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 June 30, 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)

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 July 31, 2004: Common Stock, No Par Value: 15,969,113 shares outstanding.

Item 1. Financial Statements

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

 See the notes to the consolidated financial statements.

NUI Corporation and Subsidiaries
Consolidated Balance Sheet
(Dollars in thousands)

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

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

See the notes to the consolidated financial statements.

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 an energy company that primarily operates natural gas utilities and businesses involved in natural gas storage and pipeline activities.  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 subsidiary sold in December 2003; NUI Energy, Inc. (NUI Energy), an energy retailer which is being wound down; NUI Energy Brokers, Inc. (NUI Energy Brokers), a wholesale energy trading and portfolio management subsidiary which is being wound down; OAS Group, Inc. (OAS), the company's digital mapping operation which is being wound down; and TIC Enterprises, LLC (TIC), a sales outsourcing subsidiary which is being wound down. 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 subsidiary 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, and the company engaged two investment banks to serve as financial advisors to the company during the sales process. On July 15, 2004, NUI announced that it had entered into an Agreement and Plan of Merger (Merger Agreement) with AGL Resources Inc. (AGL) which provides for AGL to acquire all of the outstanding shares of common stock of NUI for $13.70 per share in cash, or $220 million in the aggregate, based on approximately 16 million shares of outstanding NUI common stock, and the assumption of NUI's outstanding debt at closing (see Note 15 for a further discussion of the merger).

In addition, NUI and NUI Utilities received a commitment from a lender for an aggregate of $95 million in additional credit facilities intended to provide NUI and NUI Utilities with additional liquidity through the close of the sale of the company (see Notes 2, 9 and 15). If the proposed new financing is not completed by September 30, 2004, or upon the occurrence of certain other events, AGL has the right to terminate the Merger Agreement.

As discussed in Note 4, for all periods presented, the company has classified the results of Valley Cities Gas and Waverly Gas (which were sold collectively on November 7, 2002), 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. 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.

The consolidated financial statements contained herein have been prepared without audit in accordance with the rules and regulations of the Securities and Exchange Commission (SEC) 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.

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.

2.     Liquidity Issues

As a result of various factors, NUI and NUI Utilities have experienced and, in the event the merger does not occur or the anticipated $95 million of senior credit facilities are not obtained, 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.  In the event the company is successful in securing an aggregate of $95 million in senior credit facilities, as described in Note 15, both NUI and NUI Utilities believe that they will have sufficient liquidity to meet their financial obligations through the fiscal year ending September 30, 2005.  These additional credit facilities require the approval of the lenders and the New Jersey Board of Public Utilities (NJBPU).  However, in the event the company is not successful in securing these additional credit facilities, NUI and NUI Utilities believe that, subsequent to September 30, 2004, 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 an interest reserve account for the benefit of the lenders under NUI's credit agreement in the amount of approximately $20.4 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.

-       On July 15, 2004, NUI announced that it had entered into the Merger Agreement with AGL which provides for AGL to acquire all of the outstanding shares of common stock of NUI. If we are unable to sell the company, or if a sale is not completed in a timely manner, NUI's and NUI Utilities' financial condition, results of operations and liquidity could be materially adversely affected (see Note 15 for further information on the sale of the company).

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 an aggregate of $95 million in additional financing. 

On July 14, 2004, NUI and NUI Utilities received a commitment from a lender for an aggregate of $95 million in senior credit facilities (the Bridge Facilities), which are intended to provide NUI and NUI Utilities with additional liquidity fiscal year 2005 and can be utilized to purchase gas for the upcoming winter heating season and for working capital and general corporate purposes. This commitment is comprised of a $75 million senior secured credit facility to be made available to NUI Utilities and secured by NUI Utilities' (i) accounts receivable, (ii) contracts and (iii) cash proceeds of the foregoing, and a $20 million senior unsecured credit facility to be made available to NUI (see Note 15 for further discussion of the Bridge Facilities).

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. In the event the Bridge Facilities are not obtained and/or the merger with AGL is not consummated, the company would be unable to meet its maturing debt obligations, and would be forced to seek strategic alternatives, which may include a reorganization and/or bankruptcy filing.

3.     Common Shareholders' Equity

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

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 nine-month periods ended June 30 are, as follows, exclusive of affiliate transactions (in thousands):

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 12, 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.

5.     Earnings Per Share

The following table summarizes the company's basic and diluted earnings per share calculations for the three and nine-month periods ended June 30 (amounts are in thousands, except per share amounts):                                                                                              

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 June 30, 2004, unvested stock options having an exercise price less than the market value of the company's shares for the three- and nine-month periods ended on that date provided for an additional 621 shares and 596 shares of common stock equivalents outstanding, respectively; however, these shares of common stock equivalents have been omitted from the calculation of the three- and nine-month diluted earnings per share as they would have been antidilutive, since the company had a loss in both periods. 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, is 88,200 and 492,600 shares, respectively, as of June 30, 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 affected 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 the 2004 calendar year, primarily related to the company's decision to discontinue the trading operations of NUI Energy Brokers. One employee was requested to provide additional services for a limited period subsequent to his termination date; the remainder of the employees terminated as a result of the reorganization efforts are not required to provide any future service to the company. The reorganization efforts resulted in aggregate charges of approximately $2.7 million to restructuring costs for the nine months ended June 30, 2004, primarily relating to severance costs for 47 individuals. A total of approximately $1.7 million has been paid to former employees through June 30, 2004. The company has approximately $1.0 million of unpaid liabilities included in Accounts Payable, Customer Deposits, and Accrued Liabilities on the Consolidated Balance Sheet at June 30, 2004 relating to these severance costs.

In January 2004, two executive officers ended their employment with the company.  A. Mark Abramovic served as President of the company since September 26, 2003, until his retirement in January 2004.  He previously had 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.     Comprehensive Income

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

Accumulated other comprehensive loss, included in Common Shareholders' Equity on the Consolidated Balance Sheet was $(1,404,000) at June 30, 2004, and $(645,000) at September 30, 2003. Included in the balance at June 30, 2004, was $(1,404,000) related to minimum pension liability (net of $976,000 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 nine-month periods ended June 30 would have been as shown in the following table (in thousands, except for per share amounts).

9.     Notes Payable to Banks

On November 24, 2003, NUI and NUI Utilities each entered into new separate term and 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 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 June 30, 2004, NUI has fully drawn all amounts available under its credit agreement. As of August 9, 2004, NUI had overnight cash investments of $42.7 million.

NUI's facility may be extended for one 364-day period if (i) NUI Utilities' facility is simultaneously extended, (ii) the maturity of NUI Utilities' 8.35 percent medium term notes, due February 1, 2005, has been extended to a date no earlier than June 30, 2006 or the notes 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 $20.4 million, (iv) no default exists under such facility at the time of such extension and (v) all applicable regulatory approvals required for such extension have been obtained.

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 June 30, 2004, NUI Utilities has fully drawn under the $50 million revolver and the $50 million term loan facility. As of August 9, 2004, NUI Utilities had overnight cash investments of $57.9 million.

NUI Utilities' facility may be extended for one 364-day term if (i) all applicable regulatory approvals required for such extension have been obtained, (ii) the maturity of NUI Utilities' 8.35 percent medium term notes, due February 1, 2005, has been extended to a date no earlier than June 30, 2006 or the notes 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.

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. The terms of NUI's and NUI Utilities' credit facilities would have to be further amended in connection with the anticipated $95 million of Bridge Facilities.

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 certain gas pipeline assets (see Note 12 for further information on the asset purchase),

(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 June 30, 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 8.1 percent and 7.1 percent. As of that date, NUI and NUI Utilities had no unused borrowing capacity under their respective credit facilities (except for NUI Utilities' delayed draw term loan). Also, as of June 30, 2004, NUI and NUI Utilities had approximately $42.2 million and $66.6 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 $18.6 million at 8.1 percent and 2.8 percent for the three months ended June 30, 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 $210.7 million and $35.8 million at 8.0 percent and 3.0 percent for the nine months ended June 30, 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 $100.0 million and $126.8 million at 7.3 percent and 2.8 percent for the three months ended June 30, 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 $103.5 million and $114.2 million at 6.1 percent and 2.7 percent for the nine months ended June 30, 2004 and 2003, respectively.

