchase Agreement dated August 20, 2001,and the quality of the company's internal financial controls as factorsinfluencing their rating action. As a result of these downgrades, NUI's cost ofborrowing under its short-term facilities increased an additional 62.5 basispoints or 0.625 percent and the cost of borrowing for NUI Utilities wasunchanged. Moody's also indicated that NUI and NUI Utilities would remain underreview for further possible downgrade. Moody's cited that, in its continuingreview, it will assess the progress being made by management to 1) procure thecontinued support of its bank lenders and senior noteholders; 2) eitherdemonstrate unequivocal turn-around in the under-performing unregulatedbusinesses (i.e. those in the company's Retail and Business Services segment),accomplish substantial cost reductions or exit them altogether; and 3) furtherimprove internal accounting, legal and financial controls. 

On May 7, 2003, Moody's further downgraded NUI's debt rating fromBa-2 to B-1. Moody's also downgraded the debt rating of NUI Utilities fromBaa-3 to Ba-1. Moody's cited reduced financial flexibility of the company dueto under-performance of some of its unregulated businesses, as well as, in thecase of NUI's debt rating, the effective subordination of NUI's debtholders tothose of NUI Utilities. Moody's also cited the company's continued use of acentrally managed cash process at the corporate level, which effectively tiesNUI Utilities' credit more closely to that of NUI's. As a result of thesedowngrades, NUI Utilities' cost of borrowing under its short-term facilitiesincreased an additional 37.5 basis points or 0.375 percent and the cost ofborrowing for NUI was unchanged, since it was already at the highest pricinglevel provided for under its short-term facility at such time.  

On October 6, 2003, Moody's further downgraded NUI's debt ratingfrom B-1 to B-3. Moody's also downgraded the debt rating of NUI Utilities fromBa-1 to Ba-3. Moody's cited the company's announcement that the company's Boardof Directors had placed the entire company up for sale. In addition, Moody'sindicated that their action reflects the difficult business conditionsaffecting the company as well as the limited progress in selling non-coreassets, citing that this limited the company's financial flexibility.  Moody's also cited the continuing financialrelationship between NUI and NUI Utilities, liquidity concerns, and the costsassociated with finding a suitable buyer for the company. As a result of thesedowngrades, NUI Utilities' cost of borrowing under its short-term facilities increasedan additional 62.5 basis points or 0.625 percent and the cost of borrowing forNUI was unchanged. In conjunction with the downgrades on October 6, 2003,Moody's indicated they would monitor the company's liquidity position as wellas its progress in selling non-core assets. 

On April 6, 2004, Moody's further downgraded NUI's debt ratingfrom B-3 to Caa-1.  Moody's alsodowngraded the debt rating of NUI Utilities from Ba-3 to B-1. Moody's indicatedthat its outlook for both entities is negative. Moody's cited (1) the company'srecent announcements that it expects lower earnings in the first quarter offiscal 2004, resulting from severance costs and expenses related to the debtrefinancings concluded during November 2003 at substantially higher rates ofinterest and fees; (2) the continued delay in producing audited financialstatements for the fiscal year ended September 30, 2003 and its unaudited firstquarter Form 10-Q, because of the investigations by the company's AuditCommittee of certain questionable transactions of NUI Energy Brokers, thecompany's wholesale energy trading subsidiary, which required additionalwaivers from lenders of both NUI and NUI Utilities; (3) the expectation ofhaving to incur a meaningful settlement charge as a result of the focused auditconducted by the NJBPU, which would reduce the company's income and equity forfiscal 2003; (4) the ongoing investigation of the New Jersey Attorney General'sOffice into NUI Energy Brokers; and (5) the delays in realizing the sale of thecompany, which is the source of repayment of NUI's $255 million rated debt anda portion of the debt of NUI Utilities. Moody's also cited the financial relationship between NUI and NUIUtilities and that any penalties that may be assessed to the company by theNJBPU may have to be funded from the earnings and cash flows of NUIUtilities.  In addition, NUI and NUIUtilities have overlapping lenders that require debt to be serviced by eachentity.  To the extent NUI does not havethe means to discharge its own debt obligations, these lenders may seekdividends from NUI Utilities to help service NUI's debt.  The lower rating Moody's assigned to NUIreflects the structural subordination of its debt relative to that of NUIUtilities. 

In conjunction with the downgrades on April 6, 2004, Moody'sindicated that its outlook for both NUI and NUI Utilities was negative.  The negative outlook reflects Moody's beliefthat it will take time to close on the sale of the company as its assets arediverse and located in various states necessitating multiple regulatoryapprovals in the states in which the company's regulated entities operate.  In the meantime, Moody's expects the companyto continue to incur extraordinary operations and maintenance expenses as itemploys an array of outside advisors and consultants to help manage its day today operations, incur additional legal, accounting and financial advisory feesas it seeks to respond to regulatory investigations, and attempts to negotiatesettlements with its regulators and searches for a suitable buyer.

On September 26, 2003, Standard & Poor's Rating Services(S&P) lowered its corporate credit rating for NUI Utilities from BBB toBBB- and had placed its rating on CreditWatch with developing implications.S&P cited the announcement that the company is actively being offered forsale and that net income guidance for the fiscal year ended September 30, 2003,had been revised downward. S&P indicated that the CreditWatch listing withdeveloping implications reflected the potential for the ratings to be raised,lowered or maintained depending upon the credit quality of the eventualbuyer.  S&P also cited an additionalconcern regarding the company's ability to meet future liquidity needs duringthis uncertain period and viewed the renewal of NUI's and NUI Utilities' creditlines, which were set to expire on February 11, 2004, as having some executionrisk given the uncertainty regarding the company's sale; however, S&P notedthat the company was taking steps to address this issue by working to obtain anadditional $50 million line of credit.

On November 21, 2003, S&P further lowered its corporatecrediting rating for NUI Utilities from BBB- to BB and its rating remains onCreditWatch with developing implications. S&P's rating action cited the business and financial challenges thecompany faces, including an investigation of energy trading transactions by thecompany's NUI Energy Brokers subsidiary, and the potential for greaterregulatory scrutiny in New Jersey, which could impact the sale of NUI.  S&P did note the company had addressedits anticipated liquidity needs on an interim basis prior to the sale of thecompany with separate credit agreements for NUI and NUI Utilities aggregating$405 million, each of which can be extended for another 364 days at the optionof the respective borrower (under certain conditions outlined below), (seeShort-Term Debt discussion for further details).  S&P also noted that any negative outcome of the investigationof the trading transactions or possible regulatory action in New Jersey couldinhibit the company's ability for a successful sale.

There can be no assurance that additional downgrades by Moody'sand/or S&P can be avoided. 

***Sources of Liquidity***

***Short-Term Debt***. On February 12, 2003, each of NUI and NUI Utilities entered revolvingcredit facilities that replaced their respective credit facilities.  NUI's credit facility consisted of arevolving credit facility that allowed it to borrow up to approximately $38.1million, and NUI Utilities' revolving credit facilities consisted of arevolving loan and a bridge loan, which collectively allowed NUI Utilities toborrow up to an aggregate of approximately $141.9 million.  On June 27, 2003, the NUI Utilitiesrevolving loan became fully subscribed at an aggregate of $141.9 million, andthe 364-day bridge loan was terminated. These credit agreements were scheduled to mature on February 11, 2004,and were repaid with a portion of the proceeds from new credit facilities NUIand NUI Utilities entered into on November 24, 2003 (additional discussion ofthese new credit facilities follows). The February 12, 2003 credit facilities contained certain restrictivecovenants and also required NUI and NUI Utilities, respectively, to maintaincertain financial ratios.  NUI wasrequired to maintain a fixed charge coverage ratio of not less than 1.50x andNUI Utilities was required to maintain a fixed charge coverage ratio of notless than 1.75x.  NUI and NUI Utilitieseach were to maintain leverage ratios of not more than 0.65x from March 1through August 31 and not more than 0.70x from September 1 through February 28(or 29, if applicable). 

Borrowings under the credit facilities entered into on February12, 2003, bore interest at a rate equal to either the London Interbank OfferedRate (LIBOR) or the Prime Rate plus, in each case, a margin based on NUI's andNUI Utilities' credit ratings, as the case may be.  As of September 30, 2003, the total aggregate outstanding borrowingsunder NUI's and NUI Utilities' credit facilities were $164.1 million with acombined weighted average interest rate of 3.1 percent.  On that date, NUI had outstanding borrowingsunder its credit facility amounting to $31.7 million and unused borrowingcapacity amounting to $6.4 million, and NUI Utilities had outstandingborrowings under its credit facility amounting to $132.4 million and unusedborrowing capacity amounting to $9.5 million. Also on that date, the company had available cash in the form ofovernight investments of approximately $23.1 million.  The weighted average daily amounts of borrowings outstandingunder NUI's credit facility and the weighted average interest rates on thoseamounts were $33.9 million and $97.4 million at 3.1 percent and 3.3 percent,respectively, for the fiscal years ended September 30, 2003 and 2002,respectively.  The weighted averagedaily amounts outstanding of borrowings under NUI Utilities' credit facilityand the weighted average interest rates on those amounts were $118.7 millionand $66.9 million at 2.7 percent and 2.8 percent, respectively, for the fiscalyears ended September 30, 2003 and 2002, respectively.

On March 31, 2003, NUI and the banks amended NUI's 364-day creditfacility to approve the increase in interest rates under the senior notes, theguarantees under the senior notes and the execution of the IntercreditorAgreement, as described below.  Thisamendment to NUI's credit facility also provided for a new pricing grid, whichincreased NUI's cost of borrowing under the credit facility by 25 basis points(0.25 percent).

In August 2003, NUI Utilities entered into an amendment with thelenders under its credit agreement, which among other things, permitted NUIUtilities to obtain an additional $50 million of indebtedness, as well as torefinance such indebtedness through certain financing transactions.  On October 10, 2003, NUI Utilities enteredinto a bridge loan agreement with a lender for a credit facility that allowedit to borrow up to $50 million to fund near-term natural gas purchases andother general working capital needs. This bridge loan agreement, which was scheduled to mature on February11, 2004, was terminated by NUI Utilities upon entering into a new creditfacility on November 24, 2003.  Noamounts were ever drawn under this bridge loan agreement. 

On November 24, 2003, NUI and NUI Utilities each entered intotheir current separate revolving credit facilities aggregating $405million.  Both NUI's and NUI Utilities'current credit agreements expire on November 22, 2004, and each may be extendedfor one364-day term,subject to certain conditions.

NUI'sfacility may be extended if (i) NUI Utilities' facility is simultaneouslyextended, (ii) the maturity of NUI Utilities' 8.35 percent medium term notes,due Februa**r**y1, 2005, have been extended to a date no earlier than June 30, 2006 or havebeen repaid with the proceeds of the delayed draw term loan, (iii) NUIdeposits cash with the administrative agent to cover interest that would accrueon outstanding amounts under the credit facility until the extended maturitydate, in an amount of approximately $20 million, and (iv) no default existsunder such facility at the time of such extension. 

NUIUtilities' facility may be extended if (i) all applicable regulatory approvalsrequired for such extensions have been obtained, (ii) the maturity of NUIUtilities' 8.35 percent medium term notes, due Februa**r**y 1, 2005, have been extended to a date no earlier thanJune 30, 2006 or have been repaid with the proceeds of the delayed draw termloan and (iii) no default exists under such facility at the time of suchextension. 

NUI's current credit agreement provides for a $255 million termloan facility.  The proceeds of the termloan facility were used (1) to repay and terminate NUI's credit agreement whichwas entered into on February 12, 2003, (2) to repay NUI's outstanding $60million senior notes and pay a $9.4 million prepayment premium relatingthereto, (3) to repay approximately $85 million of an intercompany balance owedby NUI to NUI Utilities, (4) to fund a $20.4 million interest reserve accountfor the benefit of the lenders under NUI's credit agreement, and (5) for othergeneral corporate purposes.  NUI'scredit agreement bears interest at a rate, at NUI's option, equal to either (i)LIBOR (subject to a 2 percent floor) plus 6 percent, or (ii) the Base Rate(subject to a 3 percent floor) plus 5 percent. The obligations under NUI's credit agreement are guaranteed on a seniorunsecured basis by NUI's direct and indirect wholly-owned subsidiaries (subjectto certain exceptions).  NUI Utilitiesdoes not guarantee NUI's obligations under this credit agreement.  As of April 26, 2004, NUI had overnight cashinvestments of $24.5 million.

NUI Utilities' current credit agreement provides for (i) a $50 millionrevolving credit facility, (ii) a $50 million term loan facility and (iii) a$50 million delayed draw term loan facility. The proceeds from the revolving credit facility and the term loanfacility combined with the proceeds from the repayment of the $85 millionintercompany balance from NUI were used (1) to repay outstanding loans under,and terminate, the NUI Utilities credit agreement which was entered into onFebruary 12, 2003, (2) to pay accrued and unpaid fees under the interim creditagreement entered into on October 10, 2003 and (3) for general corporatepurposes.  The proceeds from the delayeddraw term loan facility, which can be drawn at the option of the company, canbe used solely for the purpose of repaying NUI Utilities' 8.35 percent mediumterm notes, which are due on February 1, 2005. NUI Utilities' credit agreement bears interest at a rate, at NUIUtilities' option, equal to either (i) LIBOR (subject to a 2 percent floor)plus 5 percent, or (ii) Base Rate (subject to a 3 percent floor) plus 4percent.  NUI Utilities has fully drawnall amounts available under the $50 million revolver and the $50 million termloan facility.  As of April 26, 2004,NUI Utilities had overnight cash investments of $114.4 million.

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

As noted earlier, the company's delay in delivering auditedfinancial statements for fiscal 2003 resulted in events of default under NUI'sand NUI Utilities' respective credit agreements.  On January 26, 2004, NUI and NUI Utilities obtained waivers ofsuch defaults from the lenders under their respective credit agreements, andreceived an extension of the delivery date for NUI's audited financialstatements for fiscal 2003 and its 2004 first fiscal quarter unauditedfinancial statements through March 1, 2004, and amended the credit agreementsto clarify certain technical provisions. Further delays in the delivery of these financial statements beyond thedate to which NUI and NUI Utilities had received waivers resulted in anotherevent of default.  On March 12,2004, NUI and NUI Utilities received a further waiver of such defaults from thelenders and such lenders otherwise deferred their rights to exercise remediesin respect thereof.  NUI and NUIUtilities subsequently entered into amendments dated as of May 10, 2004 totheir respective credit agreements which:

(i) extended the delivery datefor the aforementioned financial statements (as well as for the financialstatements for the fiscal quarter ended March 31, 2004) until June 15, 2004, 

(ii) consented to the NJBPUsettlement, 

(iii) modified financialcovenants contained in the credit agreements to take into account the NJBPUSettlement and the recent and expected futureperformance of the company,

(iv) permitted the acquisition byNUI Utilities of approximately $350,000 worth of gas pipeline, 

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

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

(vii) increased the interest rate on NUI Utilities' delayeddraw term loan (if drawn) by one percent until a purchase agreement is executedto sell NUI or NUI Utilities to an unaffiliated third party.

Under the dividend restrictiondescribed above, NUI is prohibited from paying any cash dividends during any fiscalquarter in which NUI's consolidated total debt represents more than 60 percentof its total capitalization, measured (i) at the last day of theimmediately preceding fiscal quarter and (ii) pro forma at the time suchdividend is made.  As a result ofthese restrictions, NUI is prohibited from paying any dividends at this time orin the foreseeable future.  Under NUI'scredit facility, NUI also is prohibited from paying dividends exceeding $20million in the aggregate while the credit facility is outstanding.

***Long-Term Debt***. NUI has outstanding $50 million 8.35 percent medium term notes, whichmature on February 1, 2005.  As notedunder Short-Term Debt above, included in NUI Utilities' current credit facilityis a $50 million delayed draw term loan that can be drawn at the option of thecompany and used, subject to satisfaction of the terms and conditions containedtherein, to repay these medium term notes.

On November 24, 2003, NUI repaid its $60 million senior noteswith the proceeds of its new credit facility entered into on that date.  In conjunction with the repayment of thisindebtedness, NUI paid a prepayment premium of approximately $9.4 million tothe noteholders, which was recorded during the first quarter of fiscal 2004.

NUI Utilities is party to a series of loan agreements with theNew Jersey Economic Development Authority (NJEDA) pursuant to which the NJEDAhas issued four series of gas facilities revenue bonds:  (i) $46.5 million bonds at 6.35 percent dueOctober 1, 2022, (ii) $39 million bonds at variable rates due June 1, 2026(Variable Bonds), (iii) $54.6 million bonds at 5.7 percent due June 1, 2032 and(iv) $40 million bonds at 5.25 percent due November 1, 2033.  NUI Utilities is also party to a loanagreement pursuant to which Brevard County, Florida (the County) has issued $20million bonds at 6.40 percent due October 1, 2024.  In accordance with the terms of these loan agreements, the fundsreceived by the NJEDA or the County, as the case may be, upon the issuance ofthe applicable bonds have been loaned to NUI Utilities.  The interest rates and maturity dates underthe loan agreements parallel the interest rates and maturity dates under thebonds.  Interest payments by NUIUtilities on the loans are used to pay the interest on the bonds.  During fiscal 2003, NUI Utilities paid $9.9million in interest payments on these loans. 

Approximately $2.1 million of interest earned on the original netproceeds from the $20 million 6.4 percent revenue bonds due 2024 is unexpendedand accordingly has been classified as "Funds for Construction Held by Trustee"on the Consolidated Balance Sheet at September 30, 2003 until drawn upon.

The Variable Bonds contain a provision whereby the holder can"put" the bonds back to the issuer.  In1996, the company executed a long-term Standby Bond Purchase Agreement (SBPA)with a syndicate of banks, which was amended and restated on June 12,2001.  Under the terms of the SBPA, asfurther amended on June 10, 2003, July 21, 2003 and December 4, 2003, The Bankof New York is obligated under certain circumstances to purchase Variable Bondsthat are tendered by the holders thereof and not remarketed by the remarketingagent.  Such obligation of the bankwould remain in effect until the expiration of the SBPA on June 30, 2004,unless extended or earlier terminated. The terms of the SBPA also restrict thepayment of dividends by NUI Utilities to NUI to an amount based, in part, onthe earned surplus of NUI Utilities, which has been reduced by the NJBPUsettlement.  There is no capacity underthis covenant for further dividends at this time or in the foreseeable future,unless a waiver is obtained from the bondholders.  

If the SBPA is not further extended beyond its current expirationdate of June 30, 2004, in accordance with the terms of the Variable Bonds, allof the Variable Bonds would be subject to mandatory tender at a purchase priceof 100 percent of the principal amount, plus accrued interest, to the date oftender.  In such case, any VariableBonds that are not remarketable by the remarketing agent will be purchased byThe Bank of New York.

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

As of September 30, 2003, the aggregate principal and accruedinterest on the outstanding Variable Bonds totaled approximately $39.0million.  Principal and any unpaidinterest on the outstanding Variable Bonds are due on June 1, 2026, unless theput option is exercised before that time.

The delay in delivering certain officers' certificates, SECfilings and quarterly financial information throughout the fiscal year 2003, aswell as audited fiscal 2003 financial statements and related documents(Required Documents), resulted in breaches under certain loan agreements, trustindentures, and related documents underlying NUI Utilities' gas revenue bondfacilities, namely (i) $20 million of 6.40 percent bonds due October 1, 2024, (ii)$46.5 million of 6.35 percent bonds due October 1, 2022, (iii) the VariableBonds, (iv) $54.6 million of 5.70 percent bonds due June 1, 2032 and (v) $40million of 5.25 percent bonds due November 1, 2033, as well as under the 8.35percent medium term notes.

Many of these breaches were cured on May 10, 2004 with deliveryof many of the Required Documents.  Theremaining breaches will be cured by virtue of NUI Utilities' delivery of thisannual report, related officers' certificates and other financial information. 

Defaults may occur in the near future under the Variable Bonds,the 5.25 percent bonds and the 8.35 percent medium term notes if NUI Utilitiesdoes not provide unaudited financial statements for NUI for the fiscal quartersended December 31, 2003 and March 31, 2004, and related documentation andofficers' certificates.  Defaults may occur in the near future under the5.70 percent bonds if NUI Utilities does not provide audited financialstatements for NUI Utilities for the fiscal year ended September 30, 2003 andunaudited financial statements for NUI Utilities for fiscal quarters endedDecember 31, 2003 and March 31, 2004.  To date, NUIhas obtained all necessary waivers and extended the respective deadlines fordelivery of all information required pursuant to such bond facilities to June30, 2004.  NUI and NUI Utilities areworking diligently to deliver the required documentation within thistimeframe.  

***Common Stock***. The company periodically issues shares of common stock in connectionwith NUI Direct, the company's dividend reinvestment and stock purchase plan,and various employee benefit plans. From time to time, the company may issueadditional equity to reduce short-term indebtedness and for other generalcorporate purposes.  As noted above, thecompany sold 1.725 million shares of its common stock for net proceeds ofapproximately $37.0 million in March 2002. The total proceeds from all otherissuances amounted to approximately $1.2 million in fiscal 2003, $0.7 millionin fiscal 2002, and $0.5 million in fiscal 2001. The proceeds were used primarilyto reduce outstanding short-term debt. 

The company issued stock in conjunction with several acquisitionsduring fiscal 2002. This included 144,648 shares worth approximately $3.1million to acquire Virginia Gas Storage and Virginia Gas Distribution (see Note3 of the Notes to the Consolidated Financial Statements), and 216,039 sharesworth approximately $4.2 million to acquire Norcom, Inc. (see Note 6 of theNotes to the Consolidated Financial Statements). In addition, the companyissued 47,136 shares to the former owners of NUI Telecom as payment of anincentive of $1.0 million under a provision of the Agreement and Plan ofMerger. No stock was issued during fiscal 2003 for acquisitions.

***Assets and Liabilities Held for Sale***. During June2003, the company approved a plan to sell NUI Telecom and began activelyseeking a buyer.  See Notes 11 and 24 ofthe Notes to the Consolidated Financial Statements. In accordance with theprovisions of Statement of Financial Accounting Standards No. 144, "Accountingfor Impairment or Disposal of Long-lived Assets," the company has reclassifiedthe assets and liabilities of NUI Telecom, NC and VCW as Held for Sale on theConsolidated Balance Sheets at September 30, 2003, and 2002.  

The company completed the sale of NC on September 30, 2002, andcompleted the sale of VCW on November 7, 2002 See Note 11 to the Notes to theConsolidated Financial Statements.  

On October 11, 2001, the company sold the capital stock ofVirginia Gas Propane Company, and on March 1, 2002, the company sold thecapital stock of Virginia Gas Exploration Company and Virginia Gas MarketingCompany, all of which were subsidiaries of VGC. 

**Capital Expenditures and Commitments**

***Capital Expenditures***. Capital expenditures, whichconsist primarily of expenditures to expand and upgrade the company's gasdistribution systems, were $41.8 million in fiscal 2003, $55.7 million infiscal 2002, and $59.4 million in fiscal 2001. The decreased capital spendingduring the current fiscal year was due to the company's reduction of capitalprojects at the corporate level and reduced spending for operations being heldfor sale. 

Capital expenditures are expected to be approximately $51 millionin fiscal 2004, which will be used primarily for continued expansion and upkeepof the company's natural gas distribution system and certain informationtechnology projects.

***Joint Venture with Duke Energy***. On April 30, 2001,the company announced an agreement with a subsidiary of Duke Energy to developa natural gas storage facility in Saltville, Virginia. NUISS and Duke EnergySaltville Gas Storage, LLC (DESGS) have created a limited liability company,SSLLC.  After receiving the requiredregulatory approval in February 2003, VGC contributed certain storage assetsvalued at approximately $16.3 million to SSLLC. DESGS has contributed an equalamount (approximately $16.3 million) of capital required to expand the facilityfor its intended purpose.  To the extentSSLLC determines it needs additional funding (which decision can only be madejointly by the company and DESGS), the company and DESGS are obligated to fundthe development of SSLLC equally. 

The company has loaned SSLLC approximately $25.6 million towardthe development of the Saltville storage facility through September 30, 2003,and currently estimates its share of the future funding to be zero in fiscal2004, and $2.5 million in fiscal 2005. Subsequent fiscal years are expected tobe funded with internally generated cash flows of the joint venture.

SSLLC plans to expand the present Saltville storage facility fromits current capacity of 1 Bcf to approximately 12 Bcf and connect it to DukeEnergy Gas Transmission's (DEGT) East Tennessee Natural Gas interstate systemand DEGT's Patriot pipeline. At full capacity, the Saltville storage field willbe able to deliver up to 500 million cubic feet per day of natural gas to areamarkets. The Saltville facility features fast-injection and fast-withdrawalcapabilities offered by salt cavern storage. The expansion will be completed in phases which began in fiscal 2003,with the Phase I total of 5.3 Bcf of working natural gas storage capacity to becompleted by fiscal 2008. The market demand for additional storage will dictatethe timing of the other phases of the expansion.

Development of the Saltville facility is intended to create astrategically located energy-trading hub, and enable the company to capitalizeon the energy supply and wholesale energy portfolio and risk managementopportunities in the rapidly developing Mid-Atlantic region. The additionalstorage capacity is expected to allow the company to meet the significantdemand from local distribution companies as well as power plant developmentthat is underway in the region.

In conjunction with the development of the Saltville facility,during December 2002, the company entered into a twenty-year agreement withDEGT for the firm transportation of natural gas on the Patriot pipeline, whichwas under construction at that time. Upon completion of the pipeline, thecompany became obligated to pay annual demand charges of approximately $4.7million over the life of the transportation agreement.

In August 2003, the company entered into a twenty-year agreementwith SSLLC for the firm storage of natural gas. Upon completion of DEGT's Patriotpipeline, the company became obligated to pay annual demand charges of $0.3million over the life of the storage agreement.

Regarding the transportation and storage agreements discussed above, thecompany is not utilizing the Patriot pipeline in its operations at this timesince it has discontinued its trading operations.   However, thecompany is currently evaluating how to obtain the maximum benefit from itsrights under these agreements.

***Other Storage and Pipeline Projects***. The companyhas acquired options on the land and mineral rights for property located in Richton,Perry County, Mississippi, that the company plans to develop into a natural gasstorage facility to help serve the Southeast United States. The land option hasa purchase price of approximately $0.5 million and the mineral rights optionhas a purchase price of $0.9 million. Both options expire on February 15, 2005.Should the options not be exercised, the company's right to make such purchaseswould expire. 

NUI plans to develop a salt dome natural gas storage facility inRichton, Perry County, Mississippi. Like its companion storage facility in Saltville, Richton is expected tooffer the high-deliverability capabilities of salt dome storage for natural gasand will have access to a number of major interstate pipelines, includingDestin Pipeline and its connections to Gulf South, Gulfstream, FGT, SONAT,Tennessee Natural Gas and Transco. Through its connection to Destin Pipeline,Richton will have direct access to the gas supplies in the Gulf of Mexico, aswell to supplies from the interconnected interstate pipelines previouslylisted.  Richton can also serve as apotential storage facility for the various proposed LNG projects in the GulfCoast.     

The preliminary plan is to develop two caverns with approximately3.8 Bcf of working gas capacity each. The total gas capacity of both caverns is expected to be approximately11.6 Bcf.  The gas handling facilitiesare expected to provide an average injection rate of 250,000 Mcf per day and amaximum withdrawal rate of 600,000 Mcf per day.  The facilities willinclude approximately 18,000 HP of compression and a 14.6 kilometer, 24 inchpipeline connecting the facility to the Destin pipeline.  It is anticipated that Richton will be aFERC regulated facility.  Thepreliminary engineering study, conceptual design for the facility and pipeline,water resource analysis, and a successful "open season" have beencompleted.  The total cost of theproject is expected to be approximately $85 million over a period of threeyears, which NUI will seek to fund through project finance debt. 

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

During 2001, the company began building a planned gas pipelineintended to cross the state of Florida from West Palm Beach to Fort Myers (theFlorida East-West Pipeline Project). Phase I of the pipeline has been completed and is currently in servicebeginning with a connection to the Florida Gas Transmission Company's pipelinein West Palm Beach and terminating in South Bay.  The remaining portions of the project are intended to include aninterconnection with the Florida Gas Transmission Company's pipeline in FortMyers and the Gulfstream Natural Gas System pipeline in Martin County. DuringOctober 2003, the company retained a company to provide engineering-related servicesin support of the expansion of its Florida East-West Pipeline project.  The company anticipates a twenty-eight (28)month schedule to complete the pipeline systems inclusive of a state regulatoryapproval process and construction activities. The company intends to begin the regulatory approval process oncesuitable customer commitments are obtained. When completed, the pipeline is expected to be capable of transportingup to 300,000 Mcf per day of natural gas. The pipeline is also intended to include direct connection to any of thethree LNG pipelines proposed to come onshore in southeast Florida at the portsof Palm Beach and/or Port Everglades. Once completed, the company's pipeline will serve as a transportationhub linking the east and west sides of the Florida Gas Transmission system tothe proposed LNG pipelines and the Gulfstream Natural Gas System as well as thecompany's proposed West Felda Gas Storage facility.

In conjunction with the expansion of the Florida East-WestPipeline, the company entered into agreements with Plains Resources Inc.(Plains), under which the parties have been validating technical and commercialviability of developing up to 15 Bcf of working gas capacity of natural gasstorage in the West Felda Field, located in South Florida. The West Felda Fieldrepresents one of five oil-producing properties currently operated by Plains inthe oil-producing "Sunniland Trench" in South Florida. The West Felda Field isexpected to be serviced by the Florida East-West Pipeline, with an approximate12-mile pipeline connection to the storage field south of the pipeline. Uponentering into final agreements, the parties intend to begin offering storageservices in conjunction with the initiation of service of the pipeline.

Together these projects are expected to provide increasedreliability for Florida's natural gas supply and distribution infrastructureand support Florida's rapidly growing demand for natural gas utilized forelectricity generation.

***Contractual Obligations***.  In the course of its business activities, the company enters intoa variety of contractual obligations and commercial commitments. Some of theseitems result in direct obligations on NUI's balance sheet while others arecommitments, some firm and some based on uncertainties, that are disclosed inthe company's underlying consolidated financial statements.

The following table summarizes the company's contractualobligations as of September 30, 2003 by payment due date. Each of theseobligations is discussed in further detail below (amounts in thousands):
|                                            |                | **Payments  Due by Period**                     |                           |
|--------------------------------------------|----------------|-------------------------------------------------|---------------------------|
| **Contractual  Cash Obligations**          | **Total**      | **Less than 1 Year**                            | **1-3 Years**             | **4-5 Years** | **After 5 Years** |
|                                            |                |                                                 |                           |  |  |
| Long-term debt  (1)                        | $310,100       | $        --- | $55,000                   | $  15,000 | $240,100 |
| Capital lease  obligations (2)             | 14,467         | 2,711                                           | 4,262                     | 2,376 | 5,118 |
| Notes payable  to banks                    | 164,100        | 164,100                                         | ---                       | --- | --- |
| Notes payable  (3)                         | 1,400          | 1,400                                           | ---                       | --- | --- |
| Operating  leases                          | 82,630         | 6,063                                           | 11,106                    | 10,941 | 54,520 |
| Capital  expenditures of joint venture (4) | 2,500          | ---                                             | 2,500                     | --- | --- |
| Gas procurement  contracts                 |   346,013 |     60,100                       |     81,769 |   56,232 |    147,912 |
| Total  contractual obligations             |  $921,210 | $234,374                                        | $154,637                  | $84,549 | $447,650 |

(1) The long-termdebt cash obligations exclude $1.0 million of unamortized debt discounts as ofSeptember 30, 2003.

(2) Includes $2.5million of interest to be paid on the capital leases.

(3) This amountrepresents an unsecured promissory note. See Note 8 of the Notes to the Consolidated Financial Statements.

(4) Seediscussion under Joint Venture with Duke Energy and Note 22 of the Notes to theConsolidated Financial Statements.

***Long-term Debt***. The company's long-term debtinstruments are scheduled on the Consolidated Statement of Capitalization inthe financial statements that follow. In addition, see Note 14 to the Notes to the Consolidated FinancialStatements.

