Environmental Matters. The company is subject to federal and state laws with respect to water and air quality, solid waste disposal and employee health and safety matters, and to environmental regulations issued by the United States Environmental Protection Agency (EPA), the New Jersey Department of Environmental Protection (NJDEP) and other federal and state agencies.

The company owns, or previously owned, certain properties on which manufactured gas plants (MGP) were operated by the company or by other parties in the past. In New Jersey, the company has reported the presence of the six MGP sites to the EPA, the NJDEP and the New Jersey Board of Public Utilities (NJBPU) and is currently conducting remedial activities at all six sites with oversight from the NJDEP. The company also owns, or previously owned, 10 former MGP facilities located in the states of North Carolina, South Carolina, Pennsylvania, New York and Maryland. Based on the most recent assessment, the company has recorded a total reserve for environmental investigation and remediation costs of approximately $31.5 million, which is the probable minimum amount that the Company expects to expend during the next 5-20 years (an additional $0.6 million has been reclassified to Liabilities Held for Sale at June 30, 2002). Of this reserve, approximately $28.2 million relates to the six New Jersey M GP sites and approximately $3.3 million relates to the nine sites located outside New Jersey.

The company's prudently incurred remediation costs for the New Jersey MGP sites have been authorized by the NJBPU to be recoverable in rates over a rolling seven-year period through its MGP Remediation Adjustment Clause. As a result, the company has begun rate recovery of approximately $8.2 million of environmental costs incurred through June 30, 2000. Recovery of an additional $1.7 million in environmental costs incurred between July 1, 2000, and June 30, 2002, is currently pending NJBPU approval. Accordingly, the company has recorded a regulatory asset of approximately $34.4 million as of June 30, 2002, reflecting the future recovery of both incurred costs and future environmental remediation liabilities related to New Jersey MGP sites. The company has also been successful in recovering a portion of MGP remediation costs incurred for the New Jersey sites from the company's insurance carriers and continues to pursue additional recovery. Any amounts recovered from insurance carrie rs would reduce the amount of recorded regulatory assets. With respect to costs associated with the remaining MGP sites located outside New Jersey, the company intends to pursue recovery from ratepayers, former owners and operators, and insurance carriers, although the company is not able to express a belief as to whether any or all of these recovery efforts will be successful. 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 $64 million annually. The company currently recovers, and expects to continue to recover, such fixed charges through its purchased gas adjustment clauses. As a result of the forthcoming unbundling of natural gas services in New Jersey, these contracts may result in the realization of stranded costs by the company. Management believes the outcome of these actions will not have a material effect on the company's results. The company also is committed to purchase, at market-related prices, minimum quantities of gas that, in the aggregate, are approximately 2.6 billion cubic feet (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.

In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" (SFAS 143). This statement establishes accounting standards for recognition and measurement of liabilities for asset retirement obligations and the associated asset retirement costs. The company will implement this statement on October 1, 2002, and does not expect the adoption of this statement to have a material impact on net income.

In June 2002, the Emerging Issues Task Force (EITF) issued EITF 02-03, "Accounting for Contracts Involved in Energy Trading and Risk Management Activities" (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. The Task Force reached a final consensus related to issue (a) above that mark-to-market gains and losses on energy trading contracts (whether realized or unrealized and whether financially or physically settled) must be shown net in the income statement and that disclosures of energy trading activities be expanded. The Task Force has not yet ruled on the other issues.

EITF 02-03 is effective for periods ending after July 15, 2002, with reclassification of prior period amounts required. As a result of the EITF's final consensus on issue (a) above, NUI Energy Brokers (NUIEB) must record the margins it earns on its trading activities, whether physical or financial, as operating revenues. Through June 30, 2002, NUIEB included both the cost of purchased gas and the operating margin earned on all of its physical energy transactions (physical volumes of gas bought and sold to third parties) in operating revenues and classified the cost of that gas as a component of Purchased Gas and Fuel on the Consolidated Statement of Income. Historically, NUIEB has recorded only the operating margin component for all of its financial trades (futures, options, swaps) and has classified these amounts as a component of purchased gas costs on the Consolidated Income Statement. Under EITF 02-03, this will have no net effect on these transactions other than to reclassify them to operating revenues rather than purchased gas costs. The company expects that this issue will reduce previously reported revenues and purchased gas costs for NUIEB by approximately $85.7 million and $91.4 million for the three-month periods ended June 30, 2002, and 2001, respectively, and by approximately $242.5 million and $402.0 million for the nine-month periods ended June 30, 2002, and 2001, respectively. The company is evaluating the impact, if any, EITF 02-03 would have on its NUI Energy subsidiary.

