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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2004

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

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


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


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

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

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

Yes |X| No |_|

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

Yes |X| No |_|

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

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Item 1. Financial Statements

NUI Corporation and Subsidiaries
Consolidated Statement of Income (Unaudited)
(Dollars in thousands, except per share amounts)



Three Months Ended Six Months Ended
March 31, March 31,
--------- ---------
2004 2003 2004 2003
---- ---- ---- ----
Operating Margins

Operating revenues $243,356 $249,729 $409,859 $421,546
Less - Purchased gas and fuel 164,256 157,926 265,476 266,949
Cost of sales and services 3,535 3,139 7,171 6,641
Energy taxes 5,507 5,289 9,414 8,783
------ -------- --------- ---------
70,058 83,375 127,798 139,173
------ -------- --------- ---------

Other Operating Expenses
Operations and maintenance 42,075 35,737 81,485 63,587
Restructuring costs 990 --- 2,136 ---
Depreciation and amortization 8,798 9,052 17,596 17,680
Taxes, other than income taxes 2,391 2,476 4,787 4,566
------- ------- --------- --------
54,254 47,265 106,004 85,833
------- ------- --------- --------

Operating Income 15,804 36,110 21,794 53,340
Equity in earnings of Saltville Gas Storage Company, LLC 268 --- 645 ---
Loss on extinguishment of debt --- --- 9,940 ---
Other income 638 246 1,317 662
Interest expense 11,120 7,133 19,999 13,473
Other interest income (532) (2,247) (1,263) (3,240)
------- ------- ------- -------

Income (Loss) from Continuing Operations Before Income Taxes 6,122 31,470 (4,920) 43,769

Income tax expense (benefit) 2,025 13,034 (1,619) 17,972
------ ------- -------- -------
Income (Loss) from Continuing Operations Before Effect of Change
in Accounting 4,097 18,436 (3,301) 25,797
------ ------- -------- -------
Discontinued Operations
Loss from discontinued operations (448) (690) (1,588) (1,039)
Income tax benefit (148) (277) (524) (420)
------ ------- -------- --------
Loss from Discontinued Operations (300) (413) 1,064) (619)
------ -------- -------- --------

Income (Loss) before Effect of Change in Accounting 3,797 18,023 (4,365) 25,178

Effect of change in accounting (net of tax benefit of $4,079
in 2003) --- (5,870) --- (5,870)
------- ------- -------- --------

Net Income (Loss) $3,797 $12,153 $(4,365) $ 19,308
====== ======= ======== ========
Basic and Diluted Income (Loss) from Continuing Operations
Per Share of Common Stock $ 0.26 $ 1.15 $ (0.21) $ 1.61
====== ======== ======== ========
Basic and Diluted Net Income (Loss) Per Share of Common Stock $ 0.24 $ 0.76 $(0.27) $ 1.21
====== ======== ======== ========

Dividends Per Share of Common Stock $0.130 $ 0.245 $ 0.375 $ 0.490
====== ======== ======== =========
Weighted Average Number of Shares of Common Stock
Outstanding 15,969,802 16,072,702 15,979,826 16,048,767
========== ========== ========= ==========


See the notes to the consolidated financial statements.

1




NUI Corporation and Subsidiaries
Consolidated Balance Sheet
(Dollars in thousands)
March 31, 2004 September 30, 2003
(Unaudited) (*)
---------- ---
ASSETS
Current Assets

Cash and cash equivalents $151,046 $25,209
Accounts receivable (less allowance for doubtful accounts of
$7,671 and $7,304, respectively) 105,665 55,575
Fuel inventories, at average cost 11,425 63,852
Unrecovered purchased gas costs 10,026 25,398
Derivative assets 7,696 8,059
Federal income tax receivable --- 3,333
Assets held for sale --- 7,976
Prepayments and other 48,786 31,120
----------- ----------
334,644 220,522
----------- ----------
Property, Plant and Equipment
Property, plant and equipment, at original cost 969,962 954,446
Accumulated depreciation and amortization (338,869) (323,370)
Unamortized plant acquisition adjustments, net 12,838 13,372
Assets held for sale --- 147
---------- ----------
643,931 644,595
---------- ----------

Funds for Construction Held by Trustee 2,066 2,058
Investment in Saltville Gas Storage Company, LLC 17,101 16,456
Other Investments 120 210

Other Assets
Regulatory assets 47,987 57,040
Notes receivable from Saltville Gas Storage Company, LLC 20,732 17,575
Other receivable from Saltville Gas Storage Company, LLC 5,303 8,010
Long-term portion of derivative assets 12,706 5,133
Goodwill 8,056 8,056
Assets held for sale --- 1,002
Other assets 36,073 40,106
------------ -----------
130,857 136,922
------------ -----------
$1,128,719 $1,020,763
============ ===========

CAPITALIZATION AND LIABILITIES
Current Liabilities
Notes payable to banks $355,000 $164,100
Notes payable 1,400 1,400
Current portion of long term debt and capital lease obligations 52,005 2,167
Accounts payable, customer deposits and accrued liabilities 101,297 125,353
Liabilities held for sale --- 3,150
Federal income and other taxes 20,053 5,166
Current portion of deferred Federal income taxes 599 6,705
----------- -----------
530,354 308,041
----------- -----------
Other Liabilities
Capital lease obligations 9,378 9,798
Deferred Federal income taxes 61,695 61,608
Liabilities held for sale --- 19
Unamortized investment tax credits 3,159 3,375
Environmental remediation reserve 33,840 33,941
Regulatory and other liabilities 71,568 64,813
----------- -----------
179,640 173,554
----------- -----------
Capitalization
Common shareholders' equity 219,654 230,115
Long-term debt 199,071 309,053
------------ -----------
418,725 539,168
------------ -----------
$1,128,719 $1,020,763
========== ==========


* Derived from audited financial statements.
See the notes to the consolidated financial statements.

2


NUI Corporation and Subsidiaries
Consolidated Statement of Cash Flows (Unaudited)
(Dollars in thousands)



Six Months Ended March 31,
2004 2003
---- ----
Operating Activities

Net income (loss) $(4,365) $19,308
Less: Loss from discontinued operations, net of tax (1,064) (619)
Effect of change in accounting, net of tax --- (5,870)
-------- --------
Net income (loss) from continuing operations (3,301) 25,797
-------- -------

Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization 17,596 17,680
Deferred Federal income taxes (6,019) (9,179)
Amortization of deferred investment tax credits (216) (293)
Derivative assets and liabilities 4,347 817
Regulatory assets and liabilities 13,434 14,355
Other (1,019) 2,089
Effect of changes in:
Accounts receivable, net (50,090) (98,066)
Fuel inventories 52,427 28,734
Accounts payable, deposits and accruals (24,056) 46,971
Under-recovered purchased gas costs 6,155 (7,863)
Prepaids and other (17,666) 16,275
Federal and state income taxes 18,220 28,720
Other 3,834 2,366
-------- --------
Net cash provided by operating activities 13,646 68,403
Net cash provided by (used in) discontinued operations 4,941 (1,838)
-------- --------
Net cash provided by operating activities 18,587 66,565
-------- --------
Financing Activities
Proceeds from sales of common stock 276 158
Dividends to shareholders (5,980) (7,876)
Payments of long-term debt (60,000) ---
Funds for construction held by trustee, net --- 1,849
Principal payments under capital lease obligations (1,352) (1,281)
Net short-term borrowings 190,900 46,643
------- ------
Net cash provided by continuing operations 123,844 39,493
Net cash used in discontinued operations --- (3)
-------- --------
Net cash provided by financing activities 123,844 39,490
-------- -------
Investing Activities
Cash expenditures for property, plant and equipment (16,760) (24,875)
Net proceeds from sale of subsidiaries --- 13,117
Other 215 (8,131)
-------- --------
Net cash used in continuing operations (16,545) (19,889)
Net cash used in discontinued operations (49) (896)
-------- --------
Net cash used in investing activities (16,594) (20,785)
-------- --------

Net increase in cash and cash equivalents from continuing operations 120,945 88,007
Net increase (decrease) in cash and cash equivalents from discontinued operations 4,892 (2,737)
-------- --------
Net increase in cash and cash equivalents $125,837 $85,270
======== =======
Cash and Cash Equivalents
At beginning of period $ 25,209 $ 4,247
At end of period $151,046 $89,517


See the notes to the consolidated financial statements.
3


NUI Corporation and Subsidiaries
Notes to the Consolidated Financial Statements

1. Basis of Presentation

The consolidated financial statements include all operating divisions and
subsidiaries of NUI Corporation (NUI and, together with its subsidiaries, the
company, we, our, or us). NUI is a diversified energy company that 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), and serve approximately 371,000 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. The company's non-regulated businesses are
carried out by NUI Capital Corp. and its subsidiaries. As of April 1, 2004, the
company's only remaining non-regulated subsidiary with substantial continuing
operations is Utility Business Services, Inc. (UBS), a billing and customer
information systems and services subsidiary. The company's other non-regulated
subsidiaries have either been sold or are winding down their operations; these
subsidiaries include: NUI Environmental, Inc. (NUI Environmental), an
environmental project development subsidiary sold in September 2003; NUI
Telecom, Inc. (NUI Telecom), a telecommunications services subsidiary sold in
December 2003; NUI Energy, Inc. (NUI Energy), an energy retailer; NUI Energy
Brokers, Inc. (NUI Energy Brokers), a wholesale energy trading and portfolio
management subsidiary; OAS Group, Inc. (OAS), the company's digital mapping
operation, which prior to September 30, 2003, was part of UBS; and TIC
Enterprises, LLC (TIC), a sales outsourcing subsidiary which sold wireless and
network telephone services. 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 4, for all periods presented, the company has classified the
results of Valley Cities Gas and Waverly Gas, NUI Telecom, and TIC as
Discontinued Operations in the Consolidated Statements of Income. The assets and
liabilities of NUI Telecom have been classified as Assets Held for Sale and
Liabilities Held for Sale in the Consolidated Balance Sheet as of September 30,
2003.

During fiscal 2003, the company discontinued the operations of NUI Energy and
TIC. During January 2004, the company began to wind down the trading operations
of NUI Energy Brokers and discontinued trading operations altogether at NUI
Energy Brokers in March 2004, although NUI Energy Brokers continues to manage
its prior contractual obligations under a long-term sales agreement in addition
to two long-term gas storage and transportation agreements discussed in Note 12.
Effective April 1, 2004, OAS has subcontracted all of its existing services to a
third party engineering firm. OAS has notified its customers that upon
expiration of their current contracts, their relationship with OAS will
terminate.

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

The consolidated financial statements contained herein have been prepared
without audit in accordance with the rules and regulations of the Securities and
Exchange Commission and reflect all adjustments which, in the opinion of
management, are necessary for a fair statement of the results for interim
periods. 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. The
consolidated financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto that are included in the
company's Annual Report on Form 10-K for the fiscal year ended September 30,
2003.

4


NUI is a holding company and is exempt from registration under the Public
Utility Holding Company Act of 1935. 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. Because of the seasonal nature of gas utility operations,
the results for interim periods are not necessarily indicative of the company's
results for an entire year.

2. Liquidity Issues

As a result of various factors, NUI and NUI Utilities have experienced and
expect to continue experiencing significant liquidity problems. Liquidity needs
for NUI Utilities generally are driven by factors that include prepayment for
its natural gas requirements; natural gas commodity prices; the impact of
weather on customer bills; lags in fully collecting gas costs from customers
under the purchased gas adjustment clauses; 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
and 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 New Jersey Board of Public
Utilities (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 9 and 10 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.