***Capital Lease Obligations***.  The company acquires property and equipmentunder capital leases in the ordinary course of business, and the terms of theagreements vary through 2012. At September 30, 2003, the company had totalobligations under capital leases of $11.9 million. 

***Notes Payable to Banks***.  Represents outstanding borrowings under NUI's and NUI Utilities'short-term credit facilities at September 30, 2003.  In November 2003, these credit facilities were replaced by newcredit facilities aggregating $405 million. 

***Notes Payable***. This represents an unsecuredpromissory note.  See Note 8 of theNotes to the Consolidated Financial Statements. 

***Operating Leases***. The company maintains operatingleases in the ordinary course of business. These leases include those foroffice space and office equipment, and the terms of the agreements vary from2003 through 2022. At September 30, 2003, the company had total commitmentsunder operating leases of $82.6 million. See Note 17 of the Notes to the Consolidated Financial Statements.

***Gas ProcurementContracts***. Certainof the company's long-term contracts for the supply, storage and delivery ofnatural gas include fixed charges that amounted to approximately $60.1 millionin fiscal 2004 (this amount includes the company's obligations under twotwenty-year agreements related to the Patriot pipeline discussed above). Thecompany also is committed to purchase, at market-related prices, minimumquantities of gas that, in the aggregate, are approximately 2.1 Bcf per year orto pay certain costs in the event the minimum quantities are not taken. Thecompany expects that minimum demand on its systems for the duration of thesecontracts will continue to exceed these minimum purchase obligations.

NUI Utilities has entered into an agreement with Cinergy tomanage all of its interstate pipeline assets. NUI Utilities initially entered into an agreement with Cinergy effectiveMarch 31, 2004, which covered only a one month period.  That agreement was superseded by anagreement effective on April 1, 2004, pursuant to which Cinergy will serve asthe NUI Utilities asset manager from April 1, 2004 until March 31, 2005, andwill provide NUI Utilities with a full requirements gas supply service toenable NUI Utilities to meet its public utility obligations to supply gas tocustomers in New Jersey, Florida and Maryland. The gas supply will be providedat market-based prices. 

NUI Utilities has assigned to Cinergy or, in the case of non-assignableassets, granted Cinergy agency authority to control, NUI Utilities' gas supplyand deliverability assets, and Cinergy will pay NUI Utilities a fixed amountfor the right to act as NUI Utilities' asset manager for the twelve monthsended March 31, 2005. The obligations of NUI Utilities, including all commodityand demand charges, will be secured by a pre-payment obligation unless NUIUtilities' credit rating improves to investment grade, at which time theparties will negotiate other mutually agreeable payment terms based on theimproved creditworthiness of NUI Utilities. The agreement provides NUIUtilities the option to terminate the agreement in the event of a change incontrol of NUI Utilities or NUI.

**Commitments**

***Environmental***. The company owns or previously owned properties on which formermanufactured gas plants (MGP) were operated in the states of New Jersey, NorthCarolina, South Carolina, Pennsylvania, New York and Maryland.  Although the actual total cost of futureenvironmental investigation and remediation efforts cannot be reasonablyestimated, the company has recorded a total reserve of approximately $33.9million, which the company believes represents the undiscounted probableminimum amount the company may expend over the next 30 years. Of this reserve,approximately $30.2 million relates to the New Jersey MGP properties andapproximately $3.7 million relates to the MGP properties located outside thestate of New Jersey. The company believes that all costs associated withremediation of the New Jersey MGP properties will be recoverable in rates orfrom insurance carriers.  As ofSeptember 30, 2003, the company has a regulatory asset of $36.4 million on itsConsolidated Balance Sheet for environmental remediation, inclusive ofinterest, which reflects the future recovery of both incurred costs and futureremediation liabilities in the state of New Jersey. In New Jersey, the companyhas rate recovery of approximately $9.8 million of such costs, of which aportion has been recovered through September 30, 2003.  Recovery of an additional $0.7 million iscurrently pending NJBPU approval. With respect to costs that may be associatedwith the MGP properties located outside the state of New Jersey, the company iscurrently or intends to pursue recovery from ratepayers, former owners andoperators, and/or insurance carriers. 

**Off-Balance Sheet Arrangements**

The company's off-balance sheet arrangementsinclude commitments under operating leases, guarantees, letters of credit andgas procurement contracts, all of which are normal to the company'soperations.  As described above, atSeptember 30, 2003, the company had total commitments under non-cancelableoperating leases totaling $82.6 million. See Note 22 of the Notes to the Consolidated Financial Statements for adiscussion of the company's guarantees. In addition, the company is a 50 percent member of a joint venture thatis developing natural gas storage assets and is required to provide fundingtoward the development of these assets for their intended purpose.  See Capital Expenditures andCommitments-Joint Venture with Duke Energy below for further discussion.  NUI is also party to two Standby Letters ofCredit secured by cash collateral, as follows:

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

--     asecured Standby Letter of Credit issued on February 1, 2004 by Fleet Bank,originally in the amount of $1,000,000, in favor of National Union FireInsurance Company and several other insurance companies underwriting thecompany's workmen's compensation policy. As of April 23, 2004, the amount of the letter of credit has beenreduced to $948,000. The letter of credit expires on February 1, 2005.

**Item7A. Quantitative and Qualitative Disclosures About Market Risk**

In March 2004, the company discontinued the trading operations ofits NUI Energy Brokers business, although NUI Energy Brokers continues tomanage its prior contractual obligations. Prior to that date, NUI EnergyBrokers used derivatives for multiple purposes: i) to hedge price commitmentsand minimize the risk of fluctuating gas prices, ii) to fulfill its tradingstrategies and, therefore, ensure favorable prices and margins, and iii) totake advantage of market information and opportunities in the marketplace.These derivative instruments included forwards, futures, options and swaps. Themajority of NUI Energy Brokers' positions were short-term in nature (up to 2years) and could be readily valued using New York Mercantile Exchange settlementprices and those from several other well-established, third-partyorganizations.  At September 30, 2003NUI Energy Brokers had recorded derivative assets and associated unrealizedgains of approximately $7.9 million. The actual amounts realized in subsequent periods could differ based onfluctuation in market pricing.

NUI Energy Brokers was also responsible for administration of theNUI Utilities hedge program.  Thisprogram was established in December 2000 in accordance with the Gas ProcurementStrategy and Plan (GPS&P) to help fulfill its mission to operate its gasdistribution system in a safe, reliable and cost effective manner.  The focus of the GPS&P is to manage thepurchased costs of gas for firm sales customers of NUI Utilities.  To meet its objectives of managing gas pricerisk, NUI Utilities engages in financial hedging activities that include theuse of New York Mercantile Exchange traded natural gas futures contracts andoptions.  NUI Utilities plans totransfer the administration of the hedging program from NUI Energy Brokers toNUI Utilities in the third quarter of fiscal 2004.  Consistent with this plan, NUI Utilities has adopted a hedgingrisk management policy that sets guidelines and controls to govern its hedgeprogram.

NUI accounts for its trading and hedging activities in accordancewith the provisions of SFAS 133, "Accounting for Derivative Instruments andHedging Activities."  SFAS 133 requiresthat all derivatives be recognized on the balance sheet at fair value withchanges in the value of derivatives that are not hedges recorded in earnings. 

Further, consistent with the regulatory accounting treatment forNUI Utilities' gas procurement activities and pursuant to the provisions of FAS71 "Accounting for the Effects of Certain Types of Regulation," NUI Utilitiesdefers both the realized and unrealized gains/(losses) attributable to thederivative instruments covered by this policy. Realized gains or losses are recorded as adjustments to gas purchasecosts and are recovered from customers through the purchased gas adjustmentclauses.  Unrealized gains or losses arerecorded on the balance sheet as a regulatory asset or liability, asapplicable.

At September 30, 2003, NUI Energy Brokers had designated certainfutures contracts and physical forwards associated with the delivery and saleof natural gas into and from storage as cash flow hedges with the objective offixing an acceptable return.  Under SFAS133, the changes in the value of derivatives designated as hedges that areeffective in offsetting the variability in cash flows of a forecastedtransaction are recognized in other comprehensive income until the forecastedtransactions occur and the ineffective portion of changes in fair value ofderivatives is recognized immediately in earnings. 

At September 30, 2003, the value in other comprehensive incomeassociated with these positions is $0.8 million, net of tax, which will bereclassified into earnings over the next twelve months.  However, the actual amount reclassified intoearnings could differ based on fluctuations in market prices.  At September 30, 2003 there was no hedgeineffectiveness recognized in earnings.

The risk associated with open positions is closely monitored on adaily basis, and controlled in accordance with NUI Energy Brokers' RiskManagement Policy. This policy has been prepared by senior management andapproved by the company's Board of Directors, and dictates policies andprocedures for all trading activities. The policy defines both value-at-risk(VaR) and loss limits, and all traders are required to read, sign, and followthis policy. At the end of each day, all trading positions are marked-to-marketand a VaR is calculated.  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 in derivativeassets and liabilities for the year ended September 30, 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                        |                                                 |  (20,163)       |
| Change in  accounting for EITF 02-03                                    |                                                 |    (9,949) |
| Changes in fair  value attributable to market pricing                   |                                                 |    13,715  |
|                                                                         |                                                 |                 |
| Derivative  assets at September 30, 2003                                | $13,192                                              |                 |
| Derivative  liabilities at September 30, 2003                           |          --- |                 |
|    Fair value of contracts outstanding at  September 30, 2003 |                                                 |    13,192  |
|                                                                         |                                                 |                 |

Changes in the fair value attributable to market pricingrepresents the changes in value of the company's unrealized mark-to-market netassets that relate to changes in commodity pricing, volatility of options oncommodities, and other market related changes.

The following table summarizes the fair value of the contractscomprising the company's net derivative assets by maturity date (amounts inthousands):
|                                                                                                        | **Fair Value of Contracts at Period-End** |
|--------------------------------------------------------------------------------------------------------|-------------------------------------------|
| **Source of  Fair Value**                                                                              | **Less than 1 Year**                      | ** 1-3 Years** | ** 4-5 Years** | ** After 5**       **Years** | **Total** |
|                                                                                                        |                                           |  |  |  |  |
| Prices actively quoted                                                                                 | $5,982                                    | $1,649 | $--- | $--- | $7,631 |
| Prices provided by other external sources                                                              | 864                                       | --- | --- | --- | 864 |
| Prices based on models and other valuation     methods, net of valuation  reserves |   1,213                              |   2,356 |   1,128 |   --- |      4,697 |
| Total Fair Value of Contracts                                                                          | $8,059                                    | $4,005 | $1,128 | $--- | $13,192 |

NUI Energy Brokers utilizes the variance/covariance VaRmethodology. Using a 95 percent confidence interval and a one-day time horizon,NUI Energy Brokers' VaR was $144,000 and $328,000 at September 30, 2003 and2002, respectively. The average, high and low values at risk for the year endedSeptember 30, 2003 were $195,000, $743,000 and $22,000, respectively.

**Item 8.  Financial Statements andSupplementary Data**

Consolidated financial statements of the company as of September30, 2003 and 2002 and for each of the three years in the period ended September30, 2003, the auditors' report thereon, and the unaudited quarterly financialdata for the two-year period ended September 30, 2003, are included herewith asindicated on the Index to Financial Statements and Schedule on page F-1.

**Item 9.  Changes in and Disagreements withAccountants on Accounting and Financial Disclosure**

None.

**Item9A.  DisclosureControls and Procedures**

In connection with their audit of the company's fiscal 2002financial statements, our independent external auditors, PricewaterhouseCoopersLLP (PwC), identified and reported on material weaknesses within our systems ofinternal control.  In a report datedNovember 22, 2002 to the Audit Committee of the Board of Directors andmanagement of NUI, PwC identified certain conditions that created a material weaknessrelating to internal control over financial reporting that resulted in the needto restate prior financial statements. The weaknesses identified included, but were not limited to, thefollowing:

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

--     Generalledger account analyses were not being consistently performed.

--     A listing ofdebt covenants was not being maintained.

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

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

--     The flow ofaccounting information between business units and corporate accounting was nottimely or formalized.

--     Accountspayable invoice processing procedures needed to be improved.

--     A formal planand implementation timetable needed to be developed to address compliance withthe certification requirements of Section 404 of the Sarbanes-Oxley Act of2002.

The company believes that these internal control weaknesses wereaddressed by management during fiscal 2003. However, in connection with the fiscal 2003 financial statement audit,PwC communicated additional material control weaknesses, which included:

--     The contractreview process was not formally documented, and appropriate procedures had notbeen developed to ensure timely review of contracts for accountingimplications.

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

--     The payrolltimekeeping and tracking process was manual in nature and prone to errors.

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

During fiscal 2003, our internal auditors performed internalaudits which indicated material weaknesses in internal controls similar tothose noted above.  We have developedand implemented action plans to address their recommendations, and follow-upaudits are being conducted.   

Additional internal control issues have been raised anddeficiencies have been noted in the March 2004 final audit report relating tothe focused audit conducted at the request of the NJBPU.

We have taken specific, immediate steps to address the internalcontrol weaknesses discussed above.  Inaddition, we have undertaken a broader, long-term effort to assess our systemsof internal control and to comply with the requirements of Section 404 of theSarbanes-Oxley Act.  These actionsinclude:

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

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

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

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

--     Implementingprocedures for performance of account analyses and reconciliations;

--     Improving andmonitoring controls to increase the reliability of information generated by ourinformation technology processes;

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

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

The effectiveness of our, or any, systems of disclosure controlsand procedures and internal controls is subject to certain limitations,including the exercise of judgment in designing, implementing and evaluatingthe controls and procedures, the assumptions used in identifying the likelihoodof future events and the inability to eliminate misconduct completely.  Further, the design of systems of controlmust reflect the fact that there are resource constraints that affect theoperation of any such system, and that the benefits of controls must beconsidered relative to their risks.  Asa result, there can be no assurance that our systems of disclosure controls,procedures and internal controls will prevent all errors or fraud, or ensurethat all material information will be made known to management in a timelyfashion.

As required by Rule 13a-15(b) of the Exchange Act, the companyhas carried out an evaluation, under the supervision and with the participationof its management, including its Chief Executive Officer and its ChiefFinancial Officer, of the effectiveness of the design and operation of itsdisclosure controls and procedures. The evaluation examined those disclosurecontrols and procedures as of September 30, 2003, the end of the period coveredby this report. Based upon the evaluation, the company's management, includingits President and Chief Executive Officer and its interim Chief FinancialOfficer, concluded that, as of September 30, 2003, NUI's disclosure controlsand procedures were effective, except as described above, at the reasonableassurance level to ensure that information required to be disclosed in NUI'sreports filed or submitted under the Exchange Act was accumulated andcommunicated to NUI's management, including its President and Chief ExecutiveOfficer and its interim Chief Financial Officer, as appropriate to allow timelydecisions regarding required disclosure.

**PART III **
**Item 10.  Directors and Executive Officersof the Registrant**

**(a)  Directors of the Registrant**

The following table sets forth the names, positions and officesheld by the company's directors as of September 30, 2003, and the date of thisreport, and their ages as of the date of this report.

**Current Directors**

Name

Age

Positions

John Kean (1)

74

Retired as  Chairman of the Board of Directors as of April 1, 2004;  Member of the Board until the end of term;  Member of the Executive and Investment Committees

Dr. Vera King Farris (2)

63

Member of the  Compensation, Investment, Nominating and Governance, and Special Committees

J. Russell Hawkins  (2)

49

Chairman of the  Nominating and Governance Committee; Member of the Audit, Compensation,  Executive, Investment and Special Committees

Dr. Bernard S. Lee (1)

69

Chairman of the  Compensation Committee; Member of the Audit, Nominating and Governance, and  Special Committees

James J. Forese  (3)

68

Elected  Chairman of the Board as of April 1, 2004; Chairman of the Audit Committee;  Member of the Compensation, Executive, Nominating and Governance and Special  Committees

R. Van Whisnand  (3)

60

Chairman of the  Investment Committee; Member of the Compensation, Executive, Nominating and  Governance, and Special Committees

Craig G.  Matthews (1)

61

Director

Robert P. Kenney (1)

69

Director

(1)           Current term expires in 2004.(2)           Current term expires in 2005.(3)           Current termexpires in 2006.

**Directors as ofSeptember 30, 2003**

Name

Age

Positions

John Kean (1)

74

Retired as  Chairman of the Board of Directors as of April 1, 2004; Member of the Board  until the end of term; Member of the Executive and Investment Committees

Dr. Vera King Farris (2)

63

Member of the  Compensation, Investment, Nominating and Governance, and Special Committees

J. Russell  Hawkins (2)

49

Chairman of the  Nominating and Governance Committee; Member of the Audit, Compensation,  Executive, Investment and Special Committees

Dr. Bernard S. Lee (1)

69

Chairman of the  Compensation Committee; Member of the Audit, Nominating and Governance, and  Special Committees

James J. Forese  (3)

68

Elected  Chairman of the Board as of April 1, 2004; Chairman of the Audit Committee;  Member of the Compensation, Executive, Nominating and Governance and Special  Committees

R. Van Whisnand  (3)

60

Chairman of the  Investment Committee; Member of the Compensation, Executive, Nominating and  Governance, and Special Committees

(1)           Current term expires in 2004.(2)           Current term expires in 2005.(3)           Current termexpires in 2006.

Mr. Kean has served as a director since 1969. He served as ChiefExecutive Officer of the company from 1969 until his retirement in April 1995,holding the positions of Chairman of the Board since October 1994 to April 2004and President from 1969 until October 1994. Mr. Kean served as President of theInternational Gas Union, a federation of technical and scientific gasindustries associations and he continues to serve as a member of the Executiveand Investment Committees. 

Dr. Farris has served as a director of the company since 1994.She served as President Emerita and Distinguished Professor of The RichardStockton College of New Jersey from 1983 to 2003. She also serves as a directorof Denny's Corporation, Inc. (previously Advantica Corporation/FlagstarCompanies, Inc.) and is a member of the boards of numerous educational andcivic organizations and is a distinguished professor at the University ofPennsylvania.

Mr. Hawkins has served as a director of the company since 1998.He currently serves as Senior Vice President of Carrier Access Corporation.Previously, he served as President and Chief Executive Officer of ParagonNetworks, Inc. (manufacturer of telecommunications products) from September1996 to November 2003 and as a director from 1998 until 2003. Prior thereto, heserved as Managing Director of Lucent Technologies.

Dr. Lee has served as a director since 1992. He served asPresident of the Institute of Gas Technology (IGT) and as Chairman of M-C PowerCorp., a majority-owned subsidiary of IGT, from 1997 until his retirement in1999. From 1978 to 1999 he served as President and Chief Executive Officer ofIGT. Dr. Lee is also a director of Peerless Mfg. Co. and National Fuel GasCompany.

Mr. Forese has served as a director of the company since 1978 andwas appointed Chairman of the Board as of April 1, 2004. He serves as OperatingPartner of Thayer Capital Partners (Private Equity Firm) and Chief OperatingOfficer since September 2003 and was a Senior Advisor from July 2003 untilSeptember 2003. He served as Chairman of IKON Office Solutions (officeequipment and supply systems) from May 2000 until his retirement in February2003. He also served as President and Chief Executive Officer from July 1998until his retirement from such offices in August 2002. From January 1997through July 1998, he served as Executive Vice President and President,International Operations, IKON Office Solutions. From January 1996 to December1996, he served as Executive Vice President, Chief Operating Officer and adirector of Alco Standard Corp. (office equipment and supply systems). FromOctober 1993 through December 1995, he served as General Manager of CustomerFinancing for International Business Machines (IBM) and as Chairman of IBMCredit Corporation. Mr. Forese also serves as a director of American ManagementSystems, Inc., Spherion Corporation, Anheuser Busch Companies, Inc., and IESICorporation.

Mr. Whisnand has served as a director since 1982. He has servedas Managing Partner of Osprey Partners Investment Management, LLC (investmentmanagement) since September 1998. From March 1995 through August 1998, heserved as principal of Fox Asset Management (investment management). Mr.Whisnand also serves as a director of Rumson-Fair Haven Bank.

Mr. Matthews was elected President and Chief Executive Officer ofthe company effective February 1, 2004. Mr. Matthews was employed by KeySpan Corporation (previously BrooklynUnion Gas Co.) from 1965 to March 1, 2001, when he retired. He held variouspositions including Executive Vice President, Chief Financial Officer andPresident and was Vice Chairman and Chief Operating Officer at the time of hisretirement. Mr. Matthews is a member of the Board of Amerada Hess Corporation,Salvation Army of Greater New York (Past Chairman), Brooklyn Philharmonic (PastPresident), Polytechnic University and an Advisory Board Member of RepublicFinancial Corporation.

Mr. Kenney has served as a director since February 2004.  He has served on the Elizabethtown GasCompany Advisory Board and then the NUI Utilities Board of Directors since hisretirement as Elizabethtown Gas President and Chief Executive Officer in 1996,a position he held for five years. Prior to that he held a number of keypositions within the company. He has served on the Executive Committee and aspast Chairman of the Union County Economic Development Corporation, theAdvisory Board of The Occupational Center of Union County and the Board ofDirectors of Meridian Bank NJ. His past offices include Trustee for theInstitute of Gas Technology and Chairman of a variety of utilityindustry-related organizations.

**(b)  Executive Officers of the Registrant**

The following information is provided with respect to eachexecutive officer of the company as of September 30, 2003, and the date of thisreport. Officers are elected annually at the first meeting of the Board ofDirectors following the Annual Meeting. There are no arrangements orunderstandings between any officer and any other person pursuant to which theofficer was elected.

**Current Executive Officers**

Name

Age

Positions

Craig G.  Matthews

61

President and  Chief Executive Officer

Dan Scouler

54

Interim Chief  Financial Officer

Steven D. Overly

46

Vice President,  General Counsel and Secretary

Victor A.  Fortkiewicz

52

President- NUI  Utilities, Inc.

**Executive Officers as of September 30, 2003***

Name

Age

Positions

John Kean, Jr.  (1)

46

President and  Chief Executive Officer

A. Mark  Abramovic (2)

55

President,  Senior Vice President, Chief Operating Officer and Chief Financial Officer

James R. Van Horn (3)

47

Chief  Administrative Officer, General Counsel and Secretary

*  As noted below, Mr. Kean, Jr. resigned as  President and Chief Executive Officer of the company effective September 25,  2003.

(1) Resignation  effective September 25, 2003.

(2) Retirement  effective January 30, 2004.

(3) Resignation  effective January 30, 2004.

Mr. Matthews was elected President and Chief Executive Officer ofthe company effective February 1, 2004. Mr. Matthews was employed by KeySpan Corporation (previously BrooklynUnion Gas Co.) from 1965 to March 1, 2001, when he retired. He held variouspositions including Executive Vice President, Chief Financial Officer andPresident and was Vice Chairman and Chief Operating Officer at the time of hisretirement. Mr. Matthews is a member of the Board of Amerada Hess Corporation,Salvation Army of Greater New York (Past Chairman), Brooklyn Philharmonic (PastPresident), Polytechnic University and an Advisory Board Member of RepublicFinancial Corporation.

Mr. Scouler has served as interim Chief Financial Officer of thecompany since October of 2003. He is the managing member of Scouler Andrews.  He previously served as Senior ManagingDirector with FTI Consulting, Inc. from January 2002 to March 2004.  In October 2003, the company employed FTIConsultants to manage its financial operations and develop new liquidityforecasts.  

Mr. Overly has served as Vice President, General Counsel andSecretary of the company since February 2004. He served as Senior VicePresident, General Counsel, Chief Financial Officer and Secretary of CirrusLogic, Inc., from 2001 to 2003 and as Senior Vice President, General Counseland Secretary from 2000 to 2001. He also held General Counsel positions atInternational Wireless Communications Holdings, Corp., Lockheed MartinTelecommunications, Martin Marietta Astro Space and General Electric AstroSpace.

Mr. Fortkiewicz has served as President of NUI Utilities sinceSeptember 2003, prior to that he served as Vice President of NUI Utilities. Heserved as Vice President, Distribution Services from June 1998 to March 2003and prior to that appointment, he served as President of Elizabethtown Gas fromJanuary 1, 1997. He joined Elizabethtown Gas in 1978.

Mr. Kean, Jr. served as a director of the company from 1995 untilSeptember 2003. He served as President and Chief Executive Officer of thecompany from April 1995 until September 2003. From October 1994 through March1995, he served as President and Chief Operating Officer.

Mr. Abramovic served as President of the company from September26, 2003, through the date of his retirement in January 2004. He served asSenior Vice President and Chief Financial Officer from September 1997 throughSeptember 2003 and as Chief Operating Officer since May 1998. 

Mr. Van Horn served as Chief Administrative Officer of thecompany from May 1998 through the date of his resignation in January 2004 andas General Counsel and Secretary since 1995. 

**(c)  Section 16(a) Beneficial Ownership ReportingCompliance**

Section 16(a) of the Exchange Act requires our directors andexecutive officers (as defined therein), and persons who beneficially own morethan 10 percent of the company's common stock, to file a report of holdings andtransactions in NUI common stock with the SEC and the New York Stock Exchangeand to furnish us with copies of all Section 16(a) forms they file. Based onour records and other information furnished to us, the only shareholder whobeneficially owns more than 10 percent of the company's common stock isWellington Management Company, LLP (see Item 12. (a)- Security Ownership ofCertain Beneficial Owners and Management). We are not aware of any otherdirector, executive officer or shareholder who beneficially owns more than 10percent of the company's common stock.

To NUI's knowledge, based solely on a review of informationfurnished to the company, all Section 16(a) filing requirements applicable toits directors, executive officers and greater than 10 percent beneficial ownerswere complied with during fiscal 2003.

**(d)  Code of Ethics**

The company has adopted a code of ethics that applies to all ofits employees, including its principal executive officer, principal financialofficer, principal accounting officer or controller, directors or personsperforming similar functions. A copy of the company's code of ethics has beenfiled as Exhibit 14 to this Report on Form 10-K. A copy of the company's codeof ethics will be provided to any person without charge by contacting theInvestor Relations department at our corporate offices at (908) 781-0500.  The company's code of ethics will also beavailable on the company's internet website at http://www.nui.com in the nearfuture.

**(e)  Audit Committee**

The company has a separately designated standing audit committee.Each member of the Audit Committee is independent according to the definitionof independence provided by the New York Stock Exchange rule and the federalsecurities laws. The members of the audit committee are identified in the listof directors in (a) above. The company's Board of Directors has determined thatJames J. Forese, the Chair of the Audit Committee, is an "audit committeefinancial expert" as such term is defined under federal securities laws.
****
**Item 11.  Executive Compensation**
(a)  Summary Compensation Table 
The following Summary Compensation Table presents compensationinformation about the company's executive officers that were the most highlypaid during the fiscal year ended September 30, 2003.

**Summary CompensationTable**

Annual  Compensation

Long  Term Compensation

 

**Name and Principal Position**

Fiscal  Year

Salary

Bonus

Restricted  Stock Awards (1)(2)

Securities  Underlying Options/ SARs

All  Other Compensation (3)

 

 

 

 

 

**John  Kean, Jr. (4)**

2003

$490,000  

$           0

$              0

$             

$     1,109,700

*Former  President and Chief Executive Officer*

2002

450,000

0

612,408

0

          4,808

2001

397,500

61,500

691,500

435,000

         7,144

 

 

 

 

 

 

 

**A.  Mark Abramovic (5)**

2003

$305,000

$           0

$              0

$                0

$     1,207,200

*Former  President, Senior Vice President, Chief*

2002

285,000

          0

219,146

0

7,296 

*Operating Officer & *

2001

258,838

66,300

230,500

120,000

6,653

*Chief Financial   Officer*

 

 

 

 

 

 

 

 

 

 

 

 

 

**James R. Van Horn (6)**

2003

$226,000

$           0

$              0

$                0

$        807,200

*Former  Chief Administrative Officer, *

2002

210,950

         0

130,587

0

7,033

*General Counsel and*

2001

194,018

49,000

138,300

75,000

6,692

*Secretary*

 

 

 

 

 

 

 

 

 

 

 

 

 

**Robert  F. Lurie (7)**

2003

$88,100

$           0

$              0

$                0

$        138,493

*Former  Vice President-*

2002

172,800

0

78,803

0

5,376

*Corporate  Development and Planning*

2001

167,389

25,400

80,675

40,500

4,923

 

 

 

 

 

 

 

**Michael  J. Behan (8)**

2003

$  144,000

$           0

$              0

$                0

$        712,946

*Former  Vice President-*

2002

169,100

0

79,553

0

5,260

*New  Ventures*

2001

164,194

24,800

80,675

40,500

4,382

 

 

 

 

 

 

 

**Victor  A. Fortkiewicz**

2003

$189,900

$  41,800

$              0

$                0

$             6,324

*President,  NUI Utilities*

 

 

 

 

 

 

(1)     Shares of restricted stock carry asignificant risk of forfeiture. In order to earn all shares, all targetedfinancial performance objectives must be achieved. The company did not grantany restricted stock awards for fiscal year 2003. 

(2)     Since the company did not achieve many ofits performance objectives in fiscal year 2003, shares of previously grantedrestricted stock, the vesting of which was contingent upon meeting thoseobjectives, were forfeited. The number and value of shares forfeited by each ofthe listed officers was as follows: John Kean Jr.,: 2,160 shares ($31,633); A.Mark Abramovic: 15,670 shares ($243,057); James R. Van Horn: 8,290 shares($128,537); Robert F. Lurie: 924 shares ($14,060); Michael J. Behan 360 shares($5,272) and Victor A. Fortkiewicz: 5,575 shares ($86,361). 

(3)     Represents the employer match underqualified savings plans during fiscal year 2003 and additional payments made,or to be made in connection with associated severance agreements.

(4)     John Kean Jr.'s "All Other Compensation"total includes $7,200 for the employer match under qualified savings plans and$1,102,500 as part his severance agreement.

(5)     A. Mark Abramovic's  "All Other Compensation" total includes$7,200 for the employer match under qualified savings plans and $1,200,000 aspart his severance agreement.

(6)     James R. Van Horn's  "All Other Compensation" total includes$7,200 for the employer match under qualified savings plans and $800,000 aspart his severance agreement.

(7)     Robert F. Lurie's  "All Other Compensation" total includes $6,343 for the employermatch under qualified savings plans and $132,150 as part his severanceagreement.

(8)     Michael J. Behan  "All Other Compensation" total includes $5,192 for the employermatch under qualified savings plans, $372,500 as part his severance agreementand an estimated $335,254 for supplemental retirement benefits.

**(b)  Stock Options Issued**

The company did not issue any options during fiscal year 2003,other than those issued to directors, as discussed in Section (f) Compensationof Directors below.

**(c)  Options and Stock Appreciation Rights**

In November 2001, the company made a grant of stock options toofficers, including those executive officers listed in the Summary CompensationTable, in accordance with the NUI Corporation Stock Option, Stock Award andIncentive Plan. The company does not have any outstanding stock appreciationrights (SARs). Information relating to the officers listed in the SummaryCompensation Table is set forth below. All options become exercisable inNovember 2004 and carry a per share exercise price of $22.39. Stock optionsgranted are forfeited upon an employee's separation from the company.

**Aggregated Option/SARExercises in 2003 Fiscal Year and SAR Values as of September 30, 2003**

**Name**

**Shares Acquired on   Exercise**

**Value  Realized**

**Number of  Securities Underlying Unexercised Options/SARs at FY-End (#) Exercisable/  Unexercisable**

**Value of  Unexercised In-the-Money Options/SARs at FY-End ($) Exercisable/    Unexercisable**

 

 

 

 

 

John Kean, Jr.

0

$---

0/0

$---/---

A. Mark Abramovic

0

---

0/120,000

---/---

James R. Van Horn

0

---

0/75,000

---/---

Robert F. Lurie

0

  ---

  0/0

    ---/---

Michael J. Behan

0

---

0/0

---/---

Victor A. Fortkiewicz

0

---

0/39,600

---/---

**(d)  Long-term Incentive Awards**

The company did not make any long-term incentive awards during fiscalyear 2003.