The company's operations are organized and managed as three primary segments: Distribution Services, Wholesale Energy Marketing and Trading and Retail and Business Services. The Distribution Services segment distributes natural gas in seven states through the company's regulated utility operations. The Wholesale Energy Marketing and Trading segment reflects the operations of the company's NUI Energy Brokers and VGC subsidiaries (excluding Virginia Gas Distribution Company), as well as off-system sales made by NUI Energy Brokers on behalf of the utility operations. The Retail and Business Services segment reflects the operations of the company's NUI Energy, UBS, and NUI Telecom subsidiaries, as well as appliance leasing, repair and maintenance operations. The results of North Carolina Gas, Valley Cities Gas, Waverly Gas, and the product lines of TIC Enterprises that are being closed have been classified as discontinued operations. The company also has corporate ope rations that do not generate any revenues.

The following table provides information concerning the major segments of the company for the three-month and nine-month periods ended June 30, 2002 and 2001. Revenues include intersegment sales to affiliated entities, which are eliminated in consolidation. Certain reclassifications have been made to prior year segment data to conform with the current year's presentation.

A reconciliation of the company's segment revenues and pre-tax operating income to amounts reported on the consolidated financial statements is as follows:

The following discussion and analysis should be read in conjunction with the unaudited consolidated financial statements of NUI Corporation included elsewhere herein and with the company's Form 10-K for the year ended September 30, 2001.

The following discussion and analysis refers to NUI Corporation and all of its operating divisions and subsidiaries (collectively referred to as NUI or the company). NUI is engaged in the sale and distribution of natural gas, energy commodity trading and marketing, storage and pipeline activities, and telecommunications. The company's local distribution operations provide natural gas and related services to more than 380,000 customers in seven states along the eastern seaboard of the United States and comprise Elizabethtown Gas Company (New Jersey), City Gas Company of Florida, North Carolina Gas, Elkton Gas (Maryland), Valley Cities Gas (Pennsylvania), Waverly Gas (New York) and Virginia Gas. Virginia Gas is also engaged in other activities, such as pipeline operation and natural gas storage. The company's other non-regulated subsidiaries include NUI Energy, Inc. (NUI Energy), an energy retailer; NUI Energy Brokers, Inc. (NUI Energy Brokers), a wholesale energy trading and portfolio manag ement subsidiary; NUI Environmental Group, Inc., an environmental project development subsidiary; Utility Business Services, Inc. (UBS), a digital mapping and customer information systems and services subsidiary; NUI Telecom, Inc. (NUI Telecom), a telecommunications services subsidiary; and TIC Enterprises, LLC (TIC), a sales outsourcing subsidiary.

As of June 30, 2002, the company has classified North Carolina Gas, Valley Cities Gas, Waverly Gas, and certain product lines of TIC as discontinued operations (see Note 8 of the Notes to the Consolidated Financial Statements).

Net Income (Loss). Net loss for the three-month period ended June 30, 2002, was $10.4 million, or $0.66 per share, as compared with net income of $0.7 million, or $0.05 per share, for the three-month period ended June 30, 2001. The decrease was primarily due to losses incurred by TIC (see Note 8 to the Notes to the Consolidated Financial Statements), as well as a non-cash pre-tax charge of approximately $8.0 million to write-down the net assets of these two product lines to their fair value. As discussed in Note 8 to the Notes to the Consolidated Financial Statements, NUI adopted the provisions of Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," and accordingly has classified the operating results of its entities being held for sale as discontinued operations. Net loss from continuing operations was $2.6 million for the three-months ended June 30, 2002, compared to net income of $2.7 million in the prior year. The decrease in the current fiscal year was primarily the result of reduced trading activity due to reduced volatility of the price of the natural gas commodity, fewer trading counterparties as a result of unfavorable conditions in the energy marketplace, and lower credit limits extended by NUI to its counterparties in accordance with the company's strict risk management policies.

Operating Revenues. The company's operating revenues include amounts billed for the cost of purchased gas pursuant to purchased gas adjustment clauses. Such clauses enable the company to pass through to its customers, via periodic adjustments to customers' bills, increased or decreased costs incurred by the company for purchased gas without affecting operating margins. 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.

The company's operating revenues decreased by $31.3 million, or 14 percent, to $191.3 million for the three-month period ended June 30, 2002, as compared to $222.6 million for the three-month period ended June 30, 2001.

The company's Distribution Services revenue decreased by approximately $26.4 million, or 28 percent, to $68.4 million from $94.8 million in fiscal 2001, due to a reduced volume of gas sold as a result of the continued impact of the warm weather on customer billings in April, weaker economic conditions impacting all customer classes, but mainly commercial and industrial customers, and slightly lower natural gas prices in the current year period than in the prior fiscal year.

