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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-K

|                                            |  |                                                                                         
|------------------------------------------- |  | ----------------------------------------------------------------------------------------
|x                                           |  | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934    
|                                            |  |                                                                                         
|For the fiscal year ended December 31, 2002
|                                            |  |                                                                                         
|or                                         
|                                            |  |                                                                                         
|o                                           |  | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

|                |  |                                       |  |                
|--------------- |  | ------------------------------------- |  | ---------------
|                |  |                                       |  | I.R.S. Employer
|Commission File |  | Registrant, State of Incorporation,   |  | Identification 
|Number          |  | Address and Telephone Number          |  | Number         
|                |  |                                       |  |                
|1-7296          |  | Northern Illinois Gas Company         |  | 36-2863847     
|                |  | (Doing business as Nicor Gas Company) |  |                
|                |  | (An Illinois Corporation)             |  |                
|                |  | 1844 Ferry Road                       |  |                
|                |  | Naperville, Illinois 60563-9600       |  |                
|                |  | (630) 983-8888                        |  |                

Securities registered pursuant to Section 12(b) or 12(g) of the Act: None

The registrant meets the conditions set forth in General Instruction I(1)(a)
and (b) of Form 10-K and is therefore filing this Form with the reduced
disclosure format.

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 and (2) has been subject to such filing
requirements for the past 90 days. Yes x No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. x

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes o No x

All shares of common stock are owned by Nicor Inc.



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Table of Contents

Item No.

| |     |  |  |                                                                                       |  |  |    | 
| | --- |  |  | ------------------------------------------------------------------------------------- |  |  | -- | 
| |     |  |  | Part I                                                                                |  |  |    | 
| | 1.  |  |  | Business                                                                              |  |  | 1  | 
| | 2.  |  |  | Properties                                                                            |  |  | 3  | 
| | 3.  |  |  | Legal Proceedings                                                                     |  |  | 4  | 
| | 4.  |  |  | Submission of Matters to a Vote of Security Holders                                   |  |  | *  | 
| |     |  |  | Part II                                                                               |  |  |    | 
| | 5.  |  |  | Market for Registrants Common Equity and Related Stockholder Matters                 |  |  | 4  | 
| | 6.  |  |  | Selected Financial Data                                                               |  |  | *  | 
| | 7.  |  |  | Managements Discussion and Analysis of Financial
Condition and Results of Operations |  |  | 5  | 
| | 7A. |  |  | Quantitative and Qualitative Disclosures about Market Risk                            |  |  | 18 | 
| | 8.  |  |  | Financial Statements and Supplementary Data                                           |  |  | 19 | 
| | 9.  |  |  | Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure  |  |  | 41 | 
| |     |  |  | Part III                                                                              |  |  |    | 
| | 10. |  |  | Directors and Executive Officers of the Registrant                                    |  |  | *  | 
| | 11. |  |  | Executive Compensation                                                                |  |  | *  | 
| | 12. |  |  | Security Ownership of Certain Beneficial Owners and Management                        |  |  | *  | 
| | 13. |  |  | Certain Relationships and Related Transactions                                        |  |  | *  | 
| | 14. |  |  | Controls and Procedures                                                               |  |  | 41 | 
| |     |  |  | Part IV                                                                               |  |  |    | 
| | 15. |  |  | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                      |  |  | 44 | 
| |     |  |  | Signatures                                                                            |  |  | 46 | 
| |     |  |  | Certifications                                                                        |  |  | 47 | 
| |     |  |  | Supplemental Information                                                              |  |  | 49 | 
| |     |  |  | Exhibit Index                                                                         |  |  | 50 | 



|* |  | The Registrant meets the conditions set forth in General Instruction
I(1)(a) and (b) of Form 10-K and is therefore omitting the information
called for by the otherwise required item.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Glossary

|               |  |                                                                                                                                                                 
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|Degree day     |  | The extent to which the daily average temperature falls below 65 degrees
Fahrenheit. Normal weather for Nicor Gas service territory is about 6,000 degree days.
|FERC           |  | Federal Energy Regulatory Commission, the agency
that regulates the interstate transportation of
natural gas, oil and electricity.                              
|ICC            |  | Illinois Commerce Commission, the agency that
regulates investor-owned Illinois utilities.                                                                      
|Mcf, MMcf, Bcf |  | Thousand cubic feet, million cubic feet, billion cubic feet.                                                                                                    
|PBR            |  | Performance-based rate, a regulatory plan that
provided economic incentives based on natural gas
cost performance.                                              

i



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PART I

Item 1. Business

Northern Illinois Gas Company (doing business as Nicor Gas Company), an
Illinois corporation formed in 1954, is a wholly owned subsidiary of Nicor
Inc., a holding company. Certain terms used herein are defined in the glossary
on page i.

GENERAL

Nicor Gas, a regulated natural gas distribution utility, is one of the nations
largest distributors of natural gas. The company serves 2 million customers,
in a service territory that encompasses most of the northern third of Illinois,
excluding the city of Chicago. The companys service territory is diverse and
has grown steadily over the years, providing the company with a well-balanced
mix of residential, commercial and industrial customers. In 2002, residential
customers accounted for approximately 45 percent of natural gas deliveries,
while commercial and industrial customers accounted for about 25 percent and 30
percent, respectively. The companys large residential customer base provides
relative stability during weak economic periods. In addition, Nicor Gas
industrial and commercial customer base is well diversified, lessening the
impact of industry-specific economic swings. See Managements Discussion and
Analysis  Operating Statistics on page 8 for operating revenues, deliveries
and number of customers by customer classification. The company has
approximately 2,300 employees.

Natural gas deliveries are seasonal since about one-half are used for space
heating. Typically, about 70 percent of deliveries and revenues occur from
October through March. Fluctuations in weather have the potential to
significantly impact year-to-year comparisons of operating income and cash
flow. Since 2000, Nicor Gas has purchased earnings protection against the
impact of significantly warmer weather. To partially offset the cost of this
protection, beginning in 2002 Nicor Gas agreed to pay its counterparty if
weather was colder than an approximate normal. Thus far for 2003, weather
protection has been purchased for only the first quarter and the agreement
stipulates that the maximum payment received or amount paid out will not exceed
$5 million.

Nicor Gas maintains franchise agreements with most of the communities it
serves, allowing it to construct, operate and maintain distribution facilities
in those communities. Franchise agreement terms range up to 50 years.
Currently, less than 10 percent of the agreements will expire within five
years.

As described in Managements Discussion and Analysis  Customer Choice of
Commodity Supplier on page 12, all Nicor Gas customers now have the option of
purchasing their own gas supplies for delivery by Nicor Gas. Large
transportation customers also have options that include the use of Nicor Gas
storage system and the ability to choose varying supply backup facilities.
While Nicor Gas receives less revenue for transportation service as compared to
gas sales service, the company receives a margin generally comparable to gas
sales service for transportation service with full supply backup.

Nicor Gas also has several nontraditional activities, including the Chicago
Hub, which provides natural gas storage and transmission-related services to
marketers, other gas distribution companies and electric power-generation
facilities.

SOURCES OF NATURAL GAS SUPPLY

Nicor Gas purchases natural gas supplies in the open market by contracting
directly with producers and marketers. Pipeline transportation and purchased
storage services are regulated by the Federal Energy Regulatory Commission
(FERC). Firm pipeline capacity and purchased storage services held by the

1



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Item 1. Business (continued)

company that are temporarily not needed can be released in the secondary market
under FERC-mandated capacity release provisions, with proceeds reducing the
companys cost of gas charged to customers.

The companys peak-day requirements are met through utilization of
company-owned storage facilities, firm pipeline capacity, purchased storage
services and other supply sources, arranged by either Nicor Gas or its
customers. Nicor Gas has been able to obtain sufficient supplies of natural
gas to meet customer requirements. The company believes natural gas supply
availability will be sufficient to meet market demands in the foreseeable
future.

Natural gas supply.Nicor Gas maintains a diversified portfolio of natural gas
supply contracts. Firm supply contracts are diversified by supplier, producing
region, quantity and available transportation. Contract pricing is generally
tied to published price indices so as to approximate current market prices.
The contracts also generally provide for the payment of fixed demand charges to
ensure the availability of supplies on any given day and are typically
negotiated annually.

The company also purchases gas supplies on the spot market to fulfill its
supply requirements or to take advantage of favorable short-term pricing. Spot
gas purchases accounted for about one-half of the companys total gas purchases
in the last three years.

As noted previously, customers served under the companys transportation
service tariffs purchase their own gas supplies. About one-half of the gas
delivered by the company in 2002 was purchased by transportation customers
directly from producers and marketers rather than from the company.

Pipeline transportation.Nicor Gas is directly connected to eight interstate
pipelines, providing access to most of the major natural gas producing regions
in North America. The companys primary firm transportation contracts are
with: Natural Gas Pipeline Company of America, Northern Natural Gas Company,
Tennessee Gas Pipeline Company, Midwestern Gas Transmission Company and ANR
Pipeline. All of the capacity covered by these contracts will expire by 2004.
In the first quarter of 2003, Nicor Gas renewed several of these contracts
beyond 2004.

Storage.Nicor Gas owns and operates seven underground natural gas storage
facilities. This storage system is one of the largest in the gas distribution
industry. With about 140 Bcf of top storage capacity, the system is designed
to meet about 55 percent of the companys estimated peak-day deliveries and
approximately 30 percent of its normal winter deliveries. In addition to
company-owned facilities, Nicor Gas purchases about 40 Bcf of storage service.
Storage provides supply flexibility and improves the reliability of deliveries.

COMPETITION/DEMAND

Nicor Gas is one of the largest utility energy suppliers in Illinois,
delivering about one-third of all utility energy consumed in the state.
Substantially all single-family homes in Nicor Gas service territory are
heated with natural gas. The companys natural gas services compete with other
forms of energy, such as electricity and oil, based on such factors as price,
service, reliability and environmental impact. Significant factors that impact
demand for natural gas include weather, economic conditions and price. While
natural gas prices fluctuated greatly over the last several years, Nicor Gas
has traditionally maintained a pricing advantage over electricity and expects
to maintain an advantage in the foreseeable future.

Additional information on competition and demand is presented in Managements
Discussion and Analysis  Factors Affecting Business Performance beginning on
page 10.

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Item 1. Business (concluded)

REGULATION

Nicor Gas is regulated by the Illinois Commerce Commission (ICC), which
establishes the rules and regulations governing utility rates and services in
Illinois. Rates are generally designed to allow the company to recover its
costs and provide an opportunity to earn a fair return for its investors.
Significant changes in the regulations applicable to Nicor Gas or its
affiliates, or the regulatory environment in general, could affect the
performance of Nicor Gas.

The cost of gas the company purchases for customers is recovered through a
monthly gas supply charge, which accounted for approximately 75 percent of a
typical residential customers annual bill in the last three years. The
companys cost of gas is passed on to the customer without markup.

Nicor Gas performance-based rate (PBR) plan for natural gas costs went into
effect in 2000 and was terminated by the company effective January 1, 2003.
Under the PBR plan, Nicor Gas total gas supply costs were compared to a market
sensitive benchmark. Savings and losses relative to the benchmark were
determined annually and shared equally with sales customers. The PBR plan is
currently under ICC review. Additional information on the plan is presented in
Managements Discussion and Analysis  Performance-Based Rate Plan beginning on
page 14.

The companys Customer Select® program offers customers a choice of natural gas
suppliers. Additional information on the program is presented in Managements
Discussion and Analysis  Customer Choice of Commodity Supplier on page 12.

ENVIRONMENTAL MATTERS

For information on environmental matters, see Managements Discussion and
Analysis  Contingencies beginning on page 14 and the Notes to the Consolidated
Financial Statements  Contingencies beginning on page 34.

AVAILABLE INFORMATION

Nicor Gas files various reports with the Securities and Exchange Commission
(SEC). The reports include the annual report on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K and amendments to those reports filed
or furnished pursuant to Section 15 (d) of the Securities Exchange Act of 1934.
Nicor Gas makes all of these reports available without charge to the public on
Nicors web site at www.nicor.com as soon as reasonably practicable after Nicor
Gas files them with, or furnishes them to, the SEC.

Additional information about Nicor Gas business is presented in Managements
Discussion and Analysis beginning on page 11.

Item 2. Properties

The companys properties are located in the territory described under Item 1,
Business, and are suitable, adequate and utilized in its operations.

The gas distribution, transmission and storage system includes approximately
31,000 miles of steel, plastic and cast iron main; approximately 28,000 miles
of steel, plastic/aluminum composite, plastic and copper service pipe
connecting the mains to customers premises; and seven underground storage
fields.

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Item 2. Properties (concluded)

Other properties include buildings, land, motor vehicles, meters, regulators,
compressors, construction equipment, tools, communication and computer
equipment, software, and office equipment.

Most of the companys distribution and transmission property, and underground
storage fields are located on property owned by others and used by the company
through easements, permits or licenses. The company owns most of the buildings
housing its administrative offices and the land on which they sit.

Substantially all properties are subject to the lien of the indenture securing
the companys first mortgage bonds.

Item 3. Legal Proceedings

See Managements Discussion and Analysis  Contingencies beginning on page 14
and the Notes to the Consolidated Financial Statements  Contingencies
beginning on page 34, which are incorporated herein by reference.

PART II

Item 5. Market for Registrants Common Equity and Related Stockholder Matters

All of the outstanding common stock of Nicor Gas is owned by Nicor Inc. There
is no public trading market for the companys common stock. During 2002 and
2001, the company declared dividends on its common stock totaling $85 million
and $90 million, respectively.

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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations

The purpose of this financial review is to explain changes in Nicor Gas
operating results and financial condition from 2000 to 2002, and to discuss
business trends and uncertainties that might affect Nicor Gas. Certain terms
used herein are defined in the glossary on page i.

RESULTS OF OPERATIONS

Nicor Gas net income was $109.1 million, $98.8 million and $12.6 million in
2002, 2001 and 2000, respectively.

Nicor Gas net income was significantly impacted by the
effects of Nicor Gas mercury inspection and repair program in 2002, 2001 and
2000. A charge of $148 million was recorded as operating expense in 2000 to
establish a reserve related to the program. In 2002 and 2001, the recognition
of partial recoveries from insurers and contractors and reserve reductions
lowered operating expenses by $29.0 million and $12.2 million, respectively.
For details of Nicor Gas mercury inspection and repair program, see the Notes
to the Consolidated Financial Statements  Mercury Program beginning on page
37.

Net income was higher in 2002 compared with 2001 due primarily to insurance
recoveries related to the mercury inspection and repair program, increased
natural gas deliveries, lower losses related to a performance-based rate (PBR)
plan, and decreased interest expense. Overall results were negatively impacted
by higher operating costs, including lower pension credits, increased legal and
accounting costs in 2002, higher depreciation and higher health care costs.

Net income was significantly higher in 2001 compared with 2000 reflecting
changes in mercury-related costs and recoveries, greater customer finance
charges and increased contributions from the Chicago Hub, which provides gas
supply-related services. These improvements more than offset the impact of
reduced natural gas deliveries, certain increased operating expenses related to
higher average natural gas prices, greater losses from the companys
PBR plan and increased depreciation.

Operating revenues.Operating revenues decreased from $2,105.6 million in 2001
to $1,594.8 million in 2002 due primarily to significantly lower average
natural gas costs, which are passed directly through to customers without
markup. The revenue effect of the lower average natural gas costs is estimated
to be approximately $575 million. The revenue effect of the lower natural gas
costs was partially offset by the impact of colder weather on deliveries ($85.2
million) in 2002 compared to 2001.

Operating revenues increased $222.1 million in 2001 due primarily to
significantly higher average natural gas costs and related revenue taxes, which
are both generally passed directly through to customers without markup. The
revenue effect of the higher average natural gas costs in 2001 compared to 2000
is approximately $300 million. Partially offsetting the effect of the higher
average 2001 natural gas costs were the estimated effects of lower deliveries
($134 million) due to warmer weather, energy conservation and economic
conditions.

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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)

Margin.Nicor Gas utilizes a measure it refers to as margin to evaluate the
operating income impact of gas distribution revenues. Gas distribution
revenues include gas costs, which are passed directly through to customers
without markup, and revenue taxes, for which Nicor Gas earns only a small
administrative fee. These items often cause significant fluctuations in gas
distribution revenues, and yet they have virtually no direct impact on gas
distribution operating income. Therefore, Nicor Gas and many other gas utility
companies exclude these items in evaluating performance. A reconciliation of
gas distribution revenues and margin is as follows (in millions):

|                    |  |      |         |      |  |      |          |   |  |   |          |  
|------------------- |  | ---- | ------- | ---- |  | ---- | -------- | - |  | - | -------- | -
|                    |  | 2002 |         | 2001 |  | 2000
|                    |  |      |         |      |  |     
|Revenues            |  | $    | 1,594.8 |      |  | $    | 2,105.6  |   |  | $ | 1,883.5  |  
|Cost of gas         |  |      | (970.1  | )    |  |      | (1,477.5 | ) |  |   | (1,270.0 | )
|Revenue tax expense |  |      | (92.4   | )    |  |      | (109.0   | ) |  |   | (100.0   | )
|                    |  |      |         |      |  |      |          |   |  |   |          |  
|Margin              |  | $    | 532.3   |      |  | $    | 519.1    |   |  | $ | 513.5    |  
|                    |  |      |         |      |  |      |          |   |  |   |          |  

Margin increased $13.2 million in 2002. Contributing to the 2002 improvement
were the positive effects of increased natural gas deliveries unrelated to
weather ($6.6 million) and colder weather ($4.3 million), and increased
contributions from the Chicago Hub ($2.3 million), which provides gas
supply-related services. These positive factors were partially offset by lower
revenues from customer finance charges ($4.8 million). The reduction of
revenues from customer finance charges is related to lower levels of customer
receivables arising from reduced natural gas prices in 2002.

Positively affecting margin for 2001 compared to 2000 were greater customer
finance charges ($7.1 million) and larger contributions from the Chicago Hub
($6.9 million). Lower customer demand ($12.4 million) negatively impacted
results in 2001. Reduced customer demand for natural gas in 2001 resulted from
warmer weather, energy conservation and economic conditions. The negative
impact of warmer weather in 2001 versus 2000 ($5.1 million) was partially
offset by benefits from the companys weather hedge ($4.2 million).

Operating and maintenance.Operating and maintenance expense for 2002 and 2001
was $199.6 million and $177.1 million, respectively. The $22.5 million
increase reflects smaller pension credits ($14.1 million), increased legal and
accounting costs related primarily to the PBR plan review ($8.7 million) and
increased health care costs ($5.0 million). These increases were partially
offset by lower natural gas costs to operate company equipment and facilities
($4.2 million).

Operating and maintenance expenses increased by $10.7 million in 2001 to $177.1
million. The increase was due primarily to higher bad debt expenses ($6.7
million) and the higher costs of natural gas used to operate company equipment
and facilities ($4.8 million) in 2001 resulting from higher natural gas prices.
Partially offsetting these increases were higher pension credits ($3.7
million) in 2001 compared to 2000. The higher bad debt expense and company-use
gas cost in 2001 were due primarily to unusually high natural gas prices in the
fourth quarter of 2000 and the first quarter of 2001.

Operating and maintenance expense included pension credits of $9.2 million,
$23.3 million and $19.6 million in 2002, 2001 and 2000, respectively. For more
details concerning fluctuations in the pension credits, see the Factors
Affecting Business Performance  Gas Distribution  Pension Investment Returns
section on page 12.

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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)

Mercury-related costs (recoveries).Mercury-related costs (recoveries) reflect
the estimated costs, credits and recoveries associated with the companys
mercury inspection and repair program. In 2002, Nicor Gas reached an agreement
with an insurer whereby the company recovered approximately $20 million of
mercury-related costs. In both 2002 and 2001, a $9 million adjustment lowered
the mercury-related reserve and reduced operating expense. Operating income
for 2001 also reflected $3.2 million in mercury-related recoveries. The $148
million of mercury-related costs in 2000 represents the original charge to
establish the mercury program reserve. Additional information about the
companys mercury inspection and repair program is presented in the Notes to
the Consolidated Financial Statements  Contingencies  Mercury Program
beginning on page 37.

Other income (expense).Pretax other income (expense) increased $7.0 million
in 2002. Contributing to the 2002 improvement were lower PBR plan losses
compared to 2001 ($10.7 million). Additional information related to the PBR
plan is described in the Contingencies  Performance-Based Rate Plan section
beginning on page 34. Other income for 2002 was negatively impacted by lower
interest income ($1.6 million) compared to 2001.

Pretax other income (expense) decreased $9.3 million in 2001 due primarily to
increased PBR plan losses ($11.6 million) and decreased property sale gains
($2.4 million). These negative factors were partially offset by increased
interest income ($2.6 million) in 2001, due primarily to higher short-term
investment balances, and increased income from energy system development
contracts ($1.9 million).

Interest expense.Interest on debt decreased $10.3 million in 2002 due to
lower average borrowing levels and interest rates in 2002 compared to 2001.
Interest expense increased $1.3 million in 2001 due primarily to increased average borrowing levels.