**(e)  Retirement Plan Benefits**

The executive officers of the company earn retirement benefitsthat may be payable under three separate retirement plans: (1) the company'sRetirement Plan, a funded plan in which more than 70 percent of the company'semployees are eligible to participate; (2) the ERISA Excess Benefits Plan, anunfunded plan that is designated to provide benefits for those participants inthe Retirement Plan for whom benefits are reduced by reason of the limitationsimposed under Section 415 of the Internal Revenue Code of 1986, as amended fromtime to time (the Code); and (3) the Supplemental Retirement Benefits Plan, anunfunded plan that provides additional benefits to certain key executiveemployees, including those listed in the Summary Compensation Table. Whileparticipants in the Retirement Plan and the ERISA Excess Benefits Plan becomevested in their entitlement to benefits after 5 years of service, participantsin the Supplemental Retirement Benefits Plan are eligible to receive benefitsfrom the plan only if they reach retirement age while working for the company(55 years of age with 10 years of service or 65 years of age with 5 years ofservice. If retirement is prior to age 60, then NUI's Compensation Committee'sconsent is required).

The Retirement Plan, which is funded entirely by the company,provides that a participant retiring at or after age 65 (or at or after age 62with at least 25 years of credited service) will receive an annual retirementbenefit equal in amount (when calculated as a life annuity with two yearscertain) to 11⁄2 percent of the participant's final average compensation (theaverage of the highest sixty consecutive calendar months' base salary and salescommissions) multiplied by the number of years of credited service. Thisbenefit formula is different for employees who participated in other pensionplans that have been merged into the Retirement Plan. Benefits payable toparticipants in the Retirement Plan may be reduced by reason of the limitationsimposed under Section 415 of the Code. The ERISA Excess Benefits Plan will paythe difference between the amount payable to the participant under theRetirement Plan and the amount the participant would have been paid but for thelimitations imposed under Section 415 of the Code. Benefits under this plan aresubject to the same terms and conditions as the benefits payable to theparticipant under the company's Retirement Plan.

The unfunded Supplemental Retirement Benefits Plan provides thateach eligible employee who reaches retirement age while working for the companymay receive a retirement benefit, payable monthly equal in amount (whencalculated as a life annuity with two years certain) to two percent of theparticipant's final average total compensation (the average of the highest 60consecutive months' earnings, including cash bonuses earned) multiplied by thenumber of years of credited service up to a maximum of 30 years - yielding abenefit of 60 percent of final average. Benefits otherwise payable under theunfunded Supplemental Retirement Benefits Plan are reduced by amounts payableunder the Retirement Plan and the ERISA Excess Benefits Plan.

The following table shows the maximum aggregate annual retirementbenefit payable from all three retirement plans at normal retirement age of 65for various levels of final average compensation and years of service, assumingpayment of benefits in the form of a life annuity with a two-year certain:

**Years of Service**

**Remuneration (*)**

**10 Years**

**20 Years**

**30 Years**

**40 Years**

$   100,000

$  20,000

$  40,000

$  60,000

$  60,000

     200,000

40,000

80,000

120,000

120,000

     300,000

60,000

120,000

180,000

180,000

     400,000

80,000

160,000

240,000

240,000

     500,000

100,000

200,000

300,000

300,000

600,000

120,000

240,000

360,000

360,000

800,000

160,000

320,000

480,000

480,000

  1,000,000

200,000

400,000

600,000

600,000

 

 

 

 

 

* Average annual compensation utilized for formula purposesincludes salary and cash bonus as reported in the Summary Compensation Table. Thebenefit amounts shown in the preceding table are not subject to any deductionfor Social Security benefits, but are subject to offsets from the other NUIretirement plans. The years of service now credited under the Retirement Planfor the participants listed in the Summary Compensation Table are as follows:John Kean, Jr., 19 years; A. Mark Abramovic, 6 years; James R. Van Horn, 8years; Robert F. Lurie, 9 years; Victor Fortkiewicz, 25 years and Michael J.Behan, 25 years.

**(f)  Compensation of Directors**

The compensation program for directors is designed to closelyalign the interests of the directors with the interests of shareholders. Eachnon-employee director of the company is paid a retainer fee in stock thatconsists of a deferred grant of shares of common stock. The number of shares ofcommon stock to be allocated to the accounts of such non-employee directors isdetermined by dividing the cash value of the annual Board retainer (plus theannual Committee Chair retainer, if applicable) by the fair market value of thecommon stock on the date of the annual reorganization meeting of the Board.Currently the cash value of the annual Board retainer for non-employeedirectors is $25,000 and the annual Committee Chair retainer is $4,000. Inaddition to these shares, non-employee directors are credited on each commonstock dividend payment date with that number of additional shares that couldhave been purchased had their accrued shares been issued and the dividendsreinvested. The shares accrued to a director are issued upon the director'sretirement or other termination of the director's service as a member of theBoard. As of April 30, 2004, the total deferred grants for non-employeedirectors provide for the issuance of an aggregate of 57,103 shares of commonstock. These shares are issuable as follows: James J. Forese and R. VanWhisnand, 14,312 shares each; Bernard S. Lee, 12,231 shares; Vera King Farris,10,165 shares; and J. Russell Hawkins, 6,084 shares. In addition to theseretainers, non-employee directors are paid $1,000 for attendance at eachregular or special meeting of the Board of Directors and any Committee thereof.

Part of the Board's compensation program includes the granting ofstock options. Each year, at the annual reorganization meeting of the Board,all non-employee directors receive a grant of options to purchase 1,000 sharesof the company's common stock. The per share exercise price for the underlyingshares is equal to the fair market value of the common stock as of the date ofgrant. The options become exercisable one year following the date of grant andexpire, if unexercised, 10 years following the date of the grant. As of April30, 2004, the total number of shares subject to outstanding stock options foreach Board member was 2,000, for an aggregate total of 12,000 shares. Theexercise price per share for 1,000 of these options is $24.215 and $14.205 forthe additional 1,000 options.

The company has in effect a retirement plan for directors. To beeligible for retirement benefits under the plan, a director must have served asa director for at least 10 years, with a minimum of five years of service as anon-employee of the company and its subsidiaries. An eligible participant inthe plan will be paid, upon retirement and the attainment of age 65, an annualretirement benefit for life equal to the value of the annual Board retainer ineffect at the time of the director's retirement. In May 2002, the Board ofDirectors terminated the retirement plan for all non-employee directors who becomeBoard members after that date. All current non-employee directors, except forMr. Kenney, are eligible for retirement benefits under the plan.

James Forese was awarded an annual retainer of $100,000,effective January 1, 2004, to serve as Chairman of the Special Committee of theBoard of Directors.

The company is party to a consulting agreement with John Kean,who retired as Chief Executive Officer of the company effective April 1, 1995.The Agreement expired on March 31, 2004. Under the Agreement, Mr. Kean providedconsulting services to the company for up to 110 hours each calendar month. TheAgreement required Mr. Kean to devote sufficient time and effort to performsuch duties as may be assigned by the company or the Board of Directors fromtime to time. In consideration of the services rendered under the Agreement,the company provided Mr. Kean with an annual fee of $280,000, office space,clerical support and expense reimbursement. Other than amounts paid under theAgreement, Mr. Kean did not receive any compensation for serving on the Boardor Committees of the Board of the company, its divisions or subsidiaries. 

**(g)  Compensation Committee Interlocks andInsider Participation**

Disclosure rules require the company to report certainrelationships involving the company in which members of the CompensationCommittee have a direct or indirect material interest. The rules also requiredisclosure of interlocking relationships among Compensation Committee membersand those executive officers of the company, if any, who also serve as membersof Compensation Committees or executive officers at other companies. Thepurpose of these requirements is to allow shareholders to assess theindependence of the company's Compensation Committee members in makingexecutive compensation decisions and recommendations. While the company has hadtransactions with companies and firms with which certain members of theCompensation Committee are, or at some point during fiscal year 2003 were,affiliated as an officer and/or director, there are no such relationships inwhich members of the Committee have a direct or indirect material interest (seeTransactions With Management). In addition, there are no interlockingrelationships of the nature described above involving members of the CompensationCommittee. The members of the Compensation Committee are Vera King Farris,James J. Forese, J. Russell Hawkins, Bernard S. Lee (Chairman) and R. VanWhisnand.

**(h)  Compensation Committee Report on ExecutiveCompensation**

The Compensation Committee of the Board of Directors of NUICorporation is comprised of five independent, non-employee directors. TheCompensation Committee has the responsibility of making recommendations to theBoard concerning the company's executive compensation policies, practices andobjectives. The authority, responsibility and duties of the CompensationCommittee are described in a Compensation Committee Charter, which has beenapproved by the Board of Directors. The responsibilities and duties of theCommittee include, among other things:

--     reviewingfrom time to time and approving the overall compensation policies of theCompany applicable to the company's executive officers, to ensure that theexecutive officers are rewarded appropriately for their contributions to thecompany's growth and profitability and that such compensation policies arealigned with the company's objectives and shareholder interests.

--     reviewing andapproving corporate goals and objectives relevant to the compensation of theChief Executive Officer of the company; evaluating the performance of the ChiefExecutive Officer in light of these goals and objectives; and setting thecompensation of the Chief Executive Officer based on the Committee's evaluationand compensation levels of chief executive officers at companies comparable tothe Company.

--     reviewing andapproving the compensation for the executive officers of the company other thanthe Chief Executive Officer.

--     reviewing,approving, administering and annually evaluating the company's compensation plans,equity-based plans and benefit plans or programs for executive officers andsuch other officers as the Compensation Committee deems appropriate, as well asestablishing individual targets and ranges under such plans or programs.

--     reviewing,approving and administering the NUI Corporation Employee Stock Purchase Planand the 1996 Director Stock Purchase Plan (the Director Stock Plan).

--     reviewing andapproving equity-based grants to the company's executive officers and other.

--     reviewing,approving and at least annually evaluating the compensation and benefits forthe company's non-employee directors.

In discharging its responsibilities, the Compensation Committeedraws upon various resources, including but not limited to the varied businessexperiences and knowledge of Committee members and other non-employee directorsin the area of executive compensation and the advice of independentcompensation experts. These resources allow the Compensation Committee to stayabreast of current trends and developments in executive compensation andprovide valuable guidance to the Compensation Committee in making decisions andin making recommendations to the Board of Directors.

The Compensation Committee recognizes the importance of a strongexecutive compensation program to attract and retain qualified executives. TheCompensation Committee also strongly believes that the executive compensationprogram should be designed to align the interests of management closely withthe interests of shareholders and to tie compensation levels to the performanceof the company and the achievement of long-term and short-term goals andobjectives. 

The Compensation Committee has designed a compensation program toprovide executives with competitive base salaries and benefits and a significantincentive to achieve specific short- and long-term business performanceobjectives.  The program includesestablishing a target level of company performance in certain categories, suchas earnings before interest and taxes, earnings per share, return on investedcapital, revenues and debt rating.  Forofficers with responsibility for a business unit, targets tied to theperformance of the specific business unit are also established.  Short-term targets are set for annualperformance periods and long-term targets are set for a three-year performanceperiod.  Awards are earned ifperformance is at the targeted level at the conclusion of the performanceperiod.  A reduced award is earned ifperformance is at a pre-established threshold level but not at the targetedlevel and an enhanced award is earned if performance exceeds the targeted levelto an exceptional award opportunity.  Ifperformance falls below the established threshold level then performance awardsare not earned.

The components of the executive compensation program are:

--     competitivebase salaries that are targeted to be at or near the 50th percentile for theofficer's position when compared to competitive market data;

--     retentionincentives through the provision of stock options that vest three years fromthe date of grant; 

--     short-termincentives through the payment of cash bonuses and the awarding ofperformance-based restricted stock; 

--     long-termincentives through the provision of cash incentive opportunities that becomepayable in the event that long-term targeted performance levels are exceeded;and

--     competitiveexecutive benefits.

In making determinations for base salaries, award opportunitiesto be provided to officers under the compensation program and in establishingshort- and long-term performance targets, the Compensation Committee considersdata provided by independent compensation experts for the purpose ofdetermining competitive levels of total compensation for each executive. TheCompensation Committee's objective is to develop a total compensation programthat is competitive in the marketplace and provides significant incentive toincrease shareholder value. While the Compensation Committee believes it isimportant to ensure that total compensation levels for each executive arecompetitive, it also believes that the mix of compensation should be weightedtoward variable components that provide a significant incentive for theachievement of the company's financial performance objectives.

In order to further align management's interest with NUIshareholders, the Board of Directors has implemented the following minimumstock ownership requirements for both officers and members of the Board ofDirectors of NUI Corporation.

--     the ChiefExecutive Officer must own Common Stock with a market value equal to a minimumof four times his then current salary;

--     other executiveofficers must own Common Stock with a market value equal to a minimum of twotimes their then current base salary;

--     non-executiveofficers must own Common Stock with a market value equal to their then currentbase salary;

--     only shares,which are owned outright by these officers, will be included in determiningtheir compliance with these requirements;

--     shares ofrestricted Common Stock that have not vested, as well as shares that have notyet vested under NUI's benefit plans, are not included in determiningcompliance;

--     members of theBoard of Directors are required to own shares of Common Stock with a marketvalue equal to a minimum of six times the then current value of the Board'sannual retainer (this would be equivalent to $150,000 based upon the currentretainer of $25,000 in a deferred grant of Common Stock paid to members of theBoard); for purposes of determining compliance with this requirement, shares ownedoutright by directors will be combined with any shares credited to theirdeferred stock balances.

Officers and directors have six years from the implementation ofthe program or from the time they join the company (whichever is later) tocomply with these minimum stock ownership requirements.  In the event that an officer or directordoes not satisfy this requirement, the Compensation Committee may, in itsdiscretion, take action intended to promote compliance, including the paymentof cash incentives in the form of stock. The Compensation Committee regularly monitors the progress of officersand directors toward compliance and, as of the date of this annual report, allof the directors and all but one of the officers who are subject to the minimumstock ownership requirements complied with the applicable requirements.  

Consistent with the Compensation Committee's overall objective ofaligning the interests of management with the interests of shareholders andproviding an incentive for the enhancement of shareholder value, theCompensation Committee has made grants of restricted Common Stock to certainemployees of the company, including the executive officers listed in theSummary Compensation Table. The terms of these grants require the company to achievespecific performance targets in order for the recipients to receive all of thegranted shares of Common Stock. If minimum performance targets are not met, allshares related to the applicable performance period are forfeited. TheCompensation Committee has the authority to make adjustments to theseperformance objectives if it deems such adjustments appropriate.

As a result of many factors, the company did not achieve theminimum earnings performance levels in fiscal year 2003 necessary forexecutives to earn the annual restricted stock and all such shares wereforfeited. In total, 88,049 shares of NUI Common Stock, with a market value of$1,359,838, were forfeited by the holders of restricted stock. Of this amount,32,979 shares of Common Stock, with a market value of $508,921, were forfeitedby those officers listed in the Summary Compensation Table.  In addition, as a result of the company'sfinancial performance in fiscal year 2003, cash incentives were awarded tothree officers, which totaled $85,720. Of this amount, one officer listed inthe Summary Compensation Table earned $41,800.

In November 2002, the Committee approved a one-time mid-yearrestricted stock grant that vested on March 31, 2003. The company did achievethe performance levels necessary for executives to earn 80 percent of thisrestricted stock grant. In total, 60,880 shares of NUI Common Stock, with amarket value of $891,588, were awarded to the holders of restricted stock. Ofthis amount, 19,120 shares of Common Stock, with a market value of $280,012,were awarded to those officers listed in the Summary Compensation Table.

The Compensation Committee of the Board decided not to grant anyadditional restricted stock to any eligible NUI employees for vesting in thenext fiscal year (2004) and only approved cash incentive plans for individualBusiness Units and none for Corporate.

The compensation paid to John Kean, Jr., President and ChiefExecutive Officer, with respect to fiscal year 2003 is set forth in the SummaryCompensation Table. Mr. Kean's salary increased by 8.9 percent in fiscal year2003 from the salary he received in fiscal 2002. As a result of the company'sfinancial performance in fiscal year 2003, the Compensation Committeedetermined that no cash incentive award should be paid to Mr. Kean. OnSeptember 25, 2003, Mr. Kean's employment with the company ended. Hisseparation agreement provide that 45,000 shares of restricted common sharesrelated to grants dated November 1999, 2000 and 2002 are deemed vested, with amarket value of $235,356. In addition, Mr. Kean did earn 8,640 shares ofrestricted common stock related to the one-time mid-year restricted stock grantthat vested on March 31, 2003, with a market value of $126,533, for fiscal year2003. The Compensation Committee believes that the executive compensationprogram is well structured and provides maximum incentive for executives tocontinually improve the company's financial performance, as well as to attract,retain and motivate key employees, and to enhance shareholder value.

**Members of the Compensation Committee**

Dr. Bernard S. Lee, ChairmanJames J. ForeseJ. Russell HawkinsR. Van WhisnandDr. Vera King Farris

** **

**Performance Graph**

The graph below reflects the performance of the company's CommonStock during the past five fiscal years and compares that performance with theperformance of two broad market indices, the S&P 500 and the S&PUtilities. The chart below tracks the performance of an investment of $100 onOctober 1, 1998, and assumes the reinvestment of dividends.

1998

1999

2000

2001

2002

2003

NUI

100.0

112.0

141.6

99.6

109.9

80.8

S&P

100.0

98.3

140.8

105.4

68.2

83.5

S&P 500

100.0

127.8

144.7

106.3

84.5

105.1

**(i)  Employment Contracts and Termination ofEmployment and Change in Control Arrangements**

In connection with the sale of the company, the board ofdirectors initiated a Retention Bonus Program in order to retain key employeesduring and after the sale. Forty-nine employees were issued a retentionincentive letter. The objectives of the plan are to provide for continuity ofmanagement during the transition period, transfer technology to the buyer, andassure continued service to the company's existing customer base. The amount ofbonus to be paid is based on a ranking value related to the employees' jobfunction to the sale, transition and on-going operations of the company. Underthe plan, an employee who has received a retention incentive letter will beentitled to the full retention bonus 30 days following the closing date of thesale, or on a date before the closing date if the employee is released fromhis/her employment by the company.  Theretention bonus is in addition to any other benefit to which an employee isentitled including the company's severance plan as of November 2003. If aperson leaves the company voluntarily or is terminated for cause at any timeprior to 30 days following the closing date of the sale, the employee will notreceive the retention bonus.

The company is party to change in control agreements with certainofficers and directors The purpose of these agreements is to provide keymanagement personnel with certain financial protection in the event of a changein control of the company and the subsequent termination of the officer'semployment. By providing this protection, the company helps to ensure that theefforts of key employees remain focused on the company's performance and theenhancement of shareholder value during rumored, potential or actual change incontrol situations.  

A covered employee becomes entitled to the payments and benefitsprovided for in his or her agreement if, within 36 months after the change incontrol:

-       Thecompany (or its successor) terminates the employee other than for cause or as aresult of the employee's death or disability; or

-       The employeeterminates his or her employment for "Good Reason" (as defined in theagreement).

Under the agreement, the payments to which a covered employee willbe entitled in such a termination event vary and at the highest coverage levelinclude a payment of three times the employee's annual base salary plus threetimes the highest incentive compensation award received by the employee duringthe preceding 36 months.

Following the termination of employment:

-       the officerwill continue to participate in all employee benefit plans in which theemployee was eligible to participate on the date of termination;

-       allincentive awards not yet paid will be payable; and

-       the spreadbetween the exercise price and the higher of the highest bid price during thetwelve months preceding termination or the highest price per share paid inconnection with any change in control will be payable in cash in lieu of stockissuable upon the exercise of stock options.

Most change in control agreements provide that in the event thatany payment or benefit received under an agreement would be an "excessparachute payment" (within the meaning of Section 280G(b)(1) of the InternalRevenue Code of 1986, as amended from time to time), then the present value ofall payments to be received under the Agreement shall be reduced to an amountwhich maximizes payments but does not result in the payment of an excessparachute payment.

The company entered into a severance agreement with John Kean,Jr., NUI's former Chief Executive Officer and President, in connection with hisresignation from the company effective September 25, 2003. In addition to thosebenefits he would otherwise be entitled to receive in connection with hisresignation, under the severance agreement, the company agreed to pay Mr. Keana severance payment of $1,102,500, payable in monthly installments throughDecember 31, 2005, less applicable withholding taxes, and further agreed to permitMr. Kean to continue to use a company car and to pay all accrued, but unused,vacation time and certain outplacement services not to exceed $20,000, and tofully vest 45,000 shares of unvested restricted stock held by Mr. Kean .

The company entered into an agreement and general release with A.Mark Abramovic, NUI's former Senior Vice President, Chief Financial Officer andChief Operating Officer, in connection with his retirement from the companyeffective January 31, 2004. In addition to those benefits he would otherwise beentitled to receive in connection with his resignation, under the agreement,the company paid Mr. Abramovic a lump-sum severance payment of $1,200,000, lessapplicable withholding taxes, and further agreed to pay Mr. Abramovic all accrued,but unused, vacation time and for certain outplacement services not to exceed$15,000, and to fully vest 2,500 shares of unvested restricted stock held byMr. Abramovic.

The company entered into an agreement and general release withJames R. Van Horn, NUI's former Chief Administrative Officer, General Counseland Secretary, in connection with his resignation from the company effectiveJanuary 31, 2004.  In addition to thosebenefits he would otherwise be entitled to receive in connection with his resignation,under the agreement, the company paid Mr. Van Horn a lump-sum severance paymentof $800,000, less applicable withholding taxes, and further agreed to pay Mr.Van Horn all accrued, but unused, vacation time and for certain outplacementservices not to exceed $15,000, and to fully vest 875 shares of unvestedrestricted stock held by Mr. Van Horn.

The company entered into an agreement and general release withRobert F. Lurie, NUI's former Vice President of Corporate Development andPlanning, in connection with his resignation from the company effectiveDecember 31, 2003. In addition to those benefits he would otherwise be entitledto receive in connection with his resignation, under the Agreement, the companypaid Mr. Lurie a lump-sum severance payment of $132,150, less applicablewithholding taxes, and further agreed to pay all accrued, but unused, vacationtime and certain outplacement services not to exceed $15,000, and to fully vest5,175 shares of unvested restricted stock held by Mr. Lurie.

The company entered into an agreement and general release withMichael J. Behan, NUI's former Vice President, New Ventures, in connection withhis retirement from the company effective July 22, 2003. In addition to thosebenefits he would otherwise be entitled to receive in connection with hisretirement, under the agreement, the company paid Mr. Behan a lump-sumseverance payment of $360,000, less applicable withholding taxes, and furtheragreed to pay all accrued, but unused, vacation time, to reimburse certainoutplacement services of $12,500, and to fully vest 6,126 shares of unvestedrestricted stock held by Mr. Behan.  

The company entered into an agreement with Scouler Andrewseffective March 1, 2003, pursuant to which Scouler Andrews agreed to provide theservices of Dan Scouler as interim Chief Financial Officer of the company.  The company agreed to pay Scouler Andrews$200,000, plus reasonable and customary out-of-pocket expenses, for servicesrendered in March 2004 and to pay Scouler Andrews $75,000, plus reasonable andcustomary out-of-pocket expenses, on a monthly basis thereafter. Mr. Scoulerremains employed by Scouler Andrews and does not receive any compensationdirectly from the company, nor is he entitled to participate in any employeebenefit plans or programs, or any other bonus, incentive compensation,severance, or employee or retiree medical plans.

The company entered into an agreement with Craig G. Matthews toserve as President and Chief Executive Officer of NUI effective February 1, 2004.Mr. Matthews is to be paid an annual base salary of $550,000 with an additionallump sum payment of $550,000 following the sale of the Company provided that hecontinues to be employed through the sale date. Mr. Matthews is eligible toparticipate in employee benefits plans and programs available to NUI's SeniorExecutives but is not eligible for any other bonus, incentive compensation,severance, or employee or retiree medical plans.

The company entered into an employment agreement with Steven D.Overly to serve as Vice President, General Counsel and Secretary of NUIeffective February 1, 2004. Mr. Overly is to be paid an annual base salary of$250,000 with an additional lump sum payment of $250,000 following the sale ofthe company. Mr. Overly is eligible to participate in employee benefit plansand programs available to NUI's Senior Executives and is reimbursed for hiscommuting expenses, but is not eligible for any other bonus, incentivecompensation, severance, or employee or retiree medical plans.  Mr. Overly is entitled to six months writtennotice prior to termination of his employment.

Except as set forth above, the company is not party to any otheremployment, change in control, or termination agreements with executiveofficers. 

**Item 12.  Security Ownership of CertainBeneficial Owners and Management**

**(a)  Security Ownership of Certain BeneficialOwners and Management**

The following table sets forth, as of April 30, 2004, except asnoted below, information regarding the beneficial ownership of NUI commonstock, restricted stock, and stock options of (i) each director of the company,(ii) each of the company's officers named in the Summary Compensation Table(collectively, the Named Executive Officers), (iii) each person who is known tothe company to own beneficially more than 5 percent of the company's commonstock, and (iv) all directors and executive officers as a group. Except asotherwise indicated below, each person has the sole voting and investment powerwith respect to the shares indicated. The address of each of the persons listedin this table is as follows: c/o NUI Corporation, 550 Route 202-206, PO Box760, Bedminster, New Jersey 07921-0760.

**Name and Address of Beneficial Owner**

**Number of Shares  of Common Stock (1)**

**Restricted Stock  (2)**

**Option Shares**

**Total Beneficial  Ownership**

**Percent of  Class***

Wellington Management Company, LLP (11)  75 State Street  Boston, Massachusetts 02109

1,671,340

---

---

1,671,340

 10.467%

Barclays Global Investors, NA (11)  45 Fremont Street  San Francisco, California 94105

1,384,674

---

---

1,384,674

 8.671%

Artisan Partners Limited Partnerships (11)  875 East Wisconsin Avenue, Suite 800  Milwaukee, Wisconsin 53202

1,053,200

---

---

1,053,200

 6.596%

State Street Research & Management  Company (11)  One Financial Center, 31st Floor  Boston, Massachusetts 02111

1,006,500

---

 

1,006,500

 6.303%

FleetBoston Financial Corporation (11)  111 Westminster Street  Providence, Rhode Island 02903

975,013

---

---

975,013

 6.106%

A. Mark Abramovic (3)

17,819

2,500

2,500

20,319

 

Michael J. Behan  (4)

4,005

6,126

---

10,131

 

Vera King Farris

10,706

---

2,000

12,706

 

James J. Forese

14,462

---

2,000

16,462

 

Victor A.  Fortkiewicz

23,623

1,000

39,600

64,223

 

J. Russell  Hawkins

8,503

---

2,000

10,503

 

John Kean (5)

371,876

---

2,000

373,876

2.329%

Robert P. Kenney

3,125

---

---

3,125

 

John Kean, Jr. (6)

111,070

45,000

---

156,070

 

Bernard S. Lee (7)

21,605

---

2,000

23,605

 

Robert F. Lurie (8)

9,490

7,149

---

16,639

 

James R. Van Horn (9)

11,048

875

---

11,923

 

R. Van Whisnand

17,462

---

2,000

19,462

 

All current directors and current executive officers as a  group (10)

471,362

1,000

51,600

523,962 

2.952%

*      Unless otherwise noted, the individualslisted above own less than one percent of the outstanding common stock basedupon shares of common stock outstanding at April 30, 2004 of 15,968,345 shares.

(1)   This column includes common stock that hasbeen deferred under the company's deferred compensation program. This columnalso includes the number of shares of common stock issuable to non-employeedirectors upon termination of Board service in payment for their annual Boardand Committee chair retainers, as follows: James J. Forese and R. Van Whisnand,14,312 shares each; Bernard S. Lee, 12,231 shares; Vera King Farris, 10,165shares; J. Russell Hawkins, 6,084 shares; and all directors as a group, 57,103shares.

(2)   This column represents restricted stock heldby executive officers over which the officers have voting power, but noinvestment power. The total number of shares for all directors and officers asa group is.

(3)   Mr. Abramovic's holdings are as of January30, 2004.

(4)   Mr. Behan's holdings are as of July 31, 2003.

(5)   Includes 128,466 shares over which John Keanhas shared voting and investment power as a co-trustee under various trusts forthe benefit of members of the Kean family and 500 shares by Mr. Kean's wife.

(6)   Mr. John Kean, Jr.'s holdings are as ofSeptember 30, 2003.

(7)   Includes 1,000 shares held by Dr. Lee's wife.

(8)   Mr. Lurie's holdings are as of March 31,2003.

(9)   Mr. Van Horn's holdings are as of January 30,2004.

(10)Reflects shares owned by directors, nomineesand current executive officers. Since Mr. Abramovic, Mr. Behan, Mr. Kean, Jr.,Mr. Lurie and Mr. Van Horn ceased to be executive officers of the company onMarch 31, 2004, their share ownership is not included in these totals.

(11)Holdings based on December 31, 2003 filingswith the SEC on Schedule 13D.

**(b)          Equity Compensation Plan Information**

The following table provides information as of April 30, 2004,with respect to shares of NUI common stock that may be issued under thecompany's existing equity compensation plans.

**Plan Category**

**Number of  Securities to be Issued upon Exercise of Outstanding Options**

**Weighted Average  Exercise Price of Outstanding Options (3)**

**Number of  Securities Remaining Available for Future Issuance under Equity Compensation  Plans (Excluding Securities Reflected in Column (a))**

 

**(a)**

**(b)**

**(c)**

Equity compensation plans      approved by security holders (1)

 94,200

$22.12

   1,544,773  (2)

Equity compensation plans not   approved by  security holders (2)

         ---

         ---

                 ---

Total

 94,200

   $22.12

   1,544,773

(1)   Consists ofthe NUI Corporation Stock Option, Stock Award and Incentive Plan; the DirectorStock Purchase Plan; and the Employee Plan. Participation in the Employee Planby executive officers and the Director Stock Purchase Plan by directors is on avoluntary basis. Accordingly, future participation cannot be determined. Duringfiscal year 2003, the following shares were purchased under the Employee Planand Director Stock Purchase Plan: Executive Officers, 4,418 shares; allnon-Executive Directors, 750 shares; and all other employees, 58,491 shares.

(2)   Securitiesremaining available include (i) 1,332,577 from the Incentive Plan; (ii) 40,918shares from the Director Stock Purchase Plan and (iii) 171,278 shares from theEmployee Plan.

(3)   Since the purchase price of shares under theEmployee Plan and the Director Stock Purchase Plan is unknown, it has beenexcluded from the weighted average computation.

**Item 13.  Certain Relationships and RelatedTransactions**

**(a)  Transactions with Management and Others**

There are companies and firms with which certain directors andexecutive officers are, or during fiscal 2003 were, affiliated as an officerand/or director that had transactions in the ordinary course of business withthe company during fiscal year 2003 and similar transactions are expected tooccur in the future. The companies or firms involved in these transactions andthe related directors and officers are: National Fuel Gas Supply Corporation (Bernard S. Lee); FTI Consultantsand Scouler Andrews (Dan Scouler); and Enjay Realty, LLC (John Kean).  Except as discussed in the followingparagraphs, none of these directors and officers had a direct or indirectmaterial interest in any such transactions in which the amount involvedexceeded $60,000.

The company is party to two gas transportation agreements withNational Fuel Gas Supply Corporation (NFGSC). The agreements are under rateSchedule FT dated October 27, 1995 and rate Schedule EFT dated August 1,1993.  Bernard S. Lee is a director ofNFGSC.  In fiscal 2003, the company paid$1,662,192 to NFGSC under these agreements.

In October 2003, NUI engaged FTI Consultants, a consulting firmthat provides interim management services, to manage its financial operationsand develop new liquidity forecasts. Mr. Scouler, a Managing Director of FTI Consultants, became the company'sinterim Chief Financial Officer.  NUIpaid $507,318, inclusive of expenses, to FTI Consultants during the firstfiscal quarter of 2004.  In addition, onMarch 1, 2004, NUI engaged Scouler Andrews, a firm created by Mr. Scouler, toprovide interim management and related services.  Scouler Andrews continues to provide the services of Mr. Scouleras interim Chief Financial Officer. Through the second fiscal quarter of 2004, Scouler Andrews has been paid$200,000. For a discussion of the terms of this agreement, please see Item 11.Executive Compensation-Employment Contracts and Termination of Employment andChange of Control Arrangements.