Wholesale Energy Marketing and Trading revenues decreased by approximately $10.1 million, or 11 percent, to $81.0 million from $91.1 million in fiscal 2001, mainly due to the decrease in the price of natural gas. This decrease was partially offset by increased revenues of approximately $1.0 million by Virginia Gas, mainly due to the acquisition of Virginia Gas Storage Company, which was a 50 percent owned subsidiary during the prior fiscal year (see Note 3 of the Notes to the Consolidated Financial Statements).

Retail and Business Services revenue increased by approximately $5.2 million, or 14 percent, to $41.9 million from $36.7 million in fiscal 2001, mainly due to increased sales by NUI Telecom of $5.3 million as a result of customer growth, acquisitions, and the inclusion of two product lines from the company's TIC Enterprises subsidiary (see Note 8 to the Notes to the Consolidated Financial Statements). The company's appliance service business increased revenues by approximately $0.5 million due to additional installation revenues as compared to the same period in the prior year. These increases were partially offset by lower revenues of $0.6 million by UBS, resulting from revised pricing to a large customer in the current year as compared to same period in the prior year. In December 2001, UBS entered into an agreement with this customer to provide billing services to a greater number of accounts, which is expected to be completed during the fourth quarter of fiscal 2002.

Operating Margins. The company's operating margins decreased by $6.5 million, or 14 percent, to $41.5 million for the three-month period ended June 30, 2002, as compared to $48.0 million for the three-month period ended June 30, 2001.

Distribution Services segment margins for the three-month period ended June 30, 2002, decreased $1.7 million, or 5 percent, to $30.6 million from $32.3 million in the prior year. The decrease was principally a result of reduced usage of natural gas by the company's commercial customers due to weaker economic conditions experienced in the current fiscal year as compared to the prior year.

Operating margins from the company's Wholesale Energy Marketing and Trading segment decreased by approximately $4.0 million, or 52 percent, to $3.8 million for the three-month period ended June 30, 2002, from $7.8 million in the prior year. This decrease was primarily the result of a $4.8 million reduction in margins from NUI Energy Brokers due to reduced trading activity due to fewer trading partners and the enforcement of tighter credit limits by Energy Brokers on its counterparties; higher nationwide natural gas inventories during the current quarter, which limited NUI Energy Brokers' ability to profit from summer/winter trading spreads; the significant declining trend in gas prices during the third quarter of fiscal 2001 that resulted in substantial mark-to-market profits on fixed-price sales contracts a year ago; and a large electricity brokerage transaction with $1.1 million in margin during the third quarter of fiscal 2001, which did not recur in the current year quarter. This decre ase was partially offset by increased margins of $0.8 million by NUI Virginia Gas as a result of the company's acquisition of Virginia Gas Storage Company, which was a 50 percent owned investment in the prior fiscal year.

Operating margins decreased in the Retail and Business Services segment by approximately $0.8 million, or 10 percent, to $7.1 million for the three-month period ended June 30, 2002, from $7.9 million in the prior year. The decrease was due to lower margins of $3.5 million by NUI Energy due to the stabilization of the price of natural gas during the current year period as compared to the three-month period a year ago. During the three-months ended June 30, 2001, the price of natural gas had declined significantly from its unprecedented highs earlier in the year. As a result, NUI Energy was able to generate approximately $2.8 million of new business as customers sought to enter into annual contracts to protect them from future natural gas price increases. The price of natural gas has not changed significantly during the current three-month period, and, as a result, NUI Energy was unable to generate the same amount of margins from new customers as it had in the prior year. Also contributing t o the current year decrease was $0.5 million of reduced margins by UBS due to the effect of the pricing revisions noted above. Partially offsetting these decreases were higher margins by NUI Telecom of $2.9 million and the company's appliance services business of $0.3 million. As noted earlier, NUI Telecom has experienced significant growth from additional customers and acquisitions (see Capital Expenditures and Commitments- NUI Telecom).

Other Operating Expenses. Operations and maintenance expenses increased by approximately $0.7 million, or 2 percent, to $30.2 million for the three-month period ended June 30, 2002, as compared to $29.5 million in the prior year. The increase was the result of increased costs incurred by NUI Telecom to support its customer growth (see Capital Expenditures and Commitments- NUI Telecom), as well as higher costs for employee benefits, including medical and pension expenses.

Deprecation and amortization increased by $0.8 million as a result of additional fixed assets placed in service during the current fiscal year.

Taxes other than income taxes increased $0.4 million primarily due to additional payroll taxes associated with the additional employees to support the growth of NUI Telecom.

Interest Expense. Interest expense decreased approximately $0.9 million, or 16 percent, to $4.6 million for the three-month period ended June 30, 2002, compared to $5.5 million in the prior year. The decrease was primarily due to reduced levels of short-term indebtedness following the company's March 2002 equity offering, and lower short-term borrowing rates.