On July 14, 2004, NUI and NUI Utilities received a commitment from a lender for an aggregate of $95 million in senior credit facilities (also referred to as the Bridge Facilities), which are intended to provide NUI and NUI Utilities with additional liquidity through fiscal year 2005 and can be utilized to purchase gas for the upcoming winter heating season and for working capital and general corporate purposes. This commitment is comprised of a $75 million senior secured credit facility to be made available to NUI Utilities and secured by NUI Utilities' (i) accounts receivable, (ii) contracts and (iii) cash proceeds of the foregoing, and a $20 million senior unsecured credit facility to be made available to NUI. The NUI Utilities facility would mature on May 15, 2005, and the NUI facility would mature on November 21, 2005 (see Note 15 for further discussion of the Bridge Facilities).

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.  In addition, the terms of the Merger Agreement prevent NUI from paying any cash dividends, regardless of financial results.  Therefore, NUI is unable to pay 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. 

Under the amendment to NUI Utilities' credit facility dated as of May 10, 2004, NUI Utilities is prohibited from paying dividends to NUI Corporation exceeding $35 million in the aggregate while the NUI Utilities credit facility is outstanding.

10.  Long-term Debt

NUI Utilities has outstanding $50 million 8.35 percent medium term notes, which mature on February 1, 2005. As of June 30, 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.  The draw down of the $50 million delayed draw term loan to finance the medium term notes is a condition precedent to obtaining the new aggregate $95 million Bridge Facilities (as discussed in Note 15).

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.

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 further 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. In addition, pursuant to the terms of the amendment, and effective as of June 30, 2004, the expiration date of the SBPA was 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.

The SBPA would have to be further amended to permit the proposed $75 million NUI Utilities' senior secured credit facility.

As of June 30, 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 the 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.

In addition, defaults would have occurred under NUI Utilities' 5.70 percent bonds if the company did not provide audited financial statements for NUI Utilities for the fiscal year ended September 30, 2003 (by no later than 120 days after the fiscal year end) and unaudited financial statements for NUI Utilities for the fiscal quarters ended December 31, 2003 and March 31, 2004 (by no later than 60 days after the fiscal quarter ends). However, NUI Utilities obtained all necessary waivers and extended the respective deadlines for delivery of all information required pursuant to such bond facility to June 30, 2004.  No defaults ever occurred under NUI Utilities' 5.70 percent bond facility since NUI Utilities was able to provide all of the required information by the extended deadline of June 30, 2004.

The company's long-term debt maturities for each of the next five fiscal years are as follows: $50 million in fiscal year 2005 and zero in fiscal years 2006 through 2009.

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. As of June 30, 2004, NUI Utilities was permitted to pay up to $39.3 million in dividends pursuant to the SBPA. However, the amendment to NUI Utilities' short-term credit facility dated May 10, 2004, limits the dividends that NUI Utilities may pay to NUI Corporation to $35 million in the aggregate while NUI Utilities' 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.

The company has a retirement plan for eligible members of its board of directors, including both active and retired members.  As of June 30, 2004, the company has a liability of approximately $1.5 million recorded on its Consolidated Balance Sheet related to this retirement plan. Upon a change in control of the company, each participant in the plan is entitled to receive a lump sum payment from the plan equal to the present value of the future annual retirement benefits they would be paid or would be eligible to be paid should they have retired on such a date.  As of June 30, 2004, the total lump sum amount that would payable to plan participants under the plan's change of control provision is approximately $2.0 million.

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.  On July 8, 2004, the NJBPU approved the company's request to refund the first installment of $7 million plus accrued interest as bill credits to customers in September 2004.

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 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.

In addition, defaults would have occurred under NUI Utilities' 5.70 percent bonds if the company did not provide audited financial statements for NUI Utilities for the fiscal year ended September 30, 2003 (by no later than 120 days after the fiscal year end) and unaudited financial statements for NUI Utilities for the fiscal quarters ended December 31, 2003 and March 31, 2004 (by no later than 60 days after the fiscal quarter ends). However, NUI Utilities obtained all necessary waivers and extended the respective deadlines for delivery of all information required pursuant to such bond facility to June 30, 2004.  No defaults ever occurred under NUI Utilities' 5.70 percent bond facility since NUI Utilities was able to provide all of the required information by the extended deadline of June 30, 2004.

Commitments. 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. In February 2003, after receiving the required regulatory approval, 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 June 30, 2004, the company has loaned SSLLC an aggregate of approximately $27 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 an energy hub around 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.

On July 22, 2004, NUI Utilities and Penn-Jersey Pipeline Company (Penn-Jersey) entered into an Asset Purchase Agreement (APA) pursuant to which NUI Utilities will purchase, among other things, the pipeline facilities of Penn-Jersey, subject to the satisfaction of certain conditions contained in the APA, including the receipt of necessary authorizations from the Federal Energy Regulatory Commission (FERC). The purchase price is $315,000 plus the depreciated cost of any necessary capital expenditures made by Penn-Jersey subsequent to January 31, 2003. Penn-Jersey is a small interstate natural gas pipeline that delivers natural gas from an interconnection with Columbia Gas Transmission Corp. in Pennsylvania to NUI Utilities' distribution system in New Jersey.

Guarantees. The company has guarantees of approximately $74.3 million to 16 counterparties as of June 30, 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. Due to the winding down of NUI Energy Brokers' trading operations, as of June 30, 2004, there were no purchases covered by outstanding guarantees. 

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 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 $34.1 million, inclusive of interest, as of June 30, 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.

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 $62.3 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, are 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. The estimated liability for employee retention costs is approximately $3.8 million; however, no liability has been recorded as of June 30, 2004, since the payment of retention amounts is dependent upon the successful sale of the company.  These retention amounts would be payable at certain dates within the sixty day period following the closing date of the sale (pursuant to individual employment agreements), 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.

Securities 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 failed to disclose material facts and materially inflated the company's earnings by (i) allegedly making misleading statements concerning, and failing to properly record, bad debt costs, and (ii) recording revenues from a purportedly illegal "reterminating" billing practice allegedly engaged in by its former subsidiary. 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.    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 denying any wrong doing and asserting affirmative defenses. Discovery has recently commenced. Although the company intends to vigorously defend these lawsuits, it is not possible at this time to determine a likely outcome.

Joseph Pietrangelo, on behalf of himself and a class of persons similarly situated v. NUI Corporation, John Kean, John Kean Jr., Mark Abramovic, James R. Van Horn, Thomas W. Williams, Charles N. Garber, James J. Forese, Dr. Vera King Farris, J. Russell Hawkins, Bernard S. Lee, R. V. Whisnand, and John Winthrop.  On or about July 8, 2004, a complaint for breach of fiduciary duty under the Employee Retirement Income Security Act (ERISA) was filed in the United States District Court for the District of New Jersey, in which Plaintiff alleges that the company and twelve current or former officers and/or directors breached alleged fiduciary duties owed to the employee participants of the NUI Corporation Savings and Investment Plan for Collective Bargaining Employees and the NUI Corporation Savings and Investment Plan for other company employees (collectively, the Plans).  Specifically, Plaintiff alleges that Defendants failed to disclose, and made false and misleading statements concerning, the true level of the company's bad debt, the true level of the company's earnings per share, the accurate status and contribution of the company's energy trading business and other allegedly material operating and accounting issues, all of which allegedly caused the company's stock to trade at artificially inflated prices.  As a result, Plaintiff alleges, Defendants breached various fiduciary duties allegedly owed to participants of the Plans under ERISA, and engaged in a prohibited transaction under Section 404 of ERISA, by purportedly: (i) selecting and maintaining a stock fund consisting of company shares (the NUI Stock Fund) as an investment alternative in the Plans when it allegedly was no longer suitable and prudent, (ii) encouraging employees to invest in the NUI Stock Fund, (iii) continuing to invest in, and failing to divest the Plans from, the NUI Stock Fund when it allegedly became an imprudent investment, (iv) abdicating a purported duty to review, evaluate and monitor the suitability of the Plans' investment in the NUI Stock Fund and (v) failing to provide accurate, material information to the Plans' participants concerning the NUI Stock Fund.  Plaintiff purports to bring a putative class action on behalf of all participants or beneficiaries of the Plans from November 11, 2001 through and including September 26, 2003.  The company has not yet been served formally with the complaint.  Although the company intends to vigorously defend the lawsuit, it is not possible at this time to determine a likely outcome. 

Flint Energy Construction Co., Inc. v. Virginia Gas Pipeline Company.  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 September 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 Enterprises, LLC, 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 $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 July 2, 2004, plaintiffs filed an Amended Petition that adds a claim for conspiracy to fraudulently induce and seeks exemplary damages in connection with the fraud claim.  Also on July 2, 2004, plaintiffs filed Amended Responses to Defendant Nortel Network's Request for Disclosure that includes damage estimates ranging from approximately $2.12 million to $2.32 million (of which approximately $1.46 million to $1.66 million is for lost profits) plus exemplary damages. 