5


3. Common Shareholders' Equity

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



March 31, September 30,
2004 2003
- -------------------------------------------------------------------------------------------


Common stock, no par value $287,552 $288,620
Shares held in treasury (5,113) (5,320)
Retained deficit (59,296) (48,951)
Unearned employee compensation (2,085) (3,589)
Accumulated other comprehensive loss (Note 7) (1,404) (645)
- -------------------------------------------------------------------------------------------
Total common shareholders' equity $219,654 $230,115
===========================================================================================


4. Discontinued Operations and Assets and Liabilities Held for Sale

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



Three Months Ended Six Months Ended
March 31, March 31,
2004 2003 2004 2003
---- ---- ---- ----
Revenues:

Distribution Services $ --- $ --- $ --- $ 553
Retail & Business Services 1 13,058 7,078 25,659
------ ------ ------ -------
Operating Revenues $ 1 $13,058 $7,078 $26,212
------- ------- ------ -------

Operating Margins:
Distribution Services $ --- $ --- $ --- $ 250
Retail & Business Services 1 4,903 1,631 9,866
------- ------- ------ --------
Operating Margins $ 1 $ 4,903 $1,631 $10,116
------- ------- ------ -------

Pre-Tax Operating Income (Loss):
Distribution Services $ --- $ --- $ --- $ 120
Retail & Business Services (452) (436) (2,945) (281)
------- ------- ------ --------
Pre-Tax Operating Income (Loss) (452) (436) (2,945) (161)
Other Income (Expense) 4 (254) 1,357 (874)
Net Interest Charges --- --- --- 4
------- ------- ------ --------
Pre-Tax Loss from Discontinued Operations $ (448) $ (690) $(1,588) $(1,039)
------- ------- -------- --------


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

6


5. Earnings Per Share

The following table summarizes the company's basic and diluted earnings per
share calculations for the three and six-month periods ended March 31 (amounts
are in thousands, except per share amounts):




Three Months Ended Six Months Ended
March 31, March 31,
2004 2003 2004 2003
---- ---- ---- ----


Income (loss) from continuing operations $4,097 $18,436 $ (3,301) $25,797
Loss from discontinued operations (300) (413) (1,064) (619)
Effect of change in accounting --- (5,870) --- (5,870)
------- -------- -------- -------
Net income (loss) $3,797 $12,153 $ (4,365) $19,308
======= ======== ======== =======
Weighted average shares outstanding 15,970 16,073 15,980 16,049
------- -------- -------- -------

Earnings (Loss) Per Share:
Basic and diluted income (loss) from
continuing operations $ 0.26 $ 1.15 $ (0.21) $ 1.61
Basic and diluted loss from discontinued
operations (0.02) (0.03) (0.06) (0.04)
Basic and diluted effect of change in
accounting --- (0.36) --- (0.36)
------- -------- -------- -------
Basic and diluted net income (loss) $ 0.24 $ 0.76 $ (0.27) $ 1.21
======= ======== ======== =======


The company's 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 March 31, 2004, unvested stock options having an exercise
price less than the market value of the company's shares for the three month
period on that date provided for an additional 380 shares of common stock
equivalents outstanding, which had no impact on the calculation of the company's
diluted earnings per share. As of March 31, 2004, 773 shares of common stock
equivalents have been omitted from the calculation of the six month diluted
earnings per share, as they would have been antidilutive. 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 88,200 and 1,006,500 shares, respectively, as
of March 31, 2004 and 2003.

6. Restructuring Charges and Other Employee Severance Costs

During November 2003, the company commenced a reorganization effort that
resulted in workforce reductions. These workforce reductions primarily effected
the corporate shared services functions and were undertaken to reflect the
overall reduction in the size of the company due to the sale, or winding down,
of certain NUI businesses. Additional workforce reductions were undertaken
during January 2004 and March 2004, primarily related to the company's decision
to discontinue the trading operations of NUI Energy Brokers. The company
currently has no plans for additional workforce reductions. In addition, none of
the employees terminated as a result of the reorganization efforts is required
to provide any future service to the company. The reorganization efforts
resulted in aggregate charges of approximately $2.1 million to restructuring
costs for the six months ended March 31, 2004, primarily relating to severance
costs for 41 individuals. A total of approximately $1.0 million has been paid to
former employees through March 31, 2004. The company has approximately $1.1
million of unpaid liabilities included in Accounts Payable, Customer Deposits,
and Accrued Liabilities on the Consolidated Balance Sheet at March 31, 2004 and
expects to pay this amount out over a two-year period ending November 30, 2005.

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 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 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.

7

7. Comprehensive Income

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



Three Months Ended Six Months Ended
March 31, March 31,
2004 2003 2004 2003
---- ---- ---- ----


Net income (loss) $3,797 $12,153 $(4,365) $ 19,308

Other comprehensive income (loss):
Derivatives qualifying as hedges, net 813 345 (759) 345
------ ------- ---------- --------
Total comprehensive income (loss) $4,610 $12,498 $(5,124) $ 19,653
====== ======= ========= ========


Accumulated other comprehensive income (loss), included in Common Shareholders'
Equity on the Consolidated Balance Sheet was $(1,404) at March 31, 2004, and
$(645) at September 30, 2003. Included in the balance at March 31, 2004, was
$(1,404) related to minimum pension liability (net of $976 in taxes). There were
no derivatives qualifying as hedges on that date.

8. Stock Options

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,"
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.

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 three and
six-month periods ended March 31 would have been as shown in the following table
(in thousands, except for per share amounts).




Three Months Ended Six Months Ended
March 31, March 31,
2004 2003 2004 2003
---- ---- ---- ----


Net income (loss) as reported $3,797 $12,153 $(4,365) $19,308
Deduct: Total stock-based employee
- ------
compensation expense determined
under fair value based method for all
awards, net of related tax effects (91) (473) (270) (947)
------ ------- -------- ---
Pro forma net income (loss) $3,706 $11,680 $(4,635) $18,361
====== ======= ========= =======

Earnings (Loss) Per Share:
Basic and diluted-as reported $0.24 $0.76 $(0.27) $ 1.21
====== ======= ======= =======
Basic and diluted-pro forma $0.23 $0.73 $(0.29) $ 1.14
====== ======= ======= ======

8


9. Notes Payable to Banks

On November 24, 2003, NUI and NUI Utilities each entered into new separate
revolving credit facilities aggregating $405 million. Both NUI's and NUI
Utilities' current credit agreements expire on November 22, 2004, and each may
be extended for one 364-day term, subject 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 February 1, 2005, have been
extended to a date no earlier than June 30, 2006 or have been repaid with the
proceeds of the delayed draw term loan and (iii) no default exists under such
facility at the time of such extension.

NUI's new 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 March 31, 2004, NUI has fully drawn all amounts
available under its credit agreement. As of May 14, 2004, NUI had overnight cash
investments of $28.8 million.

NUI Utilities' current credit agreement provides for (i) a $50 million revolving
credit facility, (ii) a $50 million term 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) the Base Rate (subject to a 3 percent floor) plus 4
percent. As of March 31, 2004, NUI Utilities has fully drawn under the $50
million revolver and the $50 million term loan facility. As of May 14, 2004, NUI
Utilities had overnight cash investments of $109.1 million.

Both credit agreements contain various covenants that (i) restrict NUI and NUI
Utilities from taking various actions and (ii) 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.

9


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 (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.

At March 31, 2004, the outstanding borrowings under NUI's and NUI Utilities'
credit facilities were $255.0 million and $100.0 million, respectively, at
weighted average interest rates of 8.0 percent and 7.5 percent. As of that date,
NUI and NUI Utilities had no unused borrowing capacity under their respective
credit facilities. Also, as of March 31, 2004, NUI and NUI Utilities had
approximately $23.4 million and $102.0 million, respectively, of cash held as
short-term investments.

The weighted average daily amounts of borrowings outstanding under NUI's current
credit facility and the weighted average interest rates on those amounts were
$255.0 million and $40.8 million at 8.1 percent and 2.8 percent for the three
months ended March 31, 2004 and 2003, respectively. The weighted average daily
amounts of borrowings outstanding under NUI's previous and current credit
facilities and the weighted average interest rates on those amounts were $191.7
million and $45.6 million at 7.8 percent and 3.0 percent for the six months
ended March 31, 2004 and 2003, respectively. The weighted average daily amounts
of borrowings outstanding under NUI Utilities' current credit facility and the
weighted average interest rates on those amounts were $94.9 million and $132.8
million at 7.2 percent and 2.6 percent for the three months ended March 31, 2004
and 2003, respectively. The weighted average daily amounts outstanding of
borrowings under NUI Utilities' previous and current credit facilities and the
weighted average interest rates on those amounts were $105.0 million and $110.9
million at 5.6 percent and 2.5 percent for the six months ended March 31, 2004
and 2003, respectively.

Dividend Restrictions Under Short-term Credit Facilities. 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 is also prohibited from paying dividends exceeding $20
million in the aggregate while the credit facility is outstanding.

10


10. Long-term Debt

NUI Utilities has outstanding $50 million 8.35 percent medium term notes, which
mature on February 1, 2005. As of March 31, 2004, this amount has been
reclassified to current liabilities on the Consolidated Balance Sheet. As
discussed in Note 9, 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 connection with the
repayment of this indebtedness, NUI paid a prepayment premium of approximately
$9.4 million to the noteholders, which was recorded as a charge during the first
quarter of fiscal 2004. During the first quarter of fiscal 2004, the company
also recorded a charge of approximately $0.5 million for unamortized debt
expenses related to the senior notes.

NUI Utilities is party to a series of loan 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 March 31, 2004 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
several times, 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, 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
had been reduced by the NJBPU Settlement recorded in September 2003. On May 19,
2004, NUI Utilities and The Bank of New York amended the SBPA. The amendment
eliminates the effect of the NJBPU Settlement, as well as the estimated refunds
to customers in Florida and certain other related costs, on the earned surplus
of NUI Utilities, thereby allowing for the payment of dividends by NUI Utilities
to NUI at this time. In addition, pursuant to the terms of the amendment, and
effective as of June 30, 2004, the expiration date of the SBPA will be extended
to June 29, 2005.

If the SBPA is not further extended beyond June 29, 2005, in accordance with the
terms of the Variable Bonds, all of the 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.

11


As of March 31, 2004, 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 were cured by virtue of NUI
Utilities' delivery of NUI's annual report dated September 30, 2003 on Form
10-K, related officers' certificates and other financial information.

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 the fiscal quarters ended December 31, 2003 and March 31,
2004. To date, NUI Utilities has obtained all necessary waivers and extended the
respective deadlines for delivery of all information required pursuant to such
bond facility 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.

Dividend Restrictions Under Long-term Debt Agreements. The payment of cash
dividends by NUI Utilities to NUI is restricted pursuant to the SBPA to an
amount based, in part, on the earned surplus of NUI Utilities, which had been
reduced by the NJBPU Settlement. On May 19, 2004, NUI Utilities and The Bank of
New York amended the SBPA. The amendment eliminates the effect of the NJBPU
Settlement, as well as the estimated refunds to customers in Florida and certain
other related costs, on the earned surplus of NUI Utilities, thereby allowing
for the payment of dividends by NUI Utilities to NUI at this time. 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.

11. Pension and Post-Retirement Benefits

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

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



Pension Benefits Other Benefits
--------------- --------------
Three Months Ended Three Months Ended
March 31, March 31,
2004 2003 2004 2003
---- ---- ---- ----


Service cost $1,213 $ 860 $103 $126
Interest cost 1,870 1,704 479 492
Return on plan assets (2,085) (2,068) (148) (116)
Net amortization and deferral 690 523 103 70
------- ------- ------ -----
Net Periodic Benefit Costs $1,688 $1,019 $537 $572
======= ======= ====== =====

12



Pension Benefits Other Benefits
---------------- --------------
Six Months Ended Six Months Ended
March 31, March 31,
2004 2003 2004 2003
---- ---- ---- ----


Service cost $2,426 $1,719 $206 $252
Interest cost 3,741 3,408 959 984
Return on plan assets (4,170) (4,135) (297) (232)
Net amortization and deferral 1,379 1,046 205 139
------ ------ ------ -------
Net Periodic Benefit Costs $3,376 $2,038 $1,073 $1,143
====== ====== ====== =======


12. Commitments and Contingencies

Focused Audit. On March 20, 2003, the NJBPU announced the initiation of a
focused audit of 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
recorded a pre-tax charge of $30 million in the fourth quarter of fiscal 2003 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. The
company has also agreed to pay interest at 7.95 percent annually on the unpaid
balance. The $28 million will be credited to ratepayers as follows: $7 million
in NUI's fiscal year 2004, $6 million in NUI's fiscal year 2005 and $5 million
in each of NUI's fiscal years 2006, 2007 and 2008.