Income taxes.The 4 percent effective income tax rate for 2000 varied from its
historical level of about 37 percent due to the effect of the unusual charge
related to the mercury program. Lower pretax income typically results in a
lower effective income tax rate because tax credits and other permanent tax
differences represent a larger share of pretax income.

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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)

Operating Statistics

|                              |                               |                             |         |       |         |      |         |       |         |   |         |       |         |  
|----------------------------- | ----------------------------- | --------------------------- | ------- | ----- | ------- | ---- | ------- | ----- | ------- | - | ------- | ----- | ------- | -
|                              |                               |                             |         | 2002  |         | 2001 |         | 2000 
|                              |                               |                             |         |       |         |      |         |      
|Operating revenues(millions)  |                               |                             |         |       |         |      |         |       |         |   |         |      
|                              | Sales                         |                             |         |       |         |      |         |       |         |   |         |       |        
|                              |                               | Residential                 |         | $     | 1,057.4 |      |         | $     | 1,486.4 |   |         | $     | 1,353.9 |  
|
|                              |                               | Commercial                  |         |       | 209.4   |      |         |       | 274.6   |   |         |       | 236.0   |  
|                              |                               | Industrial                  |         |       | 32.5    |      |         |       | 41.5    |   |         |       | 37.0    |  
|                              |                               |                             |         |       |         |      |         |       |         |   |         |      
|                              |                               |                             | 1,299.3 |       |         |      | 1,802.5 |       |         |   | 1,626.9 |      
|                              |                               |                             |         |       |         |      |         |       |         |   |         |      
|                              | Transportation                |                             |         |       |         |      |         |       |         |   |         |       |        
|                              |                               | Residential                 |         |       | 16.3    |      |         |       | 9.5     |   |         |       | 6.7     |  
|                              |                               | Commercial                  |         |       | 75.6    |      |         |       | 75.0    |   |         |       | 78.9    |  
|                              |                               | Industrial                  |         |       | 45.8    |      |         |       | 45.6    |   |         |       | 47.5    |  
|                              |                               | Other                       |         |       | 7.6     |      |         |       | 7.5     |   |         |       | 6.2     |  
|                              |                               |                             |         |       |         |      |         |       |         |   |         |      
|                              |                               |                             | 145.3   |       |         |      | 137.6   |       |         |   | 139.3   |      
|                              |                               |                             |         |       |         |      |         |       |         |   |         |      
|                              | Other revenues                |                             |         |       |         |      |         |       |         |   |         |       |        
|                              |                               | Revenue taxes               |         |       | 95.3    |      |         |       | 112.3   |   |         |       | 101.7   |  
|                              |                               | Environmental cost recovery |         |       | 24.6    |      |         |       | 15.6    |   |         |       | (4.0    | )
|                              |                               | Chicago Hub                 |         |       | 15.4    |      |         |       | 13.0    |   |         |       | 6.1     |  
|                              |                               | Other                       |         |       | 14.9    |      |         |       | 24.6    |   |         |       | 13.5    |  
|                              |                               |                             |         |       |         |      |         |       |         |   |         |      
|                              |                               |                             | 150.2   |       |         |      | 165.5   |       |         |   | 117.3   |      
|                              |                               |                             |         |       |         |      |         |       |         |   |         |      
|                              |                               | $                           | 1,594.8 |       |         | $    | 2,105.6 |       |         | $ | 1,883.5 |      
|                              |                               |                             |         |       |         |      |         |       |         |   |         |      
|Deliveries(Bcf)               |                               |                             |         |       |         |      |         |       |         |   |         |      
|                              | Sales                         |                             |         |       |         |      |         |       |         |   |         |       |        
|                              |                               | Residential                 |         |       | 212.9   |      |         |       | 201.5   |   |         |       | 219.0   |  
|                              |                               | Commercial                  |         |       | 41.6    |      |         |       | 37.2    |   |         |       | 38.4    |  
|                              |                               | Industrial                  |         |       | 6.9     |      |         |       | 5.9     |   |         |       | 6.2     |  
|                              |                               |                             |         |       |         |      |         |       |         |   |         |      
|                              |                               |                             | 261.4   |       |         |      | 244.6   |       |         |   | 263.6   |      
|                              |                               |                             |         |       |         |      |         |       |         |   |         |      
|                              | Transportation                |                             |         |       |         |      |         |       |         |   |         |       |        
|                              |                               | Residential                 |         |       | 11.0    |      |         |       | 6.1     |   |         |       | 4.4     |  
|                              |                               | Commercial                  |         |       | 97.5    |      |         |       | 89.2    |   |         |       | 94.0    |  
|                              |                               | Industrial                  |         |       | 149.2   |      |         |       | 135.3   |   |         |       | 163.9   |  
|                              |                               |                             |         |       |         |      |         |       |         |   |         |      
|                              |                               |                             | 257.7   |       |         |      | 230.6   |       |         |   | 262.3   |      
|                              |                               |                             |         |       |         |      |         |       |         |   |         |      
|                              |                               |                             | 519.1   |       |         |      | 475.2   |       |         |   | 525.9   |      
|                              |                               |                             |         |       |         |      |         |       |         |   |         |      
|Year-end customers(thousands) |                               |                             |         |       |         |      |         |       |         |   |         |      
|                              | Sales                         |                             |         |       |         |      |         |       |         |   |         |       |        
|                              |                               | Residential                 |         |       | 1,733.6 |      |         |       | 1,766.5 |   |         |       | 1,746.3 |  
|                              |                               | Commercial                  |         |       | 108.9   |      |         |       | 102.7   |   |         |       | 98.9    |  
|                              |                               | Industrial                  |         |       | 7.0     |      |         |       | 6.7     |   |         |       | 6.6     |  
|                              |                               |                             |         |       |         |      |         |       |         |   |         |      
|                              |                               |                             | 1,849.5 |       |         |      | 1,875.9 |       |         |   | 1,851.8 |      
|                              |                               |                             |         |       |         |      |         |       |         |   |         |      
|                              | Transportation                |                             |         |       |         |      |         |       |         |   |         |       |        
|                              |                               | Residential                 |         |       | 126.8   |      |         |       | 58.1    |   |         |       | 52.8    |  
|                              |                               | Commercial                  |         |       | 62.4    |      |         |       | 66.0    |   |         |       | 68.7    |  
|                              |                               | Industrial                  |         |       | 6.7     |      |         |       | 7.1     |   |         |       | 7.4     |  
|                              |                               |                             |         |       |         |      |         |       |         |   |         |      
|                              |                               |                             | 195.9   |       |         |      | 131.2   |       |         |   | 128.9   |      
|                              |                               |                             |         |       |         |      |         |       |         |   |         |      
|                              |                               |                             | 2,045.4 |       |         |      | 2,007.1 |       |         |   | 1,980.7 |      
|                              |                               |                             |         |       |         |      |         |       |         |   |         |      
|Other statistics              |                               |                             |         |       |         |      |         |       |         |   |         |      
|                              | Degree days                   |                             |         | 5,779 |         |      |         | 5,422 |         |   |         | 5,717 |        
|                              | Average gas cost per Mcf sold |                             | $       | 3.67  |         |      | $       | 6.00  |         |   | $       | 4.78  |        

8



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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)

FINANCIAL CONDITION AND LIQUIDITY

The company believes it has access to adequate resources to meet its needs for
capital expenditures, debt redemptions, dividend payments and working capital.
These resources include net cash flow from operating activities, access to
capital markets and lines of credit.

Operating cash flows.Net cash flow provided from operating activities was
$221.7 million, $437.5 million and $201.6 million in 2002, 2001 and 2000,
respectively. Year-to-year changes in operating cash flow result largely from
fluctuations in working capital items because of factors including weather, the
price of natural gas, the timing of collections from customers and gas
purchasing practices. The company generally relies on short-term financing to
meet temporary increases in working capital needs.

Investing activities.Capital expenditures were $169.5 million in 2002
compared with $149.8 million in 2001 and $124.6 million in 2000. The increase
in 2002 capital expenditures was related to the acquisition of a compressor at
a storage facility and higher capitalized employee benefit costs. Capital
expenditures were higher in 2001 than in 2000 due primarily to increased
information technology projects and
improvements to the companys operating system. Capital spending in 2003 is
expected to be about $160 million.

Financing activities.As of the filing date of this report, Nicor Gas has
long-term debt ratings that are among the highest in the gas distribution
industry. Because of uncertainties pertaining to the energy industry in
general and to the company, as described in the Notes to the Consolidated
Financial Statements  Contingencies beginning on page 34, the rating agencies
put Nicor Gas long-term debt ratings under review for possible downgrade or on
credit watch with negative implications in 2002. Moodys Investors Service and
Fitch Ratings have also put the companys commercial paper on credit watch. On
November 5, 2002, Fitch Ratings lowered its rating on Nicor Gas long-term debt
to AA from AA+. Nicor Gas F1+ short-term debt rating was unchanged. Lower
ratings could cause higher interest costs. Nicor Gas financial statistics at
December 31 include:

|                                                                          |  |      |      |      |  |      |      |   |  |  |      |  
|------------------------------------------------------------------------- |  | ---- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                                                                          |  | 2002 |      | 2001 |  | 2000
|                                                                          |  |      |      |      |  |     
|Long-term debt, net of current maturities,
as a percent of capitalization |  |      | 39.2 | %    |  |      | 43.0 | % |  |  | 37.3 | %
|Times interest earned, before income taxes                                |  |      | 5.7  |      |  |      | 4.4  |   |  |  | 1.3  |  

Interest coverage for 2000 was negatively affected by the unusual
mercury-related charge.

Long-term debt.Nicor Gas is in compliance with its debt covenants and
believes it will remain so even if its debt ratings are lowered. Nicor Gas
debt agreements do not include ratings triggers or material adverse change
provisions. Net proceeds from securities issued are typically used for
refinancing outstanding debt, construction programs to the extent not provided
by internally generated funds, and general corporate purposes.

In April 2002, Nicor Gas issued $50 million of 3 percent unsecured notes due in
April 2003 with the proceeds to be used for general corporate purposes. Nicor
Gas plans to refinance at least $100 million of long-term debt in 2003.

In 2001, Nicor Gas issued the following First Mortgage Bonds: $50 million due
in 2006 at 5.55%, $75 million due in 2008 at 5.875%, $75 million due in 2011 at
6.625%, and $50 million due in 2016 at 7.2%. Retirements of First Mortgage
Bonds in 2001 were as follows: $75 million due in 2001 at 6.45%, $50

9



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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)

million due in 2002 at 6.75%, $50 million due in 2021 at 8.875%, and $50
million due in 2025 at 7.26%. During 2001, Nicor Gas also retired $50 million
of variable-rate unsecured notes. As a result of these activities, Nicor Gas
weighted average interest rate for long-term debt at December 31, 2001 was 6.3%
compared with 6.8% at December 31, 2000.

In January 2000, Nicor Gas issued $50 million of variable-rate unsecured notes
due in 2001 at an initial rate of 6.11% to fund the redemption of $50 million
of unsecured notes at 5.065% due in 2000.

Short-term debt.At December 31, 2002, the company had line of credit
agreements with five major domestic and foreign banks. These agreements, which
serve as backup for the issuance of commercial paper, allow for borrowings of
up to $409 million through March 31, 2003 and $334 million thereafter through
September 30, 2003. At December 31, 2002 the company had $315 million of
commercial paper
borrowings outstanding. Nicor Gas had $227 million of commercial paper
outstanding at year-end 2001.
Under the companys 2002/2003 short-term line of credit agreements, if Nicor
Inc.s ratio of consolidated total indebtedness to capitalization (including
short-term debt) exceeds 65% during the term of the credit
facility while there are short-term bank loans outstanding, each bank may at
its option declare any amounts due immediately payable and/or terminate its
commitment to make advances to the company. The company expects that
commercial paper funding will continue to be available in the foreseeable
future.

Common and preferred stock.The company paid dividends of $109.4 million,
$72.3 million and $106.4 million in 2002, 2001 and 2000, respectively.

Commitments.For a summary of Nicor Gas contractual obligations, refer to the
Notes to the Consolidated Financial Statements  Contractual Obligations on
page 34.

FACTORS AFFECTING BUSINESS PERFORMANCE

The following factors can impact year-to-year comparisons and may affect the
future performance of Nicor Gas.

Critical accounting policies and estimates.Nicor Gas prepares its
consolidated financial statements in accordance with accounting principles
generally accepted in the United States, which regularly requires Nicor Gas
management to exercise judgment in the selection and application of accounting
methods. The application of accounting methods includes making estimates using
subjective assumptions and judgments about matters that are inherently
uncertain.

The selection of accounting methods and the use of estimates affect Nicor Gas
reported results and financial condition. The company has adopted several
significant accounting policies that are important to understanding its
financial statements and are described in the Notes to the Consolidated
Financial Statements  Accounting Policies beginning on page 26. Management is
also required to make significant estimates, which are similarly described in
the footnotes.

Although there are numerous areas in which Nicor Gas management makes
significant estimates or judgments, it believes its critical estimates or
judgments involve derivative instruments, unbilled revenues, credit risk and
loss contingencies because they are susceptible to material change and could
materially impact Nicor Gas financial statements.

10



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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)

Nicor Gas is required to estimate credit risk in establishing allowances for
doubtful accounts. Actual credit losses could vary materially from Nicor Gas
estimates. Nicor Gas estimated allowance for doubtful accounts at December
31, 2002, was $14.4 million.

Nicor Gas records loss contingencies as liabilities when it is probable that a
liability has been incurred and the amount of loss is reasonably estimable.
Nicor Gas is involved in various legal proceedings and exposed to various loss
contingencies (see discussion in Contingencies beginning on page 14 and the
Notes to the Consolidated Financial Statements  Contingencies beginning on
page 34). These loss contingencies are in some cases resolved in stages over
time, estimates may change significantly from period to period, and the
companys ultimate obligations may differ materially from its estimates. Of
particular note is the PBR plan contingency described beginning on page 14 and
in the Notes to the Consolidated Financial Statements  Contingencies 
Performance-Based Rate Plan beginning on page 34.

Gas distribution. Nicor Gas, a regulated natural gas distribution utility,
serves two million customers in a service territory that encompasses most of
the northern third of Illinois, excluding the city of Chicago. The regions
economy is diverse and has grown steadily over the years, providing Nicor Gas
with a well-balanced mix of residential, commercial and industrial customers.
In 2002, residential, commercial and industrial customers accounted for
approximately 45 percent, 25 percent and 30 percent of natural gas deliveries,
respectively.

Weather. Since about one-half of gas deliveries are used for space heating,
fluctuations in weather have the potential to significantly impact year-to-year
comparisons of operating income and cash flow. Since 2000, Nicor Gas has
purchased earnings protection against the impact of significantly warmer
weather. To partially offset the cost of this protection, beginning in 2002
Nicor Gas agreed to pay its counterparty if weather is colder than an
approximate normal. Thus far for 2003, weather protection has been purchased
for only the first quarter and the agreement stipulates that the maximum
payment received or amount paid out will not exceed $5 million.

Demand and natural gas prices.In addition to the impact of weather,
significant changes in economic conditions or natural gas prices can impact
customer gas usage. However, Nicor Gas large residential customer base
provides relative stability during weak economic periods, and the industrial
and commercial customer base is well diversified, lessening the impact of
industry-specific economic swings. Nicor Gas growth in natural gas deliveries
has traditionally come from customer additions and increased usage by existing
commercial and industrial customers, including power-generation facilities.
Although commercial and industrial deliveries declined in 2001, they increased
in 2002 and the company anticipates continued long-term growth attributable to
these factors. A partial offset is expected as customers install more
energy-efficient equipment.

Changes in the price of natural gas have no direct impact on Nicor Gas margin
since gas costs are passed directly through to customers without markup.
However, high natural gas prices can have an adverse effect on accounts
receivable collections, customer demand, company-use gas expenses, financing
costs and customer service expenses.

Competition.Nicor Gas competes with other energy suppliers based on such
factors as price, service and reliability. The company believes that it is
well positioned to deal with the possibility of fuel switching by customers
because it has rates and services designed to compete against alternative
fuels. In addition,

11



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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)

the company has a rate that allows negotiation with potential bypass customers,
and no customer has bypassed the Nicor Gas system since the rate became
effective in 1987. Nicor Gas also offers
commercial and industrial customers alternatives in rates and service,
increasing its ability to compete in these markets.

Storage and supply.Nicor Gas has a direct connection to multiple interstate
pipelines and extensive underground storage capacity that provides the company
and its transportation customers with flexibility and alternatives for natural
gas supply procurement and storage services. In addition, in an effort to
ensure supply reliability, the company purchases gas from several different
producing regions under varied contract terms.

Customer choice of commodity supplier.The companys Customer Select® program
offers customers a choice of natural gas suppliers. Nicor Gas made its
Customer Select program available to all residential customers beginning in
March 2002. Previously, supplier choice was available to only industrial
customers and, under a Customer Select pilot program, all commercial customers
and about 15 percent of residential customers. In the programs first four
years, about one-third of eligible business customers and one-quarter of
eligible residential customers signed up. The choice of another natural gas
commodity supplier has no direct impact on Nicor Gas distribution margin
because natural gas costs are passed directly through to customers without
markup. Nicor Gas continues to deliver the natural gas, maintain its
distribution system and respond to emergencies.

Customer credit risk.Nicor Gas has a diversified customer base, which limits
its exposure to concentrations of credit risk in any one industry or income
class. The company believes that it maintains prudent credit policies, subject
to ICC regulations. Customers also have options to help them manage their
bills, such as energy assistance programs for low-income customers and a budget
payment plan that spreads gas bills more evenly throughout the year. However,
high natural gas prices can increase the risk of customer nonpayment. Nicor
Gas experienced increased bad debt expense in 2002, 2001 and 2000 that was
higher than historical levels due primarily to significantly higher natural gas
prices. It is expected that higher natural gas prices will continue in 2003.
See also the Credit Risk section beginning on page 13.

Pension investment returns. Nicor Gas maintains noncontributory defined
benefit pension plans covering substantially all employees hired prior to 1998.
Net income related to net periodic benefit credits represented 5 percent, 14
percent and 94 percent of Nicor Gas net income in 2002, 2001, and 2000,
respectively. The 2000 percentage was significantly affected by Nicor Gas
lower net income in 2000, which resulted from the unusual mercury program
charge. For actuarial valuation purposes, Nicor Gas utilizes an October 1
measurement date to determine the companys pension expense or credit for the
subsequent calendar year. During the 12 months ended September 30, 2001, the
pension plans experienced poor investment returns consistent with general
market conditions, negatively impacting the companys 2002 operating income.
The companys pension credit included in operating income in 2002 was $9.2
million compared to $23.3 million in 2001. The October 1, 2002 actuarial
valuation reflected even lower asset values which, along with changes in
actuarial assumptions, will lead to a materially lower pension credit for 2003,
reducing operating income by about $9 million. Actuarial assumptions affecting
2003 include an expected rate of return on plan assets of 8.75 % and a discount
rate of 6.75%. The pension plans are adequately funded, and recent market
performance is not expected to impact participant benefits or future company
contributions. However, further substantial declines in market performance or
changes to actuarial assumptions could require future company contributions.

12



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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)

Nontraditional activities.Nicor Gas continues to pursue nontraditional
activities, including the Chicago Hub, which provides natural gas
transportation and storage services. The Chicago area is a major market hub
for natural gas, and demand exists for storage-related and transmission-related
services by marketers,
other gas distribution companies and electric power-generation facilities.
During 2002, 2001, and 2000, the Chicago Hub contributed to operating income
$15.4 million, $13.0 million, and $6.1 million, respectively. Nicor Gas also
continues to assess its ownership of real estate holdings.

Other operating expenses.Health care costs have been rising and Nicor Gas
expects significant additional increases. Nicor Gas is also experiencing, and
expects to continue to experience, higher insurance costs due to a tightening
insurance market and company loss experience. These cost increases, either
collectively or individually, could materially reduce Nicor Gas future results
of operations.

Regulation.Nicor Gas is regulated by the ICC, which establishes the rules and
regulations governing utility rates and services in Illinois. Rates are
generally designed to allow the company to recover its costs and provide an
opportunity to earn a fair return for its investors. Significant changes in
the regulations applicable to Nicor Gas or its affiliates, or the regulatory
environment in general, could affect the performance of Nicor Gas. Information
regarding certain ICC proceedings is presented within the Contingencies 
Performance-Based Rate Plan section beginning on page 14 and the Notes to the
Consolidated Financial Statements  Contingencies  Performance-Based Rate Plan
beginning on page 34. In addition, Nicor Gas provides certain FERC-regulated
storage and transportation services, and information concerning FERC-regulated
activities is discussed in the Contingencies  Hub Services section and the
Contingencies  Other FERC Matters section on page 17.

Market risk.The company is exposed to market risk in the normal course of its
business operations, including the risk of loss arising from adverse changes in
natural gas commodity prices and interest rates. It is Nicor Gas practice to
manage these risks utilizing derivative instruments and other methods, as
deemed appropriate.

