AGL Resources is a registered public utility holding company that manages its business in three operating segments and one nonoperating segment.

On September 20, 2001, the Board of Directors of AGL Resources Inc. elected to change the Company's fiscal year end from September 30 to December 31 effective for the year ended December 31, 2001.

The Distribution Operations segment includes the results of operations and financial condition of AGL Resources' three natural gas local distribution companies: AGLC, VNG and CGC. AGLC conducts its primary business, the distribution of natural gas, throughout most of Georgia. VNG distributes and sells natural gas in southeastern Virginia. CGC distributes and sells natural gas in the Chattanooga area of Tennessee. The GPSC regulates AGLC; the VSCC regulates VNG; and the TRA regulates CGC. The GPSC, the VSCC and the TRA regulate Distribution Operations with respect to rates, maintenance of accounting records and various other matters. Generally, the Distribution Operations segment utilizes the same accounting policies and practices utilized by nonregulated companies for financial reporting under accounting principles generally accepted in the United States of America. The GPSC, the VSCC and the TRA occasionally order an accounting treatment different from that used by nonregulated companies to determine the rates charged to customers which are accounted for by applying SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation."

The Wholesale Services segment includes the results of operations and financial condition of Sequent, AGL Resources' asset optimization, gas supply services, and wholesale marketing and risk management subsidiary. Asset optimization focuses on capturing the value from idle or underutilized assets, typically by participating in transactions that balance the needs of varying markets and time horizons.

Although Sequent is a nonregulated business, some of its underlying assets are regulated. Under varying agreements and practices, Sequent acts as asset manager and/or gas management for AGL Resources' regulated utilities. In addition, Sequent procures from third parties storage and transportation rights on interstate pipelines to manage on its behalf.

The Energy Investments segment includes AGL Resources' investments in SouthStar and US Propane and the results of operations and financial condition of AGL Networks.

SouthStar is a joint venture in which a subsidiary of AGL Resources is a 50% owner; a subsidiary of Dynegy Inc. is a 20% owner; and a subsidiary of Piedmont Natural Gas Company is a 30% owner (collectively the Owners). Although AGL Resources owns 50% of SouthStar, it does not have a controlling interest as most matters of significance require the unanimous vote of each Owner's representative to the governing board of SouthStar. SouthStar offers a combination of unregulated energy products and services to industrial, commercial and residential customers in the Southeastern United States. SouthStar was formed and began marketing energy services in Georgia, under the trade name Georgia Natural Gas Services, in 1998, when that state became the first in the Southeast to fully open to retail natural gas competition.

The Owners of SouthStar have entered into a capital contribution agreement that requires each Owner to contribute additional capital to SouthStar to pay invoices for goods and services received from any vendor that is affiliated with an Owner whenever funds are not otherwise available to pay those invoices. The capital contributions to pay affiliated vendor invoices are repaid as funds become available, but repayment is subordinated to SouthStar's revolving line of credit with financial institutions. There was no activity related to the capital contribution agreement during the quarter ended June 30, 2002.

AGL Resources owns 22.36% of the limited partnership interests in US Propane and 22.36% of the limited liability company that serves as US Propane's general partner. The other limited partners are subsidiaries of TECO Energy, Inc., Piedmont Natural Gas Company, and Atmos Energy Corporation. These other companies also are owners of US Propane's general partner. US Propane owns all of the general partnership interest directly or indirectly and approximately 29% or 4,641,282 common units of the limited partnership interests in Heritage (NYSE: HPG), a marketer of propane through a nationwide retail distribution network. Heritage competes with electricity, natural gas and fuel oil, as well as with other companies in the retail propane distribution business. The propane business, like natural gas, is seasonal, with weather conditions significantly affecting the demand for propane.

The limited partnership agreement of US Propane requires that, in the event of liquidation, all limited partners would be required to restore capital account deficiencies, including any unsatisfied obligations of the partnership. Our maximum capital account restoration would be $13.6 million. Currently AGL Resources' capital account is positive. Management believes that the occurrence of US Propane's liquidation is not probable and, accordingly, no liability is recorded.

AGL Resources utilizes the equity method of accounting when recording the results of SouthStar and US Propane. AGL Resources reports its ownership interest in each entity as an investment within its unaudited condensed consolidated balance sheets. Additionally, AGL Resources' percentage ownership in the joint ventures' earnings or losses is reported in its condensed statements of consolidated income under other income (loss).

AGL Networks was formed on August 15, 2000, to serve the demand for high-speed network capacity in metropolitan areas within the Southeastern United States. Based in Atlanta, AGL Networks is licensed as a Competitive Local Exchange Carrier by the GPSC. AGL Networks provides last-mile infrastructure and fiber solutions to local, regional and national telecommunication companies and other commercial entities. In addition to conduit and dark fiber leasing, services also include custom built point-to-point networks including permitting, engineering and program management.