Net Income (Loss). Net loss for the nine-month period ended June 30, 2002, was $8.4 million, or $0.57 per share, as compared with net income of $23.8 million, or $1.80 per share, for the period ended June 30, 2001. The decrease in the current fiscal year was primarily due to the company's adoption of Statement of Financial Accounting Standards No. 142, which resulted in a one-time, non-cash transitional impairment charge of $21.4 million (after-tax), or $1.46 per share (see Note 6 to the Notes to the Consolidated Financial Statements). The company also recorded a non-recurring restructuring cost of $1.2 million, related to severance costs as a result of workforce reductions (see Note 9 to the Notes to the Consolidated Financial Statements). The company was adversely affected during the nine-month period ended June 30, 2002, by the effect of significantly warmer weather and reduced margins by its energy trading operations due to reduced trading activity in the energy marketplace (se e Operating Revenues and Operating Margins), and by $10.9 million of after-tax losses incurred by the company's TIC Enterprises subsidiary, which the company intends to dispose of and has classified as Discontinued Operations (see Note 8 to the Notes to the Consolidated Financial Statements).

Operating Revenues. The company's operating revenues decreased by $249.4 million, or 27 percent, to $691.1 million for the nine-month period ended June 30, 2002, as compared to $940.5 million for the nine-month period ended June 30, 2001.

The company's Distribution Services revenue decreased by approximately $93.2 million, or 22 percent, to $335.0 million from $428.2 million in fiscal 2001, mainly due to the significantly warmer weather, lower gas prices, and reduced usage by commercial customers as a result of weakening economic conditions. Weather in New Jersey was 22 percent warmer than normal and 20 percent warmer than the prior year period.

Wholesale Energy Marketing and Trading revenue decreased by approximately $162.4 million, or 42 percent, to $223.4 million from $385.8 million in fiscal 2001. This decrease was primarily due to the significant decline in natural gas prices and generally reduced trading activity during the nine-month period ended June 30, 2002 as compared to the prior year. This decrease was partially offset by $5.1 million of revenues from the addition of Virginia Gas.

Retail and Business Services revenue increased by approximately $6.2 million, or 5 percent, to $132.7 million from $126.5 million in fiscal 2001, due to increased revenues by NUI Telecom of $13.4 million due to customer growth, acquisitions and the assumption of two product lines formerly operated by TIC during the current year period, and an additional $1.5 million of revenues by the company's appliance services business due to improved pricing and additional installations. Partially offsetting these increases was a decrease of $8.7 million by NUI Energy due to a decline in, and subsequent stabilization of, natural gas prices during the current fiscal year, as compared to the prior year.

Operating Margins. The company's operating margins increased by $3.3 million, or 2 percent, to $171.5 million for the nine-month period ended June 30, 2002, as compared to $168.2 million for the nine-month period ended June 30, 2001.

The Distribution Services segment margins decreased $3.4 million, or 2 percent, to $133.9 million from $137.3 million in the prior year. This decrease was due to the warmer weather discussed above, which was partially offset by the base rate increase in Florida during fiscal 2001, and customer growth. As a result of weather normalization clauses, operating margins were approximately $8.5 million and $0.6 million higher in the fiscal 2002 and 2001 periods, respectively, than they otherwise would have been without such clauses.

Operating margins from the company's Wholesale Energy Marketing and Trading segment increased by approximately $2.1 million, or 12 percent, to $19.3 million from $17.2 million in fiscal 2001, as a result of additional margins by VGC of $5.0 million, and increased margins from utility off-system sales of $0.5 million. Partially offsetting these increases were reduced margins by NUI Energy Brokers of $3.4 million due to reduced trading activity caused by much lower volatility in natural gas prices, as well as lower liquidity in the marketplace.

The Retail and Business Services segment increased operating margins by approximately $4.6 million, or 34 percent, to $18.3 million from $13.7 million in the prior year. The increase was due to higher margins of $5.9 million from the previously discussed growth by NUI Telecom, and an additional $1.3 million by the company's appliance business as a result of increased sales and reductions in the costs of providing services. These increases were partially offset by lower margins by NUI Energy of $2.7 million due to the stabilization of the price of natural gas. As discussed earlier, during the third quarter of fiscal 2001, the lower cost of natural gas resulted in a substantial increase in new customer contracts to protect against future price increases. The less volatile price for natural gas experienced during the current fiscal year has resulted in lower customer growth.

Other Operating Expenses. Operations and maintenance expenses increased approximately $9.6 million, or 12 percent, to $87.5 million for the nine-month period ended June 30, 2002, as compared to $77.9 million for the nine-month period ended June 30, 2001. The increase was primarily due to the inclusion of Virginia Gas for the full nine-month period, increased employee benefits costs related to medical and pension, and additional expenses incurred to support the company's customer growth.