A mediation was held in 2003 and settlement discussions ensued. On June 11, 2003, TIC filed a Motion to Compel Arbitration; no decision has been rendered on the motion. Discovery is continuing and pursuant to a Second Amended Order Setting Schedule signed on August 4, 2004, trial has been set for February 28, 2005.  At this time, the company is unable to determine the likelihood of an outcome.

James Greiff and TIC Enterprises, Inc. v. TIC Enterprises, LLC, NUI Capital Corp., NUI Sales and NUI Corporation.  This case, originally filed in Georgia State Court, then removed by defendants to the United States District Court for the Northern District of Georgia, was transferred on the defendants' motion to the District of Delaware.  The plaintiffs, James Greiff and TIC Enterprises, Inc. sued the company and three other company related entities, NUI Sales Management, Inc., NUI Capital Corp. and TIC, for breach of contract and fraud.  The plaintiffs alleged they were entitled to (i) $3 million arising from the defendants' alleged breach of contract; (ii) an amount to be proven at trial arising from the defendants' alleged breach of a 2001 Purchase Agreement; (iii) $22 million and punitive damages for the defendants' alleged fraud; and (iv) $3 million plus interest and punitive damages for the defendants' alleged fraudulent transfers.  The plaintiffs also alleged a tortious interference claim for $3 million.  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 a promissory note held by the plaintiffs 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. The final Settlement Agreement was executed on June 4, 2004, general releases were exchanged and the company paid the plaintiffs $1.4 million to fully and finally settle all claims between the parties.  On June 15, 2004, the court ordered dismissal of the case pursuant to a Stipulation of Voluntary Dismissal With Prejudice filed by the parties.

United States Postal Service Investigation and Claims.  TIC entered into a contract with the United States Postal Service (USPS) relating to TIC's promotion of certain USPS products.  In January 2003, TIC filed with the USPS contracting officer a claim for "breakaway fees" that were provided for in the contract.  In the near future, TIC intends to file its remaining claims against USPS for unpaid commissions and accounts and lost profits.  The USPS Office of the Inspector General has been conducting an investigation of TIC, and it appears that the Inspector General's investigation relates to allegedly false claims submitted by TIC to USPS for the payment of commissions under the contract, which could result in civil and criminal liability for TIC.  TIC has been fully cooperating with the Inspector General's investigation and has provided documents, data, and technical assistance to the Inspector General.  Although the investigation has been opened for more than a year, the Inspector General has not produced any evidence showing any civil or criminal wrongdoing by TIC, and counsel for TIC has advised that no evidence of false claims by TIC has surfaced.  To date, USPS has only mentioned false claims for amounts totaling less than $800,000, plus fines and penalties, but TIC has since shown USPS that such false claims have no merit. At this time, the company is unable to determine the likely outcome.

Other.

Investigations of NUI Energy Brokers.  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. In connection with this matter, since November 2003, the company, NUI Energy Brokers and Elizabethtown Gas Company have been the subjects of subpoenas issued by the New Jersey State Grand Jury.  The Grand Jury was seeking diverse operational, structural, financial and personnel records relative to such entities together with documentation relating to the purchase and sale of gas on behalf of either NUI Energy Brokers or Elizabethtown Gas for the period of October 1, 1998 through the end of 2003.  Documents in the latter category were also requested by the NJBPU.

On June 30, 2004, NUI Energy Brokers entered into a plea agreement (the Plea Agreement) with the New Jersey Attorney General's Office (NJAG) relating to these questionable transactions at NUI Energy Brokers. Pursuant to the Plea Agreement, NUI Energy Brokers will pay a $500,000 fine, of which $200,000 has been paid as of June 30, 2004, and the remaining amount is expected to be paid in the first quarter of fiscal 2005.  On June 30, 2004, the company entered into a letter agreement with the NJAG pursuant to which the company has agreed to develop, fund and operate certain community service programs.  This concludes the investigation by the NJAG of NUI and its subsidiaries with respect to these matters.  

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 NJAG. On March 1, 2004, the SEC requested the company to voluntarily produce 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.

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 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. 

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 nine-month periods ended June 30, 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.

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:

The increase in non-segment pre-tax operating loss for the three and nine months ended June 30, 2004, as compared to the same periods in fiscal 2003, is primarily due to increased corporate expenses for outside professional services (approximately $2.2 million and $12.4 million, for the three and nine-month periods, respectively), bank fees (approximately $5.3 million and $12.2 million, for the three and nine-month periods, respectively), and restructuring and other severance charges (approximately $2.5 million for the nine-month period), 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 three and nine months ended June 30, 2004, as compared to the same period in fiscal 2003, is primarily due to these same factors, plus increased interest expense (approximately $2.5 million and $6.5 million, for the three and nine-month periods, respectively) and, in the nine-month period, a pre-tax loss of approximately $9.9 million recorded for the early retirement of debt (see Note 10).

15.    Recent Developments

On July 15, 2004, NUI announced that it had entered into the Merger Agreement with AGL, which provides for AGL to acquire all of the outstanding shares of common stock of NUI for $13.70 per share in cash, or $220 million in the aggregate based on approximately 16 million shares of outstanding NUI common stock. The Boards of Directors of both companies have unanimously approved the Merger Agreement. The merger is subject to the approval of NUI shareholders, regulatory agencies in the states of New Jersey, Maryland and Virginia and the SEC, the expiration of the Hart-Scott-Rodino (Federal Trade Commission) waiting period, and various other closing conditions.  In addition, the Merger Agreement grants financing-related termination rights, including AGL's right to terminate the Merger Agreement upon the acceleration of the company's or NUI Utilities' existing indebtedness or in the event of payment defaults under such indebtedness, or if, by September 30, 2004, the company fails to obtain $95 million in senior credit facilities (referred to below), extend and amend NUI's and NUI Utilities' existing $405 million credit facilities or finance NUI Utilities' $50 million medium term notes.  The conditions to AGL's obligations to complete the merger generally include, among others, that neither NUI nor any of its subsidiaries have been indicted or criminally charged for a felony criminal offense relating to certain specified matters; that, subject to certain qualifications, neither NUI nor any of its subsidiaries are the subject of an active investigation by a governmental entity relating to the matters that are the subject of the NJBPU settlement order; and that the final approvals from the applicable regulatory bodies include certain agreed upon terms, except to the extent that the failure to include any such agreed upon terms, or the inclusion of other terms, would not reasonably be expected to have a material adverse effect, individually or in the aggregate, on any of NUI, NUI Utilities or AGL, after taking into account any of the agreed upon terms that are actually included in the final approvals.  In accordance with the Merger Agreement, the Merger Agreement is terminable if the merger has not been completed on or prior to April 13, 2005, subject to an automatic 90-day extension for obtaining the required regulatory approvals. Upon closing, which is currently anticipated in the December 2004 to March 2005 timeframe, NUI will become a wholly-owned subsidiary of AGL.

On July 14, 2004, NUI and NUI Utilities received a commitment from a lender for an aggregate of $95 million in senior credit facilities (the Bridge Facilities). This commitment is comprised of a $75 million senior secured credit facility to be made available to NUI Utilities and secured by NUI Utilities' (i) accounts receivable, (ii) contracts and (iii) cash proceeds of the foregoing, and a $20 million senior unsecured credit facility to be made available to NUI. The NUI Utilities facility would mature on May 15, 2005, and the NUI facility would mature on November 21, 2005. The Bridge Facilities are intended to provide NUI and NUI Utilities with additional liquidity through fiscal 2005 and can be utilized to purchase gas for the upcoming winter heating season and for working capital and general corporate purposes. The loan commitment is subject to various conditions, including the extension of the existing credit facilities of NUI and NUI Utilities to November 21, 2005, the amendment of certain terms of such facilities to allow the new financing and the draw down by NUI Utilities of its $50 million delayed draw term loan to repay its $50 million medium term notes. Approval from the NJBPU and from the lenders under NUI's and NUI Utilities' existing credit facilities will be required to consummate the proposed financing. 

On June 30, 2004, NUI Energy Brokers entered into a plea agreement (the Plea Agreement) with the NJAG relating to certain questionable transactions at NUI Energy Brokers. Pursuant to the Plea Agreement, NUI Energy Brokers will pay a $500,000 fine, of which $200,000 has been paid as of June 30, 2004, and the remaining amount is expected to be paid in the first quarter of fiscal 2005.  On June 30, 2004, the company entered into a letter agreement with the NJAG pursuant to which the company has agreed to develop, fund and operate certain community service programs.  This concludes the investigation by the NJAG of NUI and its subsidiaries with respect to these matters.