Commodity price risk.With regard to commodity price risk, the company has
established policies and procedures governing the management of such risks and
the use of derivative commodity instruments to hedge its exposure to such
risks. A risk management committee oversees compliance with such policies and
procedures.

Nicor Gas is generally not exposed to market risk caused by changes in
commodity prices because of Illinois rate regulation allowing for the recovery
of prudently incurred natural gas supply costs from customers. However, Nicor
Gas PBR plan for natural gas costs created some exposure to commodity price
risk. The companys exposure to this market risk was partially mitigated
because the PBR plan compared actual gas costs to a market-sensitive benchmark
as opposed to a fixed benchmark. Nicor Gas terminated the PBR plan effective
January 1, 2003.

Substantial increases in natural gas prices may impact Nicor Gas earnings by
increasing the cost of gas used by the company, bad debt expense and other
operating expenses. Higher natural gas prices may also lead to lower customer
gas consumption. The company is addressing certain of these risks with
fixed-rate purchase agreements, futures contracts and swap agreements to reduce
the financial impacts arising from natural gas price changes.

Credit risk.The company is also exposed to credit risk in the event a
counterparty, customer or supplier defaults on a contract to pay for or deliver
product at agreed-upon terms and conditions. To manage this risk, the company
has established procedures to determine and monitor the creditworthiness of

13



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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)

counterparties, to require guarantees or collateral back-up, and to limit its
exposure to any one counterparty. In some instances, Nicor Gas uses, and is
entering into additional master netting arrangements to mitigate counterparty
credit risk.

On December 2, 2001 Enron North America Corporation (Enron) filed a voluntary
petition for relief under Chapter 11 of Title XI of the United States
Bankruptcy Code in the United States Bankruptcy Court for the Southern District
of New York. At the date of Enrons bankruptcy filing, the net amount due to
Enron from Nicor Gas was $2.8 million, and the net amount due to Enron from
Nicor Enerchange was $.9 million. Nicor Gas and Nicor Enerchange have filed
their appropriate proof of claims with the U.S. Bankruptcy Court. In February
of 2003 Enron and Nicor Enerchange entered into a settlement and mutual release
whereby Nicor Enerchange will pay to Enron an amount of $.9 million in full
settlement and release of all amounts due Enron. The settlement agreement
entered into between Enron and Nicor Enerchange was approved on February 11,
2003 by the U.S. Bankruptcy Court. Nicor Gas and Enron are currently in the
process of negotiating a settlement of all amounts currently due Enron.

Interest rate risk.Nicor Gas is exposed to changes in interest rates. The
company manages its interest rate risk by issuing long-term fixed-rate debt
with varying maturities, refinancing certain debt and periodically hedging the
interest rate on anticipated borrowings. For further information about debt
securities, interest rates and fair values, see the Financial Statements -
Consolidated Statements of Capitalization on page 24 and the Notes to the
Consolidated Financial Statements  Fair Value of Financial Instruments on page
29 and the Notes to the Consolidated Financial Statements  Short-Term and
Long-Term Debt on page 29.

Accounting policies.The Financial Accounting Standards Board issued key
accounting pronouncements in 2002. For further information about these
pronouncements, see the Notes to the Consolidated Financial Statements  New
Accounting Pronouncements beginning on page 27. In addition, effective January
1, 2003, Nicor Gas will use a straight-line method for interim depreciation, a
method used by other companies in its industry. Previously, Nicor Gas
allocated depreciation to interim periods based upon the level of
weather-normalized gas deliveries each quarter.

Contingencies.The following contingencies of Nicor Gas are in various stages
of investigation or disposition. Although the company is unable to estimate
the amount of loss reasonably possible in addition to any amounts already
recognized, it is possible that the resolution of these contingencies, either
individually or in aggregate, will require the company to take charges against,
or will result in reductions in, future earnings. It is the opinion of
management that the resolution of these contingencies, either individually or
in aggregate, could be material to earnings in a particular period, but is not
expected to have a material adverse impact on Nicor Gas liquidity or financial
condition.

Performance-based rate plan.Nicor Gas PBR plan for natural gas costs went
into effect in 2000 and was terminated by the company effective January 1,
2003. Under the PBR plan, Nicor Gas total gas supply costs were compared to a
market-sensitive benchmark. Savings and losses relative to the benchmark were
determined annually and shared equally with sales customers. The PBR plan is
currently under Illinois Commerce Commission (ICC) review.

There are allegations that the company acted improperly in connection with the
PBR plan, and the ICC is reviewing these allegations. On June 27, 2002 the
Citizens Utility Board (CUB) filed a motion to reopen the record in the ICCs
proceedings to review the PBR plan (the ICC Proceedings). As a result of the
motion to reopen, Nicor Gas, the Cook County States Attorneys Office (CCSAO),
the Staff of the ICC

14



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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)

and CUB entered into a stipulation providing for additional discovery. The
Illinois Attorney Generals Office has also intervened in this matter. In
addition, the Illinois Attorney Generals Office issued Civil Investigation
Demands (CIDs) to CUB and the ICC Staff. The CIDs ordered that CUB and the ICC
Staff produce all documents relating to any claims that Nicor Gas may have
presented, or caused to be presented, false information related to its PBR
plan. The Securities and Exchange Commission (SEC) and the Office of the
United States Attorney for the Northern District of Illinois are also reviewing
the allegations that the company acted improperly in connection with the PBR
plan. The company has committed to cooperate fully in the reviews of the PBR
plan. Nicor Gas has responded to numerous data requests that have been
propounded by the ICC Staff, CUB, CCSAO, the SEC, the Illinois Attorney
Generals Office and the Office of the United States Attorney for the Northern
District of Illinois.

In response to these allegations, on July 18, 2002, the Nicor Board of
Directors appointed a Special Committee of independent, non-management
directors to conduct an inquiry into issues surrounding natural gas purchases,
sales, transportation, storage and such other matters as may come to the
attention of the Special Committee in the course of its investigation. To
conduct the inquiry, the Special Committee retained Scott Lassar of the law
firm of Sidley Austin Brown & Wood (Sidley), and Sidley hired the accounting
firm of KPMG LLP. Mr. Lassar is the former United States Attorney for the
Northern District of Illinois.

The Special Committee presented the report of its counsel (Report) to Nicors
Board of Directors on October 28, 2002. The transmittal letter from the
Special Committee to Nicors Board of Directors and Mr. Lassars Report were
filed with the SEC on a Form 8-K on October 31, 2002. The findings of the
Report include:



| |  | Certain transactions increased customer costs in the aggregate amount of approximately $15
million.                     
|- |  | ------------------------------------------------------------------------------------------------------------------------
| 
| |  | No improper Nicor affiliated-party transactions or improper hedging activities were identified.                         
| 
| |  | Inadvertent accounting errors occurred, sometimes to the benefit of customers and sometimes to
the benefit of Nicor Gas.
| 
| |  | No criminal activity or fraud was identified.                                                                           

In response, the Nicor Board of Directors directed the companys management to:



| |  | make appropriate adjustments to account for, and fully address, the adverse consequences to
ratepayers of the items noted in the Report,
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | undertake a financial statement re-audit of 1999 to 2001 and a review of the first two
quarters of 2002,                                
| 
| |  | amend any filings with the ICC, the SEC or other regulatory agencies, as necessary,                                                     
| 
| |  | conduct a full audit of management fees paid by the company to third parties during 2000 and
2001,                                      
| 
| |  | conduct a detailed study of management bonus issues, and                                                                                
| 
| |  | conduct a detailed study of the adequacy of internal accounting and regulatory controls.                                                

Nicor and Nicor Gas previously restated their 2001,
2000 and 1999 annual financial statements and their 2002 and 2001
interim results to reflect corrections. The audited restated
financial statements were previously filed with the SEC. In addition, Nicor and Nicor Gas have recorded additional
charges in the fourth quarter of 2002.

The items included in the Report are
reflected in the financial statements as follows (amounts pretax):



| |  | The $15 million of transactions identified in the Report, as noted above.$11.2 million of these
customer costs relate to transactions that required corrections to gas purchase costs or storage
volumes from 1999 to 2001. The remaining $4.1 million of the $15.3 million identified in the Report
was recorded by Nicor Gas as a PBR plan loss contingency liability in the fourth quarter of 2002.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

15



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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)



|  |  | The largest correction related to a late 1999 wholesale title transfer of
natural gas from Nicor Gas storage inventory which had increased customers
gas costs by approximately $6.75 million. The corrections also
related to
physical transfers of natural gas between Nicor Gas storage fields that
were not consistently accounted for under the PBR plan and the improper
classification of 2001 weather insurance premiums as cost of gas rather than
operating expense. These two items increased customers gas costs by a
total of $4.45 million. The corrections to gas costs had no direct impact
on pretax income because gas costs are passed directly through to customers
without markup. However, the gas cost and benchmark corrections did impact
PBR plan results, as discussed below, and the weather insurance correction
increased 2001 operating and maintenance expense by $2 million.                                                                                                                                                                                                                                                                                                                                                                                                                           
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | Changes in the timing of certain sales and purchases of natural gas
inventory between Nicor Gas and independent third parties during the
period December 1999 to the present.Nicor Gas had previously
recorded these transactions based upon when it held title to the
natural gas, but there are additional criteria that were not applied
in determining the accounting treatment, including those set forth in
FASB Statement No. 49, Accounting for Product Financing Arrangements,
and Staff Accounting Bulletin No. 101, Revenue Recognition in
Financial Statements. For example, the level of economic interest in
or control over the asset must be considered, which changes the timing
of recognizing gas purchases and inventory in some of the third-party
storage arrangements. In addition, in some instances a portion of the
purchase cost is now classified as interest cost. These corrections
increased both inventory and accounts payable at December 31, 2001 and
2000. The corrections to gas costs had no direct impact on pretax
income because gas costs are passed directly through to customers
without markup. However, the gas cost and benchmark corrections did
impact PBR plan results, as discussed below, and interest expense
increased by $1.0 million and $.6 million in 2001 and 2000,
respectively.
| 
| |  | PBR plan results.Since the calendar-year PBR plan calculations
consider the cost of gas charged to customers and volumes withdrawn
from inventory, which are both restated, PBR plan results have also
changed and were reduced by $23.8 million and $15.4 million in 2001
and 2000, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

In addition to the corrections related to the Report, as a result of
management and audit reviews, the company also increased 2001 gas costs for
certain transactions which had previously been recorded in the first quarter of
2002. This reduced Nicor Gas 2001 PBR plan results by $5.8 million.

The adjustments noted above reduced Nicors 2001 and 2000 pretax gas
distribution results by $32.6 million and $16.0 million, respectively. The
impact of the items listed above resulted in a reduction to net income for 2001
and 2000 of $19.7 million and $9.7 million, respectively.

Because the PBR plan and historical utility gas costs are still under ICC
review, it is possible that the final outcome could be materially different
than the amounts noted above. Pursuant to the agreement of all parties,
including the company, the ICC re-opened the 1999 and 2000 purchased gas
adjustment filings for review of certain transactions related to the PBR plan
and consolidated the reviews of the 1999-2002 purchased gas adjustment filings
with the PBR plan review. Certain parties in the PBR plan review proceeding
have indicated disagreement with the findings in the Report or have indicated
that they believe substantially greater adjustments or penalties are warranted.
In addition, on February 5, 2003, the CCSAO and CUB filed a motion for $27
million in sanctions against the company in the ICC Proceedings. In that
motion, CCSAO and CUB alleged that Nicor Gas responses to certain CUB data
requests were false. Also on February 5, 2003, CUB stated in a press release
that, in addition to $27 million in sanctions, it would seek refunds to
consumers in an amount much greater than the $15 million of adjustments
identified in the Report. On March 5, 2003, the ICC staff filed a response
brief in support

16



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##### 



Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)

of CUBs motion for sanctions. It is not possible to determine how the ICC
will resolve the claims of CCSAO, CUB or other parties to the ICC Proceedings.

Nicor Gas is unable to predict the outcome of any of the foregoing reviews or
the companys potential exposure thereunder beyond the amounts noted above.
Also, due to the uncertainties surrounding the PBR plan, Nicor Gas has not
recognized a $26.9 million pretax gain from the 2002 PBR plan year. In a
letter dated October 28, 2002, Nicor Gas informed the ICC that it was
terminating its PBR plan effective January 1, 2003.

On July 22, 2002, a purported class action was filed against Nicor Gas and
Nicor in the Circuit Court of Cook County, Illinois, on behalf of all customers
of Nicor Gas who at any time from January 2000 through the present were subject
to Nicor Gas PBR plan. The named plaintiffs alleged breach of contract,
unjust enrichment and violation of the Illinois Consumer Fraud and Deceptive
Practices Act, and that the class sustained damages as a result of Nicor Gas
manipulating the benchmark under the PBR plan. The named plaintiffs sought, on
behalf of themselves and the purported class, compensatory damages, prejudgment
and postjudgment interest, disgorgement of all profits, and restitution to
plaintiffs and the purported class. Nicor filed a Motion to Dismiss this
action on September 24, 2002. On December 4, 2002, the named plaintiffs
voluntarily dismissed the case, but indicated an intent to bring their claims
before the ICC. Nicor Gas is unable to predict the outcome of any such
proceeding or Nicors potential exposure related thereto and has not recorded a
liability associated with the potential outcome of this contingency.

SEC and U.S. Attorney Inquiries.In 2002, the staff of the SEC informed the
company that the SEC is conducting a formal inquiry regarding the PBR plan. A
representative of the Office of the United States
Attorney for the Northern District of Illinois has notified the company that
that office is conducting an inquiry on the same matter that the SEC is
investigating, and a grand jury is also reviewing this matter.

Hub Services.Nicor Gas offers interstate transportation and storage services,
which are regulated by the Federal Energy Regulatory Commission (FERC), as well
as certain intrastate interruptible transportation and storage services which
are regulated by the ICC. During a periodic rate case that was filed with FERC
in 2002, Nicor Gas determined that refunds were due to certain customers of
these services. Nicor Gas has refunded service fees and interest totaling $1.1
million, and in the fourth quarter of 2002 it accrued $.3 million for
additional costs. Refunds were recorded as a reduction to revenue in the
periods that original billing occurred. On March 14, 2003, FERC issued an
order approving a settlement with Nicor Gas.

Other FERC Matters.In 2002, Nicor Gas determined that it may not have
complied with regulations of FERC governing the release of certain
transportation and storage capacity that it contracts for with interstate
pipelines, and the company brought these matters to the attention of FERC. The
company accrued a $.4 million liability associated with these matters in the
fourth quarter of 2002. On March 14, 2003, FERC issued an order approving a
settlement with Nicor Gas.

Mercury program.Future operating results may be impacted by adjustments to
the companys estimated mercury program liability or by mercury-related
recoveries. Additional information about this program is presented in the
Notes to the Consolidated Financial Statements  Contingencies  Mercury
Program beginning on page 37.

Manufactured gas plant sites.The company is conducting environmental
investigations and remedial activities at former manufactured gas plant sites.
Additional information about these sites is presented the

17



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##### 



Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operations (concluded)

Notes to the Consolidated Financial Statements  Contingencies  Manufactured
Gas Plant Sites beginning on page 39.

Other contingencies.The company is involved in legal or administrative
proceedings before various courts and agencies with respect to rates, taxes and
other matters. See the Notes to the Consolidated Financial Statements -
Contingencies beginning on page 34.

CAUTION CONCERNING FORWARD LOOKING STATEMENTS

This document includes certain forward-looking statements about the
expectations of Nicor Gas. Although Nicor Gas believes these statements are
based on reasonable assumptions, actual results may vary materially from stated
expectations. Actual results may differ materially from those indicated in the
companys forward-looking statements due to the direct or indirect effects of
the results of legal contingencies (including litigation) and the resolution of
those issues, including the effects of an Illinois Commerce Commission review.
Other factors that could cause materially different results include, but are
not limited to, weather conditions; natural gas prices; health care costs;
insurance costs; borrowing needs; interest rates; credit conditions; economic
and market conditions; energy conservation; legislative and regulatory actions,
results, or adjustments; asset sales; significant unplanned capital needs and
any future mercury-related charges or credits. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as
of the date of this filing. Nicor Gas undertakes no obligation to publicly
release any revision to these forward-looking statements to reflect events or
circumstances after the date of this filing.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

For disclosures about market risk, see the Market Risk section beginning on
page 13, which is incorporated herein by reference.

18



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##### 



Item 8. Financial Statements and Supplementary Data

|                             |                                                 |  |      |    | 
|---------------------------- | ----------------------------------------------- |  | ---- | -- | 
|                             |                                                 |  | Page
|                             |                                                 |  |     
|Independent Auditors Report |                                                 |  | 20   |   
|Financial Statements:        |                                                 |  |      |   
|                             | Consolidated Statements of Operations           |  |      | 21 | 
|                             | Consolidated Statements of Cash Flows           |  |      | 22 | 
|                             | Consolidated Balance Sheets                     |  |      | 23 | 
|                             | Consolidated Statements of Capitalization       |  |      | 24 | 
|                             | Consolidated Statements of Retained Earnings    |  |      | 25 | 
|                             | Consolidated Statements of Comprehensive Income |  |      | 25 | 
|                             | Notes to the Consolidated Financial Statements  |  |      | 26 | 

19



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##### 



INDEPENDENT AUDITORS REPORT

To the Shareholder and Board of Directors of Northern Illinois Gas Company

We have audited the accompanying consolidated balance sheets and statements of
capitalization of Northern Illinois Gas Company and subsidiary (the Company) as
of December 31, 2002 and 2001, and the related consolidated statements of
operations, retained earnings, comprehensive income, and cash flows for each of
the three years in the period ended December 31, 2002. Our audits also
included the financial statement schedule listed in the Index at Item 15(a)(2).
These financial statements and financial statement schedule are the
responsibility of the Companys management. Our responsibility is to express
an opinion on these financial statements and the financial statement schedule
based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Northern Illinois Gas Company and
subsidiary as of December 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2002 in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.

DELOITTE & TOUCHE LLP

Chicago, IL
February 28, 2003

20



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##### 



Consolidated Statements of Operations
(millions)

|                                                                                       |                                              |   |                        |       |      |   |         |         |   |   |         |         |  
|-------------------------------------------------------------------------------------- | -------------------------------------------- | - | ---------------------- | ----- | ---- | - | ------- | ------- | - | - | ------- | ------- | -
|                                                                                       |                                              |   | Year ended December 31
|                                                                                       |                                              |   |                       
|                                                                                       |                                              |   | 2002                   |       | 2001 |   | 2000   
|                                                                                       |                                              |   |                        |       |      |   |        
|Operating revenues (includes revenue taxes of
$95.3, $112.3, and $101.7, respectively) |                                              | $ | 1,594.8                |       |      | $ | 2,105.6 |         |   | $ | 1,883.5 |        
|                                                                                       |                                              |   |                        |       |      |   |         |         |   |   |         |        
|Operating expenses                                                                     |                                              |   |                        |       |      |   |         |         |   |   |         |        
|                                                                                       | Cost of gas                                  |   |                        | 970.1 |      |   |         | 1,477.5 |   |   |         | 1,270.0 |  
|                                                                                       | Operating and maintenance                    |   |                        | 199.6 |      |   |         | 177.1   |   |   |         | 166.4   |  
|                                                                                       | Depreciation                                 |   |                        | 137.6 |      |   |         | 132.4   |   |   |         | 129.0   |  
|                                                                                       | Taxes, other than income taxes               |   |                        | 109.5 |      |   |         | 125.5   |   |   |         | 117.5   |  
|                                                                                       | Mercury-related costs (recoveries)           |   |                        | (29.0 | )    |   |         | (12.2   | ) |   |         | 148.0   |  
|                                                                                       | Income taxes                                 |   |                        | 63.4  |      |   |         | 58.9    |   |   |         | (1.3    | )
|                                                                                       |                                              |   |                        |       |      |   |         |         |   |   |         |        
|                                                                                       |                                              |   | 1,451.2                |       |      |   | 1,959.2 |         |   |   | 1,829.6 |        
|                                                                                       |                                              |   |                        |       |      |   |         |         |   |   |         |        
|Operating income                                                                       |                                              |   | 143.6                  |       |      |   | 146.4   |         |   |   | 53.9    |        
|                                                                                       |                                              |   |                        |       |      |   |         |         |   |   |         |        
|Other income (expense)                                                                 |                                              |   |                        |       |      |   |         |         |   |   |         |        
|                                                                                       | Other, net                                   |   |                        | 2.7   |      |   |         | (4.3    | ) |   |         | 5.0     |  
|                                                                                       | Income taxes on other income                 |   |                        | (.9   | )    |   |         | 1.9     |   |   |         | (1.8    | )
|                                                                                       |                                              |   |                        |       |      |   |         |         |   |   |         |        
|                                                                                       |                                              |   | 1.8                    |       |      |   | (2.4    | )       |   |   | 3.2     |        
|                                                                                       |                                              |   |                        |       |      |   |         |         |   |   |         |        
|Interest expense                                                                       |                                              |   |                        |       |      |   |         |         |   |   |         |        
|                                                                                       | Interest on debt, net of amounts capitalized |   |                        | 34.3  |      |   |         | 44.6    |   |   |         | 43.3    |  
|                                                                                       | Other                                        |   |                        | 2.0   |      |   |         | .6      |   |   |         | 1.2     |  
|                                                                                       |                                              |   |                        |       |      |   |         |         |   |   |         |        
|                                                                                       |                                              |   | 36.3                   |       |      |   | 45.2    |         |   |   | 44.5    |        
|                                                                                       |                                              |   |                        |       |      |   |         |         |   |   |         |        
|Net income                                                                             |                                              |   | 109.1                  |       |      |   | 98.8    |         |   |   | 12.6    |        
|Dividends on preferred stock                                                           |                                              |   | .3                     |       |      |   | .4      |         |   |   | .4      |        
|                                                                                       |                                              |   |                        |       |      |   |         |         |   |   |         |        
|Earnings applicable to common stock                                                    |                                              | $ | 108.8                  |       |      | $ | 98.4    |         |   | $ | 12.2    |        
|                                                                                       |                                              |   |                        |       |      |   |         |         |   |   |         |        

The accompanying notes are an integral part of these statements.