Depreciation and amortization expense increased approximately $2.1 million primarily due to the inclusion of Virginia Gas for a full year and additional fixed assets placed in service during the current fiscal year.

Interest Expense. Interest expense decreased approximately $1.8 million, or 11 percent, to $15.2 million, as compared to $17.0 million in the prior year period. The decrease was due to reduced average interest rates during the current year period, and the company's ability to recover interest on its under-recovered gas cost balance since April 1, 2001. Accordingly, the first six months of the prior fiscal year amount include the costs associated with financing the company's under-recovered gas balance. The current year benefits were partially offset by higher levels of average short-term debt during the nine-month period ended June 30, 2002 than during the prior year.

On November 1, 2000, the New Jersey Board of Public Utilities (NJBPU) issued an order approving an increase in the New Jersey Purchased Gas Adjustment (PGA) clause by 17.3 percent. The rate increase was effective immediately and resulted in a revenue increase of approximately $47 million annually. In addition, the company was allowed to increase the PGA through a Flexible Pricing Mechanism (FPM), which allowed the company to make additional pricing adjustments on a monthly basis of approximately 2 percent each month between December 2000 and April 2001. Each of these FPM increases resulted in additional revenues of up to $6 million on an annual basis. The increases in the PGA rate were granted to cover the higher costs of natural gas purchases, which had risen from about $2.50 per dekatherm in July 1999 to more than $10.00 per dekatherm in January 2001 (see Liquidity and Capital Resources).

In a December 1, 2000 filing, the company requested the extension of the 2 percent FPM rate adjustments for an additional three months and authorization to record interest on its under-recovered gas balance. On March 30, 2001, the NJBPU issued an order approving the company's request to extend the monthly 2 percent increases through July 2001 if actual gas costs warranted such increases. The company has implemented these increases. In addition, the order allowed the company to begin recording interest on its under-recovered gas cost balance and to establish a new Gas Cost Under-recovery Adjustment (GCUA) to recover the gas cost under-recovery balance as of October 31, 2001, with associated interest over a three-year period from December 1, 2001, through November 30, 2004. In addition, pursuant to the order, the company was required to make a filing on November 15, 2001, to establish a new PGA rate designed to recover purchased gas costs for the period November 1, 2001, through September 30, 2002. In that filing, the company requested approval to decrease its PGA rate and implement its GCUA rate, with a net effect representing a decrease of 12.7 percent in residential customer bills. The NJBPU approved the Company's request on an interim basis and these changes became effective December 1, 2001.

The company's City Gas Company of Florida division received approval from the Florida Public Service Commission on January 16, 2001, to increase its annual base rates by $5.13 million. The increase represents a portion of the company's request to cover the cost of service enhancements and reliability improvements since City Gas' last base rate increase in 1996. The new rate level provides for an allowed return on equity of 11.5 percent and an overall allowed rate of return of 7.88 percent.

In response to the 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 allowed the company to continue offering basic gas supply service through December 2002, when the NJBPU will decide if the gas supply function should be removed from the gas distribution companies and made competitive. As of June 30, 2002, no residential customers in the company's New Jersey service territory have switched to an alternative gas supplier.

On April 16, 2002, Elizabethtown Gas Company filed a request with the NJBPU to increase its base rates by $28.6 million, or about 9 percent, in order to recover the cost of plant additions and increases in operating expenses since its last rate increase over twelve years ago. The requested rate level would provide for an allowed return on equity of 11.75 percent and an overall rate of return of 8.95 percent. Elizabethtown Gas also is seeking changes to its tariff that will enable it to more accurately reflect current weather patterns as well as recover the costs of system improvements without the need for frequent base rate increases. The company also is proposing increases in its service charges to more directly match the cost of providing service to its various classes of customers. It is expected that new base rates would be approved by the NJBPU and take effect on or about December 31, 2002.

On July 26, 2002, the company was notified by the Virginia State Corporation Commission (VSCC) that its Virginia Gas subsidiary was to be fined $410,000 under a Notice of Probable Violation for deficiencies in its pipeline operation. Under the terms of this notice, the company is to pay $55,000 in August 2002, and the remaining $355,000 would be held in abeyance pending its compliance with a detailed corrective action plan. The company has asked the VSCC for an extension of time and expects to receive a final ruling by early September 2002.