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 pending sale of the company to AGL Resources Inc. (AGL);

-       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 and the settlement agreements with the New Jersey Attorney General's Office (NJAG);

-       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; and

-       the sale of NUI Telecom.

The Pending Sale of the Company to AGL

On September 26, 2003, the company announced that its Board of Directors had decided to pursue the sale of the company and the company engaged two investment banks to serve as financial advisors to the company during the sales process.  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.

On July 15, 2004, NUI announced that it had entered into an Agreement and Plan of Merger (Merger Agreement) with AGL, which provides for AGL to acquire all of the outstanding shares of common stock of NUI for $13.70 per share in cash, or $220 million in the aggregate based on approximately 16 million shares of outstanding NUI common stock.  The Boards of Directors of both companies have unanimously approved the Merger Agreement. The merger is subject to the approval of NUI shareholders, regulatory agencies in the states of New Jersey, Maryland and Virginia and the Securities and Exchange Commission (SEC), the expiration of the Hart-Scott-Rodino (Federal Trade Commission) waiting period, and various other closing conditions.  In addition, the Merger Agreement grants financing-related termination rights, including AGL's right to terminate the Merger Agreement upon the acceleration of the company's or NUI Utilities' existing indebtedness or in the event of payment defaults under such indebtedness, or if, by September 30, 2004, the company fails to obtain $95 million in senior credit facilities (referred to below), extend and amend NUI's and NUI Utilities' existing $405 million credit facilities or finance NUI Utilities' $50 million medium term notes.  The conditions to AGL's obligations to complete the merger generally include, among others, that neither NUI nor any of its subsidiaries have been indicted or criminally charged for a felony criminal offense relating to certain specified matters; that, subject to certain qualifications, neither NUI nor any of its subsidiaries are the subject of an active investigation by a governmental entity relating to the matters that are the subject of the NJBPU settlement order; and that the final approvals from the applicable regulatory bodies include certain agreed upon terms, except to the extent that the failure to include any such agreed upon terms, or the inclusion of other terms, would not reasonably be expected to have a material adverse effect, individually or in the aggregate, on any of NUI, NUI Utilities or AGL, after taking into account any of the agreed upon terms that are actually included in the final approvals.  In accordance with the Merger Agreement, the Merger Agreement is terminable if the merger has not been completed on or prior to April 13, 2005, subject to an automatic 90-day extension for obtaining the required regulatory approvals. Upon closing, which is currently anticipated in the December 2004 to March 2005 timeframe, NUI will become a wholly-owned subsidiary of AGL.

In addition, in July 2004 NUI and NUI Utilities received a commitment from a lender for an aggregate of $95 million in senior credit facilities intended to provide NUI and NUI Utilities with additional liquidity through the close of the sale of the company (see Liquidity and Capital Resources). If the proposed new financing is not completed by September 30, 2004, AGL has the right to terminate the Merger Agreement.

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.

Settlement Agreement with the NJBPU

On April 14, 2004, the company announced that NUI, NUI Utilities and Elizabethtown Gas Company (Elizabethtown Gas) 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.  On July 8, 2004, the NJBPU approved the company's request to refund the first installment of $7 million plus accrued interest as bill credits to customers in September 2004.  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-utility 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;

-       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 had 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 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. 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 and Settlement Agreements with the NJAG

Regarding 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.

In connection with this matter, since November 2003, the company, NUI Energy Brokers and Elizabethtown Gas have been the subjects of subpoenas issued by the New Jersey State Grand Jury.  On June 30, 2004, NUI Energy Brokers entered into a plea agreement (the Plea Agreement) with the NJAG relating to certain questionable transactions at NUI Energy Brokers. Pursuant to the Plea Agreement, NUI Energy Brokers will pay a $500,000 fine, of which $200,000 has been paid as of June 30, 2004, and the remaining amount is expected to be paid in the first quarter of fiscal 2005.  On June 30, 2004, the company entered into a letter agreement with the NJAG pursuant to which the company has agreed to develop, fund and operate certain community service programs.  This concludes the investigation by the NJAG of NUI and its subsidiaries relating to these matters.

In addition, the SEC has commenced an informal inquiry relating to NUI Energy Brokers. NUI is fully cooperating with the SEC investigation.

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. For a description of NUI's and NUI Utilities' credit agreements, including the May 10, 2004 amendments 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. The agreement provides NUI Utilities the option to terminate the agreement in the event of a change in control of NUI Utilities or NUI.

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 had employed in October 2003 to manage its financial operations and develop new liquidity forecasts.  In June 2004, Steven D. Overly was appointed Chief Financial Officer, replacing Mr. Scouler. In addition to holding the title of Chief Financial Officer, Mr. Overly maintains his other positions in the organization.

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.

The Sale of NUI Telecom

On December 12, 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 ability to satisfy the conditions in the Merger Agreement;

-       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 the ability of NUI and NUI Utilities to satisfy the conditions precedent to obtaining the Bridge Facilities;

-       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;

-       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 obtaining the necessary consents and approvals and closing the transaction;

-       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;

-       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 and/or amendments from its lenders;

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

-       the ability of the company to maintain its exemption from regulation under the SEC Public Utility Holding Company Act of 1935;

-       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;

-       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 an energy company that primarily operates natural gas utilities and businesses involved in natural gas storage and pipeline activities. 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, 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 subsidiary sold in December 2003; NUI Energy, Inc. (NUI Energy), an energy retailer which is being wound down; NUI Energy Brokers, Inc. (NUI Energy Brokers), a wholesale energy trading and portfolio management subsidiary which is being wound down; OAS Group, Inc. (OAS), the company's digital mapping operation which is being wound down; and TIC Enterprises, LLC (TIC), a sales outsourcing subsidiary which is being wound down. 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 subsidiary 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.

During fiscal 2003, the company considered several alternate financing plans aimed at restoring the creditworthiness 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.  For further information on the pending sale of the company to AGL, see Recent Developments.

On November 24, 2003, NUI and NUI Utilities obtained a $405 million 364-day credit facility financing package.  In addition, in July 2004, NUI and NUI Utilities received a commitment from a lender for an aggregate of $95 million in senior credit facilities intended to provide NUI and NUI Utilities with additional liquidity through the close of the sale of the company. 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 prepayment 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.  In the event the merger with AGL is not consummated, the company may be unable to meet its maturing debt obligations, and may be forced to seek strategic alternatives, which may include a reorganization and/or bankruptcy filing.

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 nine-month periods ended June 30, 2004 and 2003. Following this discussion is a more detailed overview of the results for NUI's three business segments.

NUI recorded a $12.3 million reduction in net loss for the third quarter of fiscal 2004, as compared to the third quarter of last year.  The company's net loss for the third quarter ended June 30, 2004, was $12.8 million, or $0.80 per share, compared to a net loss of $25.1 million, or $1.57 per share, for the third quarter last year. 

The net loss from continuing operations was $11.6 million, or $0.72 per share, compared to a net loss of $3.7 million, $0.23 per share, in the third quarter of fiscal 2003.  The $7.9 million increased loss from continuing operations was primarily the result of (1) reduced operating margins of approximately $2.2 million, primarily due to exiting the retail energy marketing and wholesale energy trading businesses; (2) increased operating expenses of approximately $4.0 million for the reasons described below; and (3) increased net interest expense of approximately $5.3 million, which resulted from both higher weighted average indebtedness and increased interest rates during the third quarter of fiscal 2004.  The $4.0 million increase in operating expenses was due primarily to higher operation and maintenance expense of $1.3 million; higher restructuring costs of $0.6 million; higher depreciation and amortization of $1.3 million; and higher general taxes of $0.8 million.  The decrease in income from continuing operations was partially offset by higher other income of $1.0 million and a reduction in income taxes of $2.4 million as compared to the same period last year.  

Net loss from discontinued operations decreased by approximately $20.2 million to $1.2 million, or $0.08 per share, in the third quarter of fiscal 2004, compared to a net loss of $21.4 million, or $1.34 per share, in the third quarter of fiscal 2003. The fiscal 2003 quarterly results included the $20.3 million impairment charge related to the company's decision to seek a buyer for its NUI Telecom unit in June 2003. The pre-tax income from discontinued operations of $0.5 million for the three months ended June 30, 2004 resulted from revised estimated reserves for legal claims filed against TIC.  Income tax expense for the same period reflects the reversal of deferred tax benefits for TIC, which are not expected to be realized.

For the nine months ended June 30, 2004, NUI recorded a net loss of $17.1 million, or $1.07 per share, compared to a net loss of $5.8 million, or $0.36 per share for the nine months ended June 30, 2003.  The fiscal 2003 third quarter loss includes a $5.9 million after-tax charge for the effect of a change in accounting.  The net loss from continuing operations was $14.8 million, or $0.93 per share, for the nine months ended June 30, 2004, compared to net income of $22.1 million, $1.38 per share, in the same period of fiscal 2003.