The company is party to a lease agreement with Liberty Hall JointVenture for the occupancy of a 200,000 square foot office building in Union,New Jersey. The joint Venture participants are Cali Liberty Hall Associates (aNew Jersey partnership) and Enjay Realty, LLC (Enjay). John Kean, retiredChairman of the Board and current Board member, is the majority owner of Enjay.All negotiations relative to the lease were conducted between the company andCali Liberty Hall Associates. In accordance with the lease, the annual baserent was approximately $3.2 million for each of the fiscal years endedSeptember 30, 2003 and 2002. The lease provides for annual base rents ofapproximately $3.2 million from 2004 and 2005, $3.4 million from 2006 through2010, $3.6 million from 2011 through 2015, $3.9 million from 2016 through 2020,and $4.2 million from 2021 through 2022.

**(b)  Certain Business Relationships**

John Kean is the father of John Kean, Jr.

**Item 14.  Principal Accounting Fees andServices**

**(a)  Fees**

The accounting firm of PricewaterhouseCoopers LLP (PwC) has beenselected by the Audit Committee of the Board of Directors to serve asindependent public accountants for the company and its subsidiaries for thefiscal year ending September 30, 2004. PwC was first selected to serve asindependent accountants on June 20, 2002, following the termination of ArthurAndersen LLP as the company's independent accountants.

During the company's two most recent fiscal years through thedate of PwC's appointment as independent accountants, neither the company noranyone acting on its behalf consulted with PwC with respect to the applicationof accounting principles to a specific transaction, either proposed orcontemplated, or the type of audit opinion that might be rendered on thecompany's consolidated financial statements, or any other matters or reportableevents listed in Items 304(a)(2)(ii) of Regulation S-K.

The following are the fees paid by the company for the audit andother services provided by PwC for fiscal years 2003 and 2002. The fees setforth for fiscal year 2002 below include PwC relating to a re-audit of thecompany's financial statements for fiscal years 2000 and 2001.

*Audit Fees*. Total fees paid for audit services rendered byPwC during 2003 and 2002 were $891,660 and $995,000, respectively. The auditservices for 2002 included the audit of the consolidated financial statementsof the company and quarterly reviews of its financial statements for fiscalyears 2002, 2001, and 2000.

*Audit-Related Fees*. Total fees paid to PwC foraudit-related services rendered during 2003 and 2002 were $215,300 and $54,500,respectively, related primarily to benefit plans, statutory audits and servicesrelated to filings made with the SEC.

*Tax Fees*. Total fees paid to PwC for tax services during2003 and 2002 were $154,477 and $29,806, respectively, primarily related todomestic tax consultation.

*All Other Fees*. Total fees paid to PwC for all otherservices rendered during 2003 and 2002 were $4,900 and $2,607,730,respectively, primarily related to PwC Consulting, an affiliate of PwC, whichwas sold to a third party effective September 30, 2002, which had providedconsulting services during fiscal year 2002, a substantial portion was incurredprior to the appointment of PwC on June 20, 2002.

**(b)  Audit Committee Pre-Approval Policy**

Under policies and procedures adopted by the audit committee ofthe company's board of directors, the company's principal independent accountantmay not be engaged to provide non-audit services that are prohibited by law orregulation to be provided by it, nor may the company's principal independentaccountant be engaged to provide any other non-audit service unless it isdetermined that the engagement of the principal independent accountant providesa business benefit resulting from its inherent knowledge of the company whilenot impairing its independence. The audit committee or its chairman mustpre-approve the engagement of the company's principal independent accountant toprovide both audit and permissible non-audit services.  If the chairman pre-approves any engagement,he is to make a report to the full audit committee at its next meeting. 100 percentof all services provided by the company's principal independent accountant in2003 were pre-approved by the audit committee or its chairman.

**PART IV**
** **

**Item 15.  Exhibits, Financial Statement Schedules, andReports on Form 8-K **

** (a)**           (1)Consolidated financial statements of the company as of September 30, 2003 and2002 and for each of the three years in the period ended September 30, 2003 andthe auditors' report thereon, and the unaudited quarterly financial data forthe two-year period ended September 30, 2003 are included herewith as indicatedon the "Index to Financial Statements and Schedule" on page F-1.

(2). Schedule II-Valuation andQualifying Account for each of the three years in the period ended September30, 2003. All other schedules are omitted because they are not required, areinapplicable or the information is otherwise shown in the financial statementsor notes thereto.

(3) Exhibits:

**Exhibit No.**

**Description**

**Reference**

2(v)

Amendment and Restated  Agreement and Plan of Reorganization by and among NUI Corporation, VCC  Acquisition, Inc. and Virginia Gas Company, dated as of March 28, 2001

Incorporated by reference to  Exhibit 2(v) of NUI's Form 10-K Report for Fiscal Year 2001

2(vi)

Asset Purchase Agreement and  Plan of Reorganization by and among NUI Corporation, NUI Telecom, Inc.,  Norcom Acquisition, LLC, Norcom Inc. and Shareholders of Norcom, Inc. dated  as of March 1, 2002

Incorporated by reference to  Exhibit 2(vi) of NUI's Form    10-K  Report for Fiscal Year 2002

3(i)

Certificate of Incorporation,  Amended and Restated as of March 1, 2001; Certificate of Amendment of  Restated Certificate of Incorporation as of March 2, 2001

Incorporated by reference to  Exhibit 3(i) of NUI's Form 10-Q Report for the quarter ended December 31,  2001

3(ii)

By-Laws, amended and restated  as of March 2, 2001

Incorporated by reference to  Exhibit 3(ii) of NUI's Form 10-K Report for Fiscal Year 2001

4(i)

Rights Agreement between NUI  Corporation and Mellon Securities Trust Company dated November 28, 1995

Incorporated by reference to  Exhibit 10.1 of NUI's Form 8-K filed December 1, 1995

4(ii)

First Amendment dated as of  February 26, 2001 to Rights Agreement between NUI Corporation and Mellon  Securities Trust Company dated as of November 28, 1995

Incorporated by reference to  Exhibit 4 to NUI's Form 8-K filed March 2, 2001

4(iii)

Rights Agreement between NUI  Corporation and American Stock Transfer & Trust Company, dated as of  March 2, 2001

Incorporated by reference to  Exhibit 10.1 to NUI's Form 8-A dated March 2, 2001 filed March 6, 2001.

10(i)

Service Agreement by and  between Transcontinental Gas Pipe Line Corporation and Elizabethtown Gas  Company ("EGC"), dated February 1, 1992 system contract (#0.3686)

Incorporated by reference to Exhibit 10.1  to Registration Statement No. 33-50651

10(ii)

Service Agreement under Rate  Schedule GSS by and between Transcontinental Gas Pipe Line Corporation and  EGC, dated July 1, 1996

Incorporated by reference to  Exhibit 10(ii) of NUI's Form   10-K  Report for Fiscal Year 1997

10(iii)

Amendment dated May 15, 1996 to  Service Agreement under Rate Schedule LG-A by and between Transcontinental  Gas Pipe Line Corporation and EGC, dated January 12, 1971

Incorporated by reference to  Exhibit 10(iii) of NUI's Form  10-K  Report for Fiscal Year 1999

10(iv)

Service Agreement by and  between Transcontinental Gas Pipe Line Corporation and EGC, dated  November 1, 1995 (Contract #1.1997)

Incorporated by reference to  Exhibit 10(iv) of NUI's Form  10-K  Report for Fiscal Year 1996

10(v)

Service Agreement by and  between Transcontinental Gas Pipe Line Corporation and EGC, dated  November 1, 1995 (Contract #1.1995)

Incorporated by reference to  Exhibit 10(vi) of NUI's Form  10-K  Report for Fiscal Year 1996

10(vi)

Firm Gas Transportation  Agreement by and among Transcontinental Gas Pipe Line Corporation, EGC and  National Fuel Gas Supply Corporation, dated November 1, 1984 (Contract  #0.0995)

Incorporated by reference to  Exhibit 10(vi) to Registration Statement No.   33-50651

10(vii)

Service Agreement by and among  Transcontinental Gas Pipe Line Corporation and EGC, dated November 1, 1995  (Contract #1.1998)

Incorporated by reference to Exhibit  10(vii) of NUI's Form 10-K Report for Fiscal Year 1996

10(viii)

Service Agreement under Rate  Schedule FTS-7 by and between Texas Eastern Transmission Corporation and EGC,  dated October 25, 1994 (Contract #331720)

Incorporated by reference to  Exhibit 10(ix) to NUI's Form  10-K Report  for Fiscal Year 1994

10(ix)

Service Agreement for Rate  Schedule FTS-5 by and between Texas Eastern Transmission Corporation and EGC,  dated March 18, 1996 (Contract #331501)

Incorporated by reference to  Exhibit 10(x) of NUI's Form   10-K  Report for Fiscal Year 1997

10(x)

Service Agreement under Rate  Schedule FTS-8 by and between Texas Eastern Transmission Corporation and EGC,  dated June 28, 1994 (Contract #331013)

Incorporated by reference to  Exhibit 10(xi) to NUI's Form  10-K  Report for Fiscal Year 1994

10(xi)

Firm Transportation Service  Agreement under FTS-2 Rate Schedule by and between City Gas Company of  Florida and Florida Gas Transmission Company, dated August 12, 1993 (Contract  #5364)

Incorporated by reference to  Exhibit 10(xii) of NUI's Form 10-K Report for Fiscal Year 1997

10(xii)

Service Agreement under NTS  Rate Schedule by and between Columbia Gas Transmission Corporation and EGC,  dated November 1, 1993 (Contract #39275)

Incorporated by reference to  Exhibit 10(xiv) to NUI's Form 10-K Report for Fiscal Year 1993

10(xiii)

Service Agreement under SST  Rate Schedule by and between Columbia Gas Transmission Corporation and EGC,  dated November 1, 1993 (Contract #38045)

Incorporated by reference to  Exhibit 10(xv) to NUI's Form 10-K Report for Fiscal Year 1993

10(xiv)

Service Agreement under FTS  Rate Schedule by and between Columbia Gas Transmission Corporation and EGC,  dated November 1, 1993 (Contract #37882)

Incorporated by reference to  Exhibit 10(xvi) to NUI's Form 10-K Report for Fiscal Year 1993

10(xv)

Gas Transportation Agreement  under FT-G Rate Schedule by and between Tennessee Gas Pipeline Company and  EGC (Contract #597), dated   September  1, 1993

Incorporated by reference to  Exhibit 10(xvii) to NUI's Form 10-K Report for Fiscal Year 1993

10(xvi)

Gas Transportation Agreement  under FT-G Rate Schedule by and between Tennessee Gas Pipeline Company and  EGC (Contract #603), dated   September  1, 1993

Incorporated by reference to  Exhibit 10(xviii) to NUI's Form 10-K Report for Fiscal Year 1993

10(xvii)

Service Agreement by and  between Transcontinental Gas Pipe Line Company and EGC, dated November 1,  1995 (Contract #3832)

Incorporated by reference to  Exhibit 10(xix) of NUI's Form 10-K Report for Fiscal Year 1996

10(xviii)

Firm Transportation Service Agreement under  FTS-1 Rate Schedule by and between City Gas and Florida Gas Transmission  dated October 1, 1993 (Contract # 5034)

Incorporated by reference to Exhibit 10(xx) of NUI's Form  10-K for Fiscal Year 1993

10(xix)

Firm Transportation Service Agreement  under FTS-1 Rate Schedule by and between City Gas and Florida Gas  Transmission dated October 1, 1993 (Contract #5034) as amended July 26, 2000 

Incorporated by reference to Exhibit 10(xx)  of NUI's Form 10-K Report for Fiscal Year 2000

10(xx)

Amended and Restated Lease  Agreement between NUI Corporation and Liberty Hall Joint Venture, dated April  28, 2000 

Incorporated by reference to  Exhibit 10(xxi) of NUI's Form 10-K Report for Fiscal Year 2000

10(xxi)

1988 Stock Plan 

Incorporated by reference to Exhibit 10(viii) to Registration  Statement on Form S-4 No. 33-21525 dated April 28, 1988

10(xxii)

First Amendment to 1988 Stock Plan 

Incorporated by reference to Exhibit 10(xxxiii) to Registration  Statement on Form S-2 No. 33-46162 dated       March 11, 1992

10(xxiii)

Form of Termination of  Employment and Change in Control Agreements 

Incorporated by reference to Exhibit 10(xxiii) of NUI's Form 10-K  Report for Fiscal Year 1995

10(xxiv)

Firm Transportation Service  Agreement under FTS-2 Rate Schedule by and between City Gas and Florida Gas  Transmission, dated December 12, 1991 and Amendment dated November 12, 1993  (Contract #3608)

Incorporated by reference to  Exhibit 10(xxiv) of NUI's Form 10-K Report for Fiscal Year 1994

10(xxv)

1996 Employee Stock Purchase Plan, as amended

Incorporated by reference to  Exhibit 4 of Registration Statement on Form S-8 No. 333-49349 dated April 3,  1998

10(xxvi)

1996 Directors Stock Purchase Plan

Incorporated by reference to  Exhibit 10(xxix) of NUI's Form 10-K Report for Fiscal Year 1996

10(xxvii)

Service Agreement for Rate  Schedule CDS by and between Texas Eastern Transmission Corporation and EGC,  dated June 1, 1993 (Contract #800217)

Incorporated by reference to Exhibit 10(xxxvi) of NUI's Form  10-K Report for Fiscal Year 2000

10(xxviii)

Service Agreement for Rate  Schedule FT by and between Transcontinental Gas Pipe Line Corporation and EGC  (Contract #1.0431) dated April 1, 1995

Incorporated by reference to Exhibit 10(xxxvi) of NUI's Form  10-K Report for Fiscal Year 1995

10(xxix)

Service Agreement for Rate  Schedule FT by andbetween Transcontinental Gas Pipe Line Corporation and EGC  (Contract #1.0445) dated April 1, 1995

Incorporated by reference to Exhibit 10(xxxvii) of NUI's Form  10-K Report for Fiscal Year 1995

10(xxx)

Service Agreement for Rate  Schedule SS-1 by and between Texas Eastern Transmission Corporation and EGC  (Contract (#400196) dated September 23, 1994

Incorporated by reference to  Exhibit 10(xxxviii) of NUI's Form 10-K Report for Fiscal Year 1995

10(xxxi)

Gas Storage Agreement under Rate Schedule  FS by and between Tennessee Gas Pipeline Company and EGC (Contract #8703)  dated November 1, 1994

Incorporated by reference to Exhibit 10(xxxix) of NUI's Form 10-K  Report for Fiscal Year 1995

10(xxxii)

Consulting Agreement, dated as of March 24, 1995, between NUI  Corporation and John Kean

Incorporated by reference to  Exhibit 10(xl) of NUI's Form  10-K  Report for Fiscal Year 1995

10(xxxiii)

Form of Deferred Compensation Agreement

Incorporated by reference to  Exhibit 10(xli) of NUI's Form 10-K Report for Fiscal Year 1999

10(xxxiv)

1996 Stock Option and Stock Award Plan, as amended and restated  as of November 26, 2001

Incorporated by reference to  Exhibit 10(xliii) of NUI's Form 10-K Report for Fiscal Year 2001

10(xxxv)

Service Agreement under Rate  Schedule FT by and between Elkton Gas and Eastern Shore Natural Gas Company,  dated as of November 1, 1997 (Contract #010003)

Incorporated by reference to  Exhibit 10(xliii) of NUI's Form 10-K Report for Fiscal Year 1997

10(xxxvi)

Service Agreement under Rate  Schedule FT by and between Elkton Gas and Eastern Shore Natural Gas Company,  dated as of November 1, 1997 (Contract #010011)

Incorporated by reference to Exhibit 10(xliv) of NUI's Form  10-K Report for Fiscal Year 1997

10(xxxvii)

Service Agreement under Rate  Schedule FT by and between Elkton Gas and Eastern Shore Natural Gas Company,  dated as of November 1, 1997 (Contract #010012)

Incorporated by reference to Exhibit 10(xlv) of NUI's Form 10-K  Report for Fiscal Year 1997

10(xxxviii)

Service Agreement under Rate  Schedule FT by and between Elkton Gas and Eastern Shore Natural Gas Company,  dated as of November 1, 1997 (Contract #010013)

Incorporated by reference to  Exhibit 10(xlvi) of NUI's Form 10-K Report for Fiscal Year 1997

10(xxxix)

Service Agreement under Rate  Schedule ST by and between Elkton Gas and Eastern Shore Natural Gas Company,  dated as of November 1, 1997 (Contract #020003)

Incorporated by reference to  Exhibit 10(xlvii) of NUI's Form 10-K Report for Fiscal Year 1997

10(xl)

Service Agreement under Rate  Schedule ST by and between Elkton Gas and Eastern Shore Natural Gas Company,  dated as of November 1, 1997 (Contract #020005)

Incorporated by reference to Exhibit 10(xlviii) of NUI's Form  10-K Report for Fiscal Year 1997

10(xli)

Service Agreement under Rate  Schedule FT by and between Elkton Gas and Eastern Shore Natural Gas Company,  dated as of November 1, 1998 (Contract #010032)

Incorporated by reference to Exhibit 10(xlix) of NUI's Form  10-K Report for Fiscal Year 1999

10(xlii)

Agreement between T.I.C. Enterprises, L.L.C and United States  Postal Service

Incorporated by reference to Exhibit 10.1  of NUI's Form 8-K filed 12/15/99.

10(xliii)

Service Agreement under Rate  Schedule LNG by and between Transcontinental Gas Pipe Line Corporation and  NUI Corporation dated as of October 25, 1999 (Contract #3.2339)

Incorporated by reference to Exhibit 10(lii) of NUI's Form  10-K Report for Fiscal Year 2000

10(xliv)

Gas Transportation Agreement  under Rate Schedule  FT-A by and between  Tennessee Gas Pipeline Company and NUI Corporation, dated as of October 17,  1999 (Contract #31117)

Incorporated by reference to Exhibit 10(liii) of NUI's Form  10-K Report for Fiscal Year 2000

10(xlv)

Asset Sale Agreement between NUI Corporation and C&T  Enterprises, Inc., dated as of October 4, 2000

Incorporated by reference to  Exhibit 10(liv) of NUI's Form 10-K Report for Fiscal Year 2000

10(xlvi)

Service Agreement under Rate  Schedule FT by and between NUI Corporation and Eastern Shore Natural Gas Company,  dated as of May 1, 2001 (Contract #010041)

Incorporated by reference to Exhibit 10(lv) of NUI's Form  10-K Report for Fiscal Year 2001

10(xlvii)

Service Agreement for Rate  Schedule FT-1 by and between Texas Eastern Transmission LP and NUI Utilities,  Inc.  (Contract (#910333) dated March  27, 2002

Incorporated by reference to Exhibit 10(lvii) of NUI's Form  10-K Report for Fiscal Year 2002

10(xlviii)

Note Purchase Agreement, dated  August 20, 2001, for the issuance of $60 million of Senior Notes at interest  rates ranging between 6.60 percent and 7.29 percent, with maturities from  August 20, 2006 through    August 20,  2011

Incorporated by reference to Exhibit 10.1 of NUI's Form 10-Q  Report for the quarter ended 12/31/02

10(xlix)

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

Incorporated by reference to Exhibit 10.1 of NUI's Form 10-Q  Report for the quarter ended 3/31/03

10(l)

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

Incorporated by reference to Exhibit 10.2 of NUI's Form 10-Q  Report for the quarter ended 3/31/03

10(li)

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

Incorporated by reference to Exhibit 10.3  of NUI's Form 10-Q Report for the quarter ended 3/31/03

10(lii)

First amendment dated as of  March 31, 2003, to the Credit Agreement dated as of February 12, 2003, by and  among NUI Corporation and Fleet National Bank, Citizens Bank of  Massachusetts, CIBC, Inc., PNC Bank, NA, and Mellon Bank, NA

Incorporated by reference to Exhibit 10.4 of NUI's Form 10-Q  Report for the quarter ended 3/31/03

10(liii)

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

Incorporated by reference to Exhibit 10.5 of NUI's Form 10-Q  Report for the quarter ended 3/31/03

10(liv)

First Amendment and Waiver  dated as of February 20, 2003, to the Note Purchase Agreement dated August  20, 2001, between NUI Corporation and AIG Life Insurance Company, Sunamerica  Life Insurance Company, United of Omaha Life Insurance Company, Pacific Life  and Annuity Company and Mutual Life Insurance Company

Incorporated by reference to Exhibit 10.6 of NUI's Form 10-Q  Report for the quarter ended 3/31/03

10(lv)

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

Incorporated by reference to Exhibit 10.7 of NUI's Form 10-Q  Report for the quarter ended 3/31/03

10(lvi)

First Amendment, dated as of  August 11, 2003, to Credit Agreement dated as of February 12, 2003, by and  among NUI Utilities, Inc., and the Lenders from time to time and parties  thereto (the Lenders), Fleet National Bank, as Agent for the Lenders,  Citizens Bank of Massachusetts, CIBC, Inc. as Co-Syndication Agents, and PBC  Bank, NA, as Documentation Agent

Incorporated by reference to Exhibit 10 of NUI's Form 10-Q  Report for the quarter ended 6/30/03

10(lvii)

Revolving Credit Agreement  dated as of October 10, 2003 among NUI Utilities, Inc. and Drawbridge Special  Opportunities Fund, LP

Incorporated by reference to Exhibit 99.2 to NUI's 8-K filed  10/14/03

10(lviii)

Credit Agreement dated as of  November 24, 2003 by and among NUI Corporation and Credit Suisse First Boston

Incorporated by reference to Exhibit 99.1 to NUI's 8-K filed  11/26/03

10(lix)

Credit Agreement dated as of  November 24, 2003 by and among NUI Utilities, Inc. and Credit Suisse First  Boston

Incorporated by reference to Exhibit 99.2 to NUI's 8-K filed 11/26/03

10(lx)

Letter Agreement between Steven  D. Overly and NUI Corporation dated as of January 27, 2004

Filed herewith

10(lxi)

Letter Agreement between Craig  Matthews and NUI Corporation dated as of January 27, 2004

Filed herewith

10(lxii)

Agreement between Scouler  Andrews International, LLC and NUI Corporation dated as of March 1, 2004

Filed herewith

10(lxiii)

Gas Supply Asset Assignment and  Agency Agreement between NUI Utilities, Inc. and Cinergy Marketing &  Trading, LP dated as of April 7, 2004 (portions omitted and filed separately  with the Securities and Exchange Commission pursuant to a request for  confidential treatment)

Filed herewith

10(lxiv)

Gas Supply Agreement between  NUI Utilities, Inc. and Cinergy Marketing & Trading, LP dated as of April  7, 2004 (portions omitted and filed separately with the Securities and  Exchange Commission pursuant to a request for confidential treatment)

Filed herewith

10(lxv)

Amendment No. 2 to Credit  Agreement, dated as of May 10, 2004, among NUI Corporation, the lenders party  thereto from time to time and Credit Suisse First Boston, acting through its Cayman  Island Branch, as administrative agent.

Filed herewith

10(lxvi)

Amendment No. 2  to Credit Agreement, dated as of May 10,  2004, among NUI Utilities, Inc., the lenders party thereto from time to time  and Credit Suisse First Boston, acting through its Cayman Island Branch, as  administrative agent.

Filed herewith

10(lxvii)

Severance Agreement between John Kean, Jr. and NUI Corporation  dated as of September 25, 2003.

Filed herewith.

10(lxviii)

Agreement and General Release  between A. Mark Abramovic and NUI Corporation dated as of    January 27, 2004.

Filed herewith. 

10(lxix)

Agreement and General Release  between James R. Van Horn and NUI Corporation dated as of      January 27, 2004.

Filed herewith.

10(lxx)

Agreement and General Release  between Michael J. Behan and NUI Corporation dated as of October 1, 2003.

Filed herewith.

10(lxxi)

Agreement and Release between  Robert F. Lurie and NUI Corporation dated as of May 23, 2003.

 

Filed herewith.

 
10(lxxii)

Stipulation and Agreement by  and among NUI Corporation, NUI Utilities, Inc., Elizabethtown Gas Company and  the Board of New Jersey Public Utilities dated April 13, 2004

Incorporated by reference to Exhibit 99.2 to NUI's 8-K filed  4/13/04

12

Consolidated Ratio of Earnings to Fixed  Charges

Filed herewith

14

NUI Corporation Code of Ethics

Filed herewith

21

Subsidiaries of NUI Corporation

Filed herewith

23

Consent of Independent Accountants

Filed herewith

31.1

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

Filed herewith

31.2

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

Filed herewith

32.1

Certification of the Chief  Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section  1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Furnished herewith

Exhibits listed above which have heretofore been filed with theSEC pursuant to the Securities Act of 1933 or the Securities Exchange Act of1934, and which were designated as noted above and have not been amended, arehereby incorporated by reference and made a part hereof with the same effect asif filed herewith.

The company is a party to various agreements with respect tolong-term indebtedness to which the total amount of indebtedness authorizedunder each agreement, respectively, does not exceed 10 percent of the totalassets of the company on a consolidated basis. The company hereby agrees tofurnish to the SEC copies of such agreements upon request.

**(b)  Reports on Form 8-K:**

(1)           On July 22, 2003, the company filed aCurrent Report on Form 8-K dated July 22, 2003, under Item 5, announcing theretirement of Michael J. Behan, Vice President, New Ventures, effective July23, 2003.

(2)           On July 31, 2003, the companyfurnished a Current Report on Form 8-K dated July 31, 2003, under Items 7 and12, announcing results of operations for the period ending June 30, 2003.

(3)           On September 26, 2003, the companyfiled a Current Report on Form 8-K dated September 26, 2003, under Items 5 and7, announcing the company's Board of Directors had decided to pursue a sale ofthe company and the resignation of John Kean, Jr., President and ChiefExecutive Officer, effective as of that date.

(4)           On October 14, 2003, the companyfiled a Current Report on Form 8-K dated October 14, 2003, under Items 5 and 9,announcing that the company had entered into a revolving credit agreement, andproviding a copy of such agreement as an exhibit.

(5)           On November 13, 2003, the companyfurnished a Current Report on Form 8-K dated November 13, 2003, under Items 9and 12, announcing results of operations for the fiscal year ending September30, 2003.

(6)           On November 17, 2003, the companyfurnished a Current Report on Form 8-K dated November 12, 2003, under Items 9and 12, furnishing a transcript of a conference call, which included a discussionof earnings guidance for the fiscal year ended September 30, 2003.

(7)           On November 19, 2003, the companyfurnished a Current Report on Form 8-K dated November 19, 2003, under Item 9,disclosing an investigation of certain transactions of one of its subsidiaries.

(8)           On November 24, 2003, the companyfiled a Current Report on Form 8-K dated November 24, 2003, under Item 5,announcing that the company and its NUI Utilities, Inc. subsidiary had enteredinto new credit agreements aggregating $405 million.

(9)           On November 26, 2003, the companyfiled a Current Report on Form 8-K dated November 24, 2003, under Items 5 and7, disclosing the terms of the credit agreements the company and its NUIUtilities, Inc. subsidiary had entered into with Credit Suisse First Bostonaggregating $405 million and providing copies of the agreements as an exhibit.

(10)         On January 29, 2004, the company fileda Current Report on Form 8-K dated January 28, 2004, under Items 7 and 9,furnishing a press release announcing the company had elected Craig G. Matthewsas President and Chief Executive Officer, and Steven D. Overly as Secretary andGeneral Counsel. 

(11)         On February 10, 2004, the company fileda Current Report on Form 8-K dated February 10, 2004, under Items 7 and 9,furnishing a press release announcing that company would file its quarterlyreport on Form 10-Q late, its earnings for the first quarter of fiscal 2004,the receipt of the company and NUI Utilities, Inc. from their bank lenders ofan extension for the delivery of the company's financial reports, andsettlement negotiations with the New Jersey Board of Public Utilities regardingthe focused audit of the company, NUI Utilities and Elizabethtown Gas.

(12)             On April 16, 2004, the company filed a Current Report on form8-K dated April 16, 2004, under Items 5 and 7, announcing a settlement with theNew Jersey Board of Public utilities regarding all issues related to thefocused audit of the company, NUI Utilities, Inc. and Elizabethtown Gas.  In addition, the company announced that theNJBPU has approved NUI Utilities' selection of Cinergy Marketing & Trading,LP to procure all of NUI Utilities' gas requirements from April 1, 2004 throughMarch 31, 2005.

** INDEX TO FINANCIAL STATEMENTS AND SCHEDULE**

**Consolidated Financial Statements of NUI Corporation and Subsidiaries:**

                 Report of Independent  Auditors..........................................................................  F-2

                 Item 15(a)(1): Consolidated Financial Statements as of                   September 30, 2003 and 2002 and for each                   of the Three Years in the Period                   Ended September 30,  2003................................................................................  F-3

                 Unaudited Quarterly Financial Data for                   the Two-Year Period Ended September 30, 2003                   (Note 25 of the Notes to the Company's Consolidated                   Financial  Statements)............................................           .................................. F-41

** **

**Financial Statement Schedule of NUI Corporation and Subsidiaries:**

                 Item 15(a)(2): Schedule II -Valuation and Qualifying Accounts                   for each of the Three Years in the                   Period Ended September 30,  2003................................................................... F-42

All other schedules are omitted because they are not required, are  inapplicable or the information is otherwise shown in the financial statements  or notes thereto.
****
**REPORT OF INDEPENDENT AUDITORS**

To the Board of Directors and Shareholders of NUI Corporation:

In our opinion, the consolidated financial statements referred to in Item  15(a)(1) present fairly, in all material respects, the financial position of  NUI Corporation and its subsidiaries at September 30, 2003 and 2002, and the  results of their operations and their cash flows for each of the three years  in the period ended September 30, 2003 in conformity with accounting  principles generally accepted in the United States of America.  In  addition, in our opinion, the financial statement schedule referred to in Item  15(a)(2) presents fairly, in all material respects, the information set forth  therein when read in conjunction with the related consolidated financial  statements.  These financial statements and financial statement schedule  are the responsibility of the Company's management; our responsibility is to  express an opinion on these financial statements and financial statement  schedule based on our audits.  We conducted our audits of these  statements in accordance with auditing standards generally accepted in the  United States of America, which require that we plan and perform the audit to  obtain reasonable assurance about whether the financial statements are free of  material misstatement.  An audit includes examining, on a test basis,  evidence supporting the amounts and disclosures in the financial statements,  assessing the accounting principles used and significant estimates made by  management, and evaluating the overall financial statement presentation.   We believe that our audits provide a reasonable basis for our opinion.   

As discussed in Note 2 to the financial statements, the Company has  significant liquidity events occurring after September 30, 2004.

As discussed in Note 1 to the financial statements, the Company changed its  method of accounting for non-derivative energy-related contracts as of January  1, 2003 and changed its method of accounting for goodwill as of October 1,  2001. 