The company had net cash provided by operating activities of $54.1 million for the nine-month period ended June 30, 2002, compared to net cash used in operating activities of $13.2 million for the same period in the prior year. The change in the nine-month period ended June 30, 2002 was primarily due to substantial decreases in fuel inventories and under-recovered gas costs due to the significant decrease in gas costs and improved collection of gas costs from customers in the current year. Included in the cash used by operations for the nine-month period ended June 30, 2001, was a significant increase in under-recovered gas costs due to the increase in the price of natural gas experienced during the prior fiscal year. As noted in Regulatory Matters, these under-recovered gas costs are now a component of regulatory assets and will be recovered over a three-year period.

Because the company's business is highly seasonal, short-term debt is used to meet seasonal working capital requirements. The company also borrows under its bank lines of credit to finance portions of its capital expenditures, pending refinancing through the issuance of equity or long-term indebtedness at a later date, depending upon prevailing market conditions. Due to the large increase in the cost of natural gas last year and the build up of under-recovered gas costs noted earlier, the company has needed to raise capital through the issuance of long-term debt and draw downs of short-term financing under its various lines of credit. On January 31, 2002, the company filed a shelf registration statement on Form S-3 with the Securities and Exchange Commission, that enables the company to issue various types and combinations of securities, including common stock, preferred stock and debt, from time to time, up to an aggregate of $150 million. The shelf registration will enable NUI to raise f unds from the offering of any security covered by the shelf registration statement, as well as any combination thereof, subject to market conditions and the company's capital needs.

The company sold 1.725 million shares of common stock for net proceeds of approximately $37.0 million during March 2002 under the shelf registration statement. The proceeds from the sale were used to pay down short-term debt.

The company also expects to complete certain asset sales during calendar 2002 (see Capital Expenditures and Commitments- Sale of Valley Cities Gas and Waverly Gas and Sale of North Carolina Gas) that will further reduce outstanding debt.

There has been no significant change in long-term debt, capital lease obligations, or operating lease obligations during the three-month period ended June 30, 2002. In addition, the Company does not have any off-balance sheet financing.

Short-Term Debt. The weighted average daily amounts outstanding of notes payable to banks and the weighted average interest rates on those amounts were $175.2 million at 3.2 percent for the nine-month period ended June 30, 2002, and $154.1 million at 5.9 percent for the nine-month period ended June 30, 2001. At June 30, 2002, the company had outstanding notes payable to banks amounting to $125.6 million and available unused lines of credit amounting to $100.4 million. Notes payable to banks decreased as of June 30, 2002, as compared to the balance outstanding at September 30, 2001, primarily due the receipt of the proceeds from the equity offering discussed above.

Long-Term Debt and Funds for Construction Held by Trustee. On August 20, 2001, the company issued $60 million of Senior Notes with interest rates ranging from 6.60 percent to 7.29 percent. The proceeds were used to repay short-term indebtedness, which was used in part to acquire Virginia Gas and TIC.

The company deposited in trust the unexpended portion of the net proceeds from its Gas Facilities Revenue Bonds until drawn upon for eligible expenditures. As of June 30, 2002, all of the original net proceeds from the bonds have been expended. The remaining $3.9 million classified as Funds for Construction Held by Trustee on the company's Consolidated Balance Sheet at June 30, 2002, represents the unexpended portion of interest earned on the original net proceeds of the bonds.

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

The company's long-term debt agreements include, among other things, restrictions as to the payment of cash dividends. Under the most restrictive of these provisions, the company is permitted to pay approximately $57.7 million of cash dividends at June 30, 2002.

Assets and Liabilities Held for Sale. The company will complete the sales of its North Carolina Gas, Valley Cities Gas and Waverly Gas divisions following regulatory approval (see Capital Expenditures and Commitments- Sale of North Carolina Gas and Sale of Valley Cites Gas and Waverly Gas) and as of June 30, 2002, was actively seeking a buyer for certain product lines of its TIC Enterprises subsidiary. In accordance with the provisions of Statement of Financial Accounting Standards No. 144, the company has classified the assets and liabilities of these entities as Held for Sale on the Consolidated Balance Sheet at June 30, 2002 (see Note 8 to the Notes to the Consolidated Financial Statements).

Capital expenditures, which consist primarily of expenditures to expand and upgrade the company's gas distribution systems, were $43.6 million for the nine-month period ended June 30, 2002 as compared to $30.9 million for the nine-month period ended June 30, 2001. The increased capital spending during the current fiscal year was due to the costs of completing the first portion of a distribution line through South-Central Florida to provide gas to a large industrial customer, as well as the towns of South Bay and Belle Glade, and the inclusion of Virginia Gas for the full nine-month period in the current year. Capital expenditures are expected to be approximately $50 million for all of fiscal 2002, as compared with a total of $60.5 million in fiscal 2001. The remaining capital expenditure budget for fiscal 2002 will be used primarily for the continued expansion and upkeep of the company's natural gas distribution system, as well as certain technology projects.