The $36.9 million reduction in income from continuing operations was primarily the result of (1) reduced operating margins of approximately $13.6 million, primarily due to the winding down of the company's wholesale energy trading subsidiary; (2) increased operation and maintenance expense of $19.2 million for the reasons described below; (3) restructuring charges of approximately $2.7 million related to employee severance costs; (4) a prepayment penalty of approximately $9.9 million for the early extinguishment of debt; and (5) increased net interest charges of approximately $13.8 million, which resulted from both higher weighted average indebtedness and increased interest rates during the nine month period of fiscal 2004.  A reduction in income tax expense of $22.0 million partially offset the increase in the year-to-date loss as compared to last year.

The $19.2 million increase in operation and maintenance expense in the nine-month period was due primarily to (1) increased legal and professional fees of $13.7 million related to the Focused Audit conducted by the New Jersey Board of Public Utilities (which has concluded), the cost of an internal investigation into the company's wholesale energy trading subsidiary, and costs associated with finding a buyer for the company and (2) bank fees of approximately $11.2 million.  These increases were partially offset by reduced bad debt expense of approximately $6.0 million, mainly as a result of winding down the company's retail energy marketing business during fiscal 2003.

Net loss from discontinued operations decreased by approximately $19.7 million during the current nine-month period to $2.3 million, or $0.14 per share, as compared to the $22.0 million net loss, or $1.38 per share, for same period of fiscal 2003.  As discussed above, the NUI Telecom impairment charge in June 2003 was the major factor for the change in comparative loss from discontinued operations, as well as the costs of winding down the operations of TIC.

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 company's cost allocation policy. In addition, the company has corporate operations that incurred operating expenses of $8.9 million and $0.4 million for the three-month periods ended June 30, 2004 and 2003, respectively, and $29.0 million and $2.5 million for the nine-month periods ended June 30, 2004 and 2003, respectively. The increases during the fiscal 2004 periods are primarily due to increased corporate expenses for outside professional services (approximately $2.2 million and $12.4 million, for the three and nine-month periods, respectively), bank fees (approximately $5.3 million and $12.2 million, for the three and nine-month periods, respectively), and restructuring and other severance charges (approximately $2.5 million for the nine-month period).  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 through 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 and service businesses, 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 of the Notes to the Consolidated Financial Statements) and reflects the results for these operations in Discontinued Operations in the Consolidated Financial Statements for the nine-month period ended June 30, 2003. The Income from Continuing Operations before Taxes for the segment is as follows:

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 and Maryland) 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.

Distribution Services operating revenues decreased by $32.6 million, or 26 percent, to $94.9 million during the three months ended June 30, 2004, as compared to $127.5 million in the same period in fiscal 2003. The decrease in operating revenues was primarily attributable to reduced off-system sales (approximately $27.6 million) and warmer New Jersey weather (approximately $9.0 million).  These decreases were partially offset by an increase in Elizabethtown Gas' SBC revenues (approximately $2.1 million) and a base rate increase in Florida (approximately $1.9 million). (See Regulatory Matters for a further discussion of rate increases.)

Distribution Services operating revenues decreased by $28.8 million, or 5 percent, to $496.5 million during the nine months ended June 30, 2004, as compared to $525.3 million in the same period in fiscal 2003. The decrease in operating revenues was primarily attributable to reduced off-system sales (approximately $67.5 million) and warmer New Jersey weather (approximately $36.1 million). These decreases were partially offset by an increase in gas cost recovery and SBC charges to customers in New Jersey (approximately $51.9 million). Base rate increases and growth in New Jersey (approximately $16.1 million) and Florida (approximately $5.0 million) also offset the decrease in operating revenues.

Operating Margins. Operating margins increased by $1.6 million, or 4 percent, to $38.6 million for the three months ended June 30, 2004, as compared to $37.0 million in the same period in fiscal 2003. Of the factors previously discussed in operating revenues, the operating margin impact of the City Gas base rate increase contributed approximately $1.9 million.  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 the weather normalization clause, operating margins were approximately $0.8 million higher in the fiscal 2004 quarter and $1.2 million lower in the fiscal 2003 quarter than they otherwise would have been without the clause. Operating margins for the appliance services businesses decreased approximately $0.5 million for the current three-month period as a result of increased costs of providing services.

Operating margins increased by $5.8 million, or 4 percent, to $159.9 million for the nine months ended June 30, 2004, as compared to $154.1 million in the same period in fiscal 2003. Of the factors previously discussed in operating revenues, the primary drivers were the base rate increases (approximately $6.6 million) and customer growth (approximately $2.0 million).  These increases were partially offset by reduced off-system gas sales (approximately $0.9 million) and warmer New Jersey weather (approximately $0.8 million).  As a result of the weather normalization clause, operating margins were approximately $1.3 million and $6.1 million lower in the fiscal 2004 and 2003 periods, respectively, than they otherwise would have been without the clause. Operating margins for the appliance services businesses decreased approximately $1.2 million for the current nine-month period as a result of increased costs of providing services.

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 expense decreased by $1.6 million, or 6 percent, to $25.2 million for the three months ended June 30, 2004, as compared with $26.8 million in the same period in fiscal 2003, primarily due to a reduction in bad debt expense (approximately $1.6 million).

Operations and maintenance expense increased by $3.1 million, or 4 percent, to $81.0 million for the nine months ended June 30, 2004, as compared with $77.9 million in the same period in fiscal 2003. This was mainly due to increases in legal and professional fees (approximately $2.1 million) and insurance costs for general liability (approximately $2.7 million), partially offset by a reduction in bad debt expense (approximately $1.7 million).

The $1.1 million, or 15%, increase in depreciation and amortization expense to $8.3 million for the quarter ended June 30, 2004, as compared to $7.2 million for the same period in 2003, reflects an adjustment to depreciation expense in the third quarter of 2003 due to a change in estimates.

Taxes, other than income taxes, increased to $1.5 million for the three months ended June 30, 2004, as compared to $0.4 million in the same period in fiscal 2003, as a result of a revision to a regulatory assessment in the third quarter of 2003.

Other Income and Expense. Other income increased by approximately $0.9 million and approximately $1.4 million for the three- and nine-month periods ended June 30, 2004, respectively, as compared to the same periods in fiscal 2003. The increase in both periods was primarily due to additional interest income earned on cash held as overnight investments during the current fiscal period.

Net Interest Charges.  Net interest charges increased by approximately $2.3 million, or 61 percent, to $6.1 million for the three months ended June 30, 2004 from $3.8 million in the same period in fiscal 2003.  Net interest charges increased by approximately $6.3 million, or 64 percent, to $16.3 million for the nine months ended June 30, 2004 from $10.0 million in the same period in fiscal 2003. The increase during both periods 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).

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 NUI Energy Brokers, 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:

Operating Revenues. Energy Asset Management operating revenues decreased approximately $0.7 million, or 22 percent, to $2.5 million for the three months ended June 30, 2004, as compared to $3.2 million in the same period in fiscal 2003. The decrease was primarily due to reduced operating revenues of approximately $0.5 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 $16.4 million, or 68 percent, to $7.7 million for the nine months ended June 30, 2004, as compared to $24.1 million in the same period in fiscal 2003. The decrease was due to approximately $15.8 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 $0.6 million as a result of reduced storage revenues due to fewer contracts during the nine-month period ended June 30, 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 $0.7 million, or 23 percent, to $2.2 million for the three months ended June 30, 2004, as compared to $2.9 million in the same period in fiscal 2003. Of this decrease, approximately $0.6 million was attributable to NUI Energy Brokers and approximately $0.1 million was attributable to VGC, and was primarily due to the effect of the factors discussed above regarding operating revenues.

Operating margins decreased approximately $16.4 million, or 70 percent, to $7.0 million for the nine months ended June 30, 2004, as compared to $23.4 million in the same period in fiscal 2003. Of this decrease, approximately $15.8 million was attributable to NUI Energy Brokers and approximately $0.6 million was attributable to VGC, and was primarily due to the effect of the factors discussed above regarding operating revenues.

Operating Expenses.Operations and maintenance expense decreased by approximately $0.7 million during the three months ended June 30, 2004, primarily due to a reduction of bad debt expense.

Operations and maintenance expense increased by approximately $1.4 million during the nine months ended June 30, 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 $0.8 million), costs to expense abandoned assets of NUI Energy Brokers (approximately $0.8 million), and a fine pursuant to NUI Energy Brokers' plea agreement with the New Jersey Attorney General's Office ($0.5 million; see Note 12 of the Notes to the Consolidated Financial Statements). These increases were partially offset by reduced bad debt expense (approximately $0.7 million). 