In addition, the company established a pre-tax reserve of $2.6 million in fiscal
2003 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 on
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
13


Bonds, (iv) $54.6 million of 5.70 percent bonds due June 1, 2032 and (v) $40
million of 5.25 percent bonds due November 1, 2033, as well 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 were cured by virtue of NUI
Utilities' delivery of the company's annual report dated September 30, 2003 on
Form 10-K, related officers' certificates and other financial information.

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 the fiscal quarters ended December 31, 2003 and March 31,
2004. To date, NUI Utilities has obtained all necessary waivers and extended the
respective deadlines for delivery of all information required pursuant to such
bond facility 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 the required regulatory approval, 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.

As of March 31, 2004, the company has loaned SSLLC an aggregate of approximately
$26.0 million toward the development of the Saltville storage facility. The
company currently estimates its share of funding to be zero in fiscal 2004, and
$2.5 million in fiscal 2005. Subsequent years are expected 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 transportation 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 storage 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 $161.4 million to 42
counterparties as of March 31, 2004, in support of NUI Energy Brokers' trading
activities. These guarantees were necessary to facilitate trading with a broad
group of potential counterparties, although typically NUI Energy Brokers used
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 March 31, 2004, the
amount of purchases covered by outstanding guarantees was approximately $4.4
million.

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 an
14


undiscounted basis a total reserve of approximately $33.8 million which the
company believes represents the probable minimum amount the company may expend
over the next 30 years. Of this reserve, approximately $29.9 million relates to
remediation of the New Jersey MGP properties and approximately $3.9 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 NJBPU to be recoverable in rates through
its MGP Remediation Adjustment Clause. As a result, the company has recorded a
regulatory asset of approximately $34.6 million, inclusive of interest, as of
March 31, 2004, 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. 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 in recovering a
portion of the 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 amount to
approximately $60.5 million for the next twelve month period (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, the majority of 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.

NUI Utilities has entered into an agreement with Cinergy to manage its
interstate pipeline assets. NUI Utilities initially entered into an agreement
with Cinergy effective March 31, 2004, which covered only a one-month period.
That agreement was superceded by an agreement effective on April 1, 2004,
pursuant to which Cinergy will serve as NUI Utilities' asset manager from April
1, 2004 until March 31, 2005, and will provide NUI Utilities with a full
requirements gas supply service to enable NUI Utilities to meet its public
utility obligations to supply gas to customers in New Jersey, Florida and
Maryland. The gas supply will be provided at market-based prices.

NUI Utilities has assigned to Cinergy or, in the case of non-assignable assets,
granted Cinergy agency authority to control, NUI Utilities' gas supply and
deliverability assets, and Cinergy will pay NUI Utilities a fixed amount for the
right to act as NUI Utilities' asset manager for the twelve months ended March
31, 2005. The obligations of NUI Utilities, including all commodity and demand
charges, will be secured by a prepayment obligation unless NUI Utilities' credit
rating improves to investment grade, at which time the parties will negotiate
other mutually agreeable payment terms based on the improved creditworthiness of
NUI Utilities. The agreement provides NUI Utilities the option to terminate the
agreement in the event of a change in control of NUI Utilities or NUI.

Employment Agreements. The company has created an incentive plan designed to
retain key personnel through the date the company would be sold. Upon reaching
an agreement to sell the company, the company would begin accruing an aggregate
of approximately $3.7 million in retention costs through the anticipated closing
date for the sale of the company. These retention amounts would be payable
thirty days following the closing date of the sale, or on a date before the
closing date if the employee is released from his/her employment by the company.
In connection with the possible sale of the company, NUI has established a
discretionary severance plan for non-bargaining employees. In addition, certain
officers and directors have change in control agreements with NUI, which define
the amount of severance that would be payable upon the occurrence of certain
events as defined within the agreements.

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.

15


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 Class Action 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. Defendants
filed an Answer to the Second Amended Complaint on May 10, 2004. No discovery
has occurred yet. 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.

16


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 other claims and litigation incidental to its
business. In the opinion of management, none of these other claims and
litigation will have a material adverse effect on the company's results of
operations or its financial condition.

13. New Accounting Standards

In June 2002, the Emerging Issues Task Force (EITF) issued EITF 02-03, "Issues
Involved in Accounting for Contracts Under Issue 98-10," (EITF 02-03). The
purpose of EITF 02-03 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 provisions of EITF
02-03 became effective at certain times, and the provisions that were adopted
during fiscal 2003 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

17


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 applied 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 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 are 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.

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 (see Note 12). 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.

14. Business Segment Information

The company's operations are organized and managed as three primary segments:
Distribution Services, Energy Asset Management, 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 UBS operations and NUI Energy
subsidiary. The company also has corporate operations that do not generate any
revenues.

18


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 the three and six-month periods ended March 31, 2004 and 2003. The
company's management evaluates its segment profit and loss on the basis of
pre-tax income (losses) from continuing operations. 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. Certain
reclassifications have been made to prior year segment data to conform with the
current year's presentation.



Three Months Ended Six Months Ended
March 31, March 31,
(Dollars in thousands) 2004 2003 2004 2003
---- ---- ---- ----
Revenues:

Distribution Services $240,547 $232,257 $ 402,085 $398,443
Energy Asset Management 1,889 17,187 5,692 21,426
Retail and Business Services 2,412 1,527 4,746 4,386
Intersegment Revenues (1,492) (1,242) (2,664) (2,709)
-------- ---------- --------- --------
Total Revenues $243,356 $249,729 $ 409,859 $421,546
======== ======== ========= ========

Operating Margins:
Distribution Services $67,904 $66,678 $121,515 $117,423
Energy Asset Management 1,343 16,622 4,794 20,567
Retail and Business Services 1,174 380 2,326 2,053
Intersegment Operating Margins (363) (305) (837) (870)
-------- -------- -------- --------
Total Operating Margins $70,058 $83,375 $127,798 $139,173
======= ======= ======== ========

Pre-Tax Operating Income (Loss):
Distribution Services $29,093 $28,567 $45,614 $46,754
Energy Asset Management (3,862) 13,188 (3,809) 14,015
Retail and Business Services 52 (4,371) 38 (5,365)
------- ------- ------- -------
Total Pre-Tax Operating Income $25,283 $37,384 $41,843 $55,404
======= ======= ======= =======

Pre-Tax Income (Loss) from Continuing
Operations:
Distribution Services $23,952 $25,953 $36,243 $40,879
Energy Asset Management (4,453) 12,607 (4,762) 13,192
Retail and Business Services 3 (4,731) (49) (5,880)
------- ------- ------- --------
Total Pre-Tax Income (Loss) from
Continuing Operations $19,502 $33,829 $31,432 $48,191
======= ======= ======= =======

19


A reconciliation of the company's segment pre-tax operating income and income
(loss) from continuing operations, to amounts reported on the consolidated
financial statements, is as follows:



Three Months Ended Six Months Ended
March 31, March 31,
(Dollars in thousands) 2004 2003 2004 2003
---- ---- ---- ----


Segment Pre-Tax Operating Income $25,283 $37,384 $41,843 $55,404
Non-segment pre-tax operating loss (9,479) (1,274) (20,049) (2,064)
------- ------- -------- -------
Pre-tax Operating Income $15,804 $36,110 $21,794 $53,340
======= ======= ======= =======

Segment Pre-Tax Income (Loss) from
Continuing Operations $19,502 $33,829 $31,432 $48,191
Non-segment pre-tax loss from continuing
operations (13,380) (2,359) (36,352) (4,422)
------- ------- ------- -------
Pre-Tax Income (Loss) from Continuing
Operations $ 6,122 $31,470 $(4,920) $43,769
======= ======= ======= =======



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

20


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

The following discussion and analysis should be read in conjunction with the
unaudited condensed consolidated financial statements of NUI Corporation
included elsewhere herein and with the company's Annual Report on Form 10-K for
the fiscal year ended September 30, 2003.

Recent Developments

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

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

- the investigations of transactions at NUI Energy Brokers;

- new credit facilities at NUI and NUI Utilities;

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

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

- the pursuit of the sale of the company; and

- the sale of NUI Telecom.

Settlement Agreement with the NJBPU

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

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

- The company shall continue to use its existing cost allocation policy
until the earlier of the sale of the company or 18 months from the
date the settlement agreement was adopted as final;

- The company and the NJBPU agree that an appropriate target equity
percentage for Elizabethtown Gas shall be 45 percent and if the
average equity percentage for the preceding twelve months falls below
45 percent, the company shall provide the NJBPU with a written plan on
how the 45 percent equity capital will be reinstated;

- The company agrees to maintain a separate cash management system for
NUI Utilities and is prohibited from commingling cash of Elizabethtown
Gas or of NUI Utilities with the cash of NUI or of non-utilities
affiliates of NUI;

- The company shall provide the NJBPU with various financial statements
of NUI Utilities and Elizabethtown Gas;

- The pre-approval by the NJBPU is required for various intercompany
arrangements and for certain financing arrangements and certain other
transactions that could impact the assets or operations of
Elizabethtown Gas or NUI Utilities;

21


- NUI Utilities shall have different management and a separate Board of
Directors from NUI responsible for utility operations although NUI and
NUI Utilities may have up to three common directors; and

- The company agrees to settle all receivables and payables for allowed
intercompany transactions on a monthly basis in accordance with a
matrix developed by the company and the NJBPU.

The terms of the settlement agreement (1) do not prohibit the transfer of cash
between NUI Utilities and NUI for the purpose of the payment 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 NJBPU and (3) are not binding on
any purchaser of the company, except that, upon the closing of the sale, any
outstanding refund and penalty balance are required to be paid in full by the
company within a period of time to be determined by the NJBPU. The company's
agreement to the terms of the settlement is not an acknowledgement of
non-compliance with any law, regulation or NJBPU Order or requirement. The
settlement agreement resolves all issues identified in the final Liberty audit
report without acknowledgement or admission by the company as to the correctness
of any issue or that any specific issue forms the basis or any part of the basis
for the payments described above. The settlement provides that no further civil
action shall be taken by the NJBPU. The NJBPU retains the authority to impose
any requirements or conditions on a purchaser upon a petition for approval of a
sale of the company.

Other Regulatory Orders

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

Pending its review of the interim focused audit report, on December 11, 2003,
the NJBPU issued an Order in which NUI Utilities and Elizabethtown Gas were
directed to cease purchasing gas from NUI Energy Brokers upon 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 to approve by January 8,
2004. Further, per the Order, NUI Utilities is prohibited from issuing special
dividend payments (i.e., extraordinary dividends not in accordance with the
historical practices of the Board of Directors of NUI Utilities); and
Elizabethtown Gas shall not pay any allocated costs of any agreements, retainers
or arrangements for professional services and other expenditures incurred in
connection with, or as a result of, the focused audit and/or financial
difficulties of NUI unless approved by the NJBPU.

In its Order dated January 14, 2004, the NJBPU accepted the plan submitted by
NUI Utilities and Elizabethtown Gas which transferred the management of NUI
Utilities' and Elizabethtown Gas' gas supply assets to New Jersey Resources,
Inc. (NJRES) through March 31, 2004. The NJBPU further directed NUI Utilities to
file a procedure with the NJBPU for the competitive procurement of gas supply
management services for the period commencing April 1, 2004 through March 31,
2005. In the event NJRES was not

22


selected to continue to provide services to NUI Utilities as a result of the bid
process, the NJBPU directed NUI Utilities to pay an early termination fee.

NUI Utilities filed a procedure for competitive procurement of gas supply
management services, which was approved by the NJBPU on February 11, 2004. NUI
Utilities instituted a process for receiving bids for gas supply and capacity
management services to the company's New Jersey, Florida and Maryland utility
divisions. The company requested bidders to provide bids in one of three ways:
(1) on the basis of a fixed payment to the company reflecting the value of the
company's energy assets, (2) on the basis of sharing credits and/or margins
derived from capacity release and off-system sales activities, or (3) on the
basis of a fee tied to the volume of capacity in excess of the company's
requirements multiplied by a measure of the market value tied to available
published indices. The company received multiple bids from nine third-party
suppliers. As a result of this process, NUI Utilities selected Cinergy to
provide a full 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 for the use of NUI Utilities' gas and
deliverability assets for the twelve months ended March 31, 2005. The NJBPU
approved the selection of Cinergy as the company's gas and capacity management
services provider on April 14, 2004.