PricewaterhouseCoopers LLP

Philadelphia, Pennsylvania  May 11, 2004

**NUI Corporation and Subsidiaries          Consolidated Statements of Income          (Dollars in thousands, except per share amounts)**

 

 

       **Years          Ended September 30,**

 

**    2003**

**2002**

**  2001**

**Operating Margins**

 

 

 

  Operating revenues

$652,377

$519,872

$646,006

  Less-Purchased gas and fuel

403,571

299,593

422,516

                     Cost of sales and services

  12,942

  10,831

10,624

                     Energy taxes

  12,914

  10,719

  12,918

   

222,950

198,729

199,948

 

 

 

**Other Operating Expenses**

 

 

 

  Operations and maintenance

139,780

108,792

99,203

  Depreciation and amortization

34,659

32,282

27,223

  Regulatory settlement costs

30,000

---

---

  Restructuring and other non-recurring items

---

1,203

---

  Taxes, other than income taxes

    7,483

    8,079

    7,177

 

211,922

150,356

133,603

 

 

 

**Operating Income**

  11,028

    48,373

    66,345

 

 

 

**Other Income and Expense, Net**

 

 

 

  Equity in earnings of Saltville Gas Storage Company, LLC

135

---

---

  Other

      646

      288

   1,467

      781

      288

   1,467

 

 

 

Income from Continuing Operations before Interest and Taxes

11,809

48,661

67,812

 

 

 

  Interest expense

  27,467

  26,965

 26,638

  Other interest

   (5,373)

  (5,587)

  (4,402)

  22,094

  21,378

  22,236

 

 

 

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

(10,285)

27,283

45,576

  Income taxes

   1,032

  11,232

    18,122

 

 

 

**Income (Loss) from Continuing Operations before Effect of Change**

** in Accounting**

(11,317)

16,051

27,454

 

 

 

**Discontinued Operations**

 

 

 

**  **Loss from discontinued operations

(32,355)

(22,244)

(17,278)

   Income tax benefit

  (4,393)

  (7,947)

  (6,137)

**Loss from Discontinued Operations**

(27,962)

(14,297)

(11,141)

 

 

 

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

(39,279)

1,754

16,313

 

 

 

** **Effect of change in accounting (net of tax benefits          of $4,079 in 2003

    and $9,500 in 2002)

 

    (5,870)

 

  (17,642)

 

        ---

 

 

 

**Net Income (Loss)**

$(45,149)

$(15,888)

$16,313

 

 

 

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

 

 $    (0.71)

 

$     1.08

 

 $    2.05

 

 

 

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

$    (2.82)

$    (1.06)

$    1.22

 

 

 

**Dividends Per Share of Common Stock**

$      0.98

$     0.98

$    0.98

 

 

 

**Weighted Average Number of Shares**

**  of Common Stock Outstanding**

 

16,035,441

 

14,937,755

 

13,355,573

* *

*See the notes to the consolidated financial statements.*
**
**NUI Corporation and Subsidiaries        Consolidated Balance Sheets        (Dollars in thousands)**

**                  September 30,**

**                   2003**

**                   2002**

**ASSETS**

**Current Assets**

  Cash and cash equivalents

$25,209

$4,247

  Accounts receivable (less allowance for doubtful accounts of           $7,304 in 2003 and $4,267 in 2002)

        55,575

        74,833

  Fuel inventories, at average cost

63,852

37,390

  Unrecovered purchased gas costs

25,398

26,756

  Derivative assets

8,059

22,540

  Federal income tax receivable

3,333

5,509

  Assets held for sale

7,976

11,373

  Prepayments and other

      31,120

       33,658

    220,522

     216,306

 

 

**Property, Plant and Equipment**

 

 

  Property, plant, and equipment, at original cost

954,446

943,084

  Accumulated depreciation and amortization

(323,370)

                  (303,710)

  Unamortized plant acquisition adjustments, net

13,372

14,484

  Assets held for sale

                   147

       14,932

     644,595

     668,790

 

 

**Funds for Construction Held by Trustee**

2,058

3,884

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

16,456

---

**Other Investments**

210

117

 

 

**Other Assets**

 

 

  Regulatory assets

57,040

75,846

  Notes receivable from Saltville Gas Storage Company, LLC

17,575

---

  Other receivable from Saltville Gas Storage Company, LLC

8,010

---

  Long-term portion of derivative assets

5,133

7,901

  Goodwill, net of accumulated amortization

8,056

19,126

  Assets held for sale

1,002

979

  Other assets

       40,106

       46,033

     136,922

     149,885

 

 

$1,020,763

$1,038,982

 

 

**CAPITALIZATION AND LIABILITIES**

 

 

**Current Liabilities**

 

 

  Notes payable to banks

$164,100

$128,690

  Notes payable

1,400

3,000

  Current portion of long-term debt and capital lease        obligations

2,167

2,351

  Accounts payable, customer deposits and accrued liabilities

125,353

121,436

  Derivative liabilities

---

852

  Liabilities held for sale

3,150

4,605

  Federal income and other taxes

       5,166

        7,912

  Current portion of deferred Federal income taxes

                6,705

        16,428

    308,041

      285,274

**Other Liabilities**

 

 

  Capital lease obligations

9,798

10,743

  Deferred Federal income taxes

61,608

63,149

  Liabilities held for sale

19

436

  Unamortized investment tax credits

3,375

3,948

  Environmental remediation reserve

33,941

33,852

  Regulatory and other liabilities

      64,813

      44,311

    173,554

    156,439

**Capitalization**(See accompanying statements)

 

  Common shareholders' equity

230,115

288,252

  Long-term debt

     309,053

     309,017

     539,168

     597,269

 

 

$1,020,763

$1,038,982

* *

*See the notes to the consolidated financial statements.*
**               **NUI Corporation and Subsidiaries**Consolidated Statements of Cash Flows        (Dollars in thousands)**
**Years Ended September 30,**

**2003**

**2002**

**2001**

 

 

**Operating Activities**

Net income (loss)

$(45,149)

$(15,888)

$16,313

Less: Loss from discontinued operations, net of tax

  (27,962)

  (14,297)

  (11,141)

        Non-cash adjustment to        implement new accounting standard, net of tax

(5,870)

(17,642)

        ---

Net income (loss) from continuing operations

(11,317)

16,051

27,454

Adjustments to reconcile net income to net cash provided by operating        activities:

 

 

 

        Depreciation and        amortization

34,659

32,282

27,223

        Regulatory settlement        costs

30,000

---

---

        Deferred Federal income        taxes

(7,185)

(7,421)

24,456

        Amortization of deferred        investment tax credits

(490)

(439)

(438)

        Derivative assets and        liabilities

6,265

(3,821)

(12,715)

        Regulatory assets and        liabilities

22,825

5,455

5,619

        Other

1,490

3,651

8,704

        Effects of changes in:

 

 

 

                      Accounts receivable, net

19,259

5,409

21,684

                      Fuel inventories

(26,462)

17,386

(18,776)

                      Accounts payable, deposits and accruals

(10,483)

(23,670)

5,260

                      Under-recovered purchased gas costs

1,125

(5,067)

(51,819)

                      Prepaids and other

2,538

25,660

(24,681)

                      Federal and state income taxes

(570)

12,746

(20,616)

                      Other

  (1,112)

  (1,054)

  (7,860)

  Net cash provided by (used in) continuing operations

 60,542

77,168

 (16,505)

  Net cash used in discontinued operations

  (6,444)

(17,044)

(10,223)

    Net cash provided by (used in) operating        activities

 54,098

 60,124

(26,728)

**Financing Activities**

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

1,176

34,592

578

Dividends to shareholders

(15,727)

(14,639)

(13,128)

Proceeds from issuance of long-term debt

---

---

60,000

Payments of long-term debt

---

(20,000)

---

Funds for construction held by trustee, net

1,849

8,868

17,198

Principal payments under capital lease obligations

(2,609)

(2,040)

(2,011)

Net short-term borrowings (repayments)

 35,410

(54,069)

  42,488

  Net cash provided by (used in) continuing operations

 20,099

 (47,288)

 105,125

  Net cash provided by (used in) discontinued operations

        (3)

   2,222

      (115)

    Net cash provided by (used for) financing        activities

 20,096

(45,066)

105,010

 

 

 

**Investing Activities**

 

 

 

Cash expenditures for property, plant and equipment

(39,189)

(42,289)

(56,265)

Notes receivable from Saltville Gas Storage Company, LLC

(17,575)

---

---

Notes receivable from Virginia Gas

---

---

(13,000)

Other  receivable from Saltville Gas Storage Company, LLC

(8,010)

---

---

Net proceeds from sales of subsidiaries

13,117

30,681

---

Acquisitions, net of cash acquired

---

(665)

(6,441)

Other

      277

    2,215

      677

  Net cash used in continuing operations

 (51,380)

 (10,058)

 (75,029)

  Net cash used in discontinued operations

  (1,852)

  (3,354)

  (3,525)

    Net cash used in investing activities

(53,232)

(13,412)

(78,554)

 

 

 

Net increase in cash and cash equivalents from continuing operations

29,261

19,822

13,591

Net decrease in cash and cash equivalents from discontinued        operations

  (8,299)

(18,176)

(13,863)

**Net Increase (Decrease) in Cash and Cash Equivalents**

$20,962

$ 1,646

$   (272)

**Cash and Cash Equivalents**

At beginning of period

$  4,247

$   2,601

$   2,873

At end of period

$25,209

$   4,247

$   2,601

 

 

 

**Supplemental Disclosures of Cash Flows**

 

 

 

Income taxes paid (refunds received), net

$     508

$  (3,713)

$   2,333

Interest paid

$22,038

$ 22,477

$ 25,764

*See the notes to the consolidated financial statements.*
**
**NUI Corporation and Subsidiaries        Consolidated Statements of Capitalization        (Dollars in thousands)**

**September 30,**

**2003**

**2002**

**Long-Term Debt**

Gas facilities revenue bonds

     6.35 percent due October 1, 2022

$46,500

$46,500

     6.40 percent due October 1, 2024*

20,000

20,000

     Variable rate due June 1, 2026

39,000

39,000

     5.70 percent due June 1, 2032

54,600

54,600

     5.25 percent due November 1, 2033

40,000

40,000

Medium-term notes

 

 

     8.35 percent due February 1, 2005

  50,000

  50,000

Senior notes

 

 

     7.10 percent due August 20, 2006

5,000

5,000

     7.384 percent due August 20, 2008

15,000

15,000

     7.384 percent due August 20, 2011

7,000

7,000

     7.79 percent due August 20, 2011

  33,000

  33,000

    

310,100

310,100

Unamortized debt discount

   (1,047)

   (1,083)

309,053

309,017

 

 

**Preferred Stock,**5,000,000 shares authorized; none issued

*---*

---

 

 

**Common Shareholders' Equity**

 

 

Common Stock, no par value; shares authorized: 30,000,000;

     shares outstanding: 16,025,259 in 2003 and        15,989,906 in 2002

 

288,620

 

286,783

Shares held in treasury, at cost: 234,212 in 2003 and 179,201 in 2002

(5,320)

(4,384)

Retained earnings (deficit)

(48,951)

11,925

Unearned employee compensation

   (3,589)

   (4,949)

Accumulated other comprehensive loss

        (645)

     (1,123)

  230,115

  288,252

**Total Capitalization**

$539,168

$597,269

* The total unexpended portions of the net proceeds from these bonds,  amounting to $2.1 million and $3.9 million as of September 30, 2003, and 2002,  respectively, are carried on the company's Consolidated Balance Sheet as Funds  for Construction Held by Trustee, including interest earned thereon, until  drawn upon for eligible construction expenditures.

*See the notes to the consolidated financial statements.*

** **

**NUI Corporation and Subsidiaries  Consolidated Statements of Shareholders' Equity  (Dollars in thousands)**

 

 
 Common Stock

 
        SharesOutstanding

        Paid-inAmount

        Held inTreasury

        Unearned        Employee Compensation

        RetainedEarnings

Accumulated        Other Comprehensive Loss

        Total

**Balance,**

**September 30, 2000**

12,982,526

$216,095

$  (2,246)

   $  (1,725)

$ 39,267

$ (495)

$250,896

Comprehensive income:

 

 

 

 

 

 

 

   Net income

 

 

 

 

16,313

 

16,313

   Minimum pension         liability, net of taxes          of $281

 

 

 

 

 

 

(405)

            (405)

Comprehensive income

 

 

 

 

 

 

15,908

Common stock issued

 

 

 

 

 

 

 

  -Purchase of Virginia           Gas

        792,600

        22,020

 

 

 

 

        22,020

  -Employee benefit           plans*

        51,055

        3,228

 

 

 

 

        3,228

Treasury stock transactions

        (71,143)

 

        (1,631)

 

 

 

        (1,631)

Cash dividends

 

 

 

 

(13,128)

 

(13,128)

Unearned compensation

 

 

 

                 (2,566)

 

 

        (2,566)

_________

________

_______

    _______

_______

_______

________

**Balance,**

 

 

 

 

 

 

 

**September 30, 2001**

13,755,038

$241,343

$  (3,877)

 $  (4,291)

$ 42,452

$ (900)

$274,727

Comprehensive income:

 

 

 

  Net income

(15,888)

 

(15,888)

  Minimum pension         liability, net          of taxes of $155

 

(223)

 

     (223)

Comprehensive income

 

(16,111)

Common stock issued

 

 

  -Acquisitions

407,823

8,275

 

 

8,275

  -Equity offering

1,725,000

36,974

 

 

36,974

  -Employee benefit            plans*

        106,945

        191

 

 

        191

Treasury stock transactions

(4,900)

 

(507)

 

(507)

Cash dividends

 

 

 

(14,639)

 

(14,639)

Unearned compensation

 

 

 

            (658)

 

 

        (658)

_________

________

_______

_______

_______

_______

________

**Balance,**

 

 

 

 

 

 

 

**September 30, 2002**

15,989,906

$286,783

$  (4,384)

$  (4,949)

$ 11,925

$ (1,123)

$288,252

Comprehensive loss:

 

 

  Net loss

(45,149)

(45,149)

  Derivative hedges, net of taxes of $527

        759

    759

  Minimum pension           liability, net           of taxes of $196

 

 

(281)

 

     (281)

Comprehensive loss

 

 

(44,671)

Common stock issued

 

 

 

-Employee benefit          plans*

        90,364

        1,754

 

        1,754

Directors stock options

 

83

 

83

Treasury stock transactions

        (55,011)

 

        (936)

 

        (936)

Cash dividends

 

 

 

(15,727)

 

(15,727)

Unearned compensation

 

 

 

        1,360

 

 

        1,360

_________

_______

_______

_______

_______

 ______

_______

**Balance,**

 

 

 

 

 

 

 

**September 30, 2003**

16,025,259

$288,620

$  (5,320)

$ (3,589)

$(48,951)

  $(645)

$230,115

* Represents common stock issued in connection with NUI Direct and various  employee benefit plans.

* *

*                                                 See the notes to the consolidated financial statements.*

** **
****
**NUI Corporation and Subsidiaries  Notes to the Consolidated Financial Statements**

**1.              Summary of Significant Accounting Policies**

*Principles of Consolidation.*  The consolidated financial  statements include all operating divisions and subsidiaries of NUI Corporation  (collectively referred to as NUI, the company, we, our, or us).  NUI is a  diversified energy company that is primarily engaged in the sale and  distribution of natural gas through its local utility companies. NUI's local  utility operations are carried out by NUI's wholly-owned subsidiary, NUI  Utilities, Inc. (NUI Utilities) and a subsidiary of Virginia Gas Company (VGC)  (see Note 3), and serve more than 367,000 customers in four states along the  eastern seaboard of the United States. NUI Utilities is comprised of  Elizabethtown Gas Company (New Jersey), City Gas Company of Florida, and  Elkton Gas (Maryland).  VGC is also engaged in other activities, such as  pipeline operation and natural gas storage. In addition, the company is  engaged in several non-regulated businesses including NUI Energy, Inc. (NUI  Energy), an energy retailer; NUI Energy Brokers, Inc. (NUI Energy Brokers), a  wholesale energy portfolio and risk management subsidiary; NUI Environmental  Group, Inc. (NUI Environmental), an environmental project development  subsidiary; Utility Business Services, Inc., (UBS), a geospatial, billing and  customer information systems and services subsidiary; OAS Group, Inc. (OAS),  the company's digital mapping operation, which prior to September 30, 2003,  was part of UBS; NUI Telecom, Inc. (NUI Telecom), a non-facilities-based  telecommunications services subsidiary and TIC Enterprises, LLC (TIC), a sales  outsourcing subsidiary (see Note 4).  The company's wholly-owned  subsidiary, NUI Saltville Storage, Inc. (NUISS), is a fifty-percent member of  Saltville Gas Storage Company, LLC (SSLLC). SSLLC is a joint venture with a  unit of Duke Energy that is developing a natural gas storage facility in  Saltville, Virginia. All intercompany accounts and transactions have been  eliminated in consolidation.

On September 26, 2003, the company's Board of Directors announced it was  pursuing the sale of the company.  The company has engaged two investment  banks to serve as financial advisors to the company while it seeks a  buyer.  As discussed in Note 11, at September 30, 2003, the company has  classified the results of North Carolina Gas (NC), Valley Cities Gas and  Waverly Gas (VCW), NUI Telecom, and TIC as Discontinued Operations in the  Consolidated Statements of Income.  The assets and liabilities of these  entities, as well as those of NUI Environmental, have been classified as  Assets Held for Sale and Liabilities Held for Sale in the Consolidated Balance  Sheets.

In June 2003, the company had approved a plan to sell UBS.  However,  the September 2003 decision to sell the company (discussed above) reduced the  probability that a sale of UBS would occur, given that NUI Utilities is UBS'  largest customer and there was no guarantee that NUI Utilities would maintain  a long-term relationship with UBS after the company was sold.  As a  result, as of September 30, 2003, the assets and liabilities of UBS are no  longer classified as "held for sale" on the Consolidated Balance  Sheets and its results of operations have been included in Income from  Continuing Operations on the Consolidated Statements of Income. 

In addition, in May 2003, the company announced it was exiting the retail  energy business, and subsequently sold the majority of NUI Energy's contracts  (see Note 5) and is winding down its operations.

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

*Use of Estimates*.  The preparation of financial statements in  accordance with generally accepted accounting principles requires management  to make estimates and assumptions that affect the reported amounts of assets  and liabilities, the disclosure of contingent assets and liabilities at the  date of the financial statements and the reported amounts of revenues and  expenses during the reporting period. Actual results could differ from those  estimates.

*Revenue Recognition. *Natural Gas Distribution:   Utility gas customers are metered and billed monthly or bi-monthly on a cycle  basis.  Revenues include unbilled amounts related to the estimated gas  usage that occurred from the most recent meter reading to the end of the  relevant accounting period.

The cost of gas used is recovered when billed to firm customers through the  operation of purchased gas adjustment clauses (PGA) included in utility  tariffs.  The PGA provision requires periodic reconciliation of  recoverable gas costs and PGA revenues.  Any difference is deferred  pending recovery from or refund to firm customers.  Further, revenues  from tariff gas-balancing services, off-system sales and certain on-system  interruptible sales are refunded, for the most part, to firm customers subject  to certain sharing provisions.

Our New Jersey gas utility tariffs contain weather normalization  adjustments that largely offset shortfalls or excesses of firm margin revenues  during a heating season due to variations from normal weather. Revenues are  adjusted each month the clause is in effect and are generally included in  rates in the following fiscal year.  The Florida and Maryland gas utility  rate structures do not contain a weather normalization feature; therefore,  their revenues are subject to weather related demand fluctuations.

Storage and pipeline services:  Revenues for storage and  pipeline services are generated from capacity demand charges under contracts  (both short- and long-term) that contain either an annual or monthly charge  for those services.  Revenues are recognized monthly as provided by  contract and amortized ratably into income over a period of twelve months for  annual charges.

Retail energy sales:  Energy sales made by our retail energy  subsidiary are recorded upon delivery of the natural gas commodity.   Also, see "New Accounting Standards" for further discussion of EITF  02-03.

Telecommunications services:  Telecommunications service  revenues are billed based on usage of services that are provided to customers.  Revenues include unbilled amounts related to the estimated telecommunications  usage that occurred from the most recent billing to the end of each month.

Customer information services:  Revenues earned by our UBS and  OAS subsidiaries for billing and information services are recognized when  services are provided. Our UBS subsidiary provides customer account conversion  services that are deferred and recorded as unearned income and are amortized  into income over the life of the contract. UBS had unearned revenue recorded  in Regulatory and Other Liabilities on the Consolidated Balance Sheet totaling  $1.7 million and $2.1 million as of September 30, 2003 and 2002, respectively,  related to these contracts. OAS offers maintenance agreements that are  recorded as unearned income and are amortized into income over the lives of  the agreements. OAS had unearned revenue recorded in Regulatory and Other  Liabilities on the Consolidated Balance Sheet totaling $0.2 million and $0.1  million as of September 30, 2003 and 2002, respectively, related to these  agreements.

Appliance services: Our appliance business revenues are recognized  at the time repairs and installations are performed.  Our New Jersey  appliance business offers services contracts that cover the costs of repairs  for covered appliances.  These contracts are deferred as unearned revenue  at contract inception and are amortized into income ratably over a period of  twelve months.  Our appliance services subsidiary had unearned revenue  recorded in Accounts Payable, Customer Deposits and Accrued Liabilities on the  Consolidated Balance Sheet totaling $1.5 million and $1.6 million as of  September 30, 2003 and 2002, respectively, related to these contracts.   In addition, our Florida appliance business provides leasing for gas  appliances.  Leasing revenues are recognized on a monthly basis as billed  to customers according to the terms of the customer's contract.

*Regulation.*  NUI is a holding company and is exempt from  registration under the Public Utility Holding Company Act of 1935.  NUI's  wholly owned subsidiary, NUI Utilities, is subject to regulation as an  operating utility by the public utility commissions of the states in which it  operates. Certain subsidiaries of VGC are regulated by the Virginia State  Corporation Commission.

SSLLC is subject to regulation by the Federal Energy Regulatory Commission.

*Property, Plant and Equipment.*  Property, plant and equipment  include both utility plant and non-regulated assets.  Utility plant is  stated at its original cost.  Depreciation is provided on a straight-line  basis over the remaining estimated lives of depreciable property by applying  rates as approved by the state commissions.  The composite average annual  depreciation rate was3percent in each of fiscal years 2003, 2002 and  2001.  At the time properties are retired, the original cost plus the  cost of retirement, less salvage, is charged to accumulated  depreciation.  Repairs of all utility plant and replacements and renewals  of minor items of property are charged to maintenance expense as  incurred.  Non-regulated equipment consists primarily of information  technology assets and furniture and fixtures.  These assets are recorded  at original cost and are depreciated on a straight-line basis over a period  ranging from 3-10 years.  The company accounts for its investments in  computer software in accordance with Statement of Position 98-1,  "Accounting for the Costs of Computer Software Developed or Obtained for  Internal Use."

The net unamortized plant acquisition adjustments represent the remaining  portion of the excess of the purchase price over the book value of utility net  assets acquired.  The excess is being amortized on a straight-line basis  over 30 years from the date of acquisition.  The results of operations of  acquired entities have been included in the accompanying consolidated  financial statements for the periods subsequent to their acquisition.

During August 2002, the company completed a sale/leaseback transaction for  a capital lease that is collateralized by approximately $9 million of meters  by its City Gas Company of Florida subsidiary.

*Operating Revenues and Purchased Gas and Fuel Costs. *Operating  revenues include accrued unbilled revenues through the end of each accounting  period.  Operating revenues also reflect adjustments attributable to  weather normalization clauses that are accrued during the winter heating  season and billed or credited to customers in the following year.

Costs of purchased gas and fuel for the company's regulated utilities are  recognized as expenses in accordance with the purchased gas adjustment clause  applicable in each state.  Such clauses provide for periodic  reconciliations of actual recoverable gas costs and the estimated amounts that  have been billed to customers. Under- or over-recoveries are deferred when  they arise and are recovered from or refunded to customers in subsequent  periods.

The company's NUI Energy Brokers subsidiary marks-to-market through the  income statement all trading positions, including forward sales and purchase  commitments for energy-related contracts that meet the definition of a  derivative under SFAS 133 (See Note 18 for a further description of the  company's use of derivative financial instruments).  This subsidiary  records operating revenues net of purchased gas costs in accordance with the  provisions of EITF 02-03 (see "New Accounting Standards" for further  discussion of EITF 02-03).

*Environmental Reserve.*  The company, with the aid of  environmental consultants, regularly assesses the potential future costs  associated with conducting investigative activities at each of the company's  sites and implementing appropriate remedial actions, as well as the likelihood  of whether such actions will be necessary.  The company records on an  undiscounted basis a reserve if it is probable that a liability will be  incurred and the amount of the liability can be reasonably estimated.

*Stock Compensation.*  The company measures compensation cost for  stock-based compensation plans using the intrinsic value method of accounting  as prescribed in Accounting Principles Board Opinion No. 25, "Accounting  for Stock Issued to Employees," and related interpretations.  The  company has adopted those provisions of Statement of Financial Accounting  Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS  123) and Statement of Financial Accounting Standards No. 148, "Accounting  for Stock-Based Compensation - Transition and Disclosure" (SFAS 148),  which require disclosure of the pro forma effects on net earnings and earnings  per share as if compensation cost had been recognized based upon the fair  value-based method at the date of grant for options awarded.  See Note 15  for additional information on the company's stock option plans and pro forma  disclosures required by SFAS 123 and SFAS 148.

*Income Taxes.*  The company accounts for income taxes in  accordance with Statement of Financial Accounting Standards No. 109,  "Accounting for Income Taxes," which requires the liability method  to be used to account for deferred income taxes.  Under this method,  deferred income taxes related to tax and accounting basis differences are  recognized at the statutory income tax rates in effect when the tax is  expected to be paid.

Investment tax credits, which were generated principally in connection with  additions to utility plant made prior to January 1, 1986, are being amortized  over the estimated service lives of the properties that gave rise to the  credits.

*Cash Equivalents.*  Cash equivalents consist of a money market  account that invests in securities with original maturities of three months or  less.

*Notes Receivable from Saltville Gas Storage Company, LLC.*   Notes receivable from SSLLC represent amounts advanced in conjunction with the  December 1, 2002 revolving credit note between NUISS and SSLLC.  The  agreement provides SSLLC with the ability to draw up to $30 million, including  accrued and unpaid interest, to fund capital expenditures and operating costs  related to the development of a salt cavern storage facility owned by SSLLC.   Interest is to be paid to NUISS quarterly in arrears at a rate equal to LIBOR  plus 3 percent but, for the first three years of the note, such interest will  be added to the principal and, thereafter paid in cash.  All unpaid  principal and interest is due in full on January 1, 2008.  In fiscal year  2004, the maximum amount that SSLLC can draw on the revolving credit note is  $10 million due to a restriction in NUI's current credit facility.  As of  September 30, 2003, the amount payable by SSLLC under the agreement was  approximately $17.6 million.

*Goodwill*.  NUI records goodwill on purchase transactions,  representing the excess of acquisition cost over the fair value of net assets  acquired. In testing for goodwill impairment under Statement of Financial  Accounting Standards (SFAS) 142 "Goodwill and Other Intangible  Assets," significant reliance is placed upon a number of estimates  regarding future performance that require broad assumptions and significant  judgment by management. A change in the fair value of the company's  investments could cause a significant change in the carrying value of  goodwill. The assumptions used to measure the fair value of our investments  are the same as those used by us to prepare yearly operating segment and  consolidated earnings and cash flow forecasts. In addition, these assumptions  are used to set yearly budgetary guidelines.

As of September 30, 2003, NUI has $8.1 million of goodwill on its  Consolidated Balance Sheet, all of which is recorded at VGC. As permitted  under SFAS 142, the company can rely on its previous valuations for the annual  impairment testing provided that the following criteria are met: (a) the  assets and liabilities of VGC have not changed significantly since the most  recent fair value determination; and (b) the most recent fair value  determination resulted in an amount that exceeded the carrying amount by a  substantial margin and there is no economic indication that the carrying value  of goodwill may be impaired. In the case of VGC, the above criteria have been  met and therefore, there was no impairment to goodwill in fiscal 2003.

In determining the fair value for its investment in VGC, an income  valuation and discounted cash flow valuation approach was used to estimate the  fair market value for VGC. Under the income valuation approach, the fair value  of a company is obtained by discounting the sum of (i) the expected future  cash flows of the company; and (ii) the terminal value of a company. The  discount factor used in the discounted cash flow calculation is the company's  weighted-average cost of capital. NUI was required to make certain significant  assumptions in the income approach, specifically the weighted-average cost of  capital, short and long-term growth rates and expected future cash  flows. 

As a result of the valuation performed by the company, management has  determined that the fair value of the assets of VGC adequately exceeds their  carrying value and no impairment charge is necessary as of September 30, 2003.  Management will continue to evaluate the related carrying value of its  goodwill at least annually. While we believe that our valuation is reasonable,  actual results may differ from our projections.  See Note 9 for further  discussion of the company's goodwill.

*Net Income (Loss) Per Share of Common Stock.*  Basic net income  (loss) per share is computed by dividing net income (loss) by the  weighted-average number of shares outstanding. Diluted net income (loss) per  share includes the dilutive effect of stock options.  See Note 13 for  calculation of per share amounts.

*Regulatory Assets and Liabilities.*  The company's utility  operations follow the accounting for regulated enterprises prescribed by  Statement of Financial Accounting Standards No. 71, "Accounting for the  Effects of Certain Types of Regulation" (SFAS 71).  In general, SFAS  71 requires deferral of certain costs and obligations, based upon orders  received from regulators, to be recovered from or refunded to customers in  future periods.  The following represents the company's regulatory assets  and liabilities deferred in the accompanying consolidated balance sheet as of  September 30, 2003 and 2002 (in thousands):

**2003**

**2002**

**Regulatory Assets**

Environmental investigation and remediation costs

$36,445

$36,425

Post-retirement and other employee benefits

6,081

6,783

Deferred piping allowances

526

712

Energy conservation programs

2,437

--

Under-recovered gas costs

    6,117

  25,785

Other

    5,434

    6,141

$57,040

$75,846
         
 
**2003**

**2002**

**Regulatory Liabilities**

Refunds to customers

$21,000

$     ---

Over-collection of income taxes

5,182

4,644

Utility hedging derivatives

5,382

5,565

Market development fund

2,152

2,083

Asset retirement obligations

1,366

---

Other

    1,721

       885

$36,803

$13,177

Substantially all of these regulatory assets and liabilities have been  authorized by state regulators to be recovered in rates. In New Jersey,  environmental investigation and remediation costs are recovered through a  Remediation Adjustment Clause (see Note 22) and include the carrying costs on  unrecovered amounts not currently in rates. In the event that the provisions  of SFAS 71 were no longer applicable, the company would recognize a write-off  of net regulatory assets (regulatory assets less regulatory liabilities) that  would result in a charge to net income, which would be classified as an  extraordinary item.  However, although the gas distribution industry is  becoming increasingly competitive, the company's utility operations continue  to recover their costs through cost-based rates established by the public  utility commissions.  As a result, the company believes that the  accounting prescribed under SFAS 71 remains appropriate. 

On March 20, 2003, the New Jersey Board of Public Utilities (NJBPU)  announced the initiation of a focused audit of NUI Corporation, NUI Utilities  and Elizabethtown Gas.  The final audit report was issued on March 1,  2004 and was accepted and released by the NJBPU on March 17, 2004.  As  discussed in Note 22, the company entered into a settlement agreement with the  NJBPU on April 14, 2004.  As of September 30, 2003, NUI Utilities  has recorded a pre-tax charge of $30.0 million for the final settlement of the  focused audit, of which $28.0 million was recorded as a regulatory liability  to be refunded over a five year period to customers in New Jersey, and $2.0  million was recorded by NUI Corporation as a penalty to the State of New  Jersey.  The future amounts to be refunded to customers by fixed year is  as follows (in thousands):

2004

$7,000

2005

6,000

2006

5,000

2007

5,000

2008

    5,000

Total refunds to customers

28,000

Portion included in accounts payable,             customer deposits and accrued liabilities

                                           (7,000)

Regulatory liability for customer refunds

$21,000

The company has established a pre-tax reserve of $2.6 million in  anticipation of a similar settlement with the Florida Public Service  Commission.