Environmental. The company owns or previously owned six former manufactured gas plant (MGP) sites in the state of New Jersey and ten former MGP sites in the states of North Carolina, South Carolina, Pennsylvania, New York and Maryland. Based on the company's most recent assessment, the company has recorded a total reserve for environmental investigation and remediation costs of approximately $31.5 million, which is the probable minimum amount that the company expects it will expend in the next 5-20 years to remediate the company's MGP sites (an additional $0.6 million has been reclassified to Liabilities Held for Sale at June 30, 2002). Of this reserve, approximately $28.2 million relates to New Jersey MGP sites and approximately $3.3 million relates to the MGP sites located outside New Jersey. The company believes that all costs associated with the New Jersey MGP sites will be recoverable in rates or from insurance carriers. In New Jersey, the company is currently recovering environm ental costs in rates over a rolling seven-year period through its MGP Remediation Adjustment Clause. As a result, the company has begun rate recovery of approximately $8.2 million of environmental costs incurred through June 30, 2000. Recovery of an additional $1.7 million in environmental costs incurred between July 1, 2000, and June 30, 2002, is currently pending NJBPU approval. With respect to costs that may be associated with the MGP sites located outside the state of New Jersey, the company intends to pursue recovery from ratepayers, former owners and operators of the sites and from 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.

Long-term Debt. The company repaid $20 million of Medium-Term Notes bearing interest at 7.125 percent per annum on August 1, 2002. This amount has been included in current liabilities at June 30, 2002.

On July 22, 2002, the company sold and subsequently leased back approximately $8.6 million of gas meters under a capital lease. The capital lease, which bears interest at 4.98 percent per annum and has a term of approximately 10 years, will be repaid in monthly installments of approximately $82,000. The company has an option to purchase the gas meters during the tenth year for approximately $1.7 million. The proceeds from the sale of gas meters were used to repay a portion of the Medium-Term Notes discussed above.

Sale of Valley Cities Gas and Waverly Gas. On October 5, 2000, the company agreed to sell the assets of its Valley Cities Gas and Waverly Gas utility divisions (VCW) to C&T Enterprises, Inc. (C&T), of Pennsylvania for $15 million. C&T will pay up to an additional $3 million to the company should certain post closing revenue targets be achieved. The transaction is expected to close on or about September 30, 2002, after all regulatory approvals have been obtained. For the nine months ended June 30, 2002, VCW generated $8.1 million of operating revenues, $3.1 million of operating margin and $1.8 million of operating income. The operating results of VCW have been classified as discontinued operations in the Consolidated Statement of Income at June 30, 2002 (see Note 8 to the Notes to the Consolidated Financial Statements).

The assets and liabilities of VCW have been classified as held for sale on the Consolidated Balance Sheet at June 30, 2002. The cash flows of VCW have been included in investing activities on the Consolidated Statement of Cash flows at June 30, 2002.

Sale of North Carolina Gas. On May 15, 2002, the company agreed to sell the assets of its North Carolina Gas utility division (NC) to Piedmont Natural Gas, of North Carolina for $26 million. The transaction is expected to close on or about December 31, 2002, after all regulatory approvals have been obtained. For the nine months ended June 30, 2002, NC generated $11.7 million of operating revenues, $5.1 million of operating margin and $1.4 million of operating income. The operating results of NC have been classified as discontinued operations in the Consolidated Statement of Income at June 30, 2002 (see Note 8 to the Notes to the Consolidated Financial Statements).

The assets and liabilities of NC have been classified as held for sale on the Consolidated Balance Sheet at June 30, 2002. The cash flows of NC have been included in investing activities on the Consolidated Statement of Cash flows at June 30, 2002.

Joint Venture with Duke Energy. 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. NUI's Virginia Gas subsidiary and Duke Energy Gas Transmission (DEGT) have created a limited liability company, Saltville Gas Storage Company LLC (LLC). Upon approval by appropriate regulatory agencies, NUI Virginia Gas will contribute certain storage assets valued at approximately $16 million to the LLC. DEGT will contribute $16 million of capital required to expand the facility for its intended purpose.

The LLC plans to expand the present Saltville storage facility from its current capacity of 1 Bcf to approximately 12 Bcf and connect it to DEGT's East Tennessee Natural Gas interstate system. 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 first 6.1 Bcf of working storage capacity, to be completed by 2007. 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 for NUI's wholesale trading arm, NUI Energy Brokers, and enable the company to capitalize on the energy supply, wholesale trading and portfolio management opportunities in the rapidly developing Mid-Atlantic region. The additional storage capacity would allow the company to meet the significant demand from local distribution companies as well as power plant development that is underway in the region.