Investigations of Transactions at NUI Energy Brokers

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

The Attorney General of the State of New Jersey 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. In addition, the U.S. Securities and Exchange Commission (SEC)
has commenced an informal inquiry relating to NUI Energy Brokers. NUI is fully
cooperating with these investigations.

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

New Credit Facilities at NUI and NUI Utilities

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

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

Pursuant to these waivers, the deadline for the delivery of NUI's annual report
and financial statements for its fiscal quarter ended December 31, 2003 was
extended until March 1, 2004. 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 on 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,

23


(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.

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

Gas Supply Contract with Cinergy

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

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

Changes in Boards of Directors of NUI and NUI Utilities and Changes in
Management

NUI

On January 28, 2004, the Board of Directors of NUI announced that it had
appointed Craig G. Matthews as the President and Chief Executive Officer of NUI
and as a member of its Board of Directors and that it had appointed Steven D.
Overly as the Vice President, General Counsel and Secretary of NUI. Mr. Matthews
replaced A. Mark Abramovic, who retired and who had previously been appointed
President of NUI after John Kean, Jr. stepped down in September 2003. Mr. Overly
replaced James R. Van Horn, the former Chief Administrative 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 of the Board of Directors of NUI on April 1, 2004, replacing
John Kean, who remains as a director of NUI until his retirement later in 2004.

In October 2003, NUI announced the appointment of Dan Scouler as Chief 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 is the managing member of Scouler Andrews
International, LLC and was previously a Senior Managing Director of FTI
Consultants, which the company employed in October 2003 to manage its financial
operations and develop new liquidity forecasts.

24


NUI Utilities

In October 2003, NUI Utilities expanded its existing Board of Directors 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 of Directors of NUI Utilities. Mr. Kean is the current Chairman of the
Board of Directors of NUI Utilities.

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

Sale of the Company

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

The company is continuing to work with its financial advisors on the sale
process for the company and hopes to enter into a definitive agreement with a
purchaser during the third quarter of calendar 2004. For a discussion of factors
that could prevent or delay the sale of the company, see Item 1. Business--Risk
Factors--The sale of NUI may not be consummated, as discussed in the company's
Annual Report on Form 10-K for the fiscal year ended September 30, 2003.

The Sale of NUI Telecom

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

Forward-Looking Statements

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

- statements as to NUI's and NUI Utilities' requirements for additional
financing and the ability of NUI and NUI Utilities to extend and
refinance certain of their outstanding indebtedness, including the
credit facilities entered into in November 2003;
- statements as to NUI's and NUI Utilities' expected liquidity needs
during fiscal 2004, fiscal 2005 and beyond and statements as to the
sources and availability of funds to meet the liquidity needs of NUI
and NUI Utilities;
- statements as to expected financial condition, performance, prospects
and earnings of the company; and expected liquidity needs and sources
of funds;
- statements as to the company's possible settlement with the Florida
Public Service Commission (FPSC);
- estimates as to the amount to be refunded to customers in Florida as a
result of the investigation of NUI Energy Brokers;
- statements as to expected rates, gas volumes, gas sales, revenues,
margins, expenses and operating results;
- statements as to industry forecasts in markets in which the company
has operations;
- statements as to the amount and sources of funding for future capital
expenditures and investments of the company, including the company's
estimated share of its funding commitments to its joint venture with
Duke Energy;

25


- statements as to the intended operations of the Saltville facility and
the company's other storage and pipeline projects, including the
timing of the completion and commencement of operations thereof;
- statements as to the timing for seeking regulatory approval for its
Florida East-West Pipeline project;
- statements as to the company's compliance with environmental laws and
regulations and estimations of the materiality of any related costs;
- statements as to the safety and reliability of the company's
equipment, facilities and operations;
- statements as to the sales process for the company, including with
respect to the time frame for entering into an agreement for the sale
of the company;
- expectations as to the impact of and anticipated settlement of
lawsuits filed against the company and the impact of ongoing legal
investigations and proceedings, including those described under Part
II- Other Information- Item 1. Legal Proceedings;
- statements as to financial projections;
- statements as to the company's plans to pursue recovery of costs
associated with the environmental remediation of manufactured gas
plants from ratepayers, former owners and operators and/or insurance
carriers;
- statements as to expected level of demand on the company's systems for
natural gas during the term of the company's gas procurement
contracts;
- estimates as to the expected future cash flows for hedges of
forecasted transactions;
- statements as to the ability of NUI and NUI Utilities to pay
dividends;
- statements as to the company's plans to renew municipal franchises and
consents in the territories it serves;
- expectations as 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 as to whether the company's internal control weaknesses
were addressed by management;
- expectations as to the amount to be paid for professional fees in
fiscal 2004;
- expectations as to the expected rate of increase in interest expense
as a result of the new credit facilities entered into by NUI and NUI
Utilities;
- expectations as to the level of competition that NUI Utilities will
face;
- statements as to trends;
- statements as to whether the company's accrued tax liabilities are
adequate and as to whether any settlement related to the examination
of NUI's Federal income tax returns for 2000 and 2001 by the Internal
Revenue Service will have a material impact on NUI's consolidated
statement of operations, financial position or cash flow;
- statements as to the amount of the over-recovery balance under City
Gas' purchased gas adjustment recovery clause;
- statements as to the company's ability to recover fixed charges under
its purchased gas adjustment clauses;
- expectations as to relations between the company and its employees,
including relationships with labor unions; and
- expectations as to the company's growth, cash flows and capital
expenditures.

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

- the ability of the company to obtain necessary waivers from its
lenders;
- the ability of the company to obtain additional financing for the
winter heating season;
- the impact and outcome of ongoing investigations and lawsuits;
- the ability of the company to prepay its natural gas obligations;
- the effects of general economic conditions;
- increases in competition in the markets served by the company;
- the effects of deregulation of the energy markets, including industry
restructuring and unbundling of services;
- the ability of the company to implement successfully its strategy,
including the planned sale of the company;

26


- the ability of the company to control operating expenses and to
achieve efficiencies in its operations;
- the ability of the company to continue to modernize its distribution
infrastructure as scheduled and budgeted;
- the willingness of lenders and suppliers to continue to do business
with the company;
- the availability and price of insurance;
- the availability of adequate supplies of natural gas;
- the ability of NUI and NUI Utilities to extend their existing credit
facilities for an additional 364 days, and the ability of NUI and NUI
Utilities to refinance their existing credit facilities upon
termination;
- actions taken by government regulators, including decisions on base
rate increase requests;
- actions taken by credit rating agencies;
- the ability of the company to recover environmental remediation costs
through rates or insurance;
- the ability of the company to attract and retain key executives and
employees;
- fluctuations in energy commodity prices;
- weather variations and other natural phenomena;
- acts of war or terrorism; and
- other factors discussed elsewhere in this quarterly report.

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

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

Overview

The company is a diversified energy company that is primarily engaged in the
sale and distribution of natural gas through its local utility companies. Its
local utility operations are carried out by NUI Utilities and its operating
divisions, as well as through a subsidiary of Virginia Gas Company (VGC) and
serve approximately 371,000 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. The company's non-regulated businesses are carried out by NUI Capital
and its subsidiaries. As of April 1, 2004, however, the company's only remaining
non-regulated subsidiary with substantial operations is Utility Business
Services, Inc. (UBS), a billing and customer information systems and services
subsidiary. The company's other non-regulated subsidiaries have either been sold
or are being discontinued. These subsidiaries include NUI Environmental, Inc.
(NUI Environmental), an environmental project development subsidiary sold in
September 2003; NUI Telecom, Inc. (NUI Telecom), a telecommunications services
subsidiary sold in December 2003; NUI Energy, Inc. (NUI Energy), an energy
retailer; NUI Energy Brokers, Inc. (NUI Energy Brokers); a wholesale energy
trading and portfolio management subsidiary; OAS Group, Inc. (OAS), the
company's digital mapping operation, which prior to September 30, 2003, was part
of UBS; and TIC Enterprises, LLC (TIC), a sales outsourcing subsidiary which
sold wireless and network telephone services. In addition, through NUI Saltville
Storage, Inc. (NUISS), the company is a fifty-percent member of Saltville Gas
Storage Company, LLC (SSLLC), a joint venture with a unit of Duke Energy that is
developing a natural gas storage facility in Saltville, Virginia.

The company's growth strategy has not produced the results the company had
anticipated and, as a result, the company experienced significant losses and
write-offs in its non-utility businesses during fiscal years 2001, 2002 and
2003.

27


During fiscal 2003, the company considered several alternate financing plans
aimed at restoring the credit worthiness of the company, but none of these plans
were deemed viable. The company also sold or announced its intention to sell
most of its non-core businesses in an attempt to raise capital and reduce
losses. Finally, 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.

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

As described below in Liquidity and Capital Resources and in Note 2 of the Notes
to the Consolidated Financial Statements, NUI and NUI Utilities are likely to
have additional liquidity needs beginning in the 2004-2005 winter season, as a
result of, among other things, the pre-payment requirements of NUI Utilities'
gas supply, delivery and storage requirements and the NJBPU Settlement. In
addition, NUI and NUI Utilities will be required to refinance or extend their
respective existing bank indebtedness in November 2004. Even if NUI and NUI
Utilities are able to extend their respective existing bank indebtedness in
November 2004, NUI and NUI Utilities would still have to refinance their
respective existing bank indebtedness in November 2005.

Results of Operations

Consolidated Review of Results of Operations

The following discussion is intended to provide an overview of consolidated
results for the three and six-month periods ended March 31, 2004 and 2003.
Following this discussion is a more detailed overview of the results for NUI's
three business segments.

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

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

Income (Loss) from Continuing Operations. Income from continuing operations was
$4.1 million, or $0.26 per share, for the three-month period ended March 31,
2004, compared to $18.4 million, or $1.15 per share, for the same period in
fiscal 2003. The current three-month period decrease is primarily due to (1)
reduced operating margins of approximately $15.3 million by NUI Energy Brokers,
which resulted from the company scaling back its energy trading operation in
conjunction with the focused audit being conducted by the NJBPU and an
investigation of its trading practices; (2) increased interest expense of

28


approximately $5.7 million, which resulted from both higher weighted average
indebtedness and increased interest rates during the current three-month period;
(3) increased operation and maintenance expenses of approximately $6.3 million
and (4) additional restructuring expenses related to severance payments to
employees of approximately $1.0 million during the current three-month period.
These decreases in income from continuing operations were partially offset by
higher equity and other income (approximately $0.7 million) and reduced income
tax expenses (approximately $11.0 million) during the current three-month
period, as compared to the prior fiscal period. The increased operating expenses
were due primarily to increased legal and professional fees in conjunction with
the focused audit conducted by the NJBPU, the investigation conducted involving
questionable transactions by NUI Energy Brokers, and costs associated with
finding a buyer for the company (approximately $4.7 million), bank fees
(approximately $2.7 million), insurance (approximately $0.8 million), costs
incurred to wind-down NUI Energy Brokers (approximately $0.7 million), labor and
employee benefits, primarily due to severance paid to the company's former Chief
Executive Officer and General Counsel (approximately $0.7 million), and
increased pension costs (approximately $0.6 million). These increases were
partially offset by reduced bad debts, mainly as a result of the winding-down of
NUI Energy during fiscal 2003 (approximately $3.6), and rent expenses
(approximately $0.3 million) during the three-month period ended March 31, 2004.

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

The company anticipates increased costs related to legal, professional, and bank
fees while it completes the sale process and continues to address its liquidity
needs. Increases are also anticipated in pension and insurance expenses during
the remainder of fiscal 2004.

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

After-tax losses from discontinued operations for the six months ended March 31,
2004, were $1.1 million, or $0.06 per share, compared to $0.6 million, or $0.04
per share during the prior fiscal year. The increased losses during fiscal 2004
were primarily due to losses of NUI Telecom prior to the sale on December 15,
2003, as well as the costs of winding-down the operations of TIC.