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

Other Income and Expense. Other income increased by approximately $0.3 million for the three months ended June 30, 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 $1.1 million for the nine months ended June 30, 2004, as compared to the same period in fiscal 2003. The increase in the current nine-month period was due to approximately $1.4 million of equity income of SSLLC, partially offset by a decrease in interest income during the current fiscal period (approximately $0.3 million).

Net Interest Charges.  Net interest charges increased by approximately $0.6 million, to $0.9 million for the three months ended June 30, 2004 from $0.3 million in the same period in fiscal 2003. Net interest charges increased by approximately $1.6 million, to $2.9 million for the nine months ended June 30, 2004 from $1.3 million in the same period in fiscal 2003. The increase during both periods 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).

Retail and Business Services Segment

The Retail and Business Services segment includes the operations of the company's UBS and NUI Energy 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 12, 2003 (see Note 4 of the Notes to the Consolidated Financial Statements). As a result, 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:

Operating Revenues. Retail and Business Services operating revenues decreased by approximately $3.1 million, or 67 percent, to $1.5 million for the three months ended June 30, 2004 from $4.6 million in the same period in fiscal 2003. This decrease was primarily due to the company's exit from its retail energy business. Operating revenues for UBS during the three-months ended June 30, 2004, were consistent with the prior fiscal year.

Operating revenues decreased by approximately $2.8 million, or 38 percent, to $4.5 million for the nine months ended June 30, 2004 from $7.3 million in the same period in fiscal 2003. This decrease was primarily due to the company's exit from its retail energy business.  Operating revenues for UBS during the nine-months ended June 30, 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 the remainder of fiscal 2004, which will result in reduced operating revenues as compared to fiscal 2003.

Operating Margins. Retail and Business Services operating margins decreased by approximately $3.1 million during the three months ended June 30, 2004, to $0.9 million, as compared to $4.0 million in the same period in fiscal 2003. This decrease was primarily attributable to the effects of the factors previously discussed in operating revenues.

Operating margins decreased by approximately $2.9 million during the nine months ended June 30, 2004, to $2.6 million, as compared to $5.5 million in the same period in fiscal 2003, which was primarily attributable to the effects of the factors previously discussed in operating revenues.

Operating Expenses.Operations and maintenance expense, depreciation and amortization, and taxes other than income for the Retail and Business Services segment decreased in total by $4.6 million, or 83 percent, to $1.0 million during the three months ended June 30, 2004, as compared to $5.6 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 its retail energy business during the previous fiscal year (approximately $4.9 million), partially offset by increased operating expenses at UBS.

Operations and maintenance expense, depreciation and amortization, and taxes other than income decreased in total by $9.8 million, or 78 percent, to $2.7 million during the nine months ended June 30, 2004, as compared to $12.5 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 its retail energy business during the previous fiscal year (approximately $10.3 million), partially offset by increased operating expenses at UBS.

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

Net Interest Charges.  Net interest charges decreased by approximately $0.2 million, to $0.1 million for the three months ended June 30, 2004 from $0.3 million in the same period in fiscal 2003. Net interest charges decreased by approximately $0.7 million, to $0.1 million for the nine months ended June 30, 2004 from $0.8 million in the same period in fiscal 2003. The decrease during both periods 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.

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 of its focused audit 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 the 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 of its focused audit 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 Electric Discount and Energy Competition Act, which was signed into law in February 1999, the NJBPU approved a stipulation in March 2001 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 June 30, 2004, only a small number of residential customers in Elizabethtown Gas' service territories were receiving gas from an alternate 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 assets, 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.

On June 1, 2004, Elizabethtown Gas filed a petition with the NJBPU requesting an increase in its BGSS rates to recover approximately $18.8 million of higher gas costs.  The increase equates to approximately 4.2 percent of an average residential customer's bill.  The company proposed that this rate increase become effective October 1, 2004.  The company also renewed its proposal that the GCUA, approved by the NJBPU in its March 30, 2001 Order, be authorized to remain in effect beyond November 30, 2004 to ensure full recovery of the company's GCUA balance.

Liquidity and Capital Resources

Overview

As a result of the various factors discussed in this quarterly report, NUI and NUI Utilities have experienced 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 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 risks associated with the sale of the company, 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.   As of June 30, 2004, NUI Utilities was permitted to pay up to $39.3 million in dividends pursuant to the SBPA. However, the amendment to NUI Utilities' short-term credit facility dated May 10, 2004, limits the dividends that NUI Utilities may pay to NUI Corporation to $35 million in the aggregate while NUI Utilities' 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 used in operating activities was $9.6 million for the nine-month period ended June 30, 2004, and net cash provided by operating activities was $45.1 million for the nine-month period ended June 30, 2003. The decrease of $54.7 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' existing credit facilities and as collateral for the company's gas procurement needs. The decrease in operating cash flows was partially offset by reductions in fuel inventories and accounts receivable for the company's non-regulated businesses during the nine-month period ended June 30, 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.  In the event the company is successful in securing an aggregate of $95 million in senior credit facilities described below, both NUI and NUI Utilities believe that they will have sufficient liquidity to meet their financial obligations through the fiscal year ending September 30, 2005.  These additional credit facilities require the approval of the lenders and the NJBPU.  However, in the event the company is not successful in securing the additional credit facilities, NUI and NUI Utilities believe that, subsequent to September 30, 2004, 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 an interest reserve account for the benefit of the lenders under NUI's credit agreement in the amount of approximately $20.4 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.

-       On July 15, 2004, NUI announced that it had entered into the Merger Agreement with AGL which provides for AGL to acquire all of the outstanding shares of common stock of NUI. If we are unable to sell the company, or if a sale is not completed in a timely manner, NUI's and NUI Utilities' financial condition, results of operations and liquidity could be materially adversely affected.

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 an aggregate of $95 million in additional financing.  

On July 14, 2004, NUI and NUI Utilities received a commitment from a lender for an aggregate of $95 million in senior credit facilities (the Bridge Facilities). This commitment is comprised of a $75 million senior secured credit facility to be made available to NUI Utilities and secured by NUI Utilities' (i) accounts receivable, (ii) contracts and (iii) cash proceeds of the foregoing, and a $20 million senior unsecured credit facility to be made available to NUI. The NUI Utilities facility would mature on May 15, 2005, and the NUI facility would mature on November 21, 2005. The Bridge Facilities are intended to provide NUI and NUI Utilities with additional liquidity through fiscal year 2005 and can be utilized to purchase gas for the upcoming winter heating season and for working capital and general corporate purposes. The loan commitment is subject to various conditions, including the extension of the existing credit facilities of NUI and NUI Utilities to November 21, 2005, the amendment of certain terms of such facilities to allow the new financing and the draw down by NUI Utilities of its $50 million delayed draw term loan to repay its $50 million medium term notes. Approval from the NJBPU and from the lenders under NUI's and NUI Utilities' existing credit facilities will be required to consummate the proposed financing. If the proposed new financing and the related financing matters described above are not completed by September 30, 2004, AGL has the right to terminate the Merger Agreement.

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.  In the event the Bridge Facilities are not obtained and/or the merger with AGL is not consummated, the company may be unable to meet its maturing debt obligations, and may be forced to seek strategic alternatives, which may include a reorganization and/or bankruptcy filing.  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 June 30, 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 $42.2 million and $66.6 million, respectively.

NUI's and NUI Utilities' debt agreements 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.  In addition, the terms of the Merger Agreement prevent NUI from paying any cash dividends, regardless of financial results.  Therefore, NUI is unable to pay any dividends at this time or 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 anticipated $95 million of Bridge Facilities which the company received a commitment from a lender would further amend the terms of NUI's and NUI Utilities' credit facilities.

The company completed the sale of its NUI Telecom subsidiary on December 12, 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). 

Credit Rating Actions

During fiscal years 2002, 2003 and 2004, Moody's Investors' Service (Moody's) downgraded NUI's credit rating from Baa1 to Caa1 and downgraded NUI Utilities' credit rating from A3 to B1. 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 B1 to B3. Moody's also downgraded the debt rating of NUI Utilities from Ba1 to Ba3. 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 B3 to Caa1. Moody's also downgraded the debt rating of NUI Utilities from Ba3 to B1. 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 then ongoing investigation of the NJAG 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.  On July 15, 2004, following the announcement of the Merger Agreement with AGL, Moody's changed its outlook for both NUI and NUI Utilities from negative to developing.  The developing outlook reflects Moody's belief that while the news of the sale is a positive development, the uncertainties surrounding the timing and the conditions that may be imposed on the sale by regulators, as well as material adverse events that could lead AGL to abandon its purchase of NUI, require continued monitoring of the credit rating. In the meantime, Moody's expects the company to continue to incur higher than historical operations and maintenance expenses as it employs an array of outside advisors and consultants to help manage its day to day operations; incurs additional legal, accounting and financial advisory fees as it seeks to respond to regulatory investigations; deals with its shareholder lawsuits; attempts to execute settlements with its regulators; and seeks financial and legal advice on the implementation of the Merger Agreement.