21



---



##### 



Consolidated Statements of Cash Flows
(millions)

|                                             |                                                                                          |                                               |                               |        |             |        |       |        |       |        |      |        |       |        |  
|-------------------------------------------- | ---------------------------------------------------------------------------------------- | --------------------------------------------- | ----------------------------- | ------ | ----------- | ------ | ----- | ------ | ----- | ------ | ---- | ------ | ----- | ------ | -
|                                             |                                                                                          |                                               |                               |        | December 31
|                                             |                                                                                          |                                               |                               |        |            
|                                             |                                                                                          |                                               |                               |        | 2002        |        | 2001  |        | 2000 
|                                             |                                                                                          |                                               |                               |        |             |        |       |        |      
|Operating activities                         |                                                                                          |                                               |                               |        |             |        |       |        |       |        |      |       
|                                             | Net income                                                                               |                                               | $                             | 109.1  |             |        | $     | 98.8   |       |        | $    | 12.6   |      
|                                             | Adjustments to reconcile net income to net cash flow
provided from operating activities: |                                               |                               |        |             |        |       |        |       |        |      |        |      
|                                             |                                                                                          | Depreciation                                  |                               |        | 137.6       |        |       |        | 132.4 |        |      |        | 129.0 |       
|                                             |                                                                                          | Deferred income tax expense (benefit)         |                               |        | 32.3        |        |       |        | 16.0  |        |      |        | (35.3 | )     
|                                             |                                                                                          | Gain on sale of property, plant and equipment |                               |        | (4.1        | )      |       |        | (3.9  | )      |      |        | (6.3  | )     
|                                             |                                                                                          | Changes in assets and liabilities:            |                               |        |             |        |       |        |       |        |      |        |       |       
|                                             |                                                                                          |                                               | Receivables, less allowances  |        |             | (101.8 | )     |        |       | 279.6  |      |        |       | (254.0 | )
|                                             |                                                                                          |                                               | Gas in storage                |        |             | 13.4   |       |        |       | (10.4  | )    |        |       | 50.1   |  
|                                             |                                                                                          |                                               | Deferred/accrued gas costs    |        |             | (40.7  | )     |        |       | 183.5  |      |        |       | (70.5  | )
|                                             |                                                                                          |                                               | Prepaid pension costs         |        |             | (12.8  | )     |        |       | (32.0  | )    |        |       | (26.9  | )
|                                             |                                                                                          |                                               | Other assets                  |        |             | (52.9  | )     |        |       | 20.4   |      |        |       | (16.2  | )
|                                             |                                                                                          |                                               | Accounts payable              |        |             | 64.0   |       |        |       | (194.0 | )    |        |       | 309.4  |  
|                                             |                                                                                          |                                               | Accrued mercury-related costs |        |             | (13.6  | )     |        |       | (41.0  | )    |        |       | 78.0   |  
|                                             |                                                                                          |                                               | Other liabilities             |        |             | 89.0   |       |        |       | (11.5  | )    |        |       | 30.4   |  
|                                             |                                                                                          | Other                                         |                               |        | 2.2         |        |       |        | (.4   | )      |      |        | 1.3   |       
|                                             |                                                                                          |                                               |                               |        |             |        |       |        |       |        |      |       
|                                             | Net cash flow provided from operating activities                                         |                                               |                               | 221.7  |             |        |       | 437.5  |       |        |      | 201.6  |      
|                                             |                                                                                          |                                               |                               |        |             |        |       |        |       |        |      |       
|Investing activities                         |                                                                                          |                                               |                               |        |             |        |       |        |       |        |      |       
|                                             | Capital expenditures                                                                     |                                               |                               | (169.5 | )           |        |       | (149.8 | )     |        |      | (124.6 | )    
|                                             | Net proceeds from the sale of property, plant and equipment                              |                                               |                               | 4.2    |             |        |       | 4.0    |       |        |      | 6.6    |      
|                                             |                                                                                          |                                               |                               |        |             |        |       |        |       |        |      |       
|                                             | Net cash flow used for investing activities                                              |                                               |                               | (165.3 | )           |        |       | (145.8 | )     |        |      | (118.0 | )    
|                                             |                                                                                          |                                               |                               |        |             |        |       |        |       |        |      |       
|Financing activities                         |                                                                                          |                                               |                               |        |             |        |       |        |       |        |      |       
|                                             | Net proceeds from issuing long-term debt                                                 |                                               |                               | 49.9   |             |        |       | 247.2  |       |        |      | 49.9   |      
|                                             | Disbursements to retire long-term debt                                                   |                                               |                               |       |             |        |       | (279.5 | )     |        |      | (50.0  | )    
|                                             | Short-term borrowings (repayments), net                                                  |                                               |                               | 48.0   |             |        |       | (88.6  | )     |        |      | 52.8   |      
|                                             | Dividends paid                                                                           |                                               |                               | (109.4 | )           |        |       | (72.3  | )     |        |      | (106.4 | )    
|                                             | Other                                                                                    |                                               |                               | (.4    | )           |        |       | (.5    | )     |        |      | (.5    | )    
|                                             |                                                                                          |                                               |                               |        |             |        |       |        |       |        |      |       
|                                             | Net cash flow used for financing activities                                              |                                               |                               | (11.9  | )           |        |       | (193.7 | )     |        |      | (54.2  | )    
|                                             |                                                                                          |                                               |                               |        |             |        |       |        |       |        |      |       
|Net increase in cash and cash equivalents    |                                                                                          |                                               | 44.5                          |        |             |        | 98.0  |        |       |        | 29.4 |       
|Cash and cash equivalents, beginning of year |                                                                                          |                                               | 137.7                         |        |             |        | 39.7  |        |       |        | 10.3 |       
|                                             |                                                                                          |                                               |                               |        |             |        |       |        |       |        |      |       
|Cash and cash equivalents, end of year       |                                                                                          | $                                             | 182.2                         |        |             | $      | 137.7 |        |       | $      | 39.7 |       
|                                             |                                                                                          |                                               |                               |        |             |        |       |        |       |        |      |       
|Supplemental information                     |                                                                                          |                                               |                               |        |             |        |       |        |       |        |      |       
|                                             | Income taxes paid, net of refunds                                                        |                                               | $                             | 17.5   |             |        | $     | 30.1   |       |        | $    | 43.4   |      
|                                             | Interest paid, net of amounts capitalized                                                |                                               |                               | 31.6   |             |        |       | 44.9   |       |        |      | 44.0   |      

The accompanying notes are an integral part of these statements.

22



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##### 



Consolidated Balance Sheets
(millions)

|                                       |                                                              |   |         |         |             |   |         |         |  |  | 
|-------------------------------------- | ------------------------------------------------------------ | - | ------- | ------- | ----------- | - | ------- | ------- |  |  | 
|                                       |                                                              |   |         |         | December 31
|                                       |                                                              |   |         |         |            
|                                       |                                                              |   |         |         | 2002        |   | 2001   
|                                       |                                                              |   |         |         |             |   |        
|Assets                                
|Gas distribution plant, at cost        |                                                              | $ | 3,558.1 |         |             | $ | 3,425.6 |        
|                                       | Less accumulated depreciation                                |   |         | 1,910.1 |             |   |         | 1,804.9 | 
|                                       |                                                              |   |         |         |             |   |         |        
|                                       |                                                              |   | 1,648.0 |         |             |   | 1,620.7 |        
|                                       |                                                              |   |         |         |             |   |         |        
|Current assets                         |                                                              |   |         |         |             |   |         |        
|                                       | Cash and cash equivalents  affiliates                       |   |         | 115.3   |             |   |         | 137.7   | 
|                                       | Cash and cash equivalents  other                            |   |         | 66.9    |             |   |         |        | 
|                                       | Receivables, less allowances of $14.4 and $9.6, respectively |   |         | 382.4   |             |   |         | 280.7   | 
|                                       | Receivables  affiliates                                     |   |         | 10.7    |             |   |         | 10.6    | 
|                                       | Gas in storage, at last-in, first-out cost                   |   |         | 18.6    |             |   |         | 32.0    | 
|                                       | Deferred income taxes                                        |   |         | 31.4    |             |   |         | 38.2    | 
|                                       | Other                                                        |   |         | 12.2    |             |   |         | 9.4     | 
|                                       |                                                              |   |         |         |             |   |         |        
|                                       |                                                              |   | 637.5   |         |             |   | 508.6   |        
|                                       |                                                              |   |         |         |             |   |         |        
|Prepaid pension costs                  |                                                              |   | 177.1   |         |             |   | 164.3   |        
|Other assets                           |                                                              |   | 82.2    |         |             |   | 29.5    |        
|                                       |                                                              |   |         |         |             |   |         |        
|                                       |                                                              | $ | 2,544.8 |         |             | $ | 2,323.1 |        
|                                       |                                                              |   |         |         |             |   |         |        
|Capitalization and liabilities        
|Capitalization                         |                                                              |   |         |         |             |   |         |        
|                                       | Long-term debt                                               |   | $       | 396.2   |             |   | $       | 446.4   | 
|                                       | Preferred stock                                              |   |         | 7.0     |             |   |         | 7.5     | 
|                                       | Common equity                                                |   |         | 607.8   |             |   |         | 583.6   | 
|                                       |                                                              |   |         |         |             |   |         |        
|                                       |                                                              |   | 1,011.0 |         |             |   | 1,037.5 |        
|                                       |                                                              |   |         |         |             |   |         |        
|Current liabilities                    |                                                              |   |         |         |             |   |         |        
|                                       | Long-term obligations due within one year                    |   |         | 100.5   |             |   |         | .5      | 
|                                       | Short-term borrowings  other                                |   |         | 315.0   |             |   |         | 227.0   | 
|                                       | Short-term borrowings  affiliates                           |   |         |        |             |   |         | 40.0    | 
|                                       | Accounts payable                                             |   |         | 461.7   |             |   |         | 397.7   | 
|                                       | Accrued gas costs                                            |   |         | 67.3    |             |   |         | 108.0   | 
|                                       | Accrued mercury-related costs                                |   |         | 5.0     |             |   |         | 7.0     | 
|                                       | Accrued dividends payable                                    |   |         | 21.1    |             |   |         | 45.1    | 
|                                       | Other                                                        |   |         | 46.4    |             |   |         | 24.5    | 
|                                       |                                                              |   |         |         |             |   |         |        
|                                       |                                                              |   | 1,017.0 |         |             |   | 849.8   |        
|                                       |                                                              |   |         |         |             |   |         |        
|Deferred credits and other liabilities |                                                              |   |         |         |             |   |         |        
|                                       | Deferred income taxes                                        |   |         | 253.5   |             |   |         | 223.9   | 
|                                       | Regulatory income tax liability                              |   |         | 62.2    |             |   |         | 66.3    | 
|                                       | Unamortized investment tax credits                           |   |         | 37.5    |             |   |         | 39.0    | 
|                                       | Accrued mercury-related costs                                |   |         | 18.4    |             |   |         | 30.0    | 
|                                       | Other                                                        |   |         | 145.2   |             |   |         | 76.6    | 
|                                       |                                                              |   |         |         |             |   |         |        
|                                       |                                                              |   | 516.8   |         |             |   | 435.8   |        
|                                       |                                                              |   |         |         |             |   |         |        
|                                       |                                                              | $ | 2,544.8 |         |             | $ | 2,323.1 |        
|                                       |                                                              |   |         |         |             |   |         |        

The accompanying notes are an integral part of these statements.

23



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##### 



Consolidated Statements of Capitalization
(millions, except share data)

|                                                                       |                                                                                                                                   |          |                                                                                                                             |                                           |   |      |       |       |   |      |             |         |   |      |     |       |   |    |   |      |  |  |  |  | 
|---------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------- | -------- | --------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------- | - | ---- | ----- | ----- | - | ---- | ----------- | ------- | - | ---- | --- | ----- | - | -- | - | ---- |  |  |  |  | 
|                                                                       |                                                                                                                                   |          |                                                                                                                             |                                           |   |      |       |       |   |      | December 31 |        
|                                                                       |                                                                                                                                   |          |                                                                                                                             |                                           |   |      |       |       |   |      |            
|                                                                       |                                                                                                                                   |          |                                                                                                                             |                                           |   |      |       |       |   | 2002 |             | 2001    |  
|                                                                       |                                                                                                                                   |          |                                                                                                                             |                                           |   |      |       |       |   |      |             |         |  
|First Mortgage Bonds                                                   |                                                                                                                                   |          |                                                                                                                             |                                           |   |      |       |       |   |      |             |         |   |      |     |       |   |   
|                                                                       |                                                                                                                                   | Maturity |                                                                                                                             | Interest rate                             |   |      |       |       |   |      |             |         |   |      |     |       |   |    |   |     
|                                                                       |                                                                                                                                   |          |                                                                                                                             |                                           |   |      |       |       |   |      |             |         |   |      |     |       |   |    |   |      | 
|                                                                       |                                                                                                                                   |          | 2003                                                                                                                        |                                           |   |      | 5.75  | %     |   |      | $           | 50.0    |   |      |     |       |   |    | $ | 50.0 |  |  |  |  | 
|                                                                       |                                                                                                                                   |          | 2006                                                                                                                        |                                           |   |      | 5.55  |       |   |      |             | 50.0    |   |      |     |       |   |    |   | 50.0 |  |  |  |  | 
|                                                                       |                                                                                                                                   |          | 2008                                                                                                                        |                                           |   |      | 5.875 |       |   |      |             | 75.0    |   |      |     |       |   |    |   | 75.0 |  |  |  |  | 
|                                                                       |                                                                                                                                   |          | 2009                                                                                                                        |                                           |   |      | 5.37  |       |   |      |             | 50.0    |   |      |     |       |   |    |   | 50.0 |  |  |  |  | 
|                                                                       |                                                                                                                                   |          | 2011                                                                                                                        |                                           |   |      | 6.625 |       |   |      |             | 75.0    |   |      |     |       |   |    |   | 75.0 |  |  |  |  | 
|                                                                       |                                                                                                                                   |          | 2016                                                                                                                        |                                           |   |      | 7.20  |       |   |      |             | 50.0    |   |      |     |       |   |    |   | 50.0 |  |  |  |  | 
|                                                                       |                                                                                                                                   |          | 2027                                                                                                                        |                                           |   |      | 7.375 |       |   |      |             | 50.0    |   |      |     |       |   |    |   | 50.0 |  |  |  |  | 
|                                                                       |                                                                                                                                   |          | 2028                                                                                                                        |                                           |   |      | 6.58  |       |   |      |             | 50.0    |   |      |     |       |   |    |   | 50.0 |  |  |  |  | 
|                                                                       |                                                                                                                                   |          |                                                                                                                             |                                           |   |      |       |       |   |      |             |         |   |      |     |       |   |    |   |      |  | 
|                                                                       |                                                                                                                                   |          |                                                                                                                             | 450.0                                     |   |      |       |       |   |      |             | 450.0   |   |      |     |       |   |   
|                                                                       | Less: Amount due within one year                                                                                                  |          |                                                                                                                             | 50.0                                      |   |      |       |       |   |      |             |        |   |      |     |       |   |   
|                                                                       |                                                                                                                                   |          |                                                                                                                             | Unamortized debt discount, net of premium |   |      | 3.8   |       |   |      |             |         |   |      | 3.6 |       |   |    |   |      | 
|                                                                       |                                                                                                                                   |          |                                                                                                                             |                                           |   |      |       |       |   |      |             |         |   |      |     |       |   |   
|                                                                       |                                                                                                                                   |          |                                                                                                                             | 396.2                                     |   |      |       | 39.2  | % |      |             | 446.4   |   |      |     | 43.0  | % |   
|                                                                       |                                                                                                                                   |          |                                                                                                                             |                                           |   |      |       |       |   |      |             |         |   |      |     |       |   |   
|Other long-term debt                                                   |                                                                                                                                   |          |                                                                                                                             |                                           |   |      |       |       |   |      |             |         |   |      |     |       |  
|                                                                       | Notes payable due 2003 at variable interest rate                                                                                  |          |                                                                                                                             | 50.0                                      |   |      |       |       |   |      |             |        |   |      |     |       |   |   
|                                                                       | Less amount due within one year                                                                                                   |          | 50.0                                                                                                                        |                                           |   |      |       |       |   |      |            |         |   |      |     |       |  
|                                                                       |                                                                                                                                   |          |                                                                                                                             |                                           |   |      |       |       |   |      |             |         |   |      |     |       |   |   
|                                                                       |                                                                                                                                   |          |                                                                                                                             |                                          |   |      |       |      |   |      |             |        |   |      |     |      |   |   
|                                                                       |                                                                                                                                   |          |                                                                                                                             |                                           |   |      |       |       |   |      |             |         |   |      |     |       |   |   
|Preferred stock, cumulative, $100 par value, 800,000
shares authorized |                                                                                                                                   |          |                                                                                                                             |                                           |   |      |       |       |   |      |             |         |   |      |     |       |  
|                                                                       |                                                                                                                                   |          | Redeemable preferred stock, 4.48% and 5.00%
series, 61,000 shares outstanding in 2002
and 66,000 shares outstanding in 2001 |                                           |   | 6.1  |       |       |   |      |             |         |   | 6.6  |     |       |   |    |   |     
|                                                                       |                                                                                                                                   |          | Less amount due within one year                                                                                             |                                           |   | .5   |       |       |   |      |             |         |   | .5   |     |       |   |    |   |     
|                                                                       |                                                                                                                                   |          |                                                                                                                             |                                           |   |      |       |       |   |      |             |         |   |      |     |       |   |   
|                                                                       |                                                                                                                                   |          |                                                                                                                             | 5.6                                       |   |      |       | .6    |   |      |             | 6.1     |   |      |     | .6    |   |   
|                                                                       |                                                                                                                                   |          |                                                                                                                             |                                           |   |      |       |       |   |      |             |         |   |      |     |       |   |   
|                                                                       |                                                                                                                                   |          | Nonredeemable preferred stock, 4.60% and 5.00%
convertible series, 14,008 shares outstanding                                |                                           |   | 1.4  |       |       |   | .1   |             |         |   | 1.4  |     |       |   | .1 |   |     
|                                                                       |                                                                                                                                   |          |                                                                                                                             |                                           |   |      |       |       |   |      |             |         |   |      |     |       |   |   
|Common equity                                                          |                                                                                                                                   |          |                                                                                                                             |                                           |   |      |       |       |   |      |             |         |   |      |     |       |  
|                                                                       | Common stock, $5 par value, 25,000,000 shares
authorized, 32,365 shares reserved for conversion
and 15,232,414 shares outstanding |          |                                                                                                                             | 76.2                                      |   |      |       |       |   |      |             | 76.2    |   |      |     |       |   |   
|                                                                       | Paid-in capital                                                                                                                   |          |                                                                                                                             | 108.0                                     |   |      |       |       |   |      |             | 108.0   |   |      |     |       |   |   
|                                                                       | Retained earnings                                                                                                                 |          |                                                                                                                             | 424.5                                     |   |      |       |       |   |      |             | 400.7   |   |      |     |       |   |   
|                                                                       | Accumulated other comprehensive income (loss)                                                                                     |          |                                                                                                                             |                                           |   |      |       |       |   |      |             |         |   |      |     |       |   |   
|                                                                       |                                                                                                                                   |          | Cash flow hedges                                                                                                            |                                           |   | .5   |       |       |   |      |             |         |   | (.3  | )   |       |   |    |   |     
|                                                                       |                                                                                                                                   |          | Minimum pension liability                                                                                                   |                                           |   | (1.4 | )     |       |   |      |             |         |   | (1.0 | )   |       |   |    |   |     
|                                                                       |                                                                                                                                   |          |                                                                                                                             |                                           |   |      |       |       |   |      |             |         |   |      |     |       |   |   
|                                                                       |                                                                                                                                   |          |                                                                                                                             | (.9                                       | ) |      |       |       |   |      |             | (1.3    | ) |      |     |       |   |   
|                                                                       |                                                                                                                                   |          |                                                                                                                             |                                           |   |      |       |       |   |      |             |         |   |      |     |       |   |   
|                                                                       |                                                                                                                                   |          |                                                                                                                             | 607.8                                     |   |      |       | 60.1  |   |      |             | 583.6   |   |      |     | 56.3  |   |   
|                                                                       |                                                                                                                                   |          |                                                                                                                             |                                           |   |      |       |       |   |      |             |         |   |      |     |       |   |   
|                                                                       |                                                                                                                                   |          | $                                                                                                                           | 1,011.0                                   |   |      |       | 100.0 | % |      | $           | 1,037.5 |   |      |     | 100.0 | % |   
|                                                                       |                                                                                                                                   |          |                                                                                                                             |                                           |   |      |       |       |   |      |             |         |   |      |     |       |   |   

The accompanying notes are an integral part of
these statements.