29

Business Segment Review of Results of Operations

The following is a discussion of the company's business segment results of
operations and is presented based on Income from Continuing Operations before
Taxes. Included in operations and maintenance expenses for each of NUI's
business segments are allocations of corporate costs related to shared service
functions such as human resources, legal, accounting and information technology,
which are allocated based on the ocmpany's cost allocation policty. In addition,
the company has corporate operations that incurred operating expenses of $9.5
million and $1.3 million for the three-month periods ended March 31, 2004 and
2003, respectively, and $20.1 million and $2.1 million for the six-month periods
ended March 31, 2004 and 2003, respectively. The increases during the fiscal
2004 periods relate to increased costs related to outside professional services,
bank fees, and restructuring charges. These costs are not allocated to our
business segment results.

Distribution Services Segment

The company's Distribution Services segment distributes natural gas in three
states throught the company's regulated natural gas utility operations. These
operations are Elizabethtown Gas Company (New Jersey), City Gas Company of
Florida, and Elkton Gas (Maryland). This segment also includes the company's OAS
subsidiary, its appliance leasing, repair, maintenance operations and service
business as well as off-system sales. The company sold its Valley Cities Gas and
Waverly Gas natural gas utilities in November 2002 (see Note 4 ofthe Notes to
the Consolidated Financial Statements). The results for these operations are
reflected in Discontinued Operations in the Consolidated Financial Statements
for the three and six-month periods ended March 31, 2003 and 2002. The Income
form Continuting Operations before Taxes for the segment is as follows:



- ---------------------------------------------------------------------------------------------------------------
(Dollars in thousands) Three Months Three Months Six Months Six Months
Ended March Ended March Ended March Ended March
31, 2004 31, 2003 31, 2004 31, 2003
- ---------------------------------------------------------------------------------------------------------------

Operating Revenues $240,341 $231,967 $401,567 $397,863
Purchased Gas and Fuel 164,134 157,662 265,033 266,630
Cost of sales and services 2,876 2,516 5,877 5,393
Energy Taxes 5,507 5,289 9,414 8,783
------------------------------------------------------------------
Operating Margins 67,824 66,500 121,243 117,057
------------------------------------------------------------------
Operating Expenses:
Operations & Maintenance Expenses 28,745 27,959 55,789 51,100

Depreciation & Amortization 7,935 8,054 15,877 15,727
Taxes Other than Income 2,051 1,920 3,963 3,476
------------------------------------------------------------------
Total Operating Expenses 38,731 37,933 75,629 70,303
------------------------------------------------------------------
Pre-Tax Operating Income 29,093 28,567 45,614 46,754
Other Income & (Expense) 367 165 838 317
Net Interest Charges 5,508 2,778 10,211 6,191
------------------------------------------------------------------
Pre-Tax Income from Continuing
Operations $23,952 $25,954 $36,241 $40,880
------------------------------------------------------------------



Operating Revenues. Operating revenues include amounts billed for the cost of
purchased gas pursuant to purchased gas adjustment clauses (BGSS in New Jersey
and PGA in Florida) utilized by the company's utility operations. Such clauses
enable the company to pass through to its utility customers, via periodic
adjustments to customers' bills, changes in costs incurred by the company for
purchased gas without affecting operating margins. These purchased gas
adjustments are authorized by regulatory authorities in the states in which the
company operates. Since the company's utility operations do not earn a profit on
the sale of the gas commodity, the company's level of regulated operating
revenues is not necessarily indicative of financial performance. Similarly, the
Societal Benefits Charge (SBC) is a clause which enables Elizabethtown Gas to
pass through to its customers the costs of certain NJBPU-mandated programs and
environmental remediation programs.

30


Distribution Services operating revenues increased by $8.3 million, or 4
percent, to $240.3 million during the three months ended March 31, 2004, as
compared to $232.0 million in the same period in fiscal 2003. The increase in
operating revenues was primarily attributable to an increase in BGSS and PGA
rates charged to customers in New Jersey and Florida, respectively,
(approximately $24.5 million) and an increase in Elizabethtown Gas' SBC
(approximately $3.0 million). A base rate increase in Florida (approximately
$1.2 million) also contributed to the increase in operating revenues. (See
Regulatory Matters for a further discussion of rate increases.) These increases
were partially offset by reduced off-system sales (approximately $22.6 million).

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

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

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

With the exception of demand caused by changes in weather, the company does not
anticipate any significant change in the economic outlook for natural gas sales
in this segment for the remainder of fiscal 2004.

Operating Expenses. Operations and maintenance expenses increased by $0.8
million, or 3 percent, to $28.7 million for the three months ended March 31,
2004, as compared with $27.9 million in the same period in fiscal 2003. This was
mainly due to increases in legal and professional fees (approximately $2.4
million), insurance costs for general liability (approximately $1.5 million),
pension expenses due to lower discount rate and asset return assumptions
(approximately $0.5 million), materials and supplies costs used by the appliance
operations (approximately $0.3 million), telephone (approximately $0.3 million),
and bank fees (approximately $0.3 million). These increases were partially
offset by reduced labor and employee benefits (approximately $3.4 million), bad
debts (approximately $0.9 million), and rent expense (approximately $0.1
million).

31


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

The company anticipates increased costs related to legal, professional, and bank
fees while it completes the process of finding a buyer and continues to address
its liquidity needs. Increases are also anticipated in pension and insurance
expenses during the remainder of fiscal 2004.

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

Other income increased by approximately $0.5 million, for the six months ended
March 31, 2004, as compared to the same period in fiscal 2003. The increase in
the current six-month period was primarily due to the effect of the factor
discussed above regarding the current three-month fiscal period.

Net Interest Charges. Net interest charges increased by approximately $2.7
million, or 98 percent, to $5.5 million for the three months ended March 31,
2004 from $2.8 million in the same period in fiscal 2003. The increase during
the current three-month period is primarily a result of higher weighted average
indebtedness and increased interest rates of NUI Utilities during the current
three-month period (see additional discussion under Liquidity and Capital
Resources- Sources of Liquidity- Short-term Debt).

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

The company expects the higher amount of weighted average indebtedness and
interest rates to continue for the remainder of fiscal 2004. See Liquidity and
Capital Resources for further discussion.

Energy Asset Management Segment

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

32




- -------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) Three Months Three Months Six Months Six Months
Ended March Ended March Ended March Ended March
31, 2004 31, 2003 31, 2004 31, 2003
- -------------------------------------------------------------------------------------------------------------------------

Operating Revenues $1,465 $17,041 $5,237 $20,886
Purchased Gas and Fuel 122 264 443 319
-----------------------------------------------------------------------
Operating Margins 1,343 16,777 4,794 20,567
-----------------------------------------------------------------------
Operating Expenses:
Operations & Maintenance Expenses 4,501 2,804 7,077 4,997
Depreciation & Amortization 513 591 1,027 1,162
Taxes Other than Income 191 194 499 393
-----------------------------------------------------------------------
Total Operating Expenses 5,205 3,589 8,603 6,552
-----------------------------------------------------------------------
Pre-Tax Operating Income (Loss) (3,862) 13,188 (3,809) 14,015
Other Income & (Expense) 453 98 1,030 235
Net Interest Charges 1,044 679 1,983 1,058
-----------------------------------------------------------------------
Pre-Tax Income (loss) from
Continuing Operations $(4,453) $12,607 $(4,762) $13,192
-----------------------------------------------------------------------


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

Operating revenues decreased approximately $15.7 million, or 75 percent, to $5.2
million for the six months ended March 31, 2004, as compared to $20.9 million in
the same period in fiscal 2003. The decrease was due to the approximately $15.3
million of reduced operating margins recorded by NUI Energy Brokers as a result
of the company winding down its trading operations during the current fiscal
period. The operating revenues of VGC decreased approximately $0.4 million as a
result of reduced storage revenues due to fewer contracts during the six-month
period ended March 31, 2004, as compared to the same period in fiscal 2003.

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

Operating Margins. Operating margins decreased approximately $15.5 million, or
92 percent, to $1.3 million for the three months ended March 31, 2004, as
compared to $16.8 million in the same period in fiscal 2003. Of this decrease,
approximately $15.3 million was attributable to NUI Energy Brokers and
approximately $0.2 million was attributable to VGC, and was primarily due to the
effect of the factors discussed above regarding operating revenues.

Operating margins decreased approximately $15.8 million, or 77 percent, to $4.8
million for the six months ended March 31, 2004, as compared to $20.6 million in
the same period in fiscal 2003. Of this decrease, approximately $15.3 million
was attributable to NUI Energy Brokers and approximately $0.5 million was
attributable to VGC, and was primarily due to the effect of the factors
discussed above regarding operating revenues.

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

33


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

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

Other Income and Expense. Other income increased by approximately $0.4 million,
for the three months ended March 31, 2004, as compared to the same period in
fiscal 2003. The increase in the current three-month period was due to
approximately $0.4 million of equity income of SSLLC, which began operations
during August 2003.

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

Net Interest Charges. Net interest charges increased by approximately $0.3
million, to $1.0 million for the three months ended March 31, 2004 from $0.7
million in the same period in fiscal 2003. The increase during the current
three-month period is primarily due to increased allocated interest costs of
NUI, which resulted in higher weighted average indebtedness and increased
interest rates during the current three-month period (see additional discussion
under Liquidity and Capital Resources- Sources of Liquidity- Short-term Debt).

Net interest charges increased by approximately $0.9 million, to $2.0 million
for the six months ended March 31, 2004 from $1.1 million in the same period in
fiscal 2003. The increase during the current six-month period was primarily due
to the effect of the factors discussed above regarding the current three-month
fiscal period.

Retail and Business Services Segment

The Retail and Business Services segment includes the operations of the
company's NUI Energy and UBS subsidiaries. In order to exit the retail and
business services segment, the company began winding down the operations of NUI
Energy during May 2003 and TIC during June 2003, and sold NUI Telecom on
December 15, 2003 (see Note 4 of the Notes to the Consolidated Financial
Statements). NUI Telecom, as well as the operations of TIC previously reported
in this segment, have been reclassified to discontinued operations. The Income
from Continuing Operations before Taxes for the segment is as follows:



- ---------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) Three Months Three Months Six Months Six Months
Ended March Ended March Ended March Ended March
31, 2004 31, 2003 31, 2004 31, 2003
- ---------------------------------------------------------------------------------------------------------------------

Operating Revenues $1,550 $721 $3,055 $2,797
Cost of sales and services 659 623 1,294 1,248
Operating Margins ------------------------------------------------------------------------
891 98 1,761 1,549
------------------------------------------------------------------------
Operating Expenses:
Operations & Maintenance Expenses 449 3,995 934 5,981
Depreciation & Amortization 334 384 661 746
Taxes Other than Income 56 90 128 187
------------------------------------------------------------------------
Total Operating Expenses 839 4,469 1,723 6,914
------------------------------------------------------------------------
Pre-Tax Operating Income (Loss) 52 (4,371) 38 (5,365)
Other Income & (Expense) --- --- --- 34
Net Interest Charges 48 360 87 549
------------------------------------------------------------------------
Pre-Tax Income (Loss) from
Continuing Operations $4 $(4,731) $(49) $(5,880)
------------------------------------------------------------------------


34


Operating Revenues. Retail and Business Services operating revenues increased by
approximately $0.8 million, or 115 percent, to $1.5 million for the three months
ended March 31, 2004 from $0.7 million in the same period in fiscal 2003. This
increase was primarily due to negative operating revenues of approximately $0.9
million that were recorded during the three-month period ended March 31, 2003,
which did not recur during the same period in fiscal 2004. The negative margins
recorded during the fiscal 2003 period were a result of the company's efforts to
wind down its retail energy business. Operating revenues for UBS during the
three-months ended March 31, 2004, were consistent with the prior fiscal year.

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

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

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

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

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

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

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

Net Interest Charges. Net interest charges decreased by approximately $0.3
million, to $0.1 million for the three months ended March 31, 2004 from $0.4
million in the same period in fiscal 2003. The decrease during the current
three-month period is primarily due to decreased allocated interest costs of NUI
as a result of the company's decision to wind down the operations of its retail
energy business during the prior fiscal year.

Net interest charges decreased by approximately $0.4 million, to $0.1 million
for the six months ended March 31, 2004 from $0.5 million in the same period in
fiscal 2003. The decrease during the current six-month period was primarily due
to the effect of the factors discussed above regarding the current three-month
fiscal period.