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.

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 term and 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 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 June 30, 2004, NUI had fully drawn all amounts available under its credit agreement. As of August 9, 2004, NUI had overnight cash investments of $42.7 million.

NUI's facility may be extended for one 364-day term if (i) NUI Utilities' facility is simultaneously extended, (ii) the maturity of NUI Utilities' 8.35 percent medium term notes, due February 1, 2005, has been extended to a date no earlier than June 30, 2006 or the notes 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 $20.4 million, (iv) no default exists under such facility at the time of such extension and (v) all applicable regulatory approvals required for such extension have been obtained.

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 June 30, 2004, NUI Utilities had fully drawn all amounts available under the $50 million revolver and the $50 million term loan facility. As of August 9, 2004, NUI Utilities had overnight cash investments of $57.9 million.

NUI Utilities' facility may be extended for one 364-day term if (i) all applicable regulatory approvals required for such extension have been obtained, (ii) the maturity of NUI Utilities' 8.35 percent medium term notes, due February 1, 2005, has been extended to a date no earlier than June 30, 2006 or the notes 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.

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.The terms of NUI's and NUI Utilities' credit facilities would have to be further amended in connection with the anticipated $95 million of Bridge Facilities.

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 certain gas pipeline assets (see Note 12 of the Notes to the Consolidated Financial Statements for further information on the asset purchase), 

(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. In addition, the terms of the Merger Agreement prevent NUI from paying any cash dividends, regardless of financial results.  Therefore, NUI is unable to pay 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.

Under the amendment to NUI Utilities' credit facility dated as of May 10, 2004, NUI Utilities is prohibited from paying dividends to NUI Corporation exceeding $35 million in the aggregate while the credit facility is outstanding.

At June 30, 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 8.1 percent and 7.1 percent. As of that date, NUI and NUI Utilities had no unused borrowing capacity under their credit facilities (except for NUI Utilities' delayed draw term loan). Also, as of June 30, 2004, NUI and NUI Utilities had approximately $42.2 million and $66.6 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 $18.6 million at 8.1 percent and 2.8 percent for the three months ended June 30, 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 $210.7 million and $35.8 million at 8.0 percent and 3.0 percent for the nine months ended June 30, 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 $100.0 million and $126.8 million at 7.3 percent and 2.8 percent for the three months ended June 30, 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 $103.5 million and $114.2 million at 6.1 percent and 2.7 percent for the nine months ended June 30, 2004 and 2003, respectively.  

Long-Term Debt.  NUI Utilities has outstanding $50 million 8.35 percent medium term notes, which mature on February 1, 2005. As of June 30, 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. The anticipated $95 million of Bridge Facilities for which the company received a commitment from a lender requires that the delayed draw term loan be fully drawn by September 30, 2004.

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. 

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 further 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. 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.

The SBPA would have to be further amended to permit the proposed $75 million NUI Utilities' senior secured credit facility.

As of June 30, 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, 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.

In addition, defaults would have occurred under NUI Utilities' 5.70 percent bonds if the company did not provide audited financial statements for NUI Utilities for the fiscal year ended September 30, 2003 (by no later than 120 days after the fiscal year end) and unaudited financial statements for NUI Utilities for the fiscal quarters ended December 31, 2003 and March 31, 2004 (by no later than 60 days after the fiscal quarter ends). However, NUI Utilities obtained all necessary waivers and extended the respective deadlines for delivery of all information required pursuant to such bond facility to June 30, 2004.  No defaults ever occurred under NUI Utilities' 5.70 percent bond facility since NUI Utilities was able to provide all of the required information by the extended deadline of June 30, 2004.

Common Stock.  The company has periodically issued shares of common stock in connection with its various stock and employee benefit plans.  However, in accordance with the terms of the Merger Agreement, the company is not issuing any new shares of common stock at this time or in the foreseeable future.

Capital Expenditures and Commitments

Capital Expenditures. Capital expenditures, which consist primarily of expenditures to expand and upgrade the company's gas distribution systems, were $28.2 million for the nine months ended June 30, 2004, and $33.2 million for the nine months ended June 30, 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.  In February 2003, after receiving the required regulatory approval, 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 June 30, 2004, the company has loaned SSLLC an aggregate of approximately $27 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. 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 2007. Phase I, at full capacity, will be able to deliver up to 500 million cubic feet per day of natural gas to area markets. 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.

In conjunction with the development of an energy hub around 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 facility will be regulated by the Federal Energy Regulatory Commission (FERC). 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.  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.

On July 22, 2004, NUI Utilities and Penn-Jersey Pipeline Company (Penn-Jersey) entered into an Asset Purchase Agreement (APA), pursuant to which NUI Utilities will purchase, among other things, the pipeline facilities of Penn-Jersey, subject to the satisfaction of certain conditions contained in the APA, including the receipt of necessary authorizations from the FERC. The purchase price is $315,000 plus the depreciated cost of any necessary capital expenditures made by Penn-Jersey subsequent to January 31, 2003. Penn-Jersey is a small interstate natural gas pipeline that delivers natural gas from an interconnection with Columbia Gas Transmission Corp. in Pennsylvania to NUI Utilities' distribution system in New Jersey.

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 $62.3 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. Management hopes to meet its liquidity needs as a result of the new Bridge Facilities; however, there is no assurance that this 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 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 $34.1 million, inclusive of interest, as of June 30, 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.  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, at this time, to express a belief as to the success of additional recovery efforts.

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 forthe 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 a Standby Letter of Credit secured by cash collateral, as follows: 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.

 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 was 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.  In April 2004, NUI Utilities adopted a hedging risk management policy that established guidelines and controls to govern its hedge program.  In June 2004, Cargill Investor Services (CIS) approved the NUI Utilities' hedging account, and the NJBPU granted the necessary authorizations for NUI Utilities to complete the opening of the hedge account.  As of June 30, 2004, all of the NUI Utilities open positions were transferred to the new account, and the GPS&P is now managed by NUI Utilities.

NUI accounts for its hedging and remaining trading 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 June 30, 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 June 30, 2004, there was no hedge ineffectiveness recognized in earnings.

Presently, NUI Energy Brokers' only open trading positions are related to a long-term gas sales agreement referred to above.  Prior to the company discontinuing the trading operations of NUI Energy Brokers, the risk associated with open positions was closely monitored on a daily basis, and controlled in accordance with NUI Energy Brokers' Risk Management Policy.  Utilizing the variance/covariance VaR (value at risk) methodology to measure the risk associated with open positions, NUI Energy Brokers' VaR was $267 and $45,000 at June 30, 2004 and 2003, respectively, using a 95 percent confidence interval and a one-day time horizon.
The following schedule summarizes the changes in derivative assets and liabilities for the nine-month period ended June 30, 2004 (in thousands).

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):

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.

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:

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

-       General ledger account analyses were not being consistently performed.

-       A listing of debt covenants was not being maintained.

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

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

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

-       Accounts payable invoice processing procedures needed to be improved.

-       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.

In connection with the fiscal 2003 financial statement audit, PwC communicated additional material control weaknesses, which included:

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

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

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

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

In June 2004, the company filed Amendments on Form 10-Q/A for each of the first and second fiscal quarters ending March 31, 2004 and December 31, 2003, because of a deficiency noted in its cash reconciliation process which gave rise to an overstatement of the company's cash balance and an understatement of its prepayment account as of March 31, 2004 and December 31, 2003. This deficiency was related to the company not clearing identified reconciling items timely in a cash wire transfer account resulting from certain end of the quarter cash payments.  The cash wire transfer account is included in Cash and cash equivalents on the Consolidated Balance Sheet. In June 2004, the company implemented a change in its cash reconciliation process which addresses this issue.

During fiscal 2003, our internal auditors performed internal audits which indicated material weaknesses in internal controls similar to those noted above. During fiscal 2004, our internal auditors performed additional audits which indicated continuing material weaknesses in our internal controls.

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.