On October 26, 2001, the Joint Venture filed a certification application with the Virginia State Corporation Commission (VSCC). A public hearing was held in this matter on February 20, 2002 and the Hearing Examiner's report was issued on May 31, 2002. On August 6, 2002, the VSCC issued an Order Granting Certificate for the storage facilities and attendant pipeline. The Certificate authorizes the LLC to construct, develop and maintain Phase I of the project.

Development of Trading Hubs. The company's wholesale trading subsidiary, NUI Energy Brokers (NUIEB), 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. NUIEB plans to develop a two-well salt dome storage facility in Richton that would have a working gas capacity of approximately 7.8 billion cubic feet.

The first well and a 14-mile pipeline to connect with the Destin Pipeline are tentatively scheduled to be operational by the end of the third quarter of 2003. Implementation of this development plan is dependent on favorable results from testing and other operational issues that are currently under consideration by the company.

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

NUI Telecom. Agreement to Acquire Assets of Norcom, Inc. On March 22, 2002, the company entered into an agreement to acquire certain assets of Norcom, Inc. (Norcom), including 4,000 customer accounts, for approximately $5 million, subject to post-closing adjustments, which is to be paid in NUI common stock. The transaction is expected to close on or about August 28, 2002, after regulatory approvals have been obtained in five states. Norcom is a provider of telecommunications services in the Northeast and Southeast regions of the United States and its customer accounts will be combined with the company's NUI Telecom subsidiary. The agreement provides that NUI Telecom assume management control of the business of Norcom effective March 1, 2002. Accordingly, the revenues and expenses of Norcom have been consolidated as of that date.

The number of shares of NUI common stock to be issued will be determined by dividing the total purchase price by $25.76 per share, which represents the average closing price of NUI's common stock for the first 20 of the 25 consecutive trading days immediately preceding the date regulatory approval was deemed effective by the Public Service Commission in the State of Maine on May 9, 2002.

Agreement to Acquire Assets of Norcom Agency Sales, Inc. On March 22, 2002, the company entered into an agreement to acquire certain assets of Norcom Agency Sales, Inc. (NAS). The agreement provides for the company to pay the seller a multiple of total sales to new customers obtained by NAS as agent for NUI Telecom during the period April 1, 2002, through October 31, 2003. The multiple to be paid will be determined based on the actual new customer revenues generated by NAS for the month of October 2003, and is subject to post-closing adjustments.

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

Agreement to Acquire Assets of Telcorp, Ltd. On May 31, 2002, the company entered into an agreement to acquire certain assets of Telcorp, Ltd. (Telcorp). The agreement provides for the company to pay the seller a multiple of four times the annualized earnings before interest and taxes (EBIT). The annualized EBIT will be calculated based on Telcorp's operating results for the period June 1, 2002, through November 30, 2002, and is subject to post-closing adjustments. The company expects to close on this transaction on or about March 1, 2003.

In addition, the company entered into a letter agreement with Telcorp which provides that NUI Telecom assume management control of the business effective April 1, 2002. Accordingly, the revenues and expenses of Telcorp have been consolidated as of that date.

Other. NUI Telecom is executing its growth strategy through both organic growth and acquisitions. These are acquisitions of customer relationships that are typically based on providing one product or service, that will allow NUI Telecom to offer their full suite of telecommunications products and services to these new customers, which is expected to further enhance operating margins. In addition, NUI Telecom has also leased capacity on a switch partition in New York City, with smaller leased capacity in Miami, Florida and London, England. These switch partitions provide NUI Telecom access to the wholesale telecommunications market on a domestic and international basis providing for sales of minutes to large customers, and provide opportunities to enhance service capabilities to its existing customers.

NUIEB uses derivatives for multiple purposes: i) to hedge price commitments and minimize the risk of fluctuating gas prices, ii) to take advantage of market information and opportunities in the marketplace, and iii) to fulfill its trading strategies and, therefore, ensure favorable prices and margins. These derivative instruments include forwards, futures, options and swaps. NUIEB accounts for its trading activities in accordance with the Emerging Issues Task Force Issue 98-10, by marking-to-market all trading positions. The majority of NUIEB' s positions are short-term in nature (up to 2 years) and can be readily valued using New York Mercantile Exchange settlement prices and those from several other well established, third-party organizations. There have been no changes in valuation techniques or assumptions during the nine-month period ended June 30, 2002.

The risk associated with uncovered derivative positions is closely monitored on a daily basis, and controlled in accordance with NUIEB's Risk Management Policy. This policy has been 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 and follow this policy. At the end of each day, all trading positions are marked-to-market and a VaR is calculated. This information, as well as the status of all limits, is disseminated to senior management daily.

The following schedule summarizes the changes in derivative assets and liabilities for the nine-month period ended June 30, 2002 (in thousands):