35


Regulatory Matters

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

On September 16, 2003, Elizabethtown Gas received approval from the NJBPU to
increase its BGSS rates on a provisional basis by $28.8 million and on October
10, 2003, Elizabethtown Gas was granted approval to increase its SBC by
approximately $8.0 million. The BGSS charge covers the cost of natural gas
supplies that Elizabethtown Gas purchases for its customers, while the SBC
allows Elizabethtown Gas to recover the cost of mandated energy efficiency,
low-income assistance, energy education and environmental remediation programs.
Both of these charges represent pass-through of costs on which the company does
not earn a profit. In its December 11, 2003 Order, the NJBPU stated that it
would reconsider the provisional rates approved by the NJBPU pursuant to
Elizabethtown Gas' petition for an increase in BGSS rates. The company's
settlement with the NJBPU on April 14, 2004 resolved all issues related to this
BGSS proceeding.

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

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

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

Liquidity and Capital Resources

Overview

As a result of the various factors discussed in this quarterly report, 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 purchased gas adjustment clauses; both
discretionary and required repayments of short- and long-term debt; capital
spending; and working capital requirements, such as administrative expenses

36


and taxes. Liquidity needs at NUI and NUI's non-utility operations generally are
driven by required repayments of short-term debt and working capital
requirements.

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

In addition, at times NUI utilizes intercompany dividends from NUI Utilities and
amounts realized from the settlement of intercompany balances to satisfy various
subsidiary needs and to manage short-term cash needs. Historically, NUI
Utilities has paid dividends of up to 75 percent of its annual net income to
NUI. The Standby Bond Purchase Agreement (SBPA) entered into in connection with
the Variable Bonds, which, as described below, are a series of gas facility
revenue bonds issued by the New Jersey Economic Development Authority (NJEDA),
restricts the payment of dividends by NUI Utilities to NUI to an amount based,
in part, on the earned surplus of NUI Utilities, which had been reduced by the
NJBPU Settlement. On May 19, 2004, NUI Utilities and The Bank of New York
amended the SBPA. The amendment eliminates the effect of the NJBPU Settlement,
as well as the estimated refunds to customers in Florida and certain other
related costs, on the earned surplus of NUI Utilities, thereby allowing for the
payment of dividends by NUI Utilities to NUI at this time. In addition, under
the amendment to NUI Utilities' credit facility dated May 10, 2004, NUI
Utilities is prohibited from paying dividends exceeding $35 million in the
aggregate while the credit facility is outstanding. There are no contractual
restrictions on the settlement of intercompany balances in NUI's or NUI
Utilities' financing agreements.

On a consolidated basis, the company's net cash provided by operating activities
was $18.6 million and $66.6 million for the six-month periods ended March 31,
2004 and 2003, respectively. The decrease of $48.0 million in operating cash
flows for the current period was due in part to the timing of payments to the
company's gas suppliers and amounts paid in advance for interest costs on NUI's
and NUI Utilities' new credit facilities and as collateral for the company's gas
procurement needs. The decrease in operating cash flows was partially offset by
reductions in accounts receivable for the company's non-regulated businesses
during the six-month period ended March 31, 2004, as compared to the same period
in fiscal 2003.

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. See Sources of Liquidity - Short Term Debt below for a further
description of the November 2003 credit facilities.

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

37


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, 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. 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 debt
financing. For a further discussion about risks relating to NUI Utilities'
liquidity, see Item 1. Business--Risk Factors in the company's annual report on
Form 10-K for the fiscal year ended September 30, 2003.

Because the company's business is highly seasonal, short-term debt is used to
meet seasonal working capital requirements. NUI also borrows under its bank
lines of credit to finance portions of its capital expenditures. As of March 31,
2004, NUI had drawn $255.0 million and NUI Utilities had drawn $100.0 million
under their respective short-term credit facilities. On that date, NUI and NUI
Utilities had overnight cash investments of approximately $23.4 million and
$102.0 million, respectively.

NUI's and NUI Utilities' debt agreements also contain a number of covenants that
significantly limit their respective ability to, among other things, borrow
additional money, pay dividends, transfer or sell assets, create liens and enter
into a merger or consolidation. In particular, under the amendment to NUI's
credit facility as of May 10, 2004, NUI 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 and is also not likely to be able to pay
any dividends in the foreseeable future. The covenants also require both NUI and
NUI Utilities to meet certain additional financial tests. If either NUI or NUI
Utilities were unable to meet its debt service obligations or to comply with
these covenants, there would be a default under one or more of the agreements.
Such a default, if not waived by our lenders, could result in acceleration of
the repayment of either NUI's or NUI Utilities' debt and have a material adverse
effect on each company's financial conditions, results of operations and
liquidity.

The company completed the sale of its NUI Telecom subsidiary on December 15,
2003, for approximately $2 million.

NUI repaid an approximately $85 million outstanding intercompany balance owed to
NUI Utilities on November 24, 2003, with the proceeds of a new credit facility
entered into on that date (see Short-term Debt discussion which follows).

38


Credit Rating Actions

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

On October 6, 2003, Moody's downgraded NUI's debt rating from B-1 to B-3.
Moody's also downgraded the debt rating of NUI Utilities from Ba-1 to Ba-3.
Moody's cited the company's announcement that the company's Board of Directors
had placed the entire company up for sale. In addition, Moody's indicated that
their action reflects the difficult business conditions affecting the company as
well as the limited progress in selling non-core assets, citing that this
limited the company's financial flexibility. Moody's also cited the continuing
financial relationship between NUI and NUI Utilities, liquidity concerns, and
the costs associated with finding a suitable buyer for the company. As a result
of these downgrades, NUI Utilities' cost of borrowing under its short-term
facilities increased an additional 62.5 basis points or 0.625 percent and the
cost of borrowing for NUI was unchanged. In conjunction with the downgrades on
October 6, 2003, Moody's indicated they would monitor the company's liquidity
position as well as its progress in selling non-core assets.

On April 6, 2004, Moody's further downgraded NUI's debt rating from B-3 to
Caa-1. Moody's also downgraded the debt rating of NUI Utilities from Ba-3 to
B-1. Moody's cited (1) the company's recent announcements that it expects lower
earnings in the first quarter of fiscal 2004, resulting from severance costs and
expenses related to the debt refinancings concluded during November 2003 at
substantially higher rates of interest and fees; (2) the continued delay in
producing audited financial statements for the fiscal year ended September 30,
2003 and its unaudited first quarter Form 10-Q, because of continuing
investigations by the company's Audit Committee of certain questionable
transactions of NUI Energy Brokers, the company's wholesale energy trading
subsidiary, which required additional waivers from lenders of both NUI and NUI
Utilities; (3) the expectation of having to incur a meaningful settlement charge
as a result of the focused audit conducted by the NJBPU, which would reduce the
company's income and equity for fiscal 2003; (4) the ongoing investigation of
the New Jersey Attorney General's Office into NUI Energy Brokers; and (5) the
delays in realizing the sale of the company, which is the source of repayment of
NUI's $255 million rated debt and a portion of the debt of NUI Utilities.
Moody's also cited the financial relationship between NUI and NUI Utilities and
that any penalties that may be assessed to the company by the NJBPU may have to
be funded from the earnings and cash flows of NUI Utilities. In addition, NUI
and NUI Utilities have overlapping lenders that require debt to be serviced by
each entity. Moody's further cited that to the extent NUI does not have the
means to discharge its own debt obligations, these lenders may seek dividends
from NUI Utilities to help service NUI's debt. The lower rating Moody's assigned
to NUI reflects the structural subordination of its debt relative to that of NUI
Utilities.

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

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

39


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

Sources of Liquidity

Short-Term Debt. On November 24, 2003, NUI and NUI Utilities each entered into
new separate revolving credit facilities aggregating $405 million. Both NUI's
and NUI Utilities' current credit agreements expire on November 22, 2004, and
each may be extended for one 364-day term, subject 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 with the administrative agent to cover interest that would accrue
on outstanding amounts under the credit facility until the extended maturity
date, in the 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 February 1, 2005, have been
extended to a date no earlier than June 30, 2006 or have been repaid with the
proceeds of the delayed draw term loan and (iii) no default exists under such
facility at the time of such extension.

NUI's current credit agreement provides for a $255 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 March 31, 2004, NUI had fully
drawn all amounts available under its credit agreement. As of May 14, 2004, NUI
had overnight cash investments of $28.8 million.

NUI Utilities' current credit agreement provides for (i) a $50 million revolving
credit facility, (ii) a $50 million term 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) the Base Rate (subject to a 3 percent floor) plus 4
percent. As of March 31, 2004, NUI Utilities had fully drawn all amounts
available under the $50 million revolver and the $50 million term loan facility.
As of May 14, 2004, NUI Utilities had overnight cash investments of $109.1
million.

Both credit agreements contain various covenants that (i) restrict NUI and NUI
Utilities from taking various actions and (ii) require NUI and NUI Utilities,
respectively, to each achieve and maintain certain financial covenants. Under
the terms of NUI's credit agreement, 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 amended as of May 10, 2004, 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.

40


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.

At March 31, 2004, the outstanding borrowings under NUI's and NUI Utilities'
credit facilities were $255.0 million and $100.0 million, respectively, at
weighted average interest rates of 8.0 percent and 7.5 percent. As of that date,
NUI and NUI Utilities had no unused borrowing capacity under their credit
facilities. Also, as of March 31, 2004, NUI and NUI Utilities had approximately
$23.4 million and $102.0 million, respectively, of cash held as short-term
investments.

The weighted average daily amounts of borrowings outstanding under NUI's credit
facility and the weighted average interest rates on those amounts were $255.0
million and $40.8 million at 8.1 percent and 2.8 percent for the three months
ended March 31, 2004 and 2003, respectively. The weighted average daily amounts
of borrowings outstanding under NUI's previous and current credit facilities and
the weighted average interest rates on those amounts were $191.7 million and
$45.6 million at 7.8 percent and 3.0 percent for the six months ended March 31,
2004 and 2003, respectively. The weighted average daily amounts of borrowings
outstanding under NUI Utilities' credit facility and the weighted average
interest rates on those amounts were $94.9 million and $132.8 million at 7.2
percent and 2.6 percent for the three months ended March 31, 2004 and 2003,
respectively. The weighted average daily amounts of borrowings outstanding under
NUI Utilities' previous and current credit facilities and the weighted average
interest rates on those amounts were $105.0 million and $110.9 million at 5.6
percent and 2.5 percent for the six months ended March 31, 2004 and 2003,
respectively.

41


Long-Term Debt. NUI Utilities has outstanding $50 million 8.35 percent medium
term notes, which mature on February 1, 2005. As of March 31, 2004, this amount
has been reclassified to current liabilities on the Consolidated Balance Sheet.
As noted under Short-Term Debt above, 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 the 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 as a charge during the first
quarter of fiscal 2004. During the first quarter of fiscal 2004, the company
also recorded a charge of approximately $0.5 million for unamortized debt
expenses related to the senior notes.

NUI Utilities is party to a series of loan 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 March 31, 2004 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 SBPA with a
syndicate of banks, which was amended and restated on June 12, 2001. Under the
terms of the SBPA, as further amended several times, 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, 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 had been reduced by the NJBPU
Settlement recorded in September 2003. On May 19, 2004, NUI Utilities and The
Bank of New York amended the SBPA. The amendment eliminates the effect of the
NJBPU Settlement, as well as the estimated refunds to customers in Florida and
certain other related costs, on the earned surplus of NUI Utilities, thereby
allowing for the payment of dividends by NUI Utilities to NUI at this time. In
addition, pursuant to the terms of the amendment, and effective as of June 30,
2004, the expiration date of the SBPA will be extended to June 29, 2005.

If the SBPA is not further extended beyond June 29, 2005, in accordance with the
terms of the Variable Bonds, all of the 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 March 31, 2004, 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

42


(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, (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 were cured by virtue of NUI
Utilities' delivery of the company's annual report dated September 30, 2003 on
Form 10-K, related officers' certificates and other financial information.