24



---



##### 



Consolidated Statements of Retained Earnings
(millions)

|                                      |  |                        |       |      |  |      |       |   |  |   |        |  
|------------------------------------- |  | ---------------------- | ----- | ---- |  | ---- | ----- | - |  | - | ------ | -
|                                      |  | Year ended December 31
|                                      |  |                       
|                                      |  | 2002                   |       | 2001 |  | 2000
|                                      |  |                        |       |      |  |     
|Balance at beginning of year          |  | $                      | 400.7 |      |  | $    | 392.3 |   |  | $ | 491.1  |  
|Net income                            |  |                        | 109.1 |      |  |      | 98.8  |   |  |   | 12.6   |  
|Dividends declared on common stock    |  |                        | (85.0 | )    |  |      | (90.0 | ) |  |   | (111.0 | )
|Dividends declared on preferred stock |  |                        | (.3   | )    |  |      | (.4   | ) |  |   | (.4    | )
|                                      |  |                        |       |      |  |      |       |   |  |   |        |  
|Balance at end of year                |  | $                      | 424.5 |      |  | $    | 400.7 |   |  | $ | 392.3  |  
|                                      |  |                        |       |      |  |      |       |   |  |   |        |  

The accompanying notes are an integral part of these statements.

Consolidated Statements of Comprehensive Income
(millions)

|                                                |                                                  |   |                        |     |      |   |      |     |   |   |      |     |  
|----------------------------------------------- | ------------------------------------------------ | - | ---------------------- | --- | ---- | - | ---- | --- | - | - | ---- | --- | -
|                                                |                                                  |   | Year ended December 31
|                                                |                                                  |   |                       
|                                                |                                                  |   | 2002                   |     | 2001 |   | 2000
|                                                |                                                  |   |                        |     |      |   |     
|Net income                                      |                                                  | $ | 109.1                  |     |      | $ | 98.8 |     |   | $ | 12.6 |    
|Other comprehensive income (loss), net of taxes |                                                  |   |                        |     |      |   |      |     |   |   |      |    
|                                                | Gain (loss) on cash flow hedges, net             |   |                        | .8  |      |   |      | (.3 | ) |   |      |    |  
|                                                | Decrease (increase) to minimum pension liability |   |                        | (.4 | )    |   |      | (.2 | ) |   |      | (.2 | )
|                                                |                                                  |   |                        |     |      |   |      |     |   |   |      |    
|                                                |                                                  |   | .4                     |     |      |   | (.5  | )   |   |   | (.2  | )  
|                                                |                                                  |   |                        |     |      |   |      |     |   |   |      |    
|Comprehensive income                            |                                                  | $ | 109.5                  |     |      | $ | 98.3 |     |   | $ | 12.4 |    
|                                                |                                                  |   |                        |     |      |   |      |     |   |   |      |    

The accompanying notes are an integral part of these statements.

25



---



##### 



Notes to the Consolidated Financial Statements

Nicor Gas is one of the nations largest distributors of natural gas, serving 2
million customers in a service territory that encompasses most of the northern
third of Illinois, excluding the city of Chicago.

ACCOUNTING POLICIES

General.Nicor Gas is a wholly owned subsidiary of Nicor Inc. Nicor Gas and
its affiliates reimburse each other for transactions between the companies.

Consolidation.The consolidated financial statements include the accounts of
Nicor Gas and its subsidiary. All significant intercompany balances and
transactions have been eliminated.

Use of estimates.The preparation of the financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates that affect reported amounts. Actual results
could differ from those estimates, and such differences could be material.
Accounting estimates requiring significant management judgment involve the
identification and valuation of derivative instruments, accruals for loss
contingencies, unbilled revenues, postretirement benefits, the allowance for
doubtful accounts, and the mercury inspection and repair program.

Cash and cash equivalents.The company considers investments purchased with an
initial maturity of three months or less, or that are due on demand from an
affiliate, to be cash equivalents.

Regulatory assets and liabilities.Nicor Gas is regulated by the Illinois
Commerce Commission (ICC), which establishes the rules and regulations
governing utility rates and services in Illinois. The company applies
accounting standards that recognize the economic effects of rate regulation
and, accordingly, has recorded regulatory assets and liabilities. The company
had regulatory assets (liabilities) at December 31 as follows (in millions):

|                                       |  |      |       |      |  |   |        |  
|-------------------------------------- |  | ---- | ----- | ---- |  | - | ------ | -
|                                       |  | 2002 |       | 2001
|                                       |  |      |       |     
|Accrued gas costs                      |  | $    | (67.3 | )    |  | $ | (108.0 | )
|Regulatory income tax liability        |  |      | (62.2 | )    |  |   | (66.3  | )
|Unamortized loss on reacquired debt    |  |      | 19.0  |      |  |   | 20.0   |  
|Deferred (accrued) environmental costs |  |      | 54.7  |      |  |   | (6.0   | )
|                                       |  |      |       |      |  |   |        |  
|                                       |  | $    | (55.8 | )    |  | $ | (160.3 | )
|                                       |  |      |       |      |  |   |        |  

The unamortized loss on reacquired debt is classified in other noncurrent
assets. Deferred (accrued) environmental costs are included in other
noncurrent assets and other noncurrent liabilities, respectively.

In addition, consistent with its regulatory treatment, Nicor Gas depreciates
anticipated future removal costs over the useful lives of its property, plant
and equipment. The balance of removal costs in accumulated depreciation at
December 31, 2002 and 2001 was approximately $625 million and $575 million,
respectively.

26



---



##### 



Notes to the Consolidated Financial Statements (continued)

Derivative instruments.At Nicor Gas, derivative instruments are utilized
primarily in the procurement of natural gas. Realized gains or losses on such
derivatives are included in the cost of gas delivered and
are passed directly through to customers, having no direct impact on earnings.
Unrealized changes in the fair value of these derivative instruments are
deferred and included in deferred or accrued gas costs.

Nicor Gas also enters into futures contracts and swap agreements to reduce the
earnings impact of certain forecasted operating costs arising from fluctuations
in natural gas prices. Unrealized changes in the fair market value of these
derivative instruments are reported as a component of accumulated other
comprehensive income. When the forecasted expenses are incurred, accumulated
other comprehensive income is reclassified to operating and maintenance
expense.

Since 2000, Nicor Gas has held weather-related swap agreements to limit the
earnings impact of weather fluctuations. Through 2002, these contracts settled
as of year-end, and the resulting benefit or loss was recorded in operating
revenues. For interim accounting periods, contract benefits and losses are
measured by applying the intrinsic value method, which is based on a comparison
of actual weather during interim periods to normal historical weather patterns.

Operating revenues and gas costs.Operating revenues are recorded when gas is
delivered to customers. In accordance with ICC regulations, the cost of gas
delivered is charged to customers without markup, although the timing of cost
recovery can vary. Temporary undercollections and overcollections of gas costs
are deferred or accrued as a regulatory asset or liability with a corresponding
decrease or increase to cost of gas.

Depreciation.Property, plant and equipment are depreciated over estimated
useful lives on a straight-line basis. The composite depreciation rate is 4.1
percent, which includes estimated future removal costs. Nicor Gas allocated
depreciation to interim periods based on weather-normalized gas deliveries.
Effective January 1, 2003, Nicor Gas will use a straight-line method for
interim depreciation, a method used by other companies in its industry.
Previously, Nicor Gas allocated depreciation to interim periods based upon the
level of weather-normalized gas deliveries each quarter.

Revenue taxes.Nicor Gas classifies revenue taxes billed to customers as
operating revenues and related taxes due as operating expenses. Revenue taxes
included in operating expense for 2002, 2001 and 2000 were $92.5 million,
$108.9 million and $100.0 million, respectively.

Income taxes.Nicor Gas files a consolidated federal income tax return with
Nicor Inc. Income taxes are allocated to Nicor Gas based upon the tax
liability which would have been incurred on a separate company basis. Deferred
income taxes are provided for temporary differences between the tax basis of an
asset or liability and its reported amount in the financial statements. Nicor
Gas amortizes prior investment tax credits and regulatory income tax
liabilities to income over the lives of the related properties.

Credit risk.Nicor Gas has a diversified customer base and prudent credit
policies which mitigate customer receivable and derivative counterparty credit
risk.

NEW ACCOUNTING PRONOUNCEMENTS

Asset retirement obligations.In August 2001, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards (FAS)
No. 143, Accounting for Asset Retirement Obligations.This standard requires
entities to record the fair value of a liability for an asset retirement

27



---



##### 



Notes to the Consolidated Financial Statements (continued)

obligation in the period in which the obligation is incurred. When the
liability is initially recorded, the entity capitalizes the cost by increasing
the carrying amount of the related long-lived asset. Over time,
the liability is accreted to its present value each period, and the capitalized
cost is depreciated over the useful life of the related asset. This standard
is effective for 2003.

The company has completed its review of the applicability of FAS 143. The
obligation of retiring the companys distribution, transmission, storage and
certain general plant assets appears to meet the definition of a legal
obligation within the meaning of FAS 143. However, the company, like most
other gas distribution utility companies, has determined that due to the
indefinite life of such assets a liability is not measurable. Certain costs
associated with the retirement of other items, including inside mercury
regulators, polychlorinated biphenyls, underground storage tanks and asbestos
abatement, have been determined to be immaterial or cannot be measured at this
time.

Upon adoption of the standard, Nicor Gas will continue its practice of accruing
for future retirement costs as accumulated depreciation, subject to
cost-of-service utility rate regulation, even when an asset removal obligation
does not exist under FAS 143. Through December 31, 2002, the company has
accrued and recovered about $625 million associated with the future removal of
these long-lived assets.

No cumulative effect of an accounting change was recorded as a result of
adopting this standard on January 1, 2003, and going forward this standard is
not expected to have a material impact on the companys financial position or
results of operations.

Impairment of long-lived assets.In October 2001, the FASB issued FAS 144,
Accounting for the Impairment or Disposal of Long-Lived Assets.The standard
requires that long-lived assets be measured at the lower of the carrying amount
or fair value less cost to sell. The standard was effective for 2002 and is
generally to be applied prospectively. The implementation of this standard did
not have a material impact on the companys financial position or results of
operations.

Exit activities.In June 2002, the FASB issued FAS 146, Accounting for Costs
Associated with Exit or Disposal Activities.The standard, which is effective
for all exit and disposal activities initiated after December 31, 2002,
requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan. Nicor Gas will apply this standard on a prospective
basis.

Accounting for guarantees.In November 2002, the FASB issued Interpretation
No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others.The interpretation
expands the disclosure requirements for most guarantees, including loan
guarantees such as standby letters of credit. It also clarifies that at the
time a company issues a guarantee, the company must recognize an initial
liability for the fair value, or market value, of the obligations it assumes
under that guarantee and must disclose that information in its financial
statements. The initial recognition and measurement provisions apply on a
prospective basis to guarantees issued or modified after December 31, 2002.
Nicor will apply the recognition and measurement provisions on a prospective
basis. The disclosure requirements in the interpretation are effective for
financial statements for periods ending after December 15, 2002. Nicor Gas has
determined that this interpretation will not have a material impact on the
companys financial position or results of operations.

28



---



##### 



Notes to the Consolidated Financial Statements (continued)

GAS IN STORAGE

Based on the average cost of gas purchased in December 2002 and 2001, the
estimated replacement cost of inventory at December 31, 2002 and 2001, exceeded
the last-in, first-out cost by $311.2 million and $120.5 million, respectively.

SHORT-TERM AND LONG-TERM DEBT

The company maintains short-term lines of credit with major domestic and
foreign banks. These lines, which serve as backup for the issuance of
commercial paper, totaled $409 million at December 31, 2002. Commitment fees
of up to .25 percent per annum were paid on these lines. All lines of credit
have variable interest rates tied to short-term markets.

The company had $315 million and $227 million of commercial paper outstanding
with a weighted average interest rate of 1.6 percent and 2.8 percent at
December 31, 2002 and 2001, respectively.

Bank cash balances partially compensated for the cost of maintaining accounts
and other banking services. Such demand balances may be withdrawn at any time.

First Mortgage Bonds are secured by liens on substantially all property.

Interest expense is reported net of amounts capitalized. The interest expense
capitalized for the years ended December 31, 2002, 2001 and 2000 was $.4
million, $.2 million and $.4 million, respectively.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The recorded amount of short-term investments and short-term borrowings
approximates fair value because of the short maturity of the instruments.
Long-term debt outstanding, including current maturities, is recorded at the
principal balance outstanding. The principal balance of Nicor Gas First
Mortgage Bonds outstanding at December 31, 2002 and 2001 was $450.0 million.
Based on quoted market interest rates, the fair value of the companys First
Mortgage Bonds outstanding, including current maturities, was $481.6 million
and $447.4 million at December 31, 2002 and 2001, respectively.

INCOME TAXES

The components of income tax expense (benefit) are presented below (in
millions):

|                                            |         |   |      |      |      |   |      |      |  |   |       |       |  
|------------------------------------------- | ------- | - | ---- | ---- | ---- | - | ---- | ---- |  | - | ----- | ----- | -
|                                            |         |   | 2002 |      | 2001 |   | 2000
|                                            |         |   |      |      |      |   |     
|Current                                     |         |   |      |      |      |   |      |      |  |   |       |      
|                                            | Federal |   | $    | 27.3 |      |   | $    | 33.0 |  |   | $     | 35.9  |  
|                                            | State   |   |      | 6.1  |      |   |      | 10.1 |  |   |       | 1.4   |  
|                                            |         |   |      |      |      |   |      |      |  |   |       |       |  
|                                            |         |   | 33.4 |      |      |   | 43.1 |      |  |   | 37.3  |      
|                                            |         |   |      |      |      |   |      |      |  |   |       |       |  
|Deferred                                    |         |   |      |      |      |   |      |      |  |   |       |      
|                                            | Federal |   |      | 26.8 |      |   |      | 15.7 |  |   |       | (34.0 | )
|                                            | State   |   |      | 5.5  |      |   |      | .3   |  |   |       | (1.3  | )
|                                            |         |   |      |      |      |   |      |      |  |   |       |       |  
|                                            |         |   | 32.3 |      |      |   | 16.0 |      |  |   | (35.3 | )    
|                                            |         |   |      |      |      |   |      |      |  |   |       |       |  
|Amortization of investment tax credits, net |         |   | (1.4 | )    |      |   | (2.1 | )    |  |   | (1.5  | )    
|                                            |         |   |      |      |      |   |      |      |  |   |       |       |  
|Income tax expense (benefit), net           |         | $ | 64.3 |      |      | $ | 57.0 |      |  | $ | .5    |      
|                                            |         |   |      |      |      |   |      |      |  |   |       |       |  

29



---



##### 



Notes to the Consolidated Financial Statements (continued)

The temporary differences which gave rise to the net deferred tax liability at
December 31, 2002 and 2001, are as follows (in millions):

|                           |                                    |   |       |       |      |   |       |       | 
|-------------------------- | ---------------------------------- | - | ----- | ----- | ---- | - | ----- | ----- | 
|                           |                                    |   | 2002  |       | 2001
|                           |                                    |   |       |       |     
|Deferred tax liabilities   |                                    |   |       |       |      |   |       |      
|                           | Property, plant and equipment      |   | $     | 236.0 |      |   | $     | 212.3 | 
|                           | Employee benefits                  |   |       | 37.6  |      |   |       | 32.7  | 
|                           | Gas costs recovery accounts        |   |       | 3.0   |      |   |       | 3.0   | 
|                           | Other                              |   |       | 17.1  |      |   |       | 14.8  | 
|                           |                                    |   |       |       |      |   |       |       | 
|                           |                                    |   | 293.7 |       |      |   | 262.8 |      
|                           |                                    |   |       |       |      |   |       |       | 
|Deferred tax assets        |                                    |   |       |       |      |   |       |      
|                           | Unamortized investment tax credits |   |       | 24.0  |      |   |       | 25.3  | 
|                           | Regulatory income tax liability    |   |       | 15.2  |      |   |       | 16.3  | 
|                           | Accrued mercury-related costs      |   |       | 9.0   |      |   |       | 14.7  | 
|                           | Alternative minimum tax credits    |   |       |      |      |   |       | 6.3   | 
|                           | Other                              |   |       | 23.4  |      |   |       | 14.5  | 
|                           |                                    |   |       |       |      |   |       |       | 
|                           |                                    |   | 71.6  |       |      |   | 77.1  |      
|                           |                                    |   |       |       |      |   |       |       | 
|Net deferred tax liability |                                    | $ | 222.1 |       |      | $ | 185.7 |      
|                           |                                    |   |       |       |      |   |       |       | 

The effective combined federal and state income tax rate was 37 percent in 2002
and 2001, and 4 percent in 2000. Differences between federal income taxes
computed using the statutory rate and reported income tax expense are shown
below (in millions):

|                                          |  |      |      |      |  |      |      |   |  |   |      |  
|----------------------------------------- |  | ---- | ---- | ---- |  | ---- | ---- | - |  | - | ---- | -
|                                          |  | 2002 |      | 2001 |  | 2000
|                                          |  |      |      |      |  |     
|Federal income taxes using statutory rate |  | $    | 60.7 |      |  | $    | 54.5 |   |  | $ | 4.6  |  
|State income taxes, net                   |  |      | 8.3  |      |  |      | 6.8  |   |  |   | .7   |  
|Tax credits                               |  |      | (2.3 | )    |  |      | (2.3 | ) |  |   | (2.4 | )
|Regulatory income tax liability           |  |      | (2.0 | )    |  |      | (2.1 | ) |  |   | (2.4 | )
|Other, net                                |  |      | (.4  | )    |  |      | .1   |   |  |   |     |  
|                                          |  |      |      |      |  |      |      |   |  |   |      |  
|Income tax expense (benefit), net         |  | $    | 64.3 |      |  | $    | 57.0 |   |  | $ | .5   |  
|                                          |  |      |      |      |  |      |      |   |  |   |      |  

The 4 percent effective income tax rate for 2000
varied from its historical level due to much lower pretax income
related to the mercury charge. Lower pretax income typically results
in a lower effective income tax rate because tax credits and other
permanent tax differences represent a larger share of pretax
income.

ACCRUED UNBILLED REVENUES

Receivables include accrued unbilled revenues of $142.4 million and $88.1
million at December 31, 2002 and 2001, respectively. Nicor Gas accrues
revenues for estimated deliveries to customers from the date of their last bill
until the balance sheet date.