The company has undertaken a 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:

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

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

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

-       Implementing procedures for performance of account analyses and reconciliations;

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

-       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

-       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.  In addition, the pending sale of the company has resulted in the loss of experienced financial and accounting employees, which has negatively impacted management's implementation of effective disclosure controls, procedures and internal controls.  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 Vice President, Chief Financial Officer, General Counsel and Secretary, of the effectiveness of the design and operation of its disclosure controls and procedures. The evaluation examined those disclosure controls and procedures as of June 30, 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 Vice President, Chief Financial Officer, General Counsel and Secretary, concluded that, as of June 30, 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 Vice President, Chief Financial Officer, General Counsel and Secretary, as appropriate to allow timely decisions regarding required disclosure.

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 failed to disclose material facts and materially inflated the company's earnings by (i) allegedly making misleading statements concerning, and failing to properly record, bad debt costs, and (ii) recording revenues from a purportedly illegal "reterminating" billing practice allegedly engaged in by its former subsidiary. 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. 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 denying any wrong doing and asserting affirmative defenses. Discovery has recently commenced. 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

This case, originally filed in Georgia State Court, then removed by defendants to the United States District Court for the Northern District of Georgia, was transferred on the defendants' motion to the District of Delaware.  The plaintiffs, James Greiff and TIC Enterprises, Inc. sued the company and three other company related entities, NUI Sales Management, Inc., NUI Capital Corp. and TIC, for breach of contract and fraud.  The plaintiffs alleged they were entitled to (i) $3 million arising from the defendants' alleged breach of contract; (ii) an amount to be proven at trial arising from the defendants' alleged breach of a 2001 Purchase Agreement; (iii) $22 million and punitive damages for the defendants' alleged fraud; and (iv) $3 million plus interest and punitive damages for the defendants' alleged fraudulent transfers.  The plaintiffs also alleged a tortious interference claim for $3 million.  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 a promissory note held by the plaintiffs 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. The  final Settlement Agreement was executed on June 4, 2004, general releases were exchanged and the company paid the plaintiffs $1.4 million to fully and finally settle all claims between the parties.  On June 15, 2004, the court ordered dismissal of the case pursuant to a Stipulation of Voluntary Dismissal With Prejudice filed by the parties.

Joseph Pietrangelo, on behalf of himself and a class of persons similarly situated v. NUI Corporation, John Kean, John Kean Jr., Mark Abramovic, James R. Van Horn, Thomas W. Williams, Charles N. Garber, James J. Forese, Dr. Vera King Farris, J. Russell Hawkins, Bernard S. Lee, R. V. Whisnand, and John Winthrop. 

On or about July 8, 2004, a complaint for breach of fiduciary duty under the Employee Retirement Income Security Act (ERISA) was filed in the United States District Court for the District of New Jersey, in which Plaintiff alleges that the company and twelve current or former officers and/or directors breached alleged fiduciary duties owed to the employee participants of the NUI Corporation Savings and Investment Plan for Collective Bargaining Employees and the NUI Corporation Savings and Investment Plan for other company employees (collectively, the Plans).  Specifically, Plaintiff alleges that Defendants failed to disclose, and made false and misleading statements concerning, the true level of the company's bad debt, the true level of the company's earnings per share, the accurate status and contribution of the company's energy trading business and other allegedly material operating and accounting issues, all of which allegedly caused the company's stock to trade at artificially inflated prices.  As a result, Plaintiff alleges, Defendants breached various fiduciary duties allegedly owed to participants of the Plans under ERISA, and engaged in a prohibited transaction under Section 404 of ERISA, by purportedly: (i) selecting and maintaining a stock fund consisting of company shares (the NUI Stock Fund) as an investment alternative in the Plans when it allegedly was no longer suitable and prudent, (ii) encouraging employees to invest in the NUI Stock Fund, (iii) continuing to invest in, and failing to divest the Plans from, the NUI Stock Fund when it allegedly became an imprudent investment, (iv) abdicating a purported duty to review, evaluate and monitor the suitability of the Plans' investment in the NUI Stock Fund and (v) failing to provide accurate, material information to the Plans' participants concerning the NUI Stock Fund.  Plaintiff purports to bring a putative class action on behalf of all participants or beneficiaries of the Plans from November 11, 2001 through and including September 26, 2003.  The company has not yet been served formally with the complaint.  Although the company intends to vigorously defend the lawsuit, it is not possible at this time to determine a likely outcome. 

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 September 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 $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 July 2, 2004, plaintiffs filed an Amended Petition that adds a claim for conspiracy to fraudulently induce and seeks exemplary damages in connection with the fraud claim. Also on July 2, 2004, plaintiffs filed Amended Responses to Defendant Nortel Network's Request for Disclosure that includes damage estimates ranging from approximately $2.12 million to $2.32 million (of which approximately $1.46 million to $1.66 million is for lost profits) plus exemplary damages.

A mediation was held in 2003 and settlement discussions ensued. On June 11, 2003, TIC filed a Motion to Compel Arbitration; no decision has been rendered on the motion. Discovery is continuing and pursuant to a Second Amended Order Setting Schedule signed on August 4, 2004, trial has been set for February 28, 2005.  At this time, the company is unable to determine the likelihood of an outcome.

United States Postal Service Investigation and Claims 

TIC entered into a contract with the United States Postal Service (USPS) relating to TIC's promotion of certain USPS products.  In January 2003, TIC filed with the USPS contracting officer a claim for "breakaway fees" that were provided for in the contract.  In the near future, TIC intends to file its remaining claims against USPS for unpaid commissions and accounts and lost profits.  The USPS Office of the Inspector General has been conducting an investigation of TIC, and it appears that the Inspector General's investigation relates to allegedly false claims submitted by TIC to USPS for the payment of commissions under the contract, which could result in civil and criminal liability for TIC.  TIC has been fully cooperating with the Inspector General's investigation and has provided documents, data, and technical assistance to the Inspector General.  Although the investigation has been opened for more than a year, the Inspector General has not produced any evidence showing any civil or criminal wrongdoing by TIC, and counsel for TIC has advised that no evidence of false claims by TIC has surfaced.  To date, USPS has only mentioned false claims for amounts totaling less than $800,000, plus fines and penalties, but TIC has since shown USPS that such false claims have no merit. At this time, the company is unable to determine the likely outcome.

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 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 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.

Since November 2003, the company, NUI Energy Brokers and Elizabethtown Gas have been the subjects of subpoenas issued by the New Jersey State Grand Jury.  The Grand Jury was seeking diverse operational, structural, financial and personnel records relative to such entities together with documentation relating to the purchase and sale of gas on behalf of either NUI Energy Brokers or Elizabethtown Gas for the period of October 1, 1998 through the end of 2003.  Documents in the latter category were also requested by the New Jersey Board of Public Utilities (NJBPU).  On June 30, 2004, NUI Energy Brokers entered into a plea agreement (the Plea Agreement) with the New Jersey Attorney General's Office (NJAG) relating to these questionable transactions at NUI Energy Brokers.  Pursuant to the Plea Agreement, NUI Energy Brokers will pay a $500,000 fine, of which $200,000 has been paid as of June 30, 2004, and the remaining amount is expected to be paid in the first quarter of fiscal 2005.  On June 30, 2004, the company entered into a letter agreement with the NJAG pursuant to which the company has agreed to develop, fund and operate certain community service programs.  This concludes the investigation by the NJAG of NUI and its subsidiaries with respect to these matters.

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 NJAG. On March 1, 2004, the SEC requested the company to voluntarily produce 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.

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.

(a)           Exhibits

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 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 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 June 29, 2004, the company filed a Current Report on Form 8-K dated June 29, 2004, under Items 5 and 7, furnishing a press release announcing that the company had appointed Steven D. Overly as Chief Financial Officer.

(2)                 On June 30, 2004, the company filed a Current Report on Form 8-K dated June 30, 2004, under Items 5 and 7, furnishing a press release announcing that its wholesale energy trading subsidiary, NUI Energy Brokers, Inc. (NUIEB), had entered into a plea agreement with the New Jersey Attorney General's Office relating to certain transactions at NUIEB.

(3)                 On July 15, 2004, the company filed a Current Report on Form 8-K dated July 15, 2004, under Items 5 and 7, furnishing a press release announcing that the company had entered into an Agreement and Plan of Merger with AGL Resources Inc. (AGL) which provides for AGL to acquire all of the outstanding shares of common stock of NUI Corporation for $13.70 per share in cash.

(4)                 On August 12, 2004, the company filed a Current Report on Form 8-K dated August 12, 2004, under Items 7 and 9, furnishing a press release announcing that it had deferred its fiscal 2004 third quarter earnings conference call, and that the company needed to perform a review of its accounting for deferred taxes before it could announce earnings or file its Form 10-Q for the third quarter of fiscal 2004.

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.