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 the fiscal quarters ended December 31, 2003 and March 31,
2004. To date, NUI Utilities has obtained all necessary waivers and extended the
respective deadlines for delivery of all information required pursuant to such
bond facility to June 30, 2004. NUI and NUI Utilities are working diligently to
deliver the required documentation within this timeframe.

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.

Capital Expenditures and Commitments

Capital Expenditures. Capital expenditures, which consist primarily of
expenditures to expand and upgrade the company's gas distribution systems, were
$17.6 million for the six months ended March 31, 2004, and $26.6 million for the
six months ended March 31, 2003. The decreased capital spending during the
current fiscal period was due to the company's reduction of capital projects at
the corporate level.

Capital expenditures are expected to be approximately $51 million in fiscal
2004, which will be used primarily for the continued expansion and upkeep of the
company's natural gas distribution system and certain information technology
projects.

Joint Venture with Duke Energy. On April 30, 2001, the company announced an
agreement with a subsidiary 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 the
required regulatory approval, 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.

As of March 31, 2004, the company has loaned SSLLC an aggregate of approximately
$26.0 million toward the development of the Saltville storage facility. The
company currently estimates its share of funding to be zero in fiscal 2004, and
$2.5 million in fiscal 2005. Subsequent years are expected to be funded with
internally generated cash flows of the joint venture.

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

Development of the Saltville facility is intended to create a strategically
located energy-trading hub, and enable the company to capitalize on the energy
supply and wholesale energy portfolio and risk management opportunities in the
rapidly developing Mid-Atlantic region. The additional storage capacity is
expected to allow the company to meet the significant demand from local
distribution companies as well as power plant development that is underway in
the region.

43



In conjunction with the development of the Saltville facility, during December
2002, the company entered into a twenty-year agreement with DEGT for the firm
transportation of natural gas on the Patriot pipeline, which was under
construction at that time. 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 transportation 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 storage 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.

Other Storage and Pipeline Projects. The company has 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 gas storage
facility to help serve the Southeast United States. The land option has a
purchase price of approximately $0.5 million and the mineral rights option has 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 purchases would
expire.

NUI plans to develop a salt dome natural gas storage facility near Richton,
Perry County, Mississippi. Like its companion storage facility in Saltville,
Richton is expected to offer the high-deliverability capabilities of salt dome
storage for natural gas and will have access to a number of major interstate
pipelines, including Destin 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, as well as to supplies from the interconnected
interstate pipelines previously listed. Richton can also serve as a potential
storage facility for the various proposed liquefied natural gas (LNG) projects
in the Gulf Coast.

The preliminary plan is to develop two caverns with approximately 3.8 Bcf of
working gas capacity each. The total gas capacity of both caverns is expected to
be approximately 11.6 Bcf. The gas handling facilities are expected to provide
an average injection rate of 250,000 thousand cubic feet (Mcf) per day and a
maximum withdrawal rate of 600,000 Mcf per day. The facilities will include
approximately 18,000 HP of compression and a 14.6 kilometer, 24 inch pipeline
connecting the facility to the Destin pipeline. It is anticipated that Richton
will be a FERC regulated facility. The preliminary engineering study, conceptual
design for the facility and pipeline, water resource analysis, and a successful
"open season" have been completed. The total cost of the project is expected to
be approximately $85 million over a period of three years, which NUI will seek
to fund through project finance debt.

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

During 2001, the company began building a planned gas pipeline intended to cross
the state of Florida from West Palm Beach to Fort Myers (the Florida East-West
Pipeline Project). Phase I of the pipeline has been completed and is currently
in service beginning with a connection to the Florida Gas Transmission Company's
pipeline in West Palm Beach and terminating in South Bay. The remaining portions
of the project are intended to include an interconnection with the Florida Gas
Transmission Company's pipeline in Fort Myers and the Gulfstream Natural Gas
System pipeline in Martin County. During October 2003, the company retained a
company to provide engineering-related services in 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
regulatory approval process and construction activities.

The company intends to begin the regulatory approval process once suitable
customer commitments are obtained. When completed, the pipeline is expected to
be capable of transporting up to 300,000 Mcf per day of natural gas. The
pipeline is also intended to include direct connection to any of the three LNG
pipelines proposed to come onshore in southeast Florida at the ports of Palm
Beach and/or Port Everglades.

44



Once completed, the company's pipeline will serve as a transportation hub
linking the east and west sides of the Florida Gas Transmission system to the
proposed LNG pipelines and the Gulfstream Natural Gas System as well as the
company's proposed West Felda Gas Storage facility.

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

Together these projects are expected to provide increased reliability for
Florida's natural gas supply and distribution infrastructure and support
Florida's rapidly growing demand for natural gas utilized for electricity
generation.

Gas Procurement Contracts. Certain of the company's long-term contracts for the
supply, storage and delivery of natural gas include fixed charges that amount to
approximately $60.5 million for the next twelve-month period (this amount
includes the company's obligations under two twenty-year agreements related to
the Patriot pipeline discussed above). The company also is committed to
purchase, at market-related prices, minimum quantities of gas that, in the
aggregate, are approximately 2.1 Bcf per year or to pay certain costs in the
event the minimum quantities are not taken. The company expects that minimum
demand on its systems for the duration of these contracts will continue to
exceed these minimum purchase obligations.

NUI Utilities has entered into an agreement with Cinergy to manage its
interstate pipeline assets. NUI Utilities initially entered into an agreement
with Cinergy effective March 31, 2004, which covered only a one-month period.
That agreement was superseded by an agreement effective on April 1, 2004,
pursuant to which Cinergy will serve as NUI Utilities' asset manager from April
1, 2004 until March 31, 2005, and will provide NUI Utilities with a full
requirements gas supply service to enable NUI Utilities to meet its public
utility obligations to supply gas to customers in New Jersey, Florida and
Maryland. The gas supply will be provided at market-based prices.

NUI Utilities has assigned to Cinergy or, in the case of non-assignable assets,
granted Cinergy agency authority to control, NUI Utilities' gas supply and
deliverability assets, and Cinergy will pay NUI Utilities a fixed amount for the
right to act as NUI Utilities' asset manager for the twelve months ended March
31, 2005. The obligations of NUI Utilities, including all commodity and demand
charges, will be secured by a prepayment obligation unless NUI Utilities' credit
rating improves to investment grade, at which time the parties will negotiate
other mutually agreeable payment terms based on the improved creditworthiness of
NUI Utilities. The agreement provides NUI Utilities the option to terminate the
agreement in the event of a change in control of NUI Utilities or NUI. In light
of, among other factors, the requirement that NUI Utilities must prepay its gas
requirements under its agreement with Cinergy and its other gas supply,
distribution and storage agreements, and the obligation to make payments
pursuant to its settlement with the NJBPU, management of the company believes it
will need additional financing in order to assure that the company's liquidity
needs can be met during the upcoming winter heating season. There is no
assurance that any necessary additional financing can be obtained or that the
approval of the NJBPU, 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.

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

Environmental. The company owns or previously owned properties on which former
manufactured gas plants (MGP) were operated in the states of New Jersey, North
Carolina, South Carolina, Pennsylvania, New York and Maryland. Although the
actual total cost of future environmental investigation and remediation efforts
cannot be reasonably estimated, the company has recorded on an undiscounted
basis a

45



total reserve of approximately $33.8 million, which the company believes
represents the probable minimum amount the company may expend over the next 30
years. Of this reserve, approximately $29.9 million relates to the New Jersey
MGP properties and approximately $3.9 million relates to the MGP properties
located outside the state of New Jersey. The company believes that all costs
associated with remediation of the New Jersey MGP properties will be recoverable
in rates or from insurance carriers. The company's prudently incurred
remediation costs for the New Jersey MGP properties have been authorized by the
NJBPU to be recoverable in rates through its MGP Remediation Adjustment Clause.
As a result, the company has recorded a regulatory asset of approximately $34.6
million, inclusive of interest, as of March 31, 2004. With respect to costs that
may be associated with the MGP properties located outside the state of New
Jersey, the company is currently pursuing or intends to pursue recovery from
ratepayers, former owners and operators, and/or insurance carriers. However, the
company is not able, at this time, to express a belief as to whether any or all
of these recovery efforts will ultimately be successful.

Contractual Obligations. In the course of its business activities, the company
enters into a variety of contractual obligations and commercial commitments.
Some of these items result in direct obligations on NUI's balance sheet while
others are commitments, some firm and some based on uncertainties, that are
disclosed in the company's underlying consolidated financial statements. There
have been no material changes in the company's contractual obligations from
those disclosed in the company's annual report on Form 10-K for the year ended
September 30, 2003, except for the Cinergy agreement previously discussed.

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

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

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

Application of Critical Accounting Policies

The preparation of financial statements in accordance with generally accepted
accounting principles (GAAP) 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. Management considers Critical Accounting Policies to be those
that could result in materially different financial statement results if the
assumptions regarding application of accounting principles were different. A
description of the company's Critical Accounting Policies can be found in the
company's Annual Report filed on Form 10-K for the year ended September 30,
2003. Other significant accounting policies are discussed in Note 1 of the Notes
to the Consolidated Financial Statements-- Summary of Significant Accounting
Policies of the company's Form 10-K. Recently issued accounting standards are
also discussed in Note 13 of the Notes to the Consolidated Financial Statements.

46

NUI Corporation and Subsidiaries
Summary Consolidated Operating Data


Three Months Ended Six Months Ended
March 31, March 31,
2004 2003 2004 2003
---- ---- ---- ----
Operating Revenues (Dollars in thousands)
Firm Sales:

Residential $137,444 $117,576 $227,766 $195,406
Commercial and Industrial 61,189 46,169 100,644 79,775
Interruptible Sales 11,636 16,153 21,929 30,892
Unregulated Sales 9,003 46,058 14,862 71,806
Transportation Services 16,177 15,513 28,739 27,740
Customer Service, Appliance Leasing and Other 7,908 21,318 22,997 42,139
------- -------- ------- --------
Total Revenues 243,357 262,787 416,937 447,758
Revenues by Discontinued Operations (1) (13,058) (7,078) (26,212)
--------- -------- --------- ---------
Operating Revenues from Continuing Operations $243,356 $249,729 $409,859 $421,546
======== ======== ======== ========

Gas Sold or Transported (MMcf)
Firm Sales:
Residential 11,634 12,106 18,832 19,813
Commercial and Industrial 5,499 5,013 9,006 8,551
Interruptible Sales 1,467 2,186 3,159 5,021
Unregulated Sales 3,801 25,561 7,664 58,292
Transportation Services 9,940 10,303 18,926 20,287
-------- -------- ------- -------
Total Gas Sold or Transported 32,341 55,169 57,587 111,964
Gas Sold or Transported by Discontinued Operations --- --- --- (239)
-------- -------- -------- -------
Gas Sold or Transported by Continuing Operations 32,341 55,169 57,587 111,725
======== ======== ======== =======

Average Utility Customers Served
Firm Sales:
Residential 343,454 340,913 344,243 347,271
Commercial and Industrial 22,679 22,016 22,815 22,899
Interruptible Sales 26 25 26 29
Transportation Services 3,725 4,122 3,719 4,199
---- --- --- -------
Total Average Utility Customers Served 369,884 367,076 370,803 374,398
Average Utility Customers Served by Discontinued Operations --- --- --- (6,548)
-------- -------- -------- -------
Average Utility Customers Served by Continuing Operations 369,884 367,076 370,803 367,850
======== ======== ======== =======
Degree Days in New Jersey
Actual 2,787 2,860 4,422 4,688
Normal 2,547 2,547 4,260 4,260
Percentage variance from normal
9% 12% 4% 10%
colder colder colder colder

Employees (period end) 1,015 1,114

47



Item 3. Quantitative and Qualitative Disclosure About Market Risk

In March 2004, the company discontinued the trading operations of its NUI Energy
Brokers business, although NUI Energy Brokers continues to manage its prior
contractual obligations under a long-term gas sales agreement in addition to two
long-term gas storage and transportation agreements. Prior to that date, NUI
Energy Brokers used derivatives for multiple purposes: i) to hedge price
commitments and minimize the risk of fluctuating gas prices, ii) to fulfill its
trading strategies and, therefore, ensure favorable prices and margins, and iii)
to take advantage of market information and opportunities in the marketplace.
These derivative instruments included forwards, futures, options and swaps. The
majority of NUI Energy Brokers' positions were short-term in nature (up to 2
years) and could be readily valued using New York Mercantile Exchange settlement
prices and those from several other well-established, third-party organizations.