POSTRETIREMENT BENEFITS

Nicor Gas maintains noncontributory defined benefit pension plans covering
substantially all employees hired prior to 1998 and provides health care and
life insurance benefits to eligible retired employees. About one-fourth of the
net periodic benefit cost or credit related to these plans is capitalized as a
cost of constructing gas distribution facilities and the remainder is included
in gas distribution operating and maintenance expense. Most active employees
postretirement health care benefits have been capped to a defined annual per
capita medical cost. The following table sets forth the changes in the plans
benefit obligations and assets, and reconciles the funded status of the plans
to the prepaid (accrued) benefit cost recorded on the balance sheet at December
31 (in millions):

30



---



##### 



Notes to the Consolidated Financial Statements (continued)

|                                                 |  |                  |       |                |  |      |       |      |  |   |        |   |  |   |        |  
|------------------------------------------------ |  | ---------------- | ----- | -------------- |  | ---- | ----- | ---- |  | - | ------ | - |  | - | ------ | -
|                                                 |  | Pension benefits |       | Other benefits
|                                                 |  |                  |       |               
|                                                 |  | 2002             |       | 2001           |  | 2002 |       | 2001
|                                                 |  |                  |       |                |  |      |       |     
|Change in benefit obligation                     |  |                  |       |                |  |      |       |      |  |   |        |   |  |   |        |  
|Benefit obligation at beginning of period        |  | $                | 237.5 |                |  | $    | 221.9 |      |  | $ | 141.9  |   |  | $ | 112.6  |  
|Service cost                                     |  |                  | 7.2   |                |  |      | 6.5   |      |  |   | 1.5    |   |  |   | 1.2    |  
|Interest cost                                    |  |                  | 16.5  |                |  |      | 16.4  |      |  |   | 9.9    |   |  |   | 8.4    |  
|Actuarial loss                                   |  |                  | 14.0  |                |  |      | 21.7  |      |  |   | 29.2   |   |  |   | 29.1   |  
|Participant contributions                        |  |                  |      |                |  |      |      |      |  |   | 1.3    |   |  |   | .8     |  
|Plan amendments                                  |  |                  | .3    |                |  |      |      |      |  |   |       |   |  |   |       |  
|Benefits paid                                    |  |                  | (23.5 | )              |  |      | (29.0 | )    |  |   | (14.5  | ) |  |   | (10.2  | )
|                                                 |  |                  |       |                |  |      |       |      |  |   |        |   |  |   |        |  
|Benefit obligation at end of period              |  |                  | 252.0 |                |  |      | 237.5 |      |  |   | 169.3  |   |  |   | 141.9  |  
|                                                 |  |                  |       |                |  |      |       |      |  |   |        |   |  |   |        |  
|Change in plan assets                            |  |                  |       |                |  |      |       |      |  |   |        |   |  |   |        |  
|Fair value of plan assets at beginning
of period |  |                  | 399.7 |                |  |      | 489.2 |      |  |   | 19.7   |   |  |   | 22.6   |  
|Actual loss on plan assets                       |  |                  | (38.3 | )              |  |      | (60.5 | )    |  |   | (1.3   | ) |  |   | (2.9   | )
|Employer contributions                           |  |                  |      |                |  |      |      |      |  |   | 7.9    |   |  |   | 9.4    |  
|Participant contributions                        |  |                  |      |                |  |      |      |      |  |   | 1.3    |   |  |   | .8     |  
|Benefits paid                                    |  |                  | (23.5 | )              |  |      | (29.0 | )    |  |   | (14.5  | ) |  |   | (10.2  | )
|                                                 |  |                  |       |                |  |      |       |      |  |   |        |   |  |   |        |  
|Fair value of plan assets at end of period       |  |                  | 337.9 |                |  |      | 399.7 |      |  |   | 13.1   |   |  |   | 19.7   |  
|                                                 |  |                  |       |                |  |      |       |      |  |   |        |   |  |   |        |  
|Funded status                                    |  |                  | 85.9  |                |  |      | 162.2 |      |  |   | (156.2 | ) |  |   | (122.2 | )
|Unrecognized net actuarial (gain) loss           |  |                  | 86.3  |                |  |      | (2.0  | )    |  |   | 60.7   |   |  |   | 29.4   |  
|Unrecognized transition (asset) obligation       |  |                  |      |                |  |      | (1.0  | )    |  |   | 30.9   |   |  |   | 34.0   |  
|Unrecognized prior service cost                  |  |                  | 4.9   |                |  |      | 5.1   |      |  |   |       |   |  |   |       |  
|Other                                            |  |                  |      |                |  |      |      |      |  |   | (3.3   | ) |  |   | (1.8   | )
|                                                 |  |                  |       |                |  |      |       |      |  |   |        |   |  |   |        |  
|Prepaid (accrued) benefit cost                   |  | $                | 177.1 |                |  | $    | 164.3 |      |  | $ | (67.9  | ) |  | $ | (60.6  | )
|                                                 |  |                  |       |                |  |      |       |      |  |   |        |   |  |   |        |  

Net periodic benefit cost (credit) included the following components (in
millions):

|                                                           |  |                  |       |                |  |      |       |      |  |      |       |      |  |   |      |   |  |   |      |   |  |   |      |  
|---------------------------------------------------------- |  | ---------------- | ----- | -------------- |  | ---- | ----- | ---- |  | ---- | ----- | ---- |  | - | ---- | - |  | - | ---- | - |  | - | ---- | -
|                                                           |  | Pension benefits |       | Other benefits
|                                                           |  |                  |       |               
|                                                           |  | 2002             |       | 2001           |  | 2000 |       | 2002 |  | 2001 |       | 2000
|                                                           |  |                  |       |                |  |      |       |      |  |      |       |     
|Service cost                                               |  | $                | 7.2   |                |  | $    | 6.5   |      |  | $    | 6.0   |      |  | $ | 1.5  |   |  | $ | 1.2  |   |  | $ | 1.2  |  
|Interest cost                                              |  |                  | 16.5  |                |  |      | 16.4  |      |  |      | 15.6  |      |  |   | 9.9  |   |  |   | 8.4  |   |  |   | 8.4  |  
|Expected return on plan assets                             |  |                  | (36.0 | )              |  |      | (44.3 | )    |  |      | (39.1 | )    |  |   | (1.8 | ) |  |   | (2.1 | ) |  |   | (1.8 | )
|Recognized net actuarial (gain) loss                       |  |                  |      |                |  |      | (7.4  | )    |  |      | (5.9  | )    |  |   | 1.0  |   |  |   |     |   |  |   |     |  
|Amortization of unrecognized
transition (asset) obligation |  |                  | (1.0  | )              |  |      | (3.8  | )    |  |      | (3.9  | )    |  |   | 3.1  |   |  |   | 3.1  |   |  |   | 3.1  |  
|Amortization of prior service cost                         |  |                  | .5    |                |  |      | .6    |      |  |      | .4    |      |  |   |     |   |  |   |     |   |  |   |     |  
|                                                           |  |                  |       |                |  |      |       |      |  |      |       |      |  |   |      |   |  |   |      |   |  |   |      |  
|Net periodic benefit cost (credit)                         |  | $                | (12.8 | )              |  | $    | (32.0 | )    |  | $    | (26.9 | )    |  | $ | 13.7 |   |  | $ | 10.6 |   |  | $ | 10.9 |  
|                                                           |  |                  |       |                |  |      |       |      |  |      |       |      |  |   |      |   |  |   |      |   |  |   |      |  

Assumptions used in the computations included the following:

|                               |  |                  |      |                |  |      |      |      |  |  |      |   |  |  |      |  
|------------------------------ |  | ---------------- | ---- | -------------- |  | ---- | ---- | ---- |  |  | ---- | - |  |  | ---- | -
|                               |  | Pension benefits |      | Other benefits
|                               |  |                  |      |               
|                               |  | 2002             |      | 2001           |  | 2002 |      | 2001
|                               |  |                  |      |                |  |      |      |     
|Discount rate                  |  |                  | 6.75 | %              |  |      | 7.25 | %    |  |  | 6.75 | % |  |  | 7.25 | %
|Expected return on plan assets |  |                  | 9.25 |                |  |      | 9.25 |      |  |  | 9.25 |   |  |  | 9.25 |  
|Rate of compensation increase  |  |                  | 4.00 |                |  |      | 4.00 |      |  |  | 4.00 |   |  |  | 4.00 |  

For measurement purposes, the health care cost trend rate for pre-Medicare
benefits and post-Medicare benefits was assumed to be 11 percent for 2003,
declining to 5 percent by 2007 and remaining at that level thereafter.

31



---



##### 



Notes to the Consolidated Financial Statements (continued)

Assumed health care cost trend rates can have a significant effect on the
amounts reported for the health care plans. A one-percentage-point change in
the assumed health care cost trend rates would have the following effects (in
millions):

|                                                        |  |             |      |          |  |   |       |  
|------------------------------------------------------- |  | ----------- | ---- | -------- |  | - | ----- | -
|                                                        |  | One-percent
|                                                        |  |            
|                                                        |  | Increase    |      | Decrease
|                                                        |  |             |      |         
|Effect on total of service and interest cost components |  | $           | 1.2  |          |  | $ | (1.0  | )
|Effect on benefit obligation                            |  |             | 18.4 |          |  |   | (15.5 | )

Nicor Gas also has a separate unfunded supplemental retirement plan. The
supplemental retirement plan is noncontributory with defined benefits and plan
costs of $.9 million, $.8 million and $.6 million in 2002, 2001 and 2000,
respectively. The benefit obligation of the plan was $6.2 million and $6.4
million at December 31, 2002 and 2001, respectively.

The company also sponsors defined contribution plans covering substantially all
domestic employees. These plans provide for employer matching contributions.
The total cost of these plans was $4.5 million, $3.9 million and $3.9 million
in 2002, 2001 and 2000, respectively.

DIVIDEND RESTRICTIONS

Nicor Gas is restricted by regulation in the amount it can dividend or loan to
affiliates. Dividends are allowed only to the extent of Nicor Gas retained
earnings balance. The balance of cash advances from Nicor Gas to an affiliate
at any time shall not exceed the unused balance of funds actually available to
that
affiliate under its existing bank credit agreements or its commercial paper
facilities with an unaffiliated third party.

OTHER INCOME (EXPENSE), NET

Other income (expense), net includes the following (in millions):

|                                               |  |      |      |      |  |      |       |   |  |   |      |  
|---------------------------------------------- |  | ---- | ---- | ---- |  | ---- | ----- | - |  | - | ---- | -
|                                               |  | 2002 |      | 2001 |  | 2000
|                                               |  |      |      |      |  |     
|Performance-based rate plan                    |  | $    | (4.1 | )    |  | $    | (14.8 | ) |  | $ | (3.2 | )
|Interest income                                |  |      | 2.7  |      |  |      | 4.3   |   |  |   | 1.7  |  
|Gains on sale of property, plant
and equipment |  |      | 4.1  |      |  |      | 3.9   |   |  |   | 6.3  |  
|Other income                                   |  |      | .5   |      |  |      | 2.7   |   |  |   | .7   |  
|Other expense                                  |  |      | (.5  | )    |  |      | (.4   | ) |  |   | (.5  | )
|                                               |  |      |      |      |  |      |       |   |  |   |      |  
|                                               |  | $    | 2.7  |      |  | $    | (4.3  | ) |  | $ | 5.0  |  
|                                               |  |      |      |      |  |      |       |   |  |   |      |  

REGULATORY MATTERS

Performance-based rate plan.On January 1, 2000, Nicor Gas PBR plan for
natural gas costs went into effect. Under the PBR plan, Nicor Gas total gas
supply costs were compared to a market-sensitive benchmark. The plan requires
that savings and losses relative to the benchmark be shared equally with
customers. Nicor Gas recorded pretax losses of $14.8 million and $3.2 million
for its share of PBR plan results in other income (expense) in 2001 and 2000,
respectively, and in 2002 Nicor Gas recorded a $4.1 million loss contingency
associated with the plan. The PBR plan is currently under ICC review. Nicor
Gas has terminated its PBR plan effective January 1, 2003. For developments
concerning the PBR plan see Contingencies  Performance-Based Rate Plan
beginning on page 34.

32



---



##### 



Notes to the Consolidated Financial Statements (continued)

Customer choice of commodity supplier.In March 2002, Nicor Gas expanded its
Customer Select® program to include all customers. Prior to that time the
program was available to all industrial and commercial customers and about 15
percent of residential customers on a pilot basis. Under the program,
customers are able to acquire their natural gas supplies from third-party
marketers. The choice of another natural gas commodity supplier has no direct
impact on Nicor Gas margin because natural gas costs are passed through to
customers without markup. Nicor Gas continues to deliver the natural gas,
maintain its distribution system and respond to emergencies.

RELATED PARTY TRANSACTIONS

At December 31, 2001, Nicor Gas had $40 million of short-term notes payable due
to an affiliated financing company. Nicor Gas recorded $.4 million, $2.2
million and $1.0 million of interest expense related to short-term borrowings
from the affiliated financing company in 2002, 2001 and 2000, respectively.
There were no short-term notes payable due an affiliate at December 31, 2002.

In the ordinary course of business, under the terms of an agreement approved by
the ICC, Nicor Gas enters into transactions with Nicor and its other wholly
owned subsidiaries for the use of facilities and services. The charges for
these transactions are cost-based, except where the charging party has a
prevailing price for which the facility or service is provided to the general
public. In addition, Nicor charges Nicor Gas and its other wholly owned
subsidiaries for the cost of corporate overheads. For the years ended December
31, 2002, 2001 and 2000 Nicor Gas had net charges to affiliates of $2.1
million, $6.4 million and $1.9 million, respectively.

Under the terms of an ICC order, Nicor Gas routinely enters into transactions
with Nicor Enerchange, a wholesale natural gas marketing subsidiary of Nicor,
for the purchase and sale of natural gas, transportation and storage services.
For the years ended December 31, 2002, 2001 and 2000, net charges (to) from
Nicor Enerchange were $(12.5) million, $6.8 million, and $(10.6) million,
respectively.

During the second quarter of 2002 Horizon Pipeline, a 50/50 joint venture
between Nicor and Natural Gas Pipeline Company of America (NGPL), put into
operation a 74-mile, 36-inch pipeline from Joliet, Illinois to near the
Wisconsin/Illinois border. Horizon Pipelines capacity is nearly fully
subscribed under 10-year agreements, with Nicor Gas having contracted for
approximately 80 percent of the 380 MMcf per day initial capacity. This
transportation agreement has been approved by the ICC. In 2002, Horizon
Pipeline charged Nicor Gas $6.6 million for natural gas transportation under
rates that have been accepted by FERC.

In 2002, Nicor Gas began purchasing engineering and corrosion services from
Nicor Technologies, a subsidiary of Nicor. Nicor Gas was charged $4.6 million
for these services in 2002.

33



---



##### 



Notes to the Consolidated Financial Statements (continued)

CONTRACTUAL OBLIGATIONS

As of December 31, 2002, Nicor Gas had contractual obligations with payments
due as follows (in millions):

|                                   |  |      |       |      |  |      |       |      |  |      |      |      |  |       |      |  |  |   |      |  |  |       |       |  |  |   |       | 
|---------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- | ---- |  | ---- | ---- | ---- |  | ----- | ---- |  |  | - | ---- |  |  | ----- | ----- |  |  | - | ----- | 
|                                   |  |      |       |      |  |      |       |      |  |      |      |      |  |       |      |  |  |   |      |  |  | After |       |  |  |  
|                                   |  | 2003 |       | 2004 |  | 2005 |       | 2006 |  | 2007 |      | 2007 |  | Total
|                                   |  |      |       |      |  |      |       |      |  |      |      |      |  |      
|Long-term debt                     |  | $    | 100.0 |      |  | $    |      |      |  | $    |     |      |  | $     | 50.0 |  |  | $ |     |  |  | $     | 350.0 |  |  | $ | 500.0 | 
|Unconditional
purchase
obligations |  |      | 128.8 |      |  |      | 104.0 |      |  |      | 87.9 |      |  |       | 29.4 |  |  |   | 18.2 |  |  |       | 45.5  |  |  |   | 413.8 | 
|Other                              |  |      | 2.2   |      |  |      | 1.2   |      |  |      | .8   |      |  |       | .8   |  |  |   | .8   |  |  |       | 3.9   |  |  |   | 9.7   | 
|                                   |  |      |       |      |  |      |       |      |  |      |      |      |  |       |      |  |  |   |      |  |  |       |       |  |  |   |       | 
|                                   |  | $    | 231.0 |      |  | $    | 105.2 |      |  | $    | 88.7 |      |  | $     | 80.2 |  |  | $ | 19.0 |  |  | $     | 399.4 |  |  | $ | 923.5 | 
|                                   |  |      |       |      |  |      |       |      |  |      |      |      |  |       |      |  |  |   |      |  |  |       |       |  |  |   |       | 

Unconditional purchase obligations consist primarily of transportation and
storage contracts, and firm natural gas purchase agreements. This includes the
10-year transportation agreement between Nicor Gas and Horizon Pipeline
totaling $97.2 million. In addition to the purchase
obligations quantified above, the company also has obligations to purchase
natural gas at future market prices.

Other consists of redeemable preferred stock and operating leases. Operating
leases are primarily for office space and equipment. Rental expense under
operating leases was $2.3 million, $1.5 million and $1.5 million in 2002, 2001
and 2000, respectively.

CONTINGENCIES

The following contingencies of Nicor Gas are in various stages of investigation
or disposition. Although the company is unable to estimate the amount of loss
reasonably possible in addition to any amounts already recognized, it is
possible that the resolution of these contingencies, either individually or in
aggregate, will require the company to take charges against, or will result in
reductions in, future earnings. It is the opinion of management that the
resolution of these contingencies, either individually or
in aggregate, could be material to earnings in a particular period, but is not
expected to have a material adverse impact on Nicor Gas liquidity or financial
condition.

Performance-Based Rate Plan.Nicor Gas PBR plan for natural gas costs went
into effect in 2000 and was terminated by the company effective January 1,
2003. Under the PBR plan, Nicor Gas total gas supply costs were compared to a
market sensitive benchmark. Savings and losses relative to the benchmark were
determined annually and shared equally with sales customers. The PBR plan is
currently under Illinois Commerce Commission (ICC) review.

There are allegations that the company acted improperly in connection with the
PBR plan, and the ICC is reviewing these allegations. On June 27, 2002 the
Citizens Utility Board (CUB) filed a motion to reopen the record in the ICCs
proceedings to review the PBR plan (the ICC Proceedings). As a result of the
motion to reopen, Nicor Gas, the Cook County States Attorneys Office (CCSAO),
the Staff of the ICC and CUB entered into a stipulation providing for
additional discovery. The Illinois Attorney Generals Office has also
intervened in this matter. In addition, the Illinois Attorney Generals Office
issued Civil Investigation Demands (CIDs) to CUB and the ICC Staff. The CIDs
ordered that CUB and the ICC Staff produce all documents relating to any claims
that Nicor Gas may have presented, or caused to be presented, false information
related to its PBR plan. The Securities and Exchange Commission (SEC) and the
Office of the United States Attorney for the Northern District of Illinois are
also reviewing the

34



---



##### 



Notes to the Consolidated Financial Statements (continued)

allegations that the company acted improperly in connection with the PBR plan.
The company has committed to cooperate fully in the reviews of the PBR plan.
Nicor Gas has responded to numerous data
requests that have been propounded by the ICC Staff, CUB, CCSAO, the SEC, the
Illinois Attorney Generals Office and the Office of the United States Attorney
for the Northern District of Illinois.

In response to these allegations, on July 18, 2002, the Nicor Board of
Directors appointed a Special Committee of independent, non-management
directors to conduct an inquiry into issues surrounding natural gas purchases,
sales, transportation, storage and such other matters as may come to the
attention of the Special Committee in the course of its investigation. To
conduct the inquiry, the Special Committee retained Scott Lassar of the law
firm of Sidley Austin Brown & Wood (Sidley), and Sidley hired the accounting
firm of KPMG LLP. Mr. Lassar is the former United States Attorney for the
Northern District of Illinois. The Special Committee presented the report of
its counsel (Report) to Nicors Board of Directors on October 28, 2002. The
transmittal letter from the Special Committee to Nicors Board of Directors and
Mr. Lassars Report were filed with the SEC on a Form 8-K on October 31, 2002.

Nicor and Nicor Gas previously restated their 2001, 2000 and
1999 annual financial statements, and their 2002 and 2001 interim
results, following the completion of the Special Committee's
investigation. In
addition, Nicor Gas recorded a $4.1 million loss contingency liability in the
fourth quarter of 2002.

Because the PBR plan and historical utility gas costs are still under ICC
review, it is possible that the final outcome could be materially different
than the amounts already recorded. Pursuant to the agreement of all parties,
including the company, the ICC re-opened the 1999 and 2000 purchase gas
adjustment filings for review of certain transactions related to the PBR plan
and consolidated the reviews of the 1999-2002 purchase gas adjustment filings
with the PBR plan review. Certain parties in the PBR plan review proceeding
have indicated disagreement with the findings in the Report or have indicated
that they believe substantially greater adjustments or penalties are warranted.
In addition, on February 5, 2003, the CCSAO and CUB filed a motion for $27
million in sanctions against the company in the ICC Proceedings. In that
motion, CCSAO and CUB alleged that Nicor Gas responses to certain CUB data
requests were false. Also on February 5, 2003, CUB stated in a press release
that, in addition to $27 million in sanctions, it would seek refunds to
consumers in an amount much greater than the $15 million of adjustments
identified in the Report. It is not possible to determine how the ICC will
resolve the claims of CCSAO, CUB or other parties to the ICC Proceedings.

Nicor Gas is unable to predict the outcome of any of the foregoing reviews or
the companys potential exposure thereunder beyond the amounts noted above.
Also, due to the uncertainties surrounding the PBR plan, Nicor Gas has not
recognized a $26.9 million pretax gain from the 2002 PBR plan year. In a
letter dated October 28, 2002, Nicor Gas informed the ICC that it was
terminating its PBR plan effective January 1, 2003.

On July 22, 2002, a purported class action was filed against Nicor Gas and
Nicor in the Circuit Court of Cook County, Illinois, on behalf of all customers
of Nicor Gas who at any time from January 2000 through the present were subject
to Nicor Gas PBR plan. The named plaintiffs alleged breach of contract,
unjust enrichment and violation of the Illinois Consumer Fraud and Deceptive
Practices Act, and that the class sustained damages as a result of Nicor Gas
manipulating the benchmark under the PBR plan. The named plaintiffs sought, on
behalf of themselves and the purported class, compensatory damages, prejudgment
and postjudgment interest, disgorgement of all profits, and restitution to
plaintiffs and the purported class. Nicor filed a Motion to Dismiss this
action on September 24, 2002. On December 4, 2002, the named plaintiffs
voluntarily dismissed the case, but indicated an intent to bring their claims
before the ICC. Nicor Gas is unable to predict the outcome of any such
proceeding or Nicors

35



---



##### 



Notes to the Consolidated Financial Statements (continued)

potential exposure related thereto and has not recorded a liability associated
with the potential outcome of this contingency.