In August 2001, the Financial Accounting Standards Board (FASB) issued  Statement of Financial Accounting Standards No. 143, "Accounting for  Asset Retirement Obligations" (SFAS 143).  This statement  establishes accounting standards for recognition and measurement of  liabilities for asset retirement obligations and the associated asset  retirement costs.  On October 1, 2002, the company adopted the provisions  of SFAS 143.  On that date, the company had no quantifiable legal  liabilities, as contemplated under SFAS 143, and therefore the effect of  adoption did not result in an adjustment to the Consolidated Statements of  Income.  The company uses the composite depreciation method for its  regulated utility operations, which is currently an acceptable method of  accounting under generally accepted accounting principles and is widely used  in the energy, transportation and telecommunications industries.   Historically, under the composite depreciation method, the anticipated costs  of removing assets upon retirement are provided for over the life of those  assets as a component of depreciation expense.  However, SFAS 143  precludes the recognition of expected future costs of removal as a component  of depreciation expense unless they are legal obligations under SFAS  143.  The company recovers certain asset retirement costs through rates  charged to customers as an approved component of depreciation expense.   As of October 1, 2002, the company identified $1.3 million of amounts of net  cost of removal within accumulated depreciation and reclassified this amount  to a regulatory liability.  In accordance with SFAS 71, the company  continues to accrue for the future cost of removal for its regulated utility  operations.  During fiscal 2003, the company accrued an additional $0.1  million of regulatory liabilities toward the cost of future removals.

*New Accounting Standards. *During fiscal 2001, the company  adopted Statement of Financial Accounting Standards No. 133, "Accounting  for Derivative Instruments and Hedging Activities" (SFAS 133). SFAS 133  was issued in June 1998 and establishes accounting and reporting standards  regarding derivative instruments. SFAS 133 requires that all derivative  instruments be recorded on the balance sheet at their fair value as either an  asset or liability, and that changes in the fair value be recognized currently  in earnings unless certain criteria are met.  The adoption of SFAS 133  did not have a material impact on the company's financial position or net  income.

During fiscal 2001, the company adopted Statement of Financial Accounting  Standards No. 141, "Business Combinations" (SFAS 141). SFAS 141  applies to business combinations occurring after June 30, 2001 and requires  that the purchase method of accounting be used and includes guidance on the  initial recognition and measurement of goodwill and other intangible  assets.  The company's acquisitions of Norcom, Inc. (Note 6) and Telcorp,  Inc. (Note 7) were accounted for under SFAS 141.

During fiscal 2002, the company adopted Statement of Financial Accounting  Standards No. 144, "Accounting for Impairment and Disposal of Long-lived  Assets" (SFAS 144). SFAS 144 supersedes SFAS 121 and the provisions of  APB Opinion No. 30, "Reporting the Results of Operations-Reporting the  Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and  Infrequently Occurring Events and Transactions" with regard to reporting  the effects of a disposal of a segment of a business. SFAS 144 establishes a  single accounting model for assets to be disposed of by sale and addresses  several SFAS 121 implementation issues. As a result of the adoption of this  standard, the company has classified the operating results of certain  subsidiaries to be disposed of as "Discontinued Operations" in the  Consolidated Statements of Income; assets and liabilities of certain  subsidiaries to be disposed of as "Held for Sale" in the  Consolidated Balance Sheets; and "Net Cash Provided by (used in)  Discontinued Operations" in the Consolidated Statements of Cash  Flows.  See further discussion of the subsidiaries being disposed of in  Note 11.

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 02-03 is to address certain issues related  to energy trading activities, including (a) gross versus net presentation in  the income statement, (b) whether the initial fair value of an energy  trading contract can be other than the price at which it was exchanged (i.e.,  whether there is any profit at inception), and (c) additional disclosure  requirements for energy trading activities.  On October 25, 2002, the  EITF reached a consensus on EITF 02-03 that changes the accounting for certain  energy contracts.  The main provisions of EITF 02-03 are as follows:

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

-       The consensus applies immediately to  non-derivative energy-related contracts executed after October 25, 2002.

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

-       The EITF indicated that an entity  should not record unrealized gains or losses at the inception of derivative  contracts unless the fair value of each contract in its entirety is evidenced  by quoted market prices or other current market transactions for contracts  with similar terms and counterparties.

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

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

The primary contracts affected as a result of applying the new consensus  are the full requirements natural gas sales contracts associated with NUI  Energy and a large natural gas storage contract within NUI Energy  Brokers.  However, the majority of NUI Energy Brokers' contracts are  considered derivatives under SFAS 133 and continue to be marked-to-market  through earnings.  The cumulative effect adjustment to convert the  contracts that did not meet the definition of a derivative under SFAS 133 to  accrual accounting effective on January 1, 2003 was a loss of approximately  $9.9 million before taxes.

Additionally, in accordance with one of the provisions of EITF 02-03, the  company has recorded the margins earned under the previous accounting guidance  of EITF 98-10 by both NUI Energy Brokers and NUI Energy on a net basis in  operating revenue.  In previous periods, both NUI Energy Brokers and NUI  Energy included both the cost of purchased gas and the operating margin earned  for all physical transactions within operating revenues on the Consolidated  Statement of Income.  For financial trades such as futures, options and  swap transactions, NUI Energy Brokers and NUI Energy had historically recorded  only the operating margin component, but within the purchased gas and fuel  line item on the Consolidated Income Statement.  The adoption of  net-basis reporting has no effect on these transactions or cash flows other  than to reclassify and present total margins earned within the operating  revenues line item on the Consolidated Statement of Income.  In  accordance with EITF 02-03, all prior periods have been reclassified to  conform to this presentation.  As a result of net-basis reporting, NUI  reduced previously reported 2002 and 2001 operating revenues and purchased gas  and fuel, by $425.8 million and $578.7 million, respectively, with no changes  to total operating margins.

In June 2002, the FASB issued Statement of Financial Accounting Standards  No. 146, "Accounting for Costs Associated with Exit or Disposal  Activities" (SFAS 146).  This statement is effective for exit or  disposal activities initiated after December 31, 2002.  The company now  applies SFAS 146 for exit and disposal activities.

In November 2002, the FASB issued FASB Interpretation No. 45,  "Guarantor's Accounting and Disclosure Requirements for Guarantees,  Including Indirect Guarantees of Indebtedness of Others" (FIN 45). FIN 45  elaborates on the disclosures to be made by a guarantor in its interim and  annual financial statements about its obligations under certain guarantees  that it has issued.  It also requires a guarantor to recognize, at the  inception of a guarantee, a liability for the fair value of the obligation  undertaken in issuing the guarantee.  The initial recognition and  measurement provisions of FIN 45 apply to guarantees issued or modified after  December 31, 2002.  The company has included these disclosures under  "Guarantees" in Note 22.

In December 2002, the FASB issued Statement of Financial Accounting  Standards No. 148, "Accounting for Stock-Based Compensation-Transition  and Disclosure" (SFAS 148).  This statement amends Statement of  Financial Accounting Standards No. 123, "Accounting for Stock-Based  Compensation," to provide alternative methods of transition for an entity  that voluntarily changes to a fair value based method of accounting for  stock-based employee compensation and amends disclosure provisions of that  Statement to require prominent disclosure about the effects on reported net  income of an entity's accounting policy decisions with respect to such  compensation.  The company continues to account for stock-based  compensation in accordance with Accounting Principles Board Opinion No. 25 and  has provided the disclosures required in Note 15.

In January 2003, the FASB issued FASB Interpretation No. 46,  "Consolidation of Variable Interest Entities" (FIN 46) and in  December 2003, issued a revised FIN 46R.  The objective of both FIN 46  and FIN 46R is to improve financial reporting by companies involved with  variable interest entities.  A variable interest entity is a corporation,  partnership, trust or any other legal structure used for business purposes  that either (a) does not have equity investors with voting rights, or (b) has  equity investors that do not provide sufficient financial resources for the  entity to support its activities.  Historically, entities generally were  not consolidated unless the entity was controlled through voting  interests.  FIN 46 changes that, by requiring a variable interest entity  to be consolidated by a company if that company is subject to a majority of  the risk of loss from the variable interest entity's activities or entitled to  receive a majority of the entity's residual returns or both.  A company  that consolidates a variable interest entity is called the "primary  beneficiary" of that entity.  FIN 46 also requires disclosures about  variable interest entities that a company is not required to consolidate but  in which it has a significant variable interest.  The consolidation  requirements of FIN 46 apply immediately to variable interest entities created  after January 31, 2003.  The consolidation requirements of FIN 46R apply  to existing entities no later than the end of the first reporting period after  March 15, 2004.  Also, certain disclosure requirements apply to all  financial statements issued after January 31, 2003, regardless of when  the variable interest entity was established.  The company has determined  that it does not meet the consolidation requirements with respect to its joint  venture with Duke Energy.  In addition, the company has not created or  obtained any variable interest entities after January 31, 2003. Therefore, the  adoption of the consolidation requirements of FIN 46R in March 2004 did not  have an impact on the company's financial position or results of operations.

In April 2003, the FASB issued Statement of Financial Accounting Standards  No. 149, "Amendment of Statement 133 on Derivative Instruments and  Hedging Activities" (SFAS 149).  This statement amends and clarifies  financial accounting and reporting for derivative instruments, including  certain derivative instruments embedded in other contracts and hedging  activities under SFAS 133.  This statement is effective for contracts  entered into or modified after June 30, 2003.  The adoption of this  statement had no impact on the company's net income or financial position.

In May 2003, the FASB issued Statement of Financial Accounting Standards  No. 150, "Accounting for Certain Financial Instruments with  Characteristics of both Liabilities and Equity" (SFAS 150).  This  statement establishes standards for how an issuer classifies and measures  certain financial instruments with characteristics of both liabilities and  equity.  The standard requires that an issuer classify a financial  instrument that is within its scope as a liability (or an asset in some  circumstances).  Many of these instruments were previously classified as  equity.  The standard also revises the definition of liabilities to  encompass certain obligations that an entity can or must settle by issuing its  own shares, depending on the nature of the relationship established between  the holder and the entity.  This statement is effective for financial  instruments entered into or modified after May 31, 2003 and otherwise is  effective at the beginning of the first interim period beginning after June  15, 2003.  The adoption of this statement had no impact on the company's  net income or financial position.

**2.              NUI Liquidity Issues**

As a result of various factors, NUI and NUI Utilities have experienced and  expect to continue experiencing significant liquidity problems.   Liquidity needs for NUI Utilities generally are driven by factors that  include: prepayments for its natural gas requirements; natural gas commodity  prices; the impact of weather on customer bills; lags in fully collecting gas  costs from customers under the Basic Gas Supply Service (BGSS) charge; both  discretionary and required repayments of short- and long-term debt; capital  spending; and working capital requirements, such as administrative expenses  and taxes.  Liquidity needs at NUI's non-utility operations generally are  driven by required repayments of short-term debt and working capital  requirements.

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

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

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

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

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

As noted above, based upon current anticipated cash flows, the company  believes it will have sufficient liquidity to meet its financial obligations  through the end of fiscal year ending September 30, 2004 and the company also  believes it will remain in compliance with all covenants under its various  debt agreements for the remainder of the year ending September 30, 2004 (see  Notes 14 and 16 for further discussion on debt covenants).  The company  plans to address its liquidity concerns by: successfully completing the sale  of the company; extending its existing credit facilities beyond the current  termination date of November 22, 2004; and obtaining additional financing to  ensure NUI Utilities' ability to, among other things, meet its gas purchase  prepayment requirements under its natural gas asset management contract with  Cinergy.  If the company is unsuccessful in its efforts to effectively  resolve its liquidity concerns, it may need to reorganize its operations and  restructure its credit and debt financing.

**3.              Purchase of Virginia Gas Company**

On March 28, 2001, the company completed its acquisition of Virginia Gas  Company (VGC).  The acquisition was treated as a merger whereby VGC  became a wholly owned subsidiary of NUI.  The purchase price totaled $29  million and included the issuance of 792,600 shares of NUI common stock, with  the remainder paid in cash.  VGC is a natural gas storage, pipeline, and  distribution company, which operates in a region of the nation that has  experienced a rapidly growing demand for natural gas and power generation.

The acquisition was accounted for as a purchase.  The excess of the  purchase price over the fair value of the net assets of VGC was approximately  $8.1 million.  Until October 1, 2001, this goodwill was being amortized  on a straight-line basis over a 30-year period (see Note 9). 

At the time VGC was acquired, it had two 50 percent owned subsidiaries,  Virginia Gas Storage Company (VGSC) and Virginia Gas Distribution Company (VGDC).   On October 4, 2001, the company completed its acquisition of the remaining 50  percent interests in VGSC and VGDC from the two individuals that each owned 25  percent of the stock of both companies.  Under terms of the agreements  entered into with those two individuals in June 2001, the company paid each  owner $750,000 and issued to each owner 72,324 shares of NUI Common Stock in  exchange for the owner's stock in both VGSC and VGDC.  The acquisition  was accounted for as a purchase.  The fair value of the net assets was  equal to the purchase price.

On October 11, 2001, the company sold the capital stock of Virginia Gas  Propane Company, a subsidiary of VGC, to Heritage Holdings, Inc. The sales  price was approximately $3.8 million.

On March 1, 2002, the company sold the capital stock of Virginia Gas  Exploration Company and Virginia Gas Marketing, subsidiaries of VGC, to  Appalachian Energy, Inc.  The sales price was approximately $0.8 million.

**4.              Acquisition of TIC Enterprises, LLC**

Since 1997, the company held a 49 percent equity interest in TIC  Enterprises, LLC (TIC).  On May 15, 2001, the company acquired the  remaining 51 percent of TIC which it did not previously own.  NUI paid  the majority owner $5 million in cash and assumed the outstanding debt of TIC,  and TIC issued a $3 million note payable (see Note 8) to the majority  owner.  The acquisition was accounted for as a purchase.  The excess  of the aggregate purchase price paid by NUI for this additional 51 percent  interest in TIC over the fair value of the net assets acquired was  approximately $17.7 million, which added to the unamortized goodwill of $16.4  million from the initial purchase and was being amortized on a straight-line  basis over a 25-year period through October 1, 2001 (see Note 9).   In connection with the acquisition, the company recorded a $1.5 million  liability for involuntary separations and restructuring costs which was  subsequently paid during fiscal 2001.

In conjunction with the company's plans to sell NUI Telecom, the company is  winding down the operations of TIC (see Note 11).

**5.              Sale of NUI Energy Contracts**

On May 23, 2003 and on June 25, 2003, the company sold certain contracts of  its NUI Energy subsidiary to Houston Energy Services Company, LLC (HESCO) and  to Amerada Hess Corporation, respectively.  The sales included  approximately 2,900 customer accounts, primarily in New Jersey, Florida, North  Carolina and Pennsylvania.  In conjunction with the sales of these  accounts, the company paid approximately $3.5 million to HESCO and  approximately $0.3 million to Amerada Hess, which were recorded as charges to  operations and maintenance expense, to relieve all future liabilities  associated with these gas supply contracts.

**6.              Acquisition of Norcom, Inc.**

On March 22, 2002, the company entered into an agreement to acquire certain  assets of Norcom, Inc. (Norcom), including 4,000 customer accounts.  The  agreement provided for NUI Telecom to assume management control of Norcom as  of March 1, 2002.  Norcom contributed $8.3 million of operating revenues  and $0.6 million of operating income from that date through September 30,  2002.  Norcom contributed $15.5 million of operating revenues and $1.7  million of operating income during the fiscal year ended September 30,  2003.  Norcom is a provider of telecommunications services in the  Northeast and Southeast regions of the United States, and its customer  accounts were combined with the company's NUI Telecom subsidiary. 

On August 28, 2002, the company completed the transaction, subject to  post-closing adjustments.  The purchase price totaled approximately $4.3  million and included the issuance of 216,039 shares of NUI common stock.

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

Cash

$   653

Accounts receivable

1,166

Equipment

7

Intangible assets

2,160

Goodwill

  2,402

  Total assets acquired

  6,388

Current liabilities

  2,048

  Total liabilities assumed

  2,048

  Net assets acquired

$4,340

In June 2003, the company announced that it was pursuing the sale of NUI  Telecom.  As a result, the acquired intangible assets related to customer  relationships, which were being amortized over a 7-year period, and the  goodwill were written-off during fiscal 2003 and have been included in  discontinued operations (see Notes 9, 10 and 11).

**7.              Acquisition of Telcorp, Inc.**

On May 31, 2002, the company entered into an agreement to acquire certain  assets of Telcorp, Ltd. (Telcorp).  In addition, the company entered into  a letter agreement with Telcorp, under which NUI Telecom assumed management  control of the business effective April 1, 2002.  Telcorp contributed  $3.4 million of operating revenues and $1.4 million of operating income from  that date through September 30, 2002.  Telcorp contributed $7.0 million  of operating revenues and $1.9 million of operating income for the fiscal year  ended September 30, 2003.

On September 1, 2002, the company completed its acquisition of Telcorp,  subject to post-closing adjustments. The purchase price totaled approximately  $7.2 million.

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

Accounts Receivable

$    832

Equipment

     10

Intangible assets

3,060

Goodwill

  4,172

  Total assets acquired

  8,074

Current liabilities

     832

  Total liabilities assumed

     832

  Net assets acquired

$7,242

In June 2003, the company announced that it was pursuing the sale of NUI  Telecom.  As a result, the acquired intangible assets related to customer  relationships, which were being amortized over a 10-year period, and the  goodwill were written-off during fiscal 2003 and have been included in  discontinued operations (see Notes 9, 10 and 11).

**8.              Note Payable**

Under terms of an LLC Interest Purchase Agreement dated May 8, 2001, notes  payable represents an unsecured promissory note held by the former owner of  TIC (the plaintiff) in conjunction with the company's acquisition of the  remaining equity interest of TIC on May 15, 2001.  The note, which bears  interest at 7 percent per annum, was payable on the maturity date of January  2, 2002.

On January 11, 2002, TIC notified the plaintiff that it had offsetting  claims against the note obligation under the LLC Interest Purchase Agreement.

On April 4, 2002, the plaintiff filed suit against NUI and TIC to collect  on the note.  On May 2, 2004, NUI proposed a settlement to the plaintiff  in which the company agreed to pay the plaintiff $1.4 million to completely  satisfy NUI's obligation under the note, as well as to resolve all other  claims that the company and the plaintiff had brought against each  other.  On May 5, 2004, NUI received the plaintiff's written acceptance  of the company's settlement proposal, and the plaintiff requested that NUI  prepare the appropriate settlement documents for review.  As a result,  the company reduced the amount payable under the note from $3.0 million to  $1.4 million on the September 30, 2003 Consolidated Balance Sheet, and  recorded a gain of $1.6 million in other income on the Consolidated Statement  of Income for fiscal 2003.

**9.              Goodwill**

The excess of the cost over the fair value of net assets of acquired  businesses is recorded as goodwill.  On October 1, 2001, the company  adopted Statement of Financial Accounting Standards No. 142, "Goodwill  and Intangible Assets" (SFAS 142).  The carrying value of goodwill  for each of the company's subsidiaries is no longer subject to amortization,  but must be tested for impairment annually or earlier under certain  circumstances.  Implementation of this accounting pronouncement required  the company to perform a fair value assessment to determine if the fair value  of its subsidiaries with goodwill exceeded their carrying amounts.   During the first quarter of fiscal 2002, the company completed its fair value  assessment of the subsidiaries that meet the requirements of SFAS 142.   Using the present value of expected future cash flows to determine the fair  value of its subsidiaries, the company recognized a transitional goodwill  impairment loss of approximately $27.1 million related to the carrying value  of the goodwill for its TIC subsidiary.  A goodwill impairment adjustment  for the fair market valuations of NUI Telecom and VGC was not necessary.

In conjunction with the adoption of SFAS 142, the company identified $2.2  million of intangible assets from its acquisition of VGC, which had been  originally recorded as goodwill.  These intangible assets relate to the  development rights of the property acquired in March 2001, and are being  amortized over a 30-year period (see Note 10).

In fiscal 2003, the company paid a post-closing adjustment of approximately  $3.8 million to complete its acquisition of Telcorp, which was recorded in  goodwill, and made other purchase accounting adjustments to goodwill of  approximately $0.2 million related to Telcorp and Norcom.  In June 2003  all of the Telcorp and Norcom goodwill, totaling approximately $6.6 million  (including the amounts referred to above), was written off after the company  announced it was pursuing the sale of NUI Telecom.

During June 2003, the company approved a plan to sell its NUI Telecom  subsidiary, at which time the company began to actively seek a buyer. In  conjunction with the decision, the company recorded impairment losses of  approximately $15.0 million to write-off the remaining goodwill of its NUI  Telecom and TIC subsidiaries.

The changes in the carrying amount of goodwill (net of amortization) for  the year ended September 30, 2003, are as follows (in thousands):

**NUI Telecom**

**NUIVirginia Gas**

**TIC        Enterprises**

**Total**

Balance at September 30, 2001

$4,982

$10,256

$34,271

$49,509

Reclassification to intangible assets

---

(2,200)

(159)

(2,359)

Additional goodwill during the period

2,603

---

---

2,603

Transitional impairment loss

---

---

(27,142)

(27,142)

Amounts written-off

         ---

        ---

  (3,485)

   (3,485)

Balance as of September 30, 2002

$  7,585

$ 8,056

$ 3,485

$19,126

Additional goodwill during the period

     3,971   

---

---

      3,971

Amounts written-off

(11,556)

        ---

  (3,485)

(15,041)

Balance as of September 30, 2003

$       ---

*   *$ 8,056

    $             ---

    $ 8,056

The following table sets forth the effect of SFAS 142 for the fiscal years  ended September 30 (in thousands, except per share amounts):

**       2003**

**       2002**

**       2001**

Reported net income (loss)

$(45,149)

$(15,888)

$16,313

Add back: Goodwill amortization

              ---

              ---

    1,795

Adjusted net income

$(45,149)

$(15,888)

    $18,108

 

 

 

**Basic and Diluted Earnings per Share:**

 

 

 

Reported net income (loss)

       $(2.82)

      $(1.06)

   $1.22

Goodwill amortization

              ---

              ---

          0.13

Adjusted net income

       $(2.82)

      $(1.06)

         $1.35

** 10.          Acquired  Intangible Assets**

The company has approximately $2.1 million of acquired intangible assets  for development rights held by its VGC subsidiary (net of accumulated  amortization of approximately $0.1 million), which are being amortized over  thirty years and are included in Other Assets on the Consolidated Balance  Sheet at September 30, 2003. During June 2003, the company recorded a  write-down of approximately $4.8 million related to the carrying value of the  acquired intangible assets for customer relationships (which were being  amortized over a weighted average period of nine years) in conjunction with  the company's decision to sell NUI Telecom. The fair value of the acquired  intangible assets of NUI Telecom was determined using a weighted average  discounted cash flow model based on the operations of the company's  telecommunications businesses.

The aggregate amortization of the acquired intangible assets was $73,333  for both the fiscal years ended September 30, 2003 and 2002, and is included  in Depreciation and Amortization in the Consolidated Statements of  Income.  Approximately $0.5 million of amortization expense was recorded  on the intangibles of NUI Telecom and has been included in losses from  discontinued operations for the fiscal year ended September 30, 2003 (see Note  11). Estimated annual amortization is expected to be approximately $73,333 for  each fiscal year through September 30, 2008.

**11.          Discontinued  Operations and Assets and Liabilities Held for Sale**

The company has adopted the provisions of Statement of Financial Accounting  Standards No. 144, "Accounting for the Impairment or Disposal of  Long-Lived Assets" (SFAS 144).  This statement excludes from the  definition of long-lived assets acquired goodwill and other intangibles, which  are accounted for in accordance with SFAS 142. SFAS 144 requires that  long-lived assets to be disposed of by sale be measured at the lower of their  carrying amount or fair value less cost to sell, whether reported in  continuing operations or in discontinued operations. SFAS 144 also expands the  reporting of discontinued operations to include components of an entity that  have been or will be disposed of rather than limiting such discontinuance to a  segment of a business.  Accordingly, the revenues, costs and expenses,  assets, liabilities, and cash flows of certain entities NUI is disposing of  have been segregated and reported as discontinued operations for all periods  presented.

On October 5, 2000, the company agreed to sell the assets of its Valley  Cities Gas and Waverly Gas utility operations (VCW) to C&T Enterprises,  Inc. (C&T) of Pennsylvania for $15 million.  The transaction, which  closed on November 7, 2002 after all regulatory approvals were obtained, was  immaterial to the company's fiscal 2003 results.

On May 15, 2002, the company agreed to sell the assets of its North  Carolina Gas utility operation (NC) to Piedmont Natural Gas of North Carolina  for approximately $24 million after post-closing adjustments.  The  transaction closed on September 30, 2002, after all regulatory approvals had  been obtained, and, as a result, the company recorded a $1.3 million pre-tax  gain in fiscal 2002 which is included in Loss from Discontinued Operations on  the Consolidated Statement of Income.  Post-closing adjustments in 2003  reduced the gain by $0.6 million.

The amount of net assets sold in connection with these sales was  approximately $40 million.  Not included in the sales were the  liabilities associated with the environmental cleanup of certain MGP sites and  other postretirement benefit costs totaling $4.8 million (see Note 22).

In March 2002, the company approved a plan to sell its TIC Enterprises  subsidiary, at which time the company began to actively seek a buyer.   During the third quarter of fiscal 2002, TIC continued to incur operating  losses primarily as a result of the economy, the marketplace for telephone  equipment and various operational issues with the United States Postal Service  (USPS) product lines. In June 2002, the company decided to retain TIC's  profitable wireless and network service product lines and continued to seek a  buyer for the telephone equipment and USPS product lines. In accordance with  SFAS 144, during June 2002, the net assets of the wireless and network  services product lines were reclassified back to assets held and used, and  were under the management of NUI Telecom.

The company did not receive any acceptable offers for the remaining product  lines of TIC, and NUI announced on July 16, 2002, that it had ceased the  operations of its telephone equipment and USPS product lines.  In  addition, in fiscal 2002 NUI recognized a charge of approximately $8.0 million  to write-down the net assets of these two product lines to their fair value.  This charge included the write-off of approximately $3.5 million of goodwill  allocated to these product lines.

During June 2003, the company began to wind down the remaining operations  of TIC and recognized a charge of approximately $3.5 million to write-off the  remaining goodwill of TIC. 

Prior to the acquisition of TIC on May 15, 2001, the company recorded a  pre-tax equity loss of $11.7 million during the year ended September 30, 2001,  which has been included in discontinued operations.

During June 2003, the company approved a plan to sell its NUI Telecom  subsidiary, at which time the company began to actively seek a buyer. In  conjunction with the decision, the company recorded charges of approximately  $25.5 million to adjust the assets of NUI Telecom to their estimated fair  market value, and for the provision of a Federal deferred tax valuation  allowance. This charge included the write-off of approximately $11.6 million  of goodwill, and $4.8 million of acquired intangible assets.  In December  2003, NUI Telecom was sold for $2.0 million (see Note 24), which transaction  was immaterial to the company's results for the first fiscal quarter of  2004. 

During September 2002, the company approved a plan to sell its NUI  Environmental subsidiary, at which time the company began to actively seek a  buyer.  On September 3, 2003, the company closed on the sale of NUI  Environmental to Harbor Resource Management Corporation (HRMC) for one dollar  ($1), which transaction was immaterial to the company's fiscal 2003  results.  Because of a license agreement with HRMC, the operating results  of NUI Environmental have not been included within discontinued operations on  the Consolidated Statements of Income.

The revenues, margins and operating income (losses) of the company's  discontinued operations have been reported as discontinued operations on the  Consolidated Statements of Income for all periods presented, as follows,  exclusive of affiliate transactions (in thousands):

**Discontinued Operations**

**    2003**

**  2002**

**  2001**

** **

**Revenues:**

   Distribution Services

$      553

$ 22,871

$ 34,022

   Retail & Business Services

   50,358

   45,454

   22,862

      Operating Revenues

$ 50,911

$ 68,325

$ 56,884

 

 

 

**Operating Margins:**

 

 

 

   Distribution Services

 $      250

$   9,630

$ 10,332

   Retail & Business Services

  16,380

   15,227

     6,338

      Operating Margins

$ 16,630

$ 24,857

$ 16,670

** **

 

 

 

**Pre-Tax Operating Income:**

 

 

 

   Distribution Services

$      120

$   1,695

$   2,065

   Retail & Business Services

 (33,328)

 (15,407)

 (10,328)

      Pre-Tax Operating Income (Loss)

(33,208)

(13,712)

(8,263)

   Other Income (Expense)

857

(7,637)

(7,596)

   Net Interest Charges

                     4

        895

     1,419

      Pre-Tax Income (Loss) from          Discontinued Operations

$(32,355)

$(22,244)

$(17,278)

The assets and liabilities of the company's subsidiaries held for sale have  been reclassified on the Consolidated Balance Sheets for all periods  presented, as follows (in thousands):

**Assets and Liabilities Held for Sale**

**    2003**

**  2002**

 

** **

**Current Assets:**

   Distribution Services

$        ---

$   1,704

   Retail & Business Services

     7,976

     9,669

      Current Assets

$   7,976

$ 11,373

 

 

**Property, Plant & Equipment, net:**

 

 

   Distribution Services

 $        ---

$ 13,189

   Retail & Business Services

        147

     1,743

      Property, Plant & Equipment

$      147

$ 14,932

** **

 

 

**Other Assets:**

 

 

   Distribution Services

 $        ---

$      174

   Retail & Business Services

     1,002

        805

      Other Assets

$   1,002

$      979

** **

 

 

**Current Liabilities:**

 

 

   Distribution Services

 $        ---

$      556

   Retail & Business Services

     3,150

     4,049

      Current Liabilities

$   3,150

$   4,605

** **

 

 

**Other Liabilities:**

 

 

   Distribution Services

$        ---

$      395

   Retail & Business Services

                   19

                   41

      Other Liabilities

$        19

$      436
**12.          Restructuring  Charges**
In December 2001, the company commenced a reorganization effort that  resulted in workforce reductions. The reorganization efforts resulted in  accounting charges of approximately $1.2 million, primarily relating to  severance costs.  The company has paid all of the severance costs as of  September 30, 2003.

**13.          Earnings Per  Share**

The following table summarizes the company's basic and diluted earnings per  share calculations for the fiscal years ended September 30 (amounts are in  thousands, except per share amounts):

**2003**

**2002**

**2001**

 

 

 

Income (loss) from continuing operations

$(11,317)

$16,051

$27,454

Loss from discontinued operations

(27,962)

(14,297)

    (11,141)

Effect of change in accounting

    (5,870)

  (17,642)

            ---

Net income (loss)

$(45,149)

$(15,888)

$16,313

 

 

 

Weighted Average Shares Outstanding

   16,035

  14,938

 13,356

 

 

 

**Basic and Diluted Earnings (Loss) Per Share:**

 

 

 

Income (loss) from continuing operations

     $(0.71)

$ 1.08

$2.05

Loss from discontinued operations

        (1.75)

(0.96)

       (0.83)

Effect of change in accounting

  (0.36)

  (1.18)

      ---

Net income (loss)

$(2.82)

$(1.06)

 $1.22

The company's weighted average diluted shares outstanding (not shown)  includes shares which would be issuable upon the exercise of stock options  outstanding under NUI's stock option plan, which is added to weighted average  shares outstanding.  As of September 30, 2003, unvested stock options  having an exercise price less than the market value of the company's shares on  that date provided for an additional 165 shares of common stock equivalents  outstanding, which had no impact on the company's diluted earnings per  share.  There were no dilutive shares outstanding as of the end of fiscal  2002 and 2001.  The number of shares that could potentially be dilutive  to earnings per share in the future that have been excluded in the computation  of diluted earnings per share, because to do so would have been antidilutive,  are 452,100 and 996,000 shares for fiscal 2003 and 2002, respectively.

**14.          Capitalization**

*Long-Term Debt*.  NUI has outstanding $50 million 8.35 percent  medium term notes, which mature on February 1, 2005.  Included in NUI  Utilities' current credit facility is a $50 million delayed draw term loan  that can be drawn at the option of the company and used, subject to  satisfaction of the terms and conditions contained therein, to repay these  medium term notes.

On November 24, 2003, NUI repaid its $60 million senior notes with the  proceeds of its new credit facility entered into on that date.  In  conjunction with the repayment of this indebtedness, NUI paid a prepayment  premium of approximately $9.4 million to the noteholders, which was recorded  during the first quarter of fiscal 2004.

