In response to continuing regulatory investigations, financial reporting delays and audits, Moody’s cut the credit ratings of NUI Corp. to Caa1 from B3 and cut the ratings on subsidiary NUI Utilities’ to B1 from Ba3 Tuesday. The decision affects $360 million of NUI Utilities debt and $255 million of NUI Corp. debt. Moody’s said its outlook for both entities remains negative.

It said the action was in response to the company’s recent announcements that it expects to register lower earnings in the first quarter of 2004 because of severance costs and expenses related to its debt refinancings last fall at substantially higher interest rates.

The credit downgrade also was in response to the delay of NUI’s fiscal 2003 and first quarter financials, which is a result of the continuing investigations by the audit committee of the NUI board of certain questionable transactions of wholesale subsidiary NUI Energy Brokers Inc. (see Daily GPI, Feb. 11) The financial reporting delay will require waivers from lenders of both the parent company and the utility subsidiary.

Moody’s also noted that the company is expected to incur a “meaningful settlement charge” as result of the New Jersey Board of Public Utilities’ focused audit on the company. Such a charge would cut into corporate income and equity.

Meanwhile, there is an ongoing investigation by the New Jersey attorney general’s office into NUI Energy Brokers. In addition, NUI remains waiting on the auction block. Further delay in the company’s sale means a continuing delay in the repayment of NUI Corp.’s $255 million in rated debt and a portion of the debt of the utility subsidiary, Moody’s noted.

“The rating downgrades also take into account the financial relationship between NUI Corp. and NUI Utilities,” Moody’s said. “Any penalties that may be assessed on Corp. by the regulators may have to be funded out of Utilities’ earnings and cash flows, as Corp. is now largely a corporate cost center, in the process of selling off or winding down many of its non-regulated operations.

“In addition, Corp. and Utilities have overlapping lenders that require debt to be serviced by each entity,” the credit rating agency added. “To the extent that Corp. does not have the means to discharge its own debt obligations, these lenders may seek dividends from Utilities to help service Corp.’s debt. The lower rating for Corp. reflects the structural subordination of its debt relative to that of Utilities.”

Moody’s said its negative outlook reflects its belief that it will take some time for NUI to close a sale. It noted that NUI’s assets are diverse and are located in various states, including New Jersey, Florida and Virginia, necessitating multiple regulatory approvals.

In the meantime, Moody’s expects NUI to incur extraordinary O&M and legal expenses while it employs an array of outside advisers and consultants to help manage operations, deal with regulatory investigations and search for a suitable buyer.

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