SEC and U.S. Attorney Inquiries.In 2002, the staff of the SEC informed the
company that the SEC is conducting a formal inquiry regarding the PBR plan. A
representative of the Office of the United States Attorney for the Northern
District of Illinois has notified the company that that office is conducting an
inquiry on the same matter that the SEC is investigating, and a grand jury is
also reviewing this matter.

Hub Services.Nicor Gas offers interstate transportation and storage services,
which are regulated by the Federal Energy Regulatory Commission (FERC), as well
as certain intrastate interruptible transportation and storage services which
are regulated by the ICC. During a periodic rate case that was filed with FERC
in 2002, Nicor Gas determined that refunds were due to certain customers of
these services. Nicor Gas has recorded the refund of service fees and interest totaling $1.1
million in the years 2000 to 2002, and in the fourth quarter of 2002 it accrued $.3 million for
additional costs. Refunds were recorded as a reduction to revenue in the
periods that original billing occurred.

Other FERC Matters.In 2002, Nicor Gas determined that it may not have
complied with regulations of FERC governing the release of certain
transportation and storage capacity that it contracts for with interstate
pipelines, and the company has brought these matters to the attention of FERC.
The company accrued a $.4 million liability associated with these matters in
the fourth quarter of 2002.

Fixed Bill Service.On July 17, 2002, a purported class action was filed in
the Circuit Court of Cook County, Illinois against Nicor Energy Services
Company (Nicor Services) and Nicor Gas alleging violation of the Illinois
Consumer Fraud and Deceptive Practices Act by Nicor Services and Nicor Gas
relating to the Fixed Bill Service offered by Nicor Services and a conspiracy
claim against Nicor Gas arising out of marketing efforts by Nicor Services.
Nicor Services offers a fixed bill product under which it pays the annual gas
service portion of a customers Nicor utility bill in exchange for twelve equal
monthly payments by the customer to Nicor Services, regardless of changes in
the price of natural gas or
weather. The plaintiff is seeking compensatory damages, prejudgment and
postjudgment interest, punitive damages, attorneys fees and injunctive relief.
On September 6, 2002, Nicor Gas and Nicor
Services filed a Motion to Dismiss this action. On November 26, 2002, the
court dismissed the complaint without prejudice, but allowed the plaintiff to
file an amended complaint. The plaintiff filed an amended complaint on
December 10, 2002, which names only Nicor Services as a defendant, and deleted
Nicor Gas as a defendant.

Troy Grove Facility.On October 15, 2002, Nicor Gas voluntarily disclosed a
potential violation of certain air pollution regulations and statutes to both
the United States Environmental Protection Agency (U.S. EPA) and the Illinois
Environmental Protection Agency (IEPA) related to commencement of construction
of certain compressor equipment at its Troy Grove storage field prior to the
issuance of a Prevention of Significant Deterioration (PSD) Permit. An
application for the PSD Permit had been previously submitted to the IEPA. The
disclosure to U.S. EPA was made pursuant to the U.S. EPAs Self-Disclosure
Policy. The PSD Permit was subsequently issued on December 5, 2002. On
January 14, 2003, the U.S. EPA notified Nicor Gas that it would defer the
permitting and enforcement issues related to Nicor Gas voluntary disclosure to
the IEPA. On the same day, the IEPA issued a related Notice of Violation to
Nicor Gas that alleged two violations and offered Nicor Gas the opportunity to
respond to the Notice in writing and in person. Consequently, on February 20,
2003, Nicor Gas responded to the IEPAs Notice and requested a meeting to
respond in person. Nicor Gas is unable to predict the outcome of this matter
or to reasonably estimate its exposure related thereto and has not recorded a
liability associated with this contingency.

36



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##### 



Notes to the Consolidated Financial Statements (continued)

Mercury Program.Nicor Gas has incurred, and expects to continue to incur,
significant costs related to its historical use of mercury in various kinds of
company equipment. Prior to 1961, gas regulators containing small quantities
of mercury were installed in homes. These gas regulators reduce the pressure
of natural gas flow from the service line to the inside of the home. During
the third quarter of 2000, the company learned that in certain instances some
mercury was spilled or left in residences.

As a result, in September 2000, Nicor Gas was named as a defendant in a civil
lawsuit (the Attorney Generals Lawsuit) brought by the Illinois Attorney
General and the States Attorneys of Cook, DuPage and Will Counties seeking,
among other things, to compel the company to inspect and clean up all homes and
other sites that may have been affected by mercury from company equipment. The
Circuit Court of Cook County hearing this action entered two preliminary
injunctions requiring Nicor Gas, among other things, to conduct inspections
and, where necessary, to clean up mercury, to pay for relocating residents
until cleanup is completed, and to pay for medical screening of potentially
affected persons. Potentially affected homes are being inspected using mercury
vapor analyzers. Nicor Gas has called on every such home, although it still
has been unable to gain entry to some homes. Approximately 1,100 homes have
been found to have traces of mercury requiring cleanup.

On October 10, 2001, Nicor Gas entered into a settlement agreement with respect
to the Attorney Generals Lawsuit, and on the same date the Circuit Court of
Cook County entered an order approving the settlement. Under the settlement,
Nicor Gas is paying a total of approximately $2.25 million over a 5-year
period. Of this amount, $.4 million will be used to reimburse the plaintiffs
for their costs and the balance will be used to fund environmental programs.
In addition, Nicor Gas will continue for a period of five years from the date
of settlement to provide medical screening to persons who may have been exposed
to mercury from Nicor Gas equipment.

Nicor Gas is also the subject of an Administrative Order, and an amendment
thereto, issued during the third quarter of 2000 by the U.S. Environmental
Protection Agency (EPA) pursuant to Section 106 of the Comprehensive
Environmental Response, Compensation and Liabilities Act. The order requires
the company, among other things, to develop and implement work plans to address
mercury spills at recycling centers where mercury regulators may have been
taken, at company facilities where regulators
and mercury may have been temporarily stored and at commercial/industrial sites
where mercury-containing equipment may have been used in metering facilities.
Pursuant to the injunctions and the EPA Administrative Order, Nicor Gas has
completed the work described above for all affected recycling centers,
commercial/industrial sites and company facilities. On July 12, 2001, Nicor
Gas received a Notice of Completion letter from the EPA regarding the work
performed under the Section 106 Administrative Order.

In addition to the matters described above, Nicor Gas has been named a
defendant in several private lawsuits, all in the Circuit Courts of Cook and
DuPage Counties, Illinois, claiming a variety of unquantified damages
(including bodily injury, property and punitive damages) allegedly caused by
mercury-containing regulators. One of the lawsuits in the Circuit Court of
Cook County involved five previous class actions that were consolidated before
a single judge. On October 10, 2001, Nicor Gas entered into an agreement to
settle the class action litigation. Under the terms of that agreement, Nicor
Gas has paid a total of approximately $1.85 million, will continue for a period
of five years to provide medical screening to persons exposed to mercury from
its equipment, and will use its best efforts to replace any remaining inside
residential mercury regulators within four years. The class action settlement
permitted class members to opt out of the settlement and pursue their claims
individually. On February 7, 2002, the Circuit Court of Cook County entered a
final order approving the class action settlement. The opt out period has
ended and approximately 160 households have opted out of the class. Of those,
45 households had traces of mercury, and Nicor Gas has settled with six
households.

37



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##### 



Notes to the Consolidated Financial Statements (continued)

Nicor Gas charged $148 million to operating expense in the third quarter of
2000 for estimated obligations related to the mercury-related inspection and
cleanup work and for legal defense costs. In the third quarter of 2001, a $9
million adjustment lowered the mercury-related reserve and reduced operating
expense, reflecting a lower number of homes expected to be found with traces of
mercury requiring cleanup and a lower average cleanup and repair cost. Through
December 31, 2001, the company incurred $102 million in associated costs,
leaving a $37 million estimated liability which represented managements best
estimate of future costs, including potential liabilities relating to remaining
lawsuits, based on an evaluation of available information at December 31, 2001.
In the fourth quarter of 2002, an additional $9 million adjustment lowered the
mercury-related reserve and reduced operating expense due to a settlement with
a subcontractors insurer, which reduced Nicor Gas exposure, along with
updated estimates of future costs. Through December 31, 2002, the company
incurred $106.6 million in associated costs, leaving a $23.4 million estimated
liability which represented managements best estimate of future costs,
including potential liabilities relating to remaining lawsuits, based on an
evaluation of currently available information. Actual costs may vary from this
estimate. The company will continue to reassess its estimated obligation and
will record any necessary adjustment, which could be material to operating
results in the period recorded.

The company has certain insurance policies, has notified its insurers, and is
vigorously pursuing recovery of mercury-related costs pursuant to its insurance
coverage. In January 2001, the company filed suit in the Circuit Court of Cook
County against certain of its insurance carriers for a declaration that the
companys mercury-related losses are covered, and for the recovery of those
losses. Nicor Gas is also pursuing an insurance recovery through arbitration.
In addition, some of the removals of mercury-containing regulators were
conducted by independent contractors working for the company. In November
2000, the company filed suit in the Circuit Court of Cook County seeking
indemnification and contribution from these contractors and their insurance
carriers.

Through December 31, 2001, Nicor Gas had recognized recoveries, net of related
expenses, of $3.1 million from certain insurance carriers of the company and
its independent contractors. In the third quarter of 2002 Nicor Gas recovered,
net of related expenses, approximately $20 million from an insurance carrier.
In the fourth quarter of 2002, Nicor Gas reached an agreement with a
subcontractors insurer wherein Nicor Gas received $.7 million for past defense
costs. In addition, this insurer has agreed to assume certain future defense
costs related to claims against the subcontractor and to pay certain judgments
and settlements related to such claims up to an aggregate amount of $50
million. Through December 31, 2002, Nicor Gas had recognized recoveries, net
of related expenses, of $23.1 million from certain insurance carriers of the
company and its independent contractors. These recoveries have been recorded
as a reduction to gas distribution operating expense. At this stage, it is not
possible to estimate the likelihood of additional recoveries from insurance
carriers or other third parties related to the mercury spills, and Nicor Gas
has not recorded any such recoveries in its financial statements.

Nicor Gas will not seek recovery of the costs associated with these mercury
spills from its customers, and any proceeds from insurance carriers or third
parties will be retained by the company to offset costs incurred.

The final disposition of these mercury-related matters is not expected to have
a material adverse impact on the companys financial condition.

38



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##### 



Notes to the Consolidated Financial Statements (continued)

Manufactured Gas Plant Sites.Manufactured gas plants were used in the 1800s
and early to mid 1900s to produce natural gas from coal, creating a coal tar
byproduct. Current environmental laws may require the cleanup of coal tar at
certain former manufactured gas plant sites.

To date, Nicor Gas has identified about 40 properties for which it may, in
part, be responsible. Most of these properties are not presently owned by the
company. Information regarding preliminary site reviews has been presented to
the Illinois Environmental Protection Agency for certain properties. More
detailed investigations and remedial activities are either in progress or
planned at many of these sites. The results of these detailed site-by-site
investigations determines the extent additional remediation is necessary and
provides a basis for estimating additional future costs. In accordance with
ICC authorization, the company is and has been recovering these costs from its
customers, subject to annual prudence reviews.

In December 1995, Nicor Gas filed suit in the Circuit Court of Cook County
against certain insurance carriers seeking recovery of environmental cleanup
costs of certain former manufactured gas plant sites. Nicor Gas reached a
settlement with one of the insurance carriers, and in February 2000, the court
dismissed the companys case on summary judgment motions by certain other
defendants. The company filed an appeal in March 2000. In May 2001, Nicor Gas
reached a recovery settlement with certain insurance carriers who were involved
in this appeal. In September 2002, the Illinois Appellate Court upheld the
ruling of the trial court. Nicor Gas petition for leave to appeal to the
Illinois Supreme Court was denied in December of 2002. All recoveries are
refunded to the companys customers.

In December 2001, a purported class action lawsuit was filed against Exelon
Corporation, Commonwealth Edison Company and Nicor Gas in the Circuit Court of
Cook County alleging, among other things, that plans for the proposed cleanup
of a manufactured gas plant site in Oak Park, Illinois are inadequate. The
lawsuit claims that houses might have to be razed or removed and asks that
residents be compensated for the alleged loss in the value of their homes and
other monetary damages. An amended complaint adding additional plaintiffs and,
as defendants, the Village of Oak Park and the Park District of Oak Park, was
filed in April 2002. On the defendants motion to dismiss the second amended
complaint, the court ruled in November 2002 that non-personal injury and
non-property damage claims could not be
recovered against the defendants. In October 2002, two lawsuits were filed
against Nicor Gas in the Circuit Court of Cook County seeking unspecified
damages for various injuries and one death that allegedly resulted from
exposure to contaminants allegedly emanating from the manufactured gas plant
site in Oak Park, Illinois. The plaintiffs lived in homes adjoining the site.
In December 2002, a complaint was filed against Commonwealth Edison Company and
Nicor Gas in the Circuit Court of Cook County alleging, among other things,
trespass to the plaintiffs property next to Barrie Park and private nuisance.
Requests for damages equal to the fair value of the plaintiffs homes, damages
equal to the value of the plaintiffs loss of enjoyment of their property,
punitive damages and attorneys fees were made. Management cannot predict the
outcome of this litigation or the companys potential exposure thereto and has
not recorded a liability associated with this contingency.

In April 2002, Nicor Gas was named as a defendant, together with Commonwealth
Edison Company, in a lawsuit brought by the Metropolitan Water Reclamation
District of Greater Chicago (the MWRDGC) under the Federal Comprehensive
Environmental Response, Compensation and Liability Act seeking recovery of past
and future remediation costs and a declaration of the level of appropriate
cleanup for a former manufactured gas plant site in Skokie, Illinois now owned
by the MWRDGC. In January 2003, the suit was amended to include a claim under
the Federal Resource Conservation and Recovery Act. The suit was filed in
federal court in Chicago. Management cannot predict the outcome of this
litigation or the companys potential exposure thereto and has not recorded a
liability associated with this contingency.

39



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##### 



Notes to the Consolidated Financial Statements (concluded)

Since costs and recoveries relating to the cleanup of these manufactured gas
plant sites are passed directly through to customers in accordance with ICC
regulations, subject to an annual ICC prudence review, the
final disposition of these manufactured gas plant matters is not expected to
have a material impact on the companys financial condition or results of
operations.

Other.In addition to the matters set forth above, the company is involved in
legal or administrative proceedings before various courts and agencies with
respect to rates, taxes and other matters. Although unable to determine the
outcome of these other contingencies, management believes that appropriate
accruals for them have been recorded.

QUARTERLY RESULTS (UNAUDITED)

Summarized quarterly financial data is presented below (in millions).

|     |                    |  |               |         |         |  |          |       |         |  |   |       |  |  |   |       | 
|---- | ------------------ |  | ------------- | ------- | ------- |  | -------- | ----- | ------- |  | - | ----- |  |  | - | ----- | 
|     |                    |  | Quarter ended
|     |                    |  |              
|     |                    |  | Mar. 31       |         | June 30 |  | Sept. 30 |       | Dec. 31
|     |                    |  |               |         |         |  |          |       |        
|2002 |                    |  |               |         |         |  |          |       |         |  |   |       |  |  |   |      
|     | Operating revenues |  | $             | 516.5   |         |  | $        | 282.0 |         |  | $ | 172.7 |  |  | $ | 623.6 | 
|     | Operating income   |  |               | 38.2    |         |  |          | 30.1  |         |  |   | 34.0  |  |  |   | 41.3  | 
|     | Net income         |  |               | 32.6    |         |  |          | 20.9  |         |  |   | 25.8  |  |  |   | 29.8  | 
|2001 |                    |  |               |         |         |  |          |       |         |  |   |       |  |  |   |      
|     | Operating revenues |  | $             | 1,344.0 |         |  | $        | 271.7 |         |  | $ | 152.9 |  |  | $ | 337.0 | 
|     | Operating income   |  |               | 43.5    |         |  |          | 33.0  |         |  |   | 31.9  |  |  |   | 38.0  | 
|     | Net income         |  |               | 19.9    |         |  |          | 18.2  |         |  |   | 24.3  |  |  |   | 36.4  | 

The fourth quarter of 2002 includes the positive
impact of a $9 million pretax mercury reserve adjustment and the
negative impact of establishing a $4.1 million pretax loss
contingency reserve related to the PBR plan review.

40



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##### 



Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

On May 3, 2002, Nicor Gas filed a Form 8-K announcing that its Board of
Directors dismissed Arthur Andersen LLP and engaged Deloitte & Touche LLP as
its new independent auditors. This disclosure has been previously reported.

PART III

Item 14. Controls and Procedures

Immediately following the Signatures section of this Annual Report are
certifications of the companys CEO and the CFO required in accord with Section
302 of the Sarbanes-Oxley Act of 2002 (the Section 302 Certification). This
portion of our Annual Report on Form 10-K is our disclosure of the results of
our controls evaluation referred to in paragraphs (4), (5) and (6) of the
Section 302 Certification and should be read in conjunction with the Section
302 Certification for a more complete understanding of the topics presented.

In July 2002, in response to allegations that Nicor Gas acted improperly in
connection with its performance-based rate plan for natural gas costs, the
Nicor Board of Directors appointed a special committee of independent,
non-management directors to conduct an inquiry into issues surrounding natural
gas purchases, sales, transportation and storage, and certain other matters.
In addition, following up on the work of the committee, the Nicor Board of
Directors later directed Nicors management to, among other things, (a)
undertake a reaudit of the Nicor and Nicor Gas financial statements for the
years 1999 through 2001 and a review of subsequent quarterly periods, (b) amend
any filings with the SEC as necessary, and (c) conduct a detailed study of the
adequacy of internal accounting and regulatory controls. See Notes to
Consolidated Financial Statements  Contingencies.

To assist management in assessing the control environment and related issues
associated with Nicors natural gas supply, transport, storage and marketing
activities, including Nicor Gas Hub administration and Nicor Enerchange trading
(gas supply activities), Nicor retained a consulting firm with experience in
internal controls and the energy industry that is not and has not been the
companys external auditor.
Through this review of gas supply activities (gas supply review), it was
observed that:



| |  | Although key controls have been designed to facilitate the complete
and accurate capture and processing of gas supply activities, many
control activities are not standardized. As such, the reliability and
effectiveness of these control processes are dependent on
interpretation and execution by business unit personnel.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | Existing processes provide limited oversight and monitoring to ensure
that transaction activities and control procedures are performed
reliably and consistent with management expectations.                                                                                                                                   
| 
| |  | As a result, gas supply activities are not adequately documented,
overly dependent on people, and not supported by formal training or
communication of controls.                                                                                                                                                               

In light of the foregoing, and reflecting the consultants work related to gas
supply activities, management has concluded that the following steps related to
gas supply activities should be undertaken:



| |  | Enhance the effectiveness of corporate governance and independent
oversight of gas supply activities by creating a formal risk
management function and expanding senior management oversight through
the companys risk management committee.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | Enhance senior management monitoring and oversight of gas supply
activities by creating formal reporting frameworks designed to
effectively communicate performance, existing risk profile/position,
and compliance with policies/procedures.

41



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Item 14. Controls and Procedures (continued)



| |  | Enhance the communication of senior managements
expectations regarding objectives, risk tolerances,
and business practices in connection with gas
supply activities by creating codified and
standardized policies and procedures for these
activities.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | Given the high degree of regulatory oversight and
review over gas supply activities, develop formal
documentation and retention standards for key
decision-making and transaction activities that are
subject to regulatory review.                     
| 
| |  | For each business unit responsible for gas supply
contract negotiation and execution, establish a
dedicated contract administration function as well
as a contract compliance program.                                                                  
| 
| |  | Develop formal contracting standards, including
practices and procedures surrounding contract
execution, contract review and approval and
contract modification.                                                                                        

In May 2002, the company engaged new accountants, Deloitte & Touche LLP
(D&T), who were asked in October to audit the companys 1999, 2000 and 2001
restated financial statements in addition to its audit of 2002 financial
statements. In connection with the completion of its audit of, and the
issuance of an unqualified report on, Nicors and Nicor Gas restated financial
statements for the years ended December 31, 1999, 2000 and 2001, D&T issued a
letter dated February 28, 2003 (the D&T Letter), in which it identified to
management and the Audit Committee of the Board of Directors certain
deficiencies that existed in the design or operation of Nicor Gas internal
accounting controls which, considered collectively, constituted a material
weakness in Nicor Gas internal controls pursuant to standards established by
the American Institute of Certified Public Accountants. Such deficiencies at
Nicor Gas regulated gas purchasing operations included significant weaknesses
in the design of controls surrounding execution, monitoring and accounting for
gas commodity, transportation, storage and related contracts due, in part, to
the lack of a centralized independent back office for these activities. D&T
also concluded that these weaknesses had resulted in errors that affected gas
purchase costs, inventory, regulatory assets and liabilities, and results of
the performance-based rate plan, and led to a restatement of Nicors and Nicor
Gas financial statements. D&T has made the following recommendations to Nicor
and Nicor Gas with respect to these deficiencies:



| |  | Establish a centralized, independent back office function for gas
supply activities, staffed with an adequate number of appropriately
skilled individuals.                                                                                                            
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | Charge the gas supply back office function with responsibility for,
among other matters, contract analysis to determine correct accounting
treatment, ensuring that contract terms are followed, overseeing the
contract approval process and contract administration.