NUI Utilities is party to a series of loan agreements with the New Jersey  Economic Development Authority (NJEDA) pursuant to which the NJEDA has issued  four series of gas facilities revenue bonds:  (i) $46.5 million bonds at  6.35 percent due October 1, 2022, (ii) $39 million bonds at variable rates due  June 1, 2026 (Variable Bonds), (iii) $54.6 million bonds at 5.7 percent due  June 1, 2032 and (iv) $40 million bonds at 5.25 percent due November 1,  2033.  NUI Utilities is also party to a loan agreement pursuant to which  Brevard County, Florida (the County) has issued $20 million bonds at 6.40  percent due October 1, 2024.  In accordance with the terms of these loan  agreements, the funds received by the NJEDA or the County, as the case may be,  upon the issuance of the applicable bonds have been loaned to NUI  Utilities.  The interest rates and maturity dates under the loan  agreements parallel the interest rates and maturity dates under the  bonds.  Interest payments by NUI Utilities on the loans are used to pay  the interest on the bonds.  During fiscal 2003, NUI Utilities paid $9.9  million in interest payments on these loans. 

Approximately $2.1 million of interest earned on the original net proceeds  from the $20 million 6.4 percent revenue bonds due 2024 is unexpended and  accordingly has been classified as "Funds for Construction Held by  Trustee" on the Consolidated Balance Sheet at September 30, 2003 until  drawn upon.

The Variable Bonds contain a provision whereby the holder can  "put" the bonds back to the issuer.  In 1996, the company  executed a long-term Standby Bond Purchase Agreement (SBPA) with a syndicate  of banks, which was amended and restated on June 12, 2001.  Under the  terms of the SBPA, as further amended on June 10, 2003, July 21, 2003 and  December 4, 2003, The Bank of New York is obligated under certain  circumstances to purchase Variable Bonds that are tendered by the holders  thereof and not remarketed by the remarketing agent.  Such obligation of  the bank would remain in effect until the expiration of the SBPA on June 30,  2004, unless extended or earlier terminated. The terms of the SBPA also  restrict the payment of dividends by NUI Utilities to NUI to an amount based,  in part, on the earned surplus of NUI Utilities, which has been reduced by the  NJBPU settlement.  There is no capacity under this covenant for further  dividends at this time or in the foreseeable future, unless a waiver is  obtained from the bondholders.

If the SBPA is not further extended beyond its current expiration date of  June 30, 2004, in accordance with the terms of the Variable Bonds, all of the  Variable Bonds would be subject to mandatory tender at a purchase price of 100  percent of the principal amount, plus accrued interest, to the date of  tender.  In such case, any Variable Bonds that are not remarketable by  the remarketing agent will be purchased by The Bank of New York.

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

As of September 30, 2003, the aggregate principal and accrued interest on  the outstanding Variable Bonds totaled approximately $39.0 million.   Principal and any unpaid interest on the outstanding Variable Bonds are due on  June 1, 2026, unless the put option is exercised before that time.

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

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

Defaults may occur in the near future under the Variable Bonds, the 5.25  percent bonds and the 8.35 percent medium term notes if NUI Utilities does not  provide unaudited financial statements for NUI for the fiscal quarters ended  December 31, 2003 and March 31, 2004, and related documentation and officers'  certificates.  To date, NUI has obtained all necessary waivers and  extended the respective deadlines for delivery of all information required  pursuant to such bond facilities to June 30, 2004.  NUI and NUI Utilities  are working diligently to deliver the required documentation within this  timeframe.

The company's long-term debt maturities for each of the next five fiscal  years are as follows: zero in 2004; $50 million in 2005; $5 million in 2006;  zero in 2007; and $15 million in 2008.

*Preferred Stock.* The company has 5,000,000 shares of authorized but  unissued preferred stock. Shares of Series A Junior Participating Preferred  Stock have been reserved for possible future issuance in connection with the  company's Shareholder Rights Plan, described below.

*Shareholder Rights Plan. *The company's Board of Directors has  adopted a Shareholder Rights Plan under which shareholders of NUI common stock  were issued as a dividend one right to buy one one-hundredth of a share of  Series A Junior Participating Preferred Stock at a purchase price of $50  (Right) for each share of common stock held.  The Rights initially attach  to the shares of NUI common stock and can be exercised or transferred only if  a person or group (an Acquirer), with certain exceptions, acquired, or  commenced a tender offer to acquire, beneficial ownership of 15 percent or  more of NUI common stock. The company may redeem the Rights at $0.001 per  Right at any time prior to the occurrence of any such event. Each Right,  except those held by the Acquirer, may be used by the non-acquiring  shareholders to purchase, at the Right's exercise price, shares of NUI common  stock having a market value equivalent to twice the Right's exercise price,  thus substantially reducing the Acquirer's ownership percentage. All rights  expire on March 2, 2011.

*Common Stock.*The company periodically issues shares of common stock  in connection with NUI Direct, the company's dividend reinvestment and stock  purchase plan, and various employee benefit plans.  Effective  May 26, 1998, several of these plans commenced purchasing shares on the  open market to fulfill their requirements.  Under the terms of these  plans, the company may periodically change the method of purchasing shares  from open market purchases to purchases directly from the company, or vice  versa.

The company sold 1.725 million shares of common stock for net proceeds of  approximately $37.0 million during March 2002 under the shelf registration  statement.  The proceeds from the sale were used to pay down short-term  debt.

At September 30, 2003, shares reserved for issuance under the company's  common stock plans were: NUI Direct, 35,297; Savings and Investment Plan,  121,966; NUI Corporation Stock Option, Stock Award and Incentive Plan, as  amended and restated, 923,241; 1996 Employee Stock Purchase Plan, 189,872; and  the 1996 Director Stock Purchase Plan, 40,918.

*Stock Plans.*  The company has in effect the NUI Corporation  Stock Option, Stock Award and Incentive Plan (the Plan), which provides for  the granting of equity-based and cash incentive awards to officers and other  key employees of the company.  Under the award plan, grants of  performance-based restricted stock and stock options have been made and  targets for earning cash incentive awards have been established. Stock option  grants are more fully discussed in Note 15.  In addition to the award  plan, the company maintains the 1996 Director Stock Purchase Plan, which  provides for the purchase by members of the board of directors of shares of  common stock at a fifteen percent discount to the fair market value on the  date of purchase.

Restricted shares of stock granted as long-term compensation for executive  officers and key employees amounted to 187,800 in fiscal 2003, 115,450 in  fiscal 2002, and 91,350 in fiscal 2001. As of September 30, 2003, a total of  136,980 shares of restricted stock that have been granted as long-term  compensation are subject to future vesting requirements, and are restricted  from resale.

*Dividend Restrictions.* NUI's and NUI Utilities' debt agreements  include, among other things, restrictions as to the payment of cash dividends.  With respect to NUI Utilities, the payment of cash dividends by NUI Utilities  to NUI is restricted pursuant to the Standby Bond Purchase  Agreement to an amount based, in part, on the earned surplus of NUI  Utilities, which has been reduced by the NJBPU settlement.  As a result  of this restriction, there is no capacity for further dividend payments by NUI  Utilities at this time or in the foreseeable future, unless a waiver is  obtained from the bondholders. In addition, under the amendment to NUI  Utilities' credit facility dated as of May 10, 2004, NUI Utilities is  prohibited from paying dividends exceeding $35 million in the  aggregate while the credit facility is outstanding.

With respect to NUI, under the amendment to NUI's credit facility, dated as  of May 10, 2004, NUI is prohibited from paying any cash dividends during any  fiscal quarter in which NUI's consolidated total debt represents more than 60  percent of its total capitalization, measured (i) at the last day of  the immediately preceding fiscal quarter and (ii) pro forma at the time such  dividend is made. As a result of these restrictions, NUI is prohibited  from paying any dividends at this time or in the foreseeable future.   Under NUI's credit facility, NUI is also prohibited from paying dividends  exceeding $20 million in the aggregate while the credit facility is  outstanding.

**15.          Stock Options**

Beginning in January 2002, the company may grant stock options to officers,  certain other employees, and non-employee members of the company's board of  directors to purchase shares of NUI common stock at a price equal to the  market price on the date the option is granted.  Options granted to  employees of the company generally vest over three years and have a maximum  term of 7 years.  Options granted to non-employee members of the  company's board of directors generally vest over one year and have a maximum  term of 10 years.  At September 30, 2003 and 2002, a total of 458,100,  and 1,006,500 shares, respectively, were designated for future issuance of  common stock.

Presented below is a summary of stock option activity for the years shown:

**Options Outstanding**

**Wtd Avg. Exercise         Price**

**Options Exercisable**

**Wtd Avg.        Exercise Price**

**Balance at September 30, 2001**

---

---

 

  Granted

1,006,500

$22.42

 

 

**Balance at September 30, 2002**

1,006,500

$22.42

---

N/A

  Granted

       6,000

$14.03

 

 

  Cancelled

 (554,400)

$22.39

 

 

**Balance at September 30, 2003**

  458,100

$22.36

6,000

$24.22

The following table provides additional information for the options  outstanding at September 30, 2003:

** Range of Prices**

** Number**

**Wtd Avg.         Remaining Life**

**Wtd Avg.         Exercise Price**

$10-$19

6,000

9 yrs

$14.03

$20-$29

452,100

5 yrs

$22.47

$10-$29

458,100

5 yrs

$22.36

**Pro Forma Fair Value Disclosures**

Had employee compensation expense been recognized based on the fair value  of the stock options on the grant date under the methodology prescribed by  SFAS 123, the company's net income and diluted earnings per share for the  fiscal years ended September 30, 2003 and 2002 would have been as shown in the  following table (in thousands, except for per share amounts):

**2003**

**2002**

Net loss as reported

$(45,149)

$(15,888)

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

      (1,731)

       

           (1,408)

Pro forma net loss

$(46,880)

$(17,296)

 

 

**Earnings per Share:**

 

 

Basic & Diluted-as reported

       $(2.82)

                 $(1.06)

 

 

Basic & Diluted-pro forma

          $(2.92)

           $(1.16)

The fair values of the stock options granted, which are hypothetically  amortized to compensation expense over the vesting period in determining the  pro forma impact noted above, have been estimated on the date of grant using  the Black-Scholes option-pricing model with the following weighted average  assumptions:

**2003**

**2002**

Expected life of option

        5 years

                    5 years

Risk-free interest rate

4.0 percent

4.9 percent

Expected volatility of NUI stock

     103.4 percent

     51.6 percent

Expected dividend yield on NUI stock

5.2 percent

3.8 percent

The fair value of the options granted during fiscal 2003 and 2002  determined using the Black-Scholes model is as follows (in thousands, except  for per option amount):

**2003**

**2002**

Fair value of each option granted

$8.75

$8.83

Total number of options granted

6.0

1,006.5

Total fair value of all options granted

$52.5

$8,890.8

For SFAS 123 purposes, the weighted average fair value of stock options  granted is required to be based on a theoretical option-pricing model such as  the Black-Scholes method. In actuality, because the company's employee stock  options are not traded on an exchange, employees can receive no value nor  derive any benefit from holding stock options under these plans without an  increase in the market price of NUI stock. Such an increase in stock price  benefits all stockholders commensurately.

**16.          Notes Payable  to Banks**

On February 12, 2003, each of NUI and NUI Utilities entered revolving  credit facilities that replaced their respective credit facilities.   NUI's credit facility consisted of a revolving credit facility that allowed it  to borrow up to approximately $38.1 million, and NUI Utilities' revolving  credit facilities consisted of a revolving loan and a bridge loan, which  collectively allowed NUI Utilities to borrow up to an aggregate of  approximately $141.9 million.  On June 27, 2003, the NUI Utilities  revolving loan became fully subscribed at an aggregate of $141.9 million, and  the 364-day bridge loan was terminated.  These credit agreements were  scheduled to mature on February 11, 2004, and were repaid with a portion of  the proceeds from new credit facilities NUI and NUI Utilities entered into on  November 24, 2003 (additional discussion of these new credit facilities  follows).  The February 12, 2003 credit facilities contained certain  restrictive covenants and also required NUI and NUI Utilities, respectively,  to maintain certain financial ratios.  NUI was required to maintain a  fixed charge coverage ratio of not less than 1.50x and NUI Utilities was  required to maintain a fixed charge coverage ratio of not less than  1.75x.  NUI and NUI Utilities each were to maintain leverage ratios of  not more than 0.65x from March 1 through August 31 and not more than 0.70x  from September 1 through February 28 (or 29, if applicable).

Borrowings under the credit facilities entered into on February 12, 2003,  bore interest at a rate equal to either the London Interbank Offered Rate  (LIBOR) or the Prime Rate plus, in each case, a margin based on NUI's and NUI  Utilities' credit ratings, as the case may be.  As of September 30, 2003,  the total aggregate outstanding borrowings under NUI's and NUI Utilities'  credit facilities were $164.1 million with a combined weighted average  interest rate of 3.1 percent.  On that date, NUI had outstanding  borrowings under its credit facility amounting to $31.7 million and unused  borrowing capacity amounting to $6.4 million, and NUI Utilities had  outstanding borrowings under its credit facility amounting to $132.4 million  and unused borrowing capacity amounting to $9.5 million.  Also on that  date, the company had available cash in the form of overnight investments of  approximately $23.1 million.  The weighted average daily amounts of  borrowings outstanding under NUI's credit facility and the weighted average  interest rates on those amounts were $33.9 million and $97.4 million at 3.1  percent and 3.3 percent, respectively, for the fiscal years ended September  30, 2003 and 2002, respectively.  The weighted average daily amounts  outstanding of borrowings under NUI Utilities' credit facility and the  weighted average interest rates on those amounts were $118.7 million and $66.9  million at 2.7 percent and 2.8 percent, respectively, for the fiscal years  ended September 30, 2003 and 2002, respectively.

On March 31, 2003, NUI and the banks amended NUI's 364-day credit facility  to approve the increase in interest rates under the senior notes, the  guarantees under the senior notes and the execution of the Intercreditor  Agreement, as described below.  This amendment to NUI's credit facility  also provided for a new pricing grid, which increased NUI's cost of borrowing  under the credit facility by 25 basis points (0.25 percent).

In August 2003, NUI Utilities entered into an amendment with the lenders  under its credit agreement, which among other things, permitted NUI Utilities  to obtain an additional $50 million of indebtedness, as well as to refinance  such indebtedness through certain financing transactions.  On October 10,  2003, NUI Utilities entered into a bridge loan agreement with a lender for a  credit facility that allowed it to borrow up to $50 million to fund near-term  natural gas purchases and other general working capital needs.  This  bridge loan agreement, which was scheduled to mature on February 11, 2004, was  terminated by NUI Utilities upon entering into a new credit facility on  November 24, 2003.  No amounts were ever drawn under this bridge loan  agreement.

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

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

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

NUI's current credit agreement provides for a $255 million term loan  facility.  The proceeds of the term loan facility were used (1) to repay  and terminate NUI's credit agreement which was entered into on February 12,  2003, (2) to repay NUI's outstanding $60 million senior notes and pay a $9.4  million prepayment premium relating thereto, (3) to repay approximately $85  million of an intercompany balance owed by NUI to NUI Utilities, (4) to fund a  $20.4 million interest reserve account for the benefit of the lenders under  NUI's credit agreement, and (5) for other general corporate purposes.   NUI's credit agreement bears interest at a rate, at NUI's option, equal to  either (i) LIBOR (subject to a 2 percent floor) plus 6 percent, or (ii) the  Base Rate (subject to a 3 percent floor) plus 5 percent.  The obligations  under NUI's credit agreement are guaranteed on a senior unsecured basis by  certain of NUI's direct and indirect wholly-owned subsidiaries.  NUI  Utilities and VGC do not guarantee NUI's obligations under this credit  agreement.  As of April 26, 2004, NUI had overnight cash investments of  $24.5 million.

NUI Utilities' current credit agreement provides for (i) a $50 million  revolving credit facility, (ii) a $50 million term loan facility and (iii) a  $50 million delayed draw term loan facility.  The proceeds from the  revolving credit facility and the term loan facility combined with the  proceeds from the repayment of the $85 million intercompany balance from NUI  were used (1) to repay outstanding loans under, and terminate, the NUI  Utilities credit agreement which was entered into on February 12, 2003, (2) to  pay accrued and unpaid fees under the interim credit agreement entered into on  October 10, 2003 and (3) for general corporate purposes.  The proceeds  from the delayed draw term loan facility, which can be drawn at the option of  the company, can be used solely for the purpose of repaying NUI Utilities'  8.35 percent medium term notes, which are due on February 1, 2005.  NUI  Utilities' credit agreement bears interest at a rate, at NUI Utilities'  option, equal to either (i) LIBOR (subject to a 2 percent floor) plus 5  percent, or (ii) Base Rate (subject to a 3 percent floor) plus 4  percent.  NUI Utilities has fully drawn all amounts available under the  $50 million revolver and the $50 million term loan facility.  As of April  26, 2004, NUI Utilities had overnight cash investments of $114.4 million.

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

NUI's delay in delivering audited financial statements for fiscal 2003  resulted in events of default under NUI's and NUI Utilities' respective credit  agreements.  On January 26, 2004, NUI and NUI Utilities obtained waivers  of such defaults from the lenders under their respective credit agreements,  and received an extension of the delivery date for NUI's audited financial  statements for fiscal 2003 and its 2004 first fiscal quarter unaudited  financial statements through March 1, 2004, and amended the credit agreements  to clarify certain technical provisions.  Further delays in the delivery  of these financial statements beyond the date to which NUI and NUI Utilities  had received waivers resulted in another event of default.  On March 12,  2004, NUI and NUI Utilities received a further waiver of such defaults from  the lenders and such lenders otherwise deferred their rights to exercise  remedies in respect thereof.  NUI and NUI Utilities subsequently entered  into amendments dated May 10, 2004 to their respective credit agreements  which:

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

(ii) consented to the NJBPU settlement,

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

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

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

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

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

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

**17.          Leases**

Property, plant and equipment held under capital leases amounted  to$32.1million at September 30, 2003, and $39.3 million at September 30, 2002,  with related accumulated amortization of $20.2 million and $20.0 million,  respectively. These properties consist principally of leasehold improvements,  office furniture and fixtures, vehicles and gas meters, and related equipment.  A summary of future minimum payments for properties held under capital  leases follows (in thousands):

2004

$2,711

2005

2,771

2006

1,491

2007

1,251

2008

1,125

Thereafter

  5,118

Total future minimum payments

14,467

Amount representing interest

 (2,502)

Current portion of capital lease obligations

(2,167)

   Capital lease obligations

$9,798

The company has entered into non-cancelable operating leases, which  principally relate to office space and information technology assets used in  its operations. The future minimum lease payments as of September 30, 2003 are  as follows:

2004

$6,063

2005

5,529

2006

5,576

2007

5,553

2008

5,389

Thereafter

   54,520

   Total

$82,630

Rents charged to operations expense were $10.1 million in fiscal 2003,  $11.3 million in fiscal 2002, and $9.7 million in fiscal 2001. Included in  these amounts was approximately $3.2 million of rent expense paid to a related  party (see Note 23 for further discussion). Certain of the company's office  leases contain rent escalations. The company records rent expense on a  straight-line basis over the life of these leases.

The company has entered into subleases for a portion of the office space  noted above. Amounts received from    subleases were $2.7  million in fiscal 2003, $2.8 million in fiscal 2002, and $2.6 million in  fiscal 2001. 

**18.          Financial  Instruments and Derivatives**

*Derivatives.*  Prior to discontinuing the trading operations of  NUI Energy Brokers in March 2004, NUI Energy Brokers utilized financial  instruments to provide competitive energy supplies and enhance the company's  profitability.  The company engaged in derivative activities for both  trading and non-trading purposes. Instruments utilized in connection with  trading activities are accounted for using the mark-to-market method. Under  the mark-to-market method of accounting, forwards, futures, swaps, options,  and other instruments with third parties are reflected at fair value and are  shown as "Derivative Assets and Liabilities" in the Consolidated  Balance Sheets.  Changes in the assets and liabilities from derivative  activities result primarily from changes in the valuation of the portfolio of  contracts, newly originated transactions and the timing of settlement relative  to the receipt of cash for certain contracts.

The company's utility divisions utilize certain derivatives for non-trading  purposes to hedge the impact of market fluctuations on assets, liabilities,  and other contractual commitments.  Pursuant to SFAS 133, such derivative  products are marked-to-market each reporting period.  Pursuant to  regulatory requirements, realized gains and losses related to such derivatives  are reflected in purchased gas costs and included in billings to customers.  Consequently, unrealized gains and losses are reflected as regulated assets or  liabilities as appropriate.

NUI Energy Brokers accounts for its trading activities by marking-to-market  all trading positions and calculating it's value-at-risk on a daily  basis.  The values used for these calculations include New York  Mercantile Exchange (NYMEX) settlement prices and prices from other  well-established third-party organizations, established pricing models, and  quoted market volatilities. The company manages its open positions within the  guidelines of a Risk Management Policy that limits its exposure to market  risks and requires that, among other things, any breach of policy be reported  to senior management.

Realized and unrealized gains and losses are recorded in the consolidated  statement of income under purchased gas and fuel.  At September 30, 2003,  NUI Energy Brokers had purchased and sold NYMEX futures contracts totaling  29.5 billion cubic feet of natural gas at prices ranging from $3.277 to $6.704  per thousand cubic feet, which include derivatives for the utility  divisions.  Approximately 86 percent of these contracts have a duration  of one-year or less and none of these contracts extend beyond September  2005.  The company's option contracts consisted of 553 puts and calls at  varying strike prices, none of which extend beyond August 2005.   Additionally, NUI Energy Brokers had forward purchase and sale commitments  extending through December 2007.  At September 30, 2003, NUI Energy  Brokers' forward transactions had an unrealized mark-to-market value of  approximately $4.7 million.

The company has margin collateral deposits of $9.9 million and $5.0 million  at September 30, 2003 and 2002, respectively, included within Prepayments and  Other on the Consolidated Balance Sheets.

Net realized and unrealized gains on derivative trading for fiscal 2003  totaled $17.4 million, compared to $19.6 million in 2002, which has been  included in income.

At September 30, 2003, the company had designated certain futures contracts  and physical forwards as hedging instruments.  The value of these  positions has been recorded in other comprehensive income with no  ineffectiveness recognized in earnings.

The cash flow impact of financial instruments is reflected as cash flows  from operating activities in the consolidated statement of cash flows.

The company is exposed to credit risk in the event of default or  non-performance by one of its trading partners.  The company adheres to  strict credit policies that management believes minimize overall credit  risk.  Additionally, certain trading transactions entered into under  master agreements and other arrangements provide NUI Energy Brokers with a  right of setoff in the event of bankruptcy or default by the counterparty.

*Other Financial Instruments.* The fair value of the company's cash  equivalents, funds for construction held by trustee and notes payable to banks  are approximately equivalent to their carrying value. The carrying value of  the company's long-term debt exceeded its fair value by approximately $19.5  million and $14.9 million as of September 30, 2003 and 2002, respectively. The  fair value of long-term debt was estimated based on quoted market prices for  the same or similar issues.

**19.          Consolidated  Taxes**

The provision for Federal and State income taxes was comprised of the  following (in thousands):

**       2003**

**       2002**

**       2001**

Currently payable (receivable) -

  Federal

$  2,683

$5,546

$(16,709)

  State

2,270

2,796

3,772

Deferred -

 

 

 

  Federal

(10,577)

(14,113)

25,253

  State

(1,326)

(5)

107

Amortization of investment tax credits

     (490)

     (439)

     (438)

Total provision (credit) for income taxes

$(7,440)

    $(6,215)

    $11,985

 

 

 

Total income tax provision included in:

 

 

 

Continuing operations

$ 1,032

$11,232

$18,122

Discontinued operations

(4,393)

(7,947)

(6,137)

Cumulative effect of change in accounting

  (4,079)

  (9,500)

        ----

Total provision (credit)  for income taxes

$(7,440)

    $(6,215)

   $11,985

The components of the company's net deferred Federal tax liability (asset)  as of September 30, 2003 and 2002 are as follows (in thousands):

**2003**

**2002**

Accelerated depreciation and other utility plant differences

$68,991

$61,447

Regulatory asset-environmental

13,621

13,610

Unrecovered gas costs

10,932

16,961

Unrealized gains, net

---

9,691

Pension and other employee benefits

5,493

7,124

Plant acquisition adjustments

5,668

6,050

Reserve for anticipated loss on assets held for sale

4,620

---

Other

    7,642

    5,962

    Total Federal deferred tax liabilities

116,967

120,845

 

 

Environmental reserve

(11,879)

(11,879)

Regulatory settlement costs

(9,898)

---

Alternative minimum tax credit

(5,346)

(5,346)

Asset impairments

(4,262)

---

Net operating loss-Virginia Gas

(6,157)

(8,295)

Bad debts and insurance reserves

(3,015)

(1,461)

Other regulatory liabilities

(2,786)

(2,940)

Goodwill

(2,378)

(2,766)

Capital loss carryforward

(1,254)

---

Unrealized losses, net

(1,005)

---

Other

  (5,334)

  (8,581)

    Total Federal deferred tax assets

(53,314)

(41,268)

Valuation allowance

   4,660

        ---

    Total Federal deferred tax assets, net of                valuation allowance

        (48,654)

        (41,268)

   Net Federal deferred tax liabilities

$68,313

$79,577

The alternative minimum tax credit can be carried forward indefinitely to  reduce the company's future tax liability.  The company has Federal net  operating loss carryforwards of approximately $17 million at September 30,  2003 with respect to Virginia Gas, subject to a Section 382 limitation.   These net operating loss carryforwards expire in 2016 through 2020.  In  addition, the company has provided a valuation allowance for certain tax  attributes that reduces its net deferred tax assets to an amount management  believes is more likely than not to be realized in future periods.  With  respect to continuing operations, the company has state net operating losses  in various jurisdictions.

The company's effective income tax rates differ from the statutory Federal  income tax rates due to the following (in thousands):

**2003**

**2002**

**2001**

Pre-tax income (loss)

 $(52,589)

$(22,103)

$28,298

Federal income taxes computed at Federal statutory

   Tax rate of 35 percent

 

(18,406)

 

(7,736)

 

9,904

Increase (reduction) resulting from:

 

 

 

   Excess of book over tax depreciation

146

329

321

   Amortization of investment tax credits

(490)

(439)

(438)

   Federal benefit of state tax provision

(331)

(977)

(1,357)

   Write off of goodwill

4,620

---

---

   Penalty payable to the State of New Jersey

700

---

---

   Change in valuation allowance

4,660

---

---

   Other, net

      717

     (183)

      (324)

 
Total provision (credit) for Federal income taxes

(8,384)

(9,006)

8,106

Provision for State income taxes

       944

     2,791

    3,879

Total provision (credit) for income taxes

$ (7,440)

    $(6,215)

   $11,985

NUI's Federal income tax returns for 2000 and 2001 are currently being  examined by the Internal Revenue Service.  Management believes that its  accrued tax liabilities are adequate and that any settlement related to such  examinations is not expected to have a material impact on NUI's consolidated  statements of operations, financial position and of cash flows.

**20.          Retirement and  Other Benefits**

*Pension Benefits.* The company has non-contributory defined benefit  retirement plans, which cover all of its employees other than the City Gas of  Florida union employees who participate in a union-sponsored multi-employer  plan. The company funds its plans in accordance with the requirements of the  Employee Retirement Income Security Act of 1974 and makes contributions to the  union-sponsored plan in accordance with its contractual obligations. Benefits  paid under the company's plans are based on years of service and levels of  compensation. The company's actuarial calculation of pension expense is based  on the projected unit cost method.

The changes in the pension benefit obligation for the company's plans were  as follows (in thousands):

**       2003**

**       2002**

Benefit obligation at beginning of year

$100,504

$94,610

Service cost

3,438

2,797

Interest cost

6,815

6,813

Plan amendments

---

64

Actuarial loss

21,300

5,296

Benefits paid

     (8,744)

     (9,076)

  Benefit obligation at end of year

$123,313

 $100,504

The change in the company's plan assets were as follows (in thousands):

**      2003**

**      2002**

Fair value of plan assets at beginning of year

$92,366

$111,578

Actual return on plan assets

14,649

(10,136)

Employer contributions

3,300

---

Benefits paid

    (8,744)

    (9,076)

  Fair value of plan assets at end of year

$101,571

$ 92,366

The reconciliation of the funded status of the company's funded plans as of  September 30, 2003 and 2002 was as follows (in thousands):

**       2003**

**       2002**

Funded status

$(21,742)

$(8,138)

Unrecognized net loss

47,920

34,643

Unrecognized prior service cost

    1,676

    2,126

   Pension prepayment

$27,854

$28,631

The projected benefit obligation was calculated using a discount rate of  6.00 percent in fiscal 2003 and 6.75 percent in fiscal 2002, and an assumed  annual increase in compensation levels of 4 percent in fiscal 2003 and  2002.  The expected long-term rate of return on assets was calculated at  9.25 percent in fiscal 2003 and 9.75 percent in fiscal 2002, and has been  reduced to approximately 8.50 percent beginning in fiscal 2004.  The  company's pension fund assets are invested approximately 70 percent in  publicly traded equity securities and approximately 30 percent in publicly  traded debt securities.

The components of pension expense for the company's plans were as follows  (in thousands):

**2003**

**2002**

**2001**

Service cost

$3,438

$2,797

$2,229

Interest cost

6,815

6,813

6,614

Return on plan assets

(8,270)

(10,592)

(12,504)

Net amortization and deferral

  2,093

     468

     (684)

   Pension expense (credit)

$4,076

$  (514)

$(4,345)

Certain key employees also participate in an unfunded supplemental  retirement plan.  The projected benefit obligation under this plan was  $7.4 million as of September 30, 2003, $6.7 million as of September 30, 2002,  and $6.4 million as of September 30, 2001, and the expense for this plan was  approximately $0.7 million in fiscal 2003, and $0.9 million in fiscal 2002 and  2001.  The company recorded $0.3 million, after-tax, and $0.2 million,  after-tax, in fiscal years 2003 and 2002, respectively, due to an increased  minimum liability related to the supplemental plan.  This adjustment has  been included in "Accumulated Other Comprehensive Income" on the  company's Consolidated Statement of Capitalization and Consolidated Statement  of Shareholder's Equity.

The company has a retirement plan for eligible members of its board of  directors, including both active and retired members.  To be eligible for  retirement benefits under the plan, a director must have served as a director  for at least 10 years, with a minimum of five years of service as a  non-employee of the company and its subsidiaries.  Eligible plan  participants will be paid, upon retirement and the attainment of age 65, an  annual retirement benefit for life equal to the value of the annual board  retainer in effect at the time of the director's retirement.  In May  2002, the board of directors terminated the retirement plan for all  non-employee directors who become board members after that date.  The  projected benefit obligation under this plan was approximately $1.4 million at  September 30, 2003, and approximately $1.1 million at both fiscal years ending  September 30, 2002 and 2001.  This pension liability is included within  Regulatory and Other Liabilities on the Consolidated Balance Sheet. The  expense for this plan was approximately $0.3 million in fiscal 2003.

*Post-retirement Benefits Other Than Pensions.*  The company  provides certain health care benefits to all retirees that are receiving  benefits under a company pension plan, other than the City Gas Company of  Florida plan.

The company accounts for these plans under Statement of Financial  Accounting Standards No. 106, "Employers' Accounting for Post-retirement  Benefits Other Than Pensions" (SFAS 106), which, among other things,  requires companies to accrue the expected cost of providing other  post-retirement benefits to employees and their eligible dependents during the  years that eligible employees render the necessary service. The company  currently funds these future benefits through a Voluntary Employees  Beneficiary Association.

Effective July 1, 2000, the company no longer offers post-retirement  benefits other than pensions for any new hires.  In addition, the company  has capped its share of costs at $500 per participant, per month for retirees  under age 65, and at $150 per participant, per month for retirees over age 65.