NUI Energy Brokers was also responsible for administration of the NUI Utilities
hedge program. This program was established in December 2000 in accordance with
the Gas Procurement Strategy and Plan (GPS&P) to help NUI Utilities fulfill its
mission to operate its gas distribution system in a safe, reliable and cost
effective manner. The focus of the GPS&P is to manage the purchased costs of gas
for firm sales customers of NUI Utilities. To meet its objectives of managing
gas price risk, NUI Utilities engages in financial hedging activities that
include the use of New York Mercantile Exchange traded natural gas futures
contracts and options. NUI Utilities plans to transfer the administration of the
hedging program from NUI Energy Brokers to NUI Utilities in the third quarter of
fiscal 2004. Consistent with this plan, NUI Utilities has adopted a hedging risk
management policy that sets guidelines and controls to govern its hedge program.

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

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

At March 31, 2004, NUI Energy Brokers had no futures contracts or physical
forwards associated with the delivery and sale of natural gas into and from
storage designated as cash flow hedges with the objective of fixing an
acceptable return. Under SFAS 133, the changes in the value of derivatives
designated as hedges that were effective in offsetting the variability in cash
flows of a forecasted transaction were recognized in other comprehensive income
until the forecasted transactions occur. The ineffective portion of changes in
the fair value of derivatives is recognized immediately in earnings.

At March 31, 2004, there was no hedge ineffectiveness recognized in earnings.

The risk associated with open positions is closely monitored on a daily basis,
and controlled in accordance with NUI Energy Brokers' Risk Management Policy.
This policy has been prepared by senior management and approved by the company's
Board of Directors, and dictates policies and procedures for all trading
activities. The policy defines both value-at-risk (VaR) and loss limits, and all
traders are required to read, sign, and follow this policy. At the end of each
day, all trading positions are marked-to-market and a VaR is calculated. In
addition, the Risk Management Policy is regularly reviewed by senior management
to assure that it is current and responsive to all marketplace risks, with any
changes approved by the Board of Directors.

48


The following schedule summarizes the changes in derivative assets and
liabilities for the six-month period ended March 31, 2004 (in thousands).
Amounts are shown net of valuation reserves.




Derivative assets at September 30, 2003 $13,192
Derivative liabilities at September 30, 2003 ---
-----
Fair value of contracts outstanding at September 30, 2003 $13,192

Contracts realized or settled during the period (12,040)
Changes in fair value attributable to market pricing 19,250
------

Derivative assets at March 31, 2004 $20,402
Derivative liabilities at March 31, 2004 ---
----
Fair value of contracts outstanding at March 31, 2004 $20,402
=======


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

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



Fair Value of Contracts at Period-End
-------------------------------------
Less than In Excess
Source of Fair Value 1 Year 1-3 Years 4-5 Years of 5 Years Total
- -------------------- ------ --------- --------- ---------- -----


Prices actively quoted $6,792 $ 9,181 $ --- $ --- $15,973
Prices based on models and other valuation
methods, net of valuation reserves 904 1,119 1,127 1,279 4,429
-------- ------- ------- ------- --------
Total Fair Value of Contracts $7,696 $10,300 $1,127 $1,279 $20,402
====== ======= ====== ====== =======


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

NUI Energy Brokers utilizes the variance/covariance VaR methodology. Using a 95
percent confidence interval and a one-day time horizon, NUI Energy Brokers' VaR
was $300 and $76,000 at March 31, 2004 and 2003, respectively. The average,
high, and low values at risk for the six months ended March 31, 2004 were
$33,000, $80,000, and $200, respectively.

Item 4. Disclosure Controls and Procedures

In connection with their audit of the company's fiscal 2002 financial
statements, our independent external auditors, PricewaterhouseCoopers LLC (PwC),
identified and reported on material weaknesses within our systems of internal
control. In a report dated November 22, 2002 to the Audit Committee of the Board
of Directors and management of NUI, PwC identified certain conditions that
created a material weakness relating to internal control over financial
reporting that resulted in the need to restate prior financial statements. The
weaknesses identified included, but were not limited to, the following:

o General ledger cash account balances were not being reconciled to the
bank statements.

o General ledger account analyses were not being consistently performed.

o A listing of debt covenants was not being maintained.

o Comprehensive and formalized accounting and financial reporting
policies and procedures did not exist.

49



o Instances were noted where management lacked certain technical
accounting and tax expertise that resulted in accounting errors.

o The flow of accounting information between business units and
corporate accounting was not timely or formalized.

o Accounts payable invoice processing procedures needed to be improved.

o A formal plan and implementation timetable needed to be developed to
address compliance with the certification requirements of Section 404
of the Sarbanes-Oxley Act of 2002.

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

o The contract review process was not formally documented, and
appropriate procedures had not been developed to ensure timely review
of contracts for accounting implications.

o There was a lack of adherence to policies and procedures for travel
and entertainment expense reimbursements and procurement card
expenditures.

o The payroll timekeeping and tracking process was manual in nature and
prone to errors.

o Information technology had a number of areas where formal, documented
policies and procedures had not been developed.

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

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

We have taken specific, immediate steps to address the internal control
weaknesses discussed above. In addition, we have undertaken a broader, long-term
effort to assess our systems of internal control and to comply with the
requirements of Section 404 of the Sarbanes-Oxley Act. These actions include:

o Performing a comprehensive evaluation and developing a remediation
plan with respect to internal controls over financial reporting and
related processes;

o Hiring additional qualified and experienced employees, specifically in
the finance and accounting areas, and increasing technical training in
these areas;

o Implementing a redesigned cash management process and adopting more
stringent cash management practices and procedures;

o Developing and implementing comprehensive accounting and financial
reporting policies and procedures;

o Implementing procedures for performance of account analyses and
reconciliations;

o Improving and monitoring controls to increase the reliability of
information generated by our information technology processes;

o Educating employees throughout the company as to the importance of
compliance with policies and procedures and the significance of a
system of sound internal controls; and

50


o Ensuring executive management's involvement in the oversight and
review of the disclosure and reporting process.

The effectiveness of our, or any, systems of disclosure controls and procedures
and internal controls is subject to certain limitations, including the exercise
of judgment in designing, implementing and evaluating the controls and
procedures, the assumptions used in identifying the likelihood of future events
and the inability to eliminate misconduct completely. Further, the design of
systems of control must reflect the fact that there are resource constraints
that affect the operation of any such system, and that the benefits of controls
must be considered relative to their risks. As a result, there can be no
assurance that our systems of disclosure controls, procedures and internal
controls will prevent all errors or fraud, or ensure that all material
information will be made known to management in a timely fashion.

As required by Rule 13a-15(b) of the Exchange Act, the company has carried out
an evaluation, under the supervision and with the participation of its
management, including its President and Chief Executive Officer and its interim
Chief Financial Officer, of the effectiveness of the design and operation of its
disclosure controls and procedures. The evaluation examined those disclosure
controls and procedures as of March 31, 2004, the end of the period covered by
this report. Based upon the evaluation, the company's management, including its
President and Chief Executive Officer and its interim Chief Financial Officer,
concluded that, as of March 31, 2004, NUI's disclosure controls and procedures
were effective, except as described above, at the reasonable assurance level to
ensure that information required to be disclosed in NUI's reports filed or
submitted under the Exchange Act was accumulated and communicated to NUI's
management, including its President and Chief Executive Officer and its interim
Chief Financial Officer, as appropriate to allow timely decisions regarding
required disclosure.

51

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

Class Action Litigation

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
Class Action 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. Defendants filed an
Answer to the Second Amended Complaint on May 10, 2004. No discovery has
occurred yet. Although the company intends to vigorously defend these lawsuits,
it is not possible at this time to determine a likely outcome.

James Greiff and TIC Enterprises, Inc. Litigation.

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

53



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.

Flint Energy Construction Co., Inc. and Virginia Gas Pipeline Company Litigation

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.

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

Plaintiffs, Specific Cruise Systems, Inc. and Frigette, Inc. d/b/a SCS/Frigette,
Inc., filed a Petition in Texas state court against TIC, 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 approximately $83,000. 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 company is also involved in various other claims and litigation incidental
to its business. In the opinion of management, none of these other claims and
litigation will have a material adverse effect on the company's results of
operations or its financial condition.

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 utilization of
their pipeline, storage and peaking contracts and assets. NUI Energy Brokers and
Elizabethtown Gas were also parties to a contract pursuant to which
Elizabethtown Gas purchased certain firm gas supplies from NUI Energy Brokers.
NUI Energy Brokers also arranged financial transactions on behalf of
Elizabethtown Gas relating to its gas procurement needs.

In early November 2003, as the result of the focused audit conducted by Liberty,
the Board of Directors of the company became aware of allegations of
inappropriate conduct by employees of NUI Energy Brokers. Some employees of NUI
Energy Brokers allegedly had engaged in activities that improperly benefited NUI

53


Energy Brokers at the expense of Elizabethtown Gas. The Audit Committee of the
Board of Directors retained an independent outside counsel to assist it in
conducting an independent investigation into the allegations and report the
findings and conclusions to the Audit Committee.

As a result of its investigation, the independent counsel concluded that while
NUI had established NUI Energy Brokers with internal controls designed to
protect Elizabethtown Gas' assets, NUI Energy Brokers traders often ignored or
circumvented these controls. The NUI Energy Brokers bonus/commission plan
created an incentive for NUI Energy Brokers traders and other NUI employees who
participated in the bonus/commission plan to engage in conduct that favored NUI
Energy Brokers over Elizabethtown Gas or to remain silent if they observed
conduct that allowed NUI Energy Brokers to benefit at Elizabethtown Gas'
expense. The independent counsel concluded that the maximum amount of lost
margin to Elizabethtown Gas as a result of NUI Energy Brokers' failure to obtain
for Elizabethtown Gas NUI Energy Brokers' best or weighted 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 recorded
as income a discount of $1.3 million that a counterparty gave for an early
settlement of a deferred payment transaction. In addition, the independent
counsel concluded that the maximum amount of lost margin to City Gas as a result
of NUI Energy Brokers' failure to obtain for City Gas the best or weighted
average price of the day for comparable transactions was approximately $2.6
million, for which amount the company has recorded a pre-tax reserve in
September 2003. The independent counsel also reached conclusions with respect to
the conduct of various employees. Based upon these conclusions, the Audit
Committee recommended that the Board of Directors of NUI take certain personnel
actions, which recommendation the NUI Board of Directors effected.

The Attorney General of the State of New Jersey 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 relating to NUI Energy Brokers. On March 1, 2004, the SEC requested NUI
to produce voluntarily certain documents in furtherance of its informal inquiry.
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.

54



Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits


10 Amended and Restated Standby Bond Purchase Agreement dated as of May 19,
2004, between NUI Utilities, Inc. and The Bank of New York.

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.

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

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

(b) Reports on Form 8-K

(1) On January 29, 2004, the company filed a 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. Matthews as President and Chief
Executive Officer, and Steven D. Overly as Secretary and General Counsel.

(2) On February 10, 2004, the company filed a 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 quarterly report 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 of an extension for
the delivery of the company's financial reports, and ongoing settlement
negotiations with the New Jersey Board of Public Utilities regarding the
focused audit of the company, NUI Utilities and Elizabethtown Gas.

(3) On April 16, 2004, the company filed a Current Report on form 8-K dated
April 16, 2004, under Items 5 and 7, announcing a settlement with the New
Jersey Board of Public Utilities (NJBPU) regarding all issues related to
the focused audit of the company, NUI Utilities, Inc. and Elizabethtown
Gas. In addition, the company announced that the NJBPU has approved NUI
Utilities' selection of Cinergy marketing & Trading, LP to procure all of
NUI Utilities' gas requirements from April 1, 2004 through March 31, 2005.

55


SIGNATURES



Pursuant to the requirements 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

/s/ Craig G. Matthews
CRAIG G. MATTHEWS
May 25, 2004 President and Chief Executive Officer

/s/ Dan Scouler
DAN SCOULER
May 25, 2004 Interim Chief Financial Officer