Within the 90 days prior to the date of filing this Annual Report on Form 10-K,
the company carried out an evaluation under the supervision and with the
participation of the companys management, including its principal executive
officer and principal financial officer, of the effectiveness of the design and
operation of the companys disclosure controls and procedures (the
Evaluation).

During the course of the Evaluation, the companys principal executive officer
and principal financial officer took note of, and considered as part of the
companys disclosure controls and procedures (as defined in the Rule 13a-14
under the Securities Exchange Act of 1934), additional procedures performed and
controls instituted by the company (the Additional Procedures) to supplement
its internal controls in order to mitigate the effect of the weaknesses and
deficiencies identified in the gas supply review and the D&T Letter and to
prevent misstatements or omissions in its consolidated financial statements
resulting from such factors. Based on the Evaluation, the companys Chief
Executive Officer and Chief Financial Officer concluded, as of the date of the
Evaluation, that the companys disclosure controls and procedures, including
the Additional Procedures, were effective to ensure that information required
to be disclosed by the company in reports that it files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in SEC rules and forms.

42



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##### 



Item 14. Controls and Procedures (concluded)

Management has considered the matters referred to above, D&Ts recommendations
with respect thereto and the gas supply review in connection with managements
general evaluation of the companys internal controls in particular and its
disclosure controls and procedures generally. The company has accepted the
recommendations identified in the D&T Letter and in the gas supply review. The
companys management has assigned a high priority to the short-term and
long-term correction of the internal control weaknesses and deficiencies
identified by D&T and in the gas supply review, and has implemented and
continues to implement changes to the companys policies, procedures, systems
and personnel to address these issues. The companys management is in the
process of implementing the following changes based upon the D&T Letter and the
gas supply review:



| |  | The company will dedicate additional internal audit and external resources to the assessment of the internal controls of
the company.                                                                                             
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | New policies with respect to the approval and authorization of all transactions related to gas supply activities and
affiliated transactions are being developed and adopted.                                                     
| 
| |  | Additional gas supply purchasing testing was performed to verify that prices are consistent with market rates.                                                                                                                    
| 
| |  | Personnel in gas supply accounting will now report directly to the companys Controller.                                                                                                                                          
| 
| |  | The companys Risk Management Committee has increased its oversight level, and a new Chief Risk Officer position is being
established.                                                                                            
| 
| |  | An outside consultant has been retained to coordinate documentation and implementation of appropriate processes, procedures
and controls changes, and has been assigned a number of full-time employees to assist in this process.
| 
| |  | The company will implement controls designed to ensure compliance with regulatory rules and mandates.                                                                                                                             
| 
| |  | A review of contract administration processes is underway to develop and implement a more effective method of contract
administration, including documentation of related policies and procedures.                                

The company will continue to evaluate and implement corrective actions to
improve the effectiveness of its disclosure controls and procedures, and will
take further actions as dictated by such continuing reviews. These actions
will include additional procedures to supplement its internal controls in order
to prevent misstatements or omissions in its financial statements resulting
from factors such as the weaknesses and deficiencies identified in the gas
supply review and the D&T Letter. The steps taken and to be taken to correct
the weaknesses and deficiencies identified in the gas supply review and the D&T
Letter have constituted and will constitute significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of the Evaluation.

43



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##### 



PART IV

Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

|    |  |  |   |   |  |                                                                                                                        
|--- |  |  | - | - |  | -----------------------------------------------------------------------------------------------------------------------
|(a) |  |  | 1 | ) |  | Financial Statements:                                                                                                  
|   
|    |  |  |   |   |  | See Item 8, Financial Statements and Supplementary Data, on page 19 filed herewith, for a list of
financial statements.
|   
|    |  |  | 2 | ) |  | Financial Statement Schedules:                                                                                         
|   

|                                                                               |  |                                   |  |      |    | 
|------------------------------------------------------------------------------ |  | --------------------------------- |  | ---- | -- | 
|Schedule                                                                       |  |                                   |  |      |    | 
|Number                                                                         |  |                                   |  | Page
|                                                                               |  |                                   |  |     
|                                                                               |  | Independent Auditors Report      |  |      | 20 | 
|II                                                                             |  | Valuation and Qualifying Accounts |  |      | 45 | 
|Schedules other than those listed are
omitted because they are not
applicable. |  |                                   |  |     

|    |  |  |   |   |  |                                                                                                                    
|--- |  |  | - | - |  | -------------------------------------------------------------------------------------------------------------------
|    |  |  | 3 | ) |  | Exhibits Filed:                                                                                                    
|   
|    |  |  |   |   |  | See Exhibit Index beginning on page 50 filed herewith.                                                             
|   
|(b) |  |  |   |   |  | On October 31, 2002, Nicor Gas filed a Form 8-K regarding the results of
an internal investigation of the PBR plan.

44



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##### 



Schedule II

VALUATION AND QUALIFYING ACCOUNTS
(millions)

|            |                                                 |           |            |          |            |          |            |            |  |           |   |   |         |  |   |      |     |  |   |      | 
|----------- | ----------------------------------------------- | --------- | ---------- | -------- | ---------- | -------- | ---------- | ---------- |  | --------- | - | - | ------- |  | - | ---- | --- |  | - | ---- | 
|            |                                                 |           |            |          |            |          | Additions  |            |  |           |   |   |         |  |  
|            |                                                 |           |            |          |            |          |            |            |  |           |   |   |         |  |  
|            |                                                 |           | Balance at |          | Charged to |          | Charged to |            |  |           |   |   | Balance
|            |                                                 |           | beginning  |          | costs and  |          | other      |            |  |           |   |   | at end 
|Description |                                                 | of period |            | expenses |            | accounts |            | Deductions |  | of period
|            |                                                 |           |            |          |            |          |            |            |  |          
|2002        |                                                 |           |            |          |            |          |            |            |  |           |   |   |         |  |   |      |     |  |   |     
|            | Allowance for uncollectible
accounts receivable |           | $          | 9.6      |            |          | $          | 25.7       |  |           | $ |  |         |  | $ | 20.9 | (a) |  | $ | 14.4 | 
|            | Accrued mercury-related costs                   |           |            | 37.0     |            |          |            |           |  |           |   |  |         |  |   | 13.6 | (b) |  |   | 23.4 | 
|2001        |                                                 |           |            |          |            |          |            |            |  |           |   |   |         |  |   |      |     |  |   |     
|            | Allowance for uncollectible
accounts receivable |           | $          | 13.4     |            |          | $          | 23.3       |  |           | $ |  |         |  | $ | 27.1 | (a) |  | $ | 9.6  | 
|            | Accrued mercury-related costs                   |           |            | 78.0     |            |          |            |           |  |           |   |  |         |  |   | 41.0 | (b) |  |   | 37.0 | 
|2000        |                                                 |           |            |          |            |          |            |            |  |           |   |   |         |  |   |      |     |  |   |     
|            | Allowance for uncollectible
accounts receivable |           | $          | 6.1      |            |          | $          | 16.6       |  |           | $ |  |         |  | $ | 9.3  | (a) |  | $ | 13.4 | 
|            | Accrued mercury-related costs                   |           |            |         |            |          |            | 148.0      |  |           |   |  |         |  |   | 70.0 | (b) |  |   | 78.0 | 



---

|(a) |  | Accounts receivable written off, net of recoveries.
|--- |  | ---------------------------------------------------
|   
|(b) |  | Expenditures and reductions charged to reserve.    

45



---



##### 



Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

|                    |  |                           
|------------------- |  | --------------------------
|                    |  | Nicor Gas Company         
|                    |  |                           
|Date March 27, 2003 |  | /s/ KATHLEEN L. HALLORAN  
|                    |  |                           
|                    |  | Kathleen L. Halloran      
|                    |  | Executive Vice President  
|                    |  | Finance and Administration

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below
by the following persons on behalf of the registrant and in the capacities
indicated on March 20, 2003.

|                                                                 |  |   |  |                                                    
|---------------------------------------------------------------- |  | - |  | ---------------------------------------------------
|Signature                                                        |  |   |  | Title                                              
|                                                                 |  |   |  |                                                    
|/s/ THOMAS L. FISHER                                             |  |   |  |                                                    
|Thomas L. Fisher(Principal Executive Officer)                    |  |   |  | Chairman and
Chief Executive Officer               
|                                                                 |  |   |  |                                                    
|/s/ KATHLEEN L. HALLORAN                                         |  |   |  |                                                    
|Kathleen L. Halloran(Principal Financial and Accounting Officer) |  |   |  | Executive Vice
President
Finance and Administration
|                                                                 |  |   |  |                                                    
|ROBERT M. BEAVERS, JR.*                                          |  |   |  | Director                                           
|                                                                 |  |   |  |                                                    
|BRUCE P. BICKNER*                                                |  |   |  | Director                                           
|                                                                 |  |   |  |                                                    
|JOHN H. BIRDSALL, III*                                           |  |   |  | Director                                           
|                                                                 |  |   |  |                                                    
|THOMAS A. DONAHOE*                                               |  |   |  | Director                                           
|                                                                 |  |   |  |                                                    
|JOHN E. JONES*                                                   |  |   |  | Director                                           
|                                                                 |  |   |  |                                                    
|DENNIS J. KELLER*                                                |  |   |  | Director                                           
|                                                                 |  |   |  |                                                    
|WILLIAM A. OSBORN*                                               |  |   |  | Director                                           
|                                                                 |  |   |  |                                                    
|JOHN RAU*                                                        |  |   |  | Director                                           
|                                                                 |  |   |  |                                                    
|JOHN F. RIORDAN*                                                 |  |   |  | Director                                           
|                                                                 |  |   |  |                                                    
|PATRICIA A. WIER*                                                |  |   |  | Director                                           
|                                                                 |  |   |  |                                                    
|                                                                 |  | * |  | By /s/ JEFFREY
L. METZ                             
|                                                                 |  |   |  | Jeffrey L. Metz                                    
|                                                                 |  |   |  | (Attorney-in-fact)                                 



46



---



##### 



Certification

I, Thomas L. Fisher, Chairman and Chief Executive Officer of Nicor Gas Company,
certify that:



|1) |  | I have reviewed this annual report on Form 10-K of Nicor Gas Company;                                                                                                                                                                                                                                                   
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2) |  | Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
|  
|3) |  | Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;                   
|  
|4) |  | The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:                                                                                                



| | a) |  | designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        



|5) |  | The registrants other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of internal
controls which could
adversely affect the registrants ability to record, process, summarize
and report financial
data and have identified for the registrants auditors any material
weaknesses in internal
controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves management or other
employees who
have a significant role in the registrants internal controls; and                                                                                                                                        



|6) |  | The registrants other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|     |  |                |  |                                     
|---- |  | -------------- |  | ------------------------------------
|Date |  | March 27, 2003 |  | /s/ THOMAS L. FISHER                
|     |  |                |  |                                     
|     |  |                |  | Thomas L. Fisher                    
|     |  |                |  | Chairman and Chief Executive Officer

47



---



##### 



Certification

I, Kathleen L. Halloran, Executive Vice President Finance and Administration of
Nicor Gas Company, certify that:



|1) |  | I have reviewed this annual report on Form 10-K of Nicor Gas Company;                                                                                                                                                                                                                                                   
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2) |  | Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
|  
|3) |  | Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;                   
|  
|4) |  | The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:                                                                                                



| | a) |  | designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        



|5) |  | The registrants other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of internal
controls which could
adversely affect the registrants ability to record, process, summarize
and report financial
data and have identified for the registrants auditors any material
weaknesses in internal
controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves management or other
employees who
have a significant role in the registrants internal controls; and                                                                                                                                        



|6) |  | The registrants other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|     |  |                |  |                           
|---- |  | -------------- |  | --------------------------
|Date |  | March 27, 2003 |  | /s/ KATHLEEN L. HALLORAN  
|     |  |                |  |                           
|     |  |                |  | Kathleen L. Halloran      
|     |  |                |  | Executive Vice President  
|     |  |                |  | Finance and Administration

48



---



##### 



Supplemental Information



| |  | Supplemental Information to be Furnished With Reports Filed Pursuant to Section
15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant
to Section 12 of the Act:
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | No annual report or proxy material has been sent to security holders as Nicor
Gas is a wholly owned subsidiary of Nicor Inc.                                                           

49



---



##### 



Exhibit Index

|        |  |   |  |                                                                                                                                                                                                                                        
|------- |  | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |   |  |                                                                                                                                                                                                                                        
|Number  |  |   |  | Description of Document                                                                                                                                                                                                                
|        |  |   |  |                                                                                                                                                                                                                                        
|1.01    |  | * |  | Underwriting agreement, dated December 13, 2001, between the company and ABN AMRO Incorporated. (File
No. 1-7296, Form 10-K for 2001, Exhibit 1.01.)                                                                                   
|        |  |   |  |                                                                                                                                                                                                                                        
|3.01    |  | * |  | Articles of Incorporation of the company. (File No. 1-7296, Form 10-K for 1980, Exhibit 3-01.)                                                                                                                                         
|        |  |   |  |                                                                                                                                                                                                                                        
|3.02    |  | * |  | Amendment to Articles of Incorporation of the company. (File No. 1-7296, Form 10-Q for June 1994,
Exhibit 3.01.)                                                                                                                       
|        |  |   |  |                                                                                                                                                                                                                                        
|3.03    |  | * |  | By-Laws of the company as amended by the companys Board of Directors on May 3, 1995. (File No.
1-7296, Form 10-Q for March 1995, Exhibit 3(ii).01.)                                                                                   
|        |  |   |  |                                                                                                                                                                                                                                        
|4.01    |  | * |  | Indenture of Commonwealth Edison Company to Continental Illinois National Bank and Trust Company of
Chicago, Trustee, dated as of January 1, 1954. (File No. 1-7296, Form 10-K for 1995, Exhibit 4.01.)                                
|        |  |   |  |                                                                                                                                                                                                                                        
|4.02    |  | * |  | Indenture of Adoption of the company to Continental Illinois National Bank and Trust Company of
Chicago, Trustee, dated February 9, 1954. (File No. 1-7296, Form 10-K for 1995, Exhibit 4.02.)                                         
|        |  |   |  |                                                                                                                                                                                                                                        
|4.03    |  | * |  | Supplemental Indenture, dated June 1, 1963, of the company to Continental Illinois National Bank and
Trust Company of Chicago, Trustee, under Indenture dated as of January 1, 1954. (File No. 2-21490,
Form S-9, Exhibit 2-8.)        
|        |  |   |  |                                                                                                                                                                                                                                        
|4.04    |  | * |  | Supplemental Indenture, dated May 1, 1966, of the company to Continental Illinois National Bank and
Trust Company of Chicago, Trustee, under Indenture dated as of January 1, 1954. (File No. 2-25292,
Form S-9, Exhibit 2-4.)         
|        |  |   |  |                                                                                                                                                                                                                                        
|4.05    |  | * |  | Supplemental Indenture, dated June 1, 1971, of the company to Continental Illinois National Bank and
Trust Company of Chicago, Trustee, under Indenture dated as of January 1, 1954. (File No. 2-44647,
Form S-7, Exhibit 2-03.)       
|        |  |   |  |                                                                                                                                                                                                                                        
|4.06    |  | * |  | Supplemental Indenture, dated April 30, 1976, between Nicor Inc. and Continental Illinois National
Bank and Trust Company of Chicago, Trustee, under Indenture dated as of January 1, 1954. (File No.
2-56578, Form S-9, Exhibit 2-25.)
|        |  |   |  |                                                                                                                                                                                                                                        
|4.07    |  | * |  | Supplemental Indenture, dated April 30, 1976, of the company to Continental Illinois National Bank and
Trust Company of Chicago, Trustee, under Indenture dated as of January 1, 1954. (File No. 2-56578,
Form S-9, Exhibit 2-21.)     
|        |  |   |  |                                                                                                                                                                                                                                        
|4.08    |  | * |  | Supplemental Indenture, dated May 10, 1996, of the company to Harris Trust and Savings Bank, Trustee,
under Indenture dated as of January 1, 1954. (File No. 1-7296, Form 10-Q for June 1996, Exhibit
4.01.)                           

50



---



##### 



Exhibit Index (continued)

|        |  |   |  |                                                                                                                                                                                                                      
|------- |  | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |   |  |                                                                                                                                                                                                                      
|Number  |  |   |  | Description of Document                                                                                                                                                                                              
|        |  |   |  |                                                                                                                                                                                                                      
|4.09    |  | * |  | Supplemental Indenture, dated October 15, 1997, of the company to Harris Trust and Savings Bank,
Trustee, under Indenture dated as of January 1, 1954. (File No. 1-7296, Form 10-Q for September 1997,
Exhibit 4.01.)
|        |  |   |  |                                                                                                                                                                                                                      
|4.10    |  | * |  | Supplemental Indenture, dated February 15, 1998, of the company to Harris Trust and Savings Bank,
Trustee, under Indenture dated as of January 1, 1954. (File No. 1-7296, Form 10-K for 1997, Exhibit
4.19.)         
|        |  |   |  |                                                                                                                                                                                                                      
|4.11    |  | * |  | Supplemental Indenture, dated June 1, 1998, of the company to Harris Trust and Savings Bank, Trustee,
under Indenture dated as of January 1, 1954. (File No. 1-7296, Form
10-Q for June 1998, Exhibit 4.01.)         
|        |  |   |  |                                                                                                                                                                                                                      
|4.12    |  | * |  | Supplemental Indenture, dated February 1, 1999, of the company to Harris Trust and Savings Bank,
Trustee, under Indenture dated as of January 1, 1954. (File No. 1-7296, Form 10-K for 1998, Exhibit
4.19.)          
|        |  |   |  |                                                                                                                                                                                                                      
|4.13    |  | * |  | Supplemental Indenture, dated February 1, 2001, of the company to BNY Midwest Trust Company, Trustee,
under Indenture dated as of January 1, 1954. (File No. 1-7296, Form 10-K for 2000, Exhibit 4.17.)              
|        |  |   |  |                                                                                                                                                                                                                      
|4.14    |  | * |  | Supplemental Indenture, dated May 15, 2001, of the company to BNY Midwest Trust Company, Trustee,
under Indenture dated as of January 1, 1954. (File No. 1-7296, Form 10-Q for June 2001, Exhibit
4.01.)             
|        |  |   |  |                                                                                                                                                                                                                      
|4.15    |  | * |  | Supplemental Indenture, dated August 15, 2001, of the company to BNY Midwest Trust Company, Trustee,
under Indenture dated as of January 1, 1954. (File No. 1-7296, Form 10-Q for September 2001, Exhibit
4.01.)     
|        |  |   |  |                                                                                                                                                                                                                      
|4.16    |  | * |  | Supplemental Indenture, dated December 15, 2001, of the company to BNY Midwest Trust Company, Trustee,
under Indenture dated as of January 1, 1954. (File No. 1-7296, Form 10-K for 2001, Exhibit 4.20.)             
|       
|        |  |   |  | Other debt instruments are omitted in accordance with Item 601(b)(4)(iii)(A) of Regulation S-K.
Copies of such agreements will be furnished to the Commission upon request.                                          
|        |  |   |  |                                                                                                                                                                                                                      
|12.01   |  |   |  | Computation of Consolidated Ratio of Earnings to Fixed Charges.                                                                                                                                                      
|        |  |   |  |                                                                                                                                                                                                                      
|23.01   |  |   |  | Independent Auditors Consent.                                                                                                                                                                                       
|        |  |   |  |                                                                                                                                                                                                                      
|24.01   |  |   |  | Powers of Attorney.                                                                                                                                                                                                  
|        |  |   |  |                                                                                                                                                                                                                      
|99.01   |  |   |  | Certification Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                              
|        |  |   |  |                                                                                                                                                                                                                      
|99.02   |  |   |  | Certification Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                              

51



---



##### 



Exhibit Index (concluded)

|        |  |  |  |                        
|------- |  |  |  | -----------------------
|Exhibit |  |  |  |                        
|Number  |  |  |  | Description of Document
|        |  |  |  |                        



|* |  | These exhibits have been previously filed with the
Securities and Exchange Commission as exhibits to
registration statements or to other filings with the
Commission and are incorporated herein as exhibits by
reference. The file number and exhibit number of each
such exhibit, where applicable, are stated, in
parentheses, in the description of such exhibit.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Upon written request, the company will furnish free of charge a copy of any
exhibit. Requests should be sent to Investor Relations at the corporate
headquarters.

52