The changes in the post-retirement benefit obligation for the company's  plans were as follows (in thousands):

**2003**

**2002**

Benefit obligation at beginning of year

$21,637

$20,552

Service cost

326

264

Interest cost

1,425

1,451

Actuarial loss

4,066

1,528

Plan amendments

(563)

(134)

Benefits paid

(2,446)

(2,323)

Other

       480

       299

  Benefit obligation at end of year

$24,925

$21,637

The changes in the company's plan assets were as follows (in thousands):

**2003**

**2002**

Fair value of plan assets at beginning of year

$7,123

$1,700

Actual return on plan assets

112

88

Employer contributions

3,858

      7,359

Plan participants' contributions

480

        299

Benefits paid

 (2,446)

 (2,323)

  Fair value of plan assets at end of year

$9,127

 $7,123

The reconciliation of the funded status of the company's post-retirement  plans other than pensions as of September 30, 2003 and 2002, was as follows  (in thousands):

**2003**

**2002**

Unfunded status

$15,798

$14,514

Unrecognized prior service credit

1,475

1,014

Unrecognized net loss

  (9,307)

   (5,047)

   Accrued post-retirement benefit obligation

$ 7,966

$10,481
  The components of post-retirement benefit expense other than pensions were as  follows (in thousands):
** 2003**

** 2002**

** 2001**

Service cost

$326

$264

$224

Interest cost

1,425

1,451

1,476

Other

   (408)

    (161)

    (164)

   Net post-retirement expense

$1,343

$1,554

$1,536

The health care trend rate assumption is 10.0 percent in 2003 gradually  decreasing to 5.0 percent for the year 2008 and later. The discount rate used  to compute the accumulated post-retirement benefit obligation was 6.00 percent  in fiscal 2003 and 6.75 percent in fiscal 2002. An increase in the health care  trend rate assumption by one percentage point in all years would increase the  accumulated post-retirement benefit obligation by approximately $2.5 million  and the aggregate annual service and interest costs by approximately $0.2  million.

The company continually evaluates alternative ways to manage these benefits  and control its costs.  Any changes in the plan or revisions to  assumptions that affect the amount of expected future benefit may have a  significant effect on the amount of the reported obligation and expense.

*Employee Stock Purchase Plan (ESPP).*  The company allows  eligible employees to purchase shares of the company's stock monthly at a  price equal to 85 percent of the lower of the fair market value on the first  and last trading days of the month, up to a maximum of 10 percent of their  annual compensation. The company expenses this employee discount as  compensation expense.

*Savings and Investment Plans (401(k))*.  The company maintains a  voluntary 401(k) savings plan designed to enhance existing retirement programs  covering eligible employees.  The plan allows eligible employees who  participate to make contributions of up to six percent of their annual base  pay, which are matched by contributions by the company. Contributions are  invested at the election of the employee in the company's common stock or in  various other investment funds.  Effective October 1, 2002, the company  increased the match to 60 percent of each employee's first 6 percent of salary  contributions. Prior to that date, the company matched participant  contributions that were invested in the NUI Stock Fund at 60 percent and in  all other funds at 50 percent.  Employer contributions charged to expense  were $1.3 million for the fiscal years ended September 30, 2003 and 2002, and  $1.2 million for the fiscal year ended September 30, 2001.

**21.          Business  Segment Information**

The company's operations are organized and managed as three primary  segments: Distribution Services, Energy Asset Management (formerly Wholesale  Energy Marketing and Trading), and Retail and Business Services.  The  Distribution Services segment currently distributes natural gas in three  states through the company's regulated utility operations, and engages in  appliance leasing, repair and maintenance operations, and off-system gas  sales.  The Energy Asset Management segment reflects the operations of  NUI Energy Brokers and all of the VGC subsidiaries.  The Retail and  Business Services segment reflects the operations of the company's NUI Energy  subsidiary, the billing services operations of UBS, and OAS, the company's  digital mapping business, which used to be part of UBS.  The company also  has corporate operations that do not generate any revenues.

During fiscal 2003, the company realigned its reportable business segments  as follows:  the appliance service businesses in New Jersey and Florida,  previously reported within the Retail and Business Services segment, are now  included within the Distribution Services segment; off-system sales made by  NUI Energy Brokers on behalf of the utility operations, previously reported  within the Energy Asset Management segment, are now included within the  Distribution Services segment; NUI Telecom, previously reported within the  Retail and Business Services segment, was being held for sale at September 30,  2003, and is now reported within discontinued operations; the operations of  TIC are being wound down by the company and have also been reported as  discontinued operations; and the operating results of NUI Environmental,  previously reported within discontinued operations, are now included as part  of the Retail and Business Services segment.  The change for NUI  Environmental, which was sold in September 2003, was due to the company's  potential future involvement in this business under certain ancillary  agreements entered into by the company on the date of the sale.

The following table provides information concerning the major segments of  the company for each of the three fiscal years ended September 30, 2003, 2002  and 2001.  Revenues include intersegment sales to affiliated entities,  which are eliminated in consolidation.  All of the company's operations  are in the United States and therefore do not need separate disclosure by  geographic region. As discussed above, certain reclassifications have been  made to prior year segment data to conform with the current year's  presentation.** **

**(Dollars in thousands)**

**2003**

**2002**

**2001**

** **

**Revenues:**

Distribution Services

$615,563

$485,445

$618,415

Energy Asset Management

27,611

29,375

22,210

Retail & Business Services

14,204

11,121

16,885

Intersegment Revenues

    (5,001)

    (6,069)

    (11,504)

Total Revenues

$652,377

$519,872

$646,006

 

 

 

**Operating Margins:**

 

 

 

Distribution Services

$190,280

$164,928

$168,812

Energy Asset Management

26,156

28,440

21,983

Retail & Business Services

8,256

    7,556

     15,610

Intersegment Margins

    (1,742)

    (2,195)

     (6,457)

Total Operating Margins

$222,950

$198,729

$199,948

** **

 

 

 

**Pre-Tax Operating Income:**

 

 

 

Distribution Services

$11,939

$43,223

$53,619

Energy Asset Management

12,888

14,208

13,263

Retail & Business Services

  (8,296)

   (1,504)

    3,866

Total Pre-Tax Operating Income

$16,531

$55,927

$70,748

 

 

 

**Depreciation & Amortization:**

 

 

 

Distribution Services

$31,119

$28,457

$25,865

Energy Asset Management

2,040

2,507

697

Retail & Business Services

    1,395

    1,230

       591

Total Depreciation & Amortization

$34,554

$32,194

$27,153

**Identifiable Assets:**

Distribution Services

$780,608

$765,035

$792,283

Energy Asset Management

166,013

148,234

155,224

Retail & Business Services

    11,243

    42,185

    41,756

Total Identifiable Assets

$957,864

$955,454

$989,263

 

 

 

**Capital Expenditures:**

 

 

 

Distribution Services

$36,415

$41,731

$40,772

Energy Asset Management

1,907

836

8,020

Retail & Business Services

    1,176

    1,824

    2,321

Total Capital Expenditures

$39,498

$44,391

$51,113

A reconciliation of the company's segment pre-tax operating income,  depreciation and amortization, identifiable assets and capital expenditures to  amounts reported on the consolidated financial statements is as follows:

**(Dollars in thousands)**

**2003**

**2002**

**2001**

**Segment Pre-Tax Operating Income**

$ 16,531

$55,927

$70,748

Non-segment pre-tax operating loss

   (5,503)

  (7,554)

  (4,403)

  Operating income from Continuing Operations

11,028

48,373

66,345

Other income

781

288

1,467

Net interest charges

   22,094

  21,378

  22,236

  Pre-Tax Income (Loss) from Continuing Operations

$(10,285)

$27,283

$45,576

 

 

 

**Segment Depreciation & Amortization**

$34,554

$32,194

$27,153

Non-segment depreciation & amortization

       105

         88

         70

  Depreciation & Amortization

$34,659

$32,282

$27,223

 

**(Dollars in thousands)**

**2003**

**2002**

**2001**

**Segment Identifiable Assets**

$   957,864

 $  955,454

 $  989,263

Non-segment identifiable assets

       62,899

       83,528

     157,128

  Total Assets

$1,020,763

$1,038,982

$1,146,391

 

 

 

**Segment Capital Expenditures**

$39,498

$44,391

$51,113

Non-segment capital expenditures

    2,331

   11,279

    8,336

  Gross plant additions

41,829

55,670

59,449

Less:   Capital lease additions

(1,406)

(9,779)

(1,338)

Capital expenditures by discontinued operations

   (1,234)

   (3,602)

   (1,846)

  Total Capital Expenditures

$39,189

$42,289

$56,265

**22.          Commitments  and Contingencies**

*Focused Audit.* On March 20, 2003, the New Jersey Board of Public  Utilities (NJBPU) announced the initiation of a focused audit of NUI  Corporation, NUI Utilities, and Elizabethtown Gas.  The NJBPU had  expressed the belief that recent downgrades of the senior unsecured debt of  NUI and NUI Utilities, as well as negative credit rating agency comments, and  concerns raised during a recent competitive services audit, substantiated the  need for an in-depth review of the financial practices of the company and its  subsidiaries.  On June 4, 2003, the NJBPU chose The Liberty Consulting  Group to perform the audit.  The focused audit covered the following  areas: corporate governance; strategic planning; financial structure and  interaction; accounting and property records; executive compensation and  affiliate transactions.  An interim audit report was released by the  NJBPU on December 17, 2003 and the final audit report was issued on March 1,  2004 and was accepted and released by the NJBPU on March 17, 2004, at the  NJBPU's public agenda meeting.  Among other things, the report criticizes  NUI for the energy management practices on behalf of NUI Utilities, its  financing and cash pooling arrangements, the impact of unprofitable  non-utility operations on NUI Utilities, the method used to allocate shared  services costs among its business units, and the propriety of rates  established in the 2002 Elizabethtown base rate case. NUI filed responsive  comments on March 26, 2004 and a settlement was reached with the NJBPU on  April 14, 2004.  On April 26, 2004, the NJBPU issued a Final Order  accepting and adopting the settlement agreement.  The company has  recorded a pre-tax charge of $30 million to reflect the final settlement of  the focused audit. Of this amount, $28 million was recorded as the amount to  be refunded to customers in New Jersey (See Note 1-Regulatory Assets and  Liabilities).  The company has also agreed to pay interest at 7.95  percent annually on the unpaid balance.

In addition, the company has established a pre-tax reserve of $2.6 million  in anticipation of providing refunds to customers in Florida as a result of  transactions by the company's NUI Energy Brokers subsidiary.

*Default under Credit Agreements.*In February 2003, NUI and NUI  Utilities each replaced their respective previous credit agreements with new  revolving agreements.  In November 2003, each of NUI and NUI Utilities  refinanced the February 2003 facilities and entered into credit agreements for  new 364-day credit facilities.  NUI's delay in delivering audited  financial statements for fiscal 2003 resulted in defaults under such credit  agreements.  On January 26, 2004, NUI and NUI Utilities both obtained  waivers of such defaults from the lenders under their respective credit  agreements and (i) received an extension to March 1, 2004 of the delivery date  for NUI's audited financial statements for fiscal 2003 and unaudited financial  statements for the first fiscal quarter of 2004 and (ii) amended the credit  agreements to clarify certain technical provisions.  Subsequently, on  March 12, 2004, NUI and NUI Utilities obtained a limited waiver from the  lenders under their respective credit agreements further waiving the defaults  described above.  These credit facilities were amended as of May 10, 2004  to further extend these deadlines.

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

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

Defaults may occur in the near future under the Variable Bonds, the 5.25  percent bonds and the 8.35 percent medium term notes if NUI Utilities does not  provide unaudited financial statements for NUI for the fiscal quarters ended  December 31, 2003 and March 31, 2004, and related documentation and officers'  certificates.  Defaults may occur in the near future under the 5.70  percent bonds if NUI Utilities does not provide audited financial statements  for NUI Utilities for the fiscal year ended September 30, 2003 and unaudited  financial statements for NUI Utilities for fiscal quarters ended December 31,  2003 and March 31, 2004.  To date, NUI has obtained all necessary waivers  and extended the respective deadlines for delivery of all information required  pursuant to such bond facilities to June 30, 2004.  NUI and NUI Utilities  are working diligently to deliver the required documentation within this  timeframe.

*Commitments.*  On April 30, 2001, the company announced an  agreement with a unit of Duke Energy to develop a natural gas storage facility  in Saltville, Virginia. NUISS and Duke Energy Saltville Gas Storage, LLC (DESGS)  have created a limited liability company, SSLLC.  After receiving  appropriate regulatory approvals, in February 2003 VGC contributed certain  storage assets valued at approximately $16.3 million to SSLLC.  DESGS has  contributed an equal amount (approximately $16.3 million) of capital required  to expand the facility for its intended purpose.  To the extent SSLLC  determines it needs additional funding (which decision can only be made  jointly by the company and DESGS), the company and DESGS are obligated to fund  the development of SSLLC equally.

The company has loaned SSLLC approximately $17.6 million toward the  development of the Saltville storage facility through September 30, 2003, and  currently estimates its share of funding to be nil in fiscal 2004, and $2.5  million in fiscal 2005. Subsequent years will be funded with internally  generated cash flows of the joint venture.

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

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

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

*Guarantees*. The company has guarantees of approximately $293.4  million to 69 counterparties as of September 30, 2003, in support of NUI  Energy Brokers' trading activities. These guarantees are necessary to  facilitate trading with a broad group of potential counterparties, although  typically NUI Energy Brokers uses only a fraction of the issued guarantees at  any given time. Further, since NUI Energy Brokers has netting agreements in  place with most of its counterparties, the guarantees would apply only to net  balances owed to its respective counterparties with which it has such  agreements. As of September 30, 2003, the amount of purchases covered by  outstanding guarantees was approximately $12.1 million.  

NUI Telecom had a contract with a service provider, which guaranteed that  NUI Telecom would purchase a minimum of $325,000 of services monthly through  February 2004. The guarantee was necessary to support NUI Telecom's purchase  of capacity to use in the provision of telecommunications services. The  penalty for purchasing less than the minimum amount is 25 percent of each  dollar below $325,000. NUI Telecom had historically purchased services in  excess of $325,000 from the service provider, and accordingly had not recorded  any penalty amounts under the guarantee. On December 15, 2003, this guarantee  was assumed by the acquirer of NUI Telecom (see Note 24).

*Environmental Matters.* The company owns, or previously owned,  certain properties located in the states of New Jersey, North Carolina, South  Carolina, Pennsylvania, New York and Maryland on which manufactured gas plants  (MGP) were operated by the company or by other parties in the past. In New  Jersey, the company is currently conducting remedial activities at such  properties with oversight from the New Jersey Department of Environmental  Protection and anticipates initiation of such activities in the state of North  Carolina within the next five years.  Although the actual total cost of  future environmental investigation and remediation efforts cannot be  reasonably estimated, the company has recorded on a undiscounted basis a total  reserve of approximately $33.9 million which the company believes represents  the probable minimum amount the company may expend over the next 30 years. Of  this reserve, approximately $30.2 million relates to remediation of the New  Jersey MGP properties and approximately $3.7 million relates to remediation of  the MGP properties located outside the state of New Jersey.

The company's prudently incurred remediation costs for the New Jersey MGP  properties have been authorized by the New Jersey Board of Public Utilities (NJBPU)  to be recoverable in rates through its MGP Remediation Adjustment Clause. As a  result, the company has begun rate recovery of approximately $9.8 million of  environmental costs incurred through June 30, 2002, of which a portion has  been recovered through September 30, 2003.  Recovery of an additional  $0.7 million incurred between July 1, 2002, and June 30, 2003 is currently  pending NJBPU approval. Accordingly, the company has recorded a regulatory  asset of approximately $36.4million, inclusive of interest, as of September  30, 2003, reflecting the future recovery of both incurred costs and future  remediation liabilities in the state of New Jersey.  The company has also  been successful in recovering a portion of MGP remediation costs incurred in  New Jersey from the company's insurance carriers and continues to pursue  additional recovery. As further discussed in Note 11, the company sold the net  assets of its North Carolina Gas utility division on September 30, 2002 and  its Valley Cities Gas and Waverly Gas utility divisions on November 7, 2002.  Included in these asset sales were the environmental obligations for two of  the company's MGP sites: one in North Carolina and one in Pennsylvania. With  respect to costs associated with the MGP properties located outside New  Jersey, the company is currently pursuing or intends to pursue recovery from  ratepayers, former owners and operators, and/or insurance carriers. Although  the company has been successful to date in recovering a portion of MGP  remediation costs incurred outside of New Jersey from the company's insurance  carriers, the company is not able to express a belief as to the success of  additional recovery efforts. The company is working with the regulatory  agencies to prudently manage its MGP costs so as to mitigate the impact of  such costs on both ratepayers and shareholders.

*Gas Procurement Contracts.*  Certain of the company's long-term  contracts for the supply, storage and delivery of natural gas include fixed  charges that amounted to approximately $60.1 million in fiscal 2004 (this  amount includes the company's obligations under two twenty-year agreements to  pay annual demand charges for the firm transportation and storage of natural  gas, discussed above).  The company currently recovers, and expects to  continue to recover, such fixed charges through its purchased gas adjustment  clauses.  The company also is committed to purchase from a single  supplier, at market-related prices, minimum quantities of gas that, in the  aggregate, are approximately 2.1 billion cubic feet per year.  In the  event that the company does not purchase the minimum quantity in a given year,  the company has until the next contract year to make up the difference or risk  reduction in the contracted daily delivery quantity.  The company expects  that minimum demand on its systems for the duration of these contracts will  continue to exceed these minimum purchase obligations.

*Legal Matters. *Between October 28, 2002 and December 20, 2002,  five substantially similar civil actions were commenced in the United States  District Court for the District of New Jersey, in which the plaintiffs allege  that the company and two of its former presidents violated federal securities  laws by issuing false statements and failing to disclose information regarding  the company's financial condition and current and future financial prospects  in its earnings statements, press releases, and in statements to analysts and  others.  By orders dated December 19, 2002, January 22, 2003, and  February 3, 2003, the five actions were consolidated 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 others similarly situated v. NUI Corporation and John Kean, Jr.,  filed in the United States District Court for the District of New Jersey on  October 28, 2002;  (2) an action captioned Gisela Friedman, on behalf  of herself and all others similarly situated v. NUI Corporation and John Kean,  Jr., filed in the United States District Court for the District of New  Jersey on October 31, 2002;  (3) an action captioned Thomas Davis, on  behalf of himself and all others similarly situated v. NUI Corporation and  John Kean, Jr., filed in the United States District Court for the District  of New Jersey on November 6, 2002; (4) an action captioned Marvin E.  Russell, on behalf of himself and all others similarly situated v. NUI  Corporation and John Kean, Jr., filed in the United States District Court  for the District of New Jersey on December 10, 2002; and (5) an action  captioned Phyllis Waltzer, on behalf of herself and all others similarly  situated v. NUI Corporation and John Kean, Jr., filed in the United States  District Court for the District of New Jersey on December 20, 2002. By order  dated February 3, 2003, a Lead Plaintiff, Lead Counsel and Liaison Counsel  were appointed in the consolidated action. By stipulation of the parties, an  Amended Consolidated Class Action Complaint was filed on May 12, 2003,  and subsequently plaintiffs were granted leave to file a Second Amended  Consolidated Complaint, which was filed on July 17, 2003.  The Second  Amended Complaint, brought on behalf of a putative class of purchasers of  NUI's common stock between November 8, 2001 and October 17, 2002, asserts  claims under Section 10(b), including Rule 10b-5 promulgated thereunder, and  Section 20(a) of the Exchange Act against the company, and two of its former  presidents. Specifically, the Second Amended Complaint alleges that the  defendants (i) failed to disclose material facts that would impair the  company's current and future earnings, including (a) the allegedly accurate  amount and explanation of the company's bad debts, (b) a purportedly illegal  practice by the company in "re-terminating" intrastate calls, (c)  alleged accounting improprieties in connection with purportedly unearned  revenue, and (d) allegedly inaccurate earnings per share information, and (ii)  inflated the company's earnings materially by (a) allegedly making misleading  statements concerning, and failing to properly record, bad debt costs, (b)  allegedly attributing the company's rising costs to incorrect and immaterial  factors, and (c) purportedly pursuing illegal telecommunications billing  practices. The Second Amended Complaint seeks unspecified monetary damages on  behalf of the class, including costs and attorneys fees. On October 14, 2003,  defendants moved to dismiss the Second Amended Complaint under, inter alia,  the Private Securities Litigation Reform Act.  Opposition papers to the  motion to dismiss were served on December 19, 2003, and reply papers were  filed on February 23, 2004.  The motion was heard on March 15,  2004.  By decision and order dated April 23, 2004, the district court  granted in part and denied in part defendants' motion to dismiss.  The  district court dismissed the Section 10(b) claims against the individual  defendants and dismissed all claims against the company concerning the alleged  "reterminating" scheme. The district court denied the motion to  dismiss with respect to certain allegations that the company made misleading  misstatements concerning the accurate level of bad debt and earnings and  denied the motion to dismiss the Section 20(a) claims against the individual  defendants.

No discovery has occurred and defendants' time to answer the complaint has  not yet run.  Although the Company intends to vigorously defend these  lawsuits, it is not possible at this time to determine a likely outcome.

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

Plaintiffs, Specific Cruise Systems, Inc. and Frigette, Inc. d/b/a SCS/Frigette,  Inc., filed a Petition in Texas state court against TIC, one of TIC's former  employees, Sherry Walton, and Nortel Networks, Inc. on November 5, 2002 for  alleged damages relating to lost profits and replacement services arising out  of their claims for breach of contract, fraudulent inducement, and breach of  warranty, as well as for an offset/credit in connection with the sale by TIC  of telephone equipment.  TIC denies that it made such representations and  is relying upon the contracts entered into between the parties.  TIC  seeks payment for the balance due relating to the sale in the amount of  $83,331.00.  If the provisions of the contract are not enforceable, the  plaintiffs may be entitled to lost profits resulting from the alleged delay in  the installation of the system and the alleged interference with their  business resulting from defects in the system.  If the contract is deemed  enforceable, a provision in the contract providing a limitation on liability  may preclude recovery by plaintiff on certain issues.  On June 11, 2003,  TIC filed a Motion to Compel Arbitration; no decision has been rendered on the  motion.  Discovery is continuing.  At this time, the company is  unable to determine the likelihood of an outcome.

The plaintiffs, James Greiff and TIC Enterprises, Inc., sued the company  and three other company related entities, NUI Sales Management, Inc. (NUI  Sales), NUI Capital Corp. and TIC, for breach of contract and fraud arising  out of the company's purchase of Greiff's interest in TIC Enterprises, LLC.  The plaintiffs allege they are entitled to payment on a $3 million promissory  note and have made claims arising from the defendants' alleged breach of a  2001 purchase agreement for $22 million in punitive damages for the  defendants' alleged fraud and $3 million plus interest and punitive damages  for the defendants' alleged fraudulent transfers.  The plaintiffs have  also alleged a tortious interference claim for $3 million, which the court  previously dismissed. The company and the remaining defendants are vigorously  defending the lawsuit and deny any liability to the plaintiffs. NUI Sales and  defendant TIC have a four-count counterclaim against both plaintiffs for more  than $3 million.  They are for: (1) breach of the 2001 Purchase  Agreement; (2) breach of the 1997 Amended and Restated Limited Liability  Company Agreement; (3) fraud in the inducement; and (4) unjust  enrichment.  This case, originally filed in the Northern District of  Georgia, was recently transferred on defendants' motion to the District of  Delaware.

The parties are in the midst of discovery, and have exchanged written  responses and objections to discovery requests along with numerous documents.  The parties have also begun taking depositions of the parties and fact  witnesses.  On May 2, 2004, NUI proposed a settlement to the plaintiffs  in which the company agreed to pay the plaintiffs $1.4 million to completely  satisfy NUI's obligation under the note, as well as to resolve all other  claims that the company and the plaintiffs had brought against each  other.  On May 5, 2004, NUI received the plaintiffs' written acceptance  of the company's settlement proposal, and the plaintiffs requested that NUI  prepare the appropriate settlement documents for review.  As a result,  the company reduced the amount payable under the note from $3.0 million to  $1.4 million on the September 30, 2003 Consolidated Balance Sheet, and  recorded a gain of $1.6 million in other income on the Consolidated Statement  of Income for fiscal 2003.

*Other*. On November 19, 2003, the company announced that in  connection with the focused audit of NUI Corporation, NUI Utilities, and  Elizabethtown Gas initiated by the NJBPU, certain questionable transactions  within NUI Energy Brokers were identified. The Attorney General of the State  of New Jersey also is conducting a criminal investigation relating to NUI  Energy Brokers.  In connection with this investigation, NUI received  subpoenas issued by the New Jersey State Attorney General's Office.  NUI  is cooperating fully with the New Jersey Attorney General's Office. 

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

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

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

**23.          Related Party  Transactions**

As discussed in Note 17, the company is party to a lease agreement with  Liberty Hall Joint Venture for the occupancy of a 200,000 square foot office  building in Union, New Jersey. The Joint Venture participants are Cali Liberty  Hall Associates (a New Jersey general partnership) and Enjay Realty, LLC (Enjay).  John Kean, a member of the Board of Directors of NUI, is the majority owner of  Enjay. All negotiations relative to the lease were conducted between the  company and Cali Liberty Hall Associates. In accordance with the lease, the  annual base rent was approximately $3.2 million for each of the fiscal years  ended September 30, 2003 and 2002. The lease provides for annual base rents of  approximately $3.2 million from 2004 to 2005, $3.4 million from 2006 through  2010, $3.6 million from 2011 through 2015, $3.9 million from 2016 through  2020, and $4.2 million from 2021 through 2022.

The company is party to a consulting agreement with John Kean, who retired  as Chief Executive Officer of the company effective April 1, 1995. The  agreement expired on March 31, 2004. Under the agreement, Mr. Kean provided  consulting services to the company for up to 110 hours each calendar month.  The agreement required Mr. Kean to devote sufficient time and effort to  perform such duties as may be assigned by the company or the Board of  Directors from time to time. In consideration of the services rendered under  the agreement, the company provided Mr. Kean with an annual fee of $280,000,  office space, clerical support and expense reimbursement. Other than amounts  paid under the agreement, Mr. Kean did not receive any compensation for  serving on the Board or Committees of the Board of the company, its divisions  or subsidiaries.

In addition, the company is party to two gas transportation agreements with  National Fuel Gas Supply Corporation (NFGSC). The agreements are under rate  Schedule FT dated October 27, 1995 and rate Schedule EFT dated August 1,  1993.  Bernard S. Lee is a director of NFGSC.  In fiscal 2003, the  company paid $1,662,192 to NFGSC under these agreements.

**24.          Subsequent  Events**

On October 30, 2003, the company agreed to sell its NUI Telecom subsidiary  for $2.0 million. The transaction closed on December 15, 2003, which was  immaterial to NUI's results for the first quarter of fiscal 2004. The  operating results of NUI Telecom have been classified as discontinued  operations in the Consolidated Statement of Income for all periods presented  (see Note 11).

During November 2003, the company commenced a reorganization effort that  resulted in workforce reductions, which involved the severance of 17 employees  in several of the company's corporate shared services departments. The  reorganization resulted in charges of approximately $1.1 million to operations  and maintenance expense during the first quarter of fiscal 2004, primarily  relating to severance costs. 

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

**25.          Unaudited  Quarterly Financial  Data              **

The quarterly financial data presented below reflects the seasonal nature  of the company's utility operations which normally results in higher earnings  during the heating season, which is primarily in the first two fiscal quarters  (*dollars in thousands, except per share amounts*):

**                    Fiscal Quarters       **

 

**First**

**Second**

**Third**

**Fourth**

**Total**

**Fiscal 2003:**

Operating revenues

$171,817

$249,729

$135,293

$95,538

$652,377

Operating income (loss)

17,230

36,110

94

(42,406)

11,028

Income (loss) from continuing operations

7,361

18,437

(3,813)

(33,302)

(11,317)

Discontinued operations, net of taxes

     (206)

      (414)

  (21,257)

    (6,085)

    (27,962)

Effect of change in accounting, net of taxes

---

      (5,870)

                  ---

 ---

 (5,870)

Net income (loss)

$7,155

$12,153

$(25,070)

$(39,387)

$(45,149)

Income (loss) from continuing operations per share

      $0.46

      $1.15

    $(0.24)

   $(2.08)

     $(0.71)

Net income (loss) per share

      $0.45

      $0.76

    $(1.57)

   $(2.46)

     $(2.82)

 

 

 

 

 

**Fiscal 2002:**

 

 

 

 

 

Operating revenues

$155,739

$177,713

$96,673

$89,747

$519,872

Operating income (loss)

18,758

31,286

(1,452)

(219)

48,373

Income (loss) from continuing operations

7,766

14,843

(3,927)

(2,631)

16,051

Discontinued operations, net of taxes

     482

      (1,007)

   (7,408)

    (6,364)

    (14,297)

Effect of change in accounting, net of taxes

(17,642)

         ---

                  ---

 ---

 (17,642)

Net income (loss)

$(9,394)

$13,836

$(11,335)

$(8,995)

$(15,888)

Income (loss) from continuing operations per share

      $ 0.56

      $1.04

    $(0.25)

    $(0.17)

     $1.08

Net income (loss) per share

      $(0.67)

      $0.97

    $(0.72)

    $(0.57)

     $(1.06)

Quarterly net income (loss) per share in fiscal 2002 does not total to the  annual amount in the Consolidated Statements of Income due to rounding and to  changes in the average common shares outstanding.

As discussed in Note 11, the company has classified the results of NC, VCW,  NUI Telecom and TIC as Discontinued Operations in the Consolidated Statements  of Income.  Accordingly, certain quarterly 2003 and 2002 data have been  restated to reflect the reclassification of discontinued operations, which did  not have an effect on net income.

**SCHEDULE II**

**NUI Corporation and Subsidiaries        Valuation and Qualifying Accounts        For each of the Three Years in the        Period Ended September 30, 2003        (Dollars in thousands)**

**Additions**

**Description**

**Balance,        Beginningof Period**

**Charged to        Costs andExpenses**

**Other**

**Deductions**

**Balance,        End ofPeriod**

**2003**

Allowance for doubtful accounts

  $  4,267

$12,410

$      236(a)

   $9,609(b)

$  7,304

Environmental remediation reserve

  $33,852

---

        573

         484

$33,941

Restructuring reserve

$     284

---

          ---

         284

$       ---

 

 

 

 

**2002**

 

 

 

 

Allowance for doubtful accounts

  $  3,483

$  6,609

     $1,266(a)(c)

   $7,091(b)

$  4,267

Environmental remediation reserve

  $32,559

---

      2,453

    1,160

$33,852

Restructuring reserve

   $     ---

        1,203

           ---

       919

   $     284

 

 

 

**2001**

 

 

 

Allowance for doubtful accounts

   $  1,369

$  5,734

   $2,893(a)(c)

   $6,513(b)

   $  3,483

Environmental remediation reserve

   $33,361

---

---

        802

$32,559

a Recoveries

b Uncollectible amounts written off.

c Acquisitions

 **Note:** The schedule above excludes amounts included within  Assets and Liabilities Held for Sale on the Consolidated Balance Sheets.

**SIGNATURES**

Pursuant to the requirements of Section 13 or 15(d) of the Securities  Exchange Act of 1934, the registrant has duly caused this report to be signed  on its behalf by the undersigned, thereunto duly authorized.

**                                                                     NUI  CORPORATION**                                                                        By: STEVEN D. OVERLY                                                                        Vice President,                                                                        General Counsel and Secretary                                                                        May 13, 2004

Pursuant to the requirements of the Securities Exchange Act of 1934, this  report has been signed below by the following persons on behalf of the  registrant and in the capacities and on the dates indicated.

CRAIG G. MATTHEWS

President, Chief Executive Officer (Principal Executive Officer)

May 13, 2004

DAN SCOULER

Interim Chief Financial Officer

May 13, 2004

PETER E. MARICONDO

Vice President and Corporate Controller (Principal Accounting        Officer)

May 13, 2004

JAMES J. FORESE

Chairman and Director

May 13, 2004

JOHN KEAN

Director

May 13, 2004

DR. VERA KING FARRIS

Director

May 13, 2004

J. RUSSELL HAWKINS

Director

May 13, 2004

BERNARD S. LEE

Director

May 13, 2004

R. V. WHISNAND

Director

May 13, 2004

ROBERT P. KENNEY

Director

May 13, 2004