The Corporate segment includes the results of operations and financial condition of AGL Resources' nonoperating business units, including AGSC and AGL Capital Corporation. AGSC is a service company established in accordance with PUHCA. AGL Capital Corporation was established to finance the acquisition of VNG; refinance existing short-term debt; and provide for the ongoing financing needs of AGL Resources and its subsidiaries through a commercial paper program, the issuance of various debt and hybrid securities, and other financing mechanisms. All costs associated with AGSC, as well as financing costs associated with AGL Capital Corporation, are allocated to the operating segments in accordance with PUHCA. The Corporate segment also includes intercompany eliminations for transactions between operating business segments.

Basis of Presentation. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnote disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, the financial statements reflect all adjustments considered necessary for a fair statement of the results of operations and financial condition for the interim periods presented. All such adjustments are of a normal, recurring nature. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended September 30, 2001 and notes thereto contained in AGL Resources Inc.'s Annual Report on Form 10-K, filed with the SEC on December 18, 2001.

The results of operations for the three and six months ended June 30, 2002 are not necessarily indicative of the results to be expected for the year ending December 31, 2002 or any other interim period.

Accounting Changes. In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" (SFAS 143). SFAS 143 addresses financial accounting and reporting obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The provisions of SFAS 143 are effective for AGL Resources' 2003 fiscal year. AGL Resources has not yet determined the financial statement impact of this statement but there will be no impact on AGL Resources' net income.

Basic earnings per common share are computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per common share reflect the potential dilution that could occur when potential common shares are added to common shares outstanding. Diluted earnings per common share are calculated quarterly and the number of incremental shares to be included at year end is the weighted-average of each quarterly calculation. AGL Resources' potential common shares were derived from performance units whose future issuance is contingent upon the satisfaction of certain performance criteria and stock options whose exercise prices were less than the average market price of the common shares for the respective periods. Performance units totaling 11,430 and 10,488 qualified as potential common shares as of June 30, 2002 and 2001, respectively. An average of 405,593 and 419,701 incremental shares qualified as potential common s hares during the six-month periods ended June 30, 2002 and 2001, respectively, because the exercise prices of those options were less than the average market price of the common shares for the respective periods.

During the six-month periods ended June 30, 2002 and 2001, AGL Resources issued 568,365 shares and 548,882 shares of common stock out of treasury, respectively, under ResourcesDirect, a direct stock purchase and dividend reinvestment plan; the Retirement Savings Plus Plan; the Long-Term Stock Incentive Plan; the Long-Term Incentive Plan; and the Non-Employee Directors Equity Compensation Plan.

AGL Capital Corporation is a party in two interest rate swap transactions (Swaps) in the aggregate amount of $75.0 million executed as a hedge against the fair value of the AGL Capital Trust II's 8% Trust Preferred Securities due 2041. Pursuant to the Swaps, AGL Capital Corporation receives future interest rate payments on $75.0 million at an annual 8% interest rate, and pays floating interest rates on $75.0 million. AGL Capital Corporation pays floating interest each May 15, August 15, November 15 and February 15 at three-month LIBOR plus 1.315%, with no floor or ceiling. At June 30, 2002, the current rate was 3.2%. The expiration date of the Swaps is May 15, 2041, unless terminated earlier or called. Each quarter, under hedge accounting treatment, AGL Capital Corporation records a long-term asset or liability to reflect the assessed change in fair value of the Swaps. The fair value changes as interest rates change from those that were in effect on the original settlement date. The fair value of these Sw aps at June 30, 2002 and December 31, 2001, was $0.1 million and ($2.2) million, respectively.

Sequent follows SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" and EITF Issue No. 98-10 (EITF 98-10), "Accounting for Contracts Involved in Energy Trading and Risk Management Activities" in reporting the fair value of its energy contracts and any changes in earnings. EITF 98-10 also provides Sequent factors to consider for purposes of identifying energy trading activities. Sequent will adopt EITF Issue No. 02-03 (EITF 02-03), "Accounting for Contracts Involved in Energy Trading and Risk Management Activities," in the third quarter of 2002. EITF 02-03 requires all energy-trading entities within the scope of EITF 98-10 to present gains and losses from energy-trading activities on a net basis and requires additional disclosures for energy-trading activities. Beginning in the third quarter of 2002, Sequent will adopt the requirements of EITF 02-03 and will restate comparative financial statements. The Company has not yet determined the impact of EITF 02-03 but there will be no i mpact on AGL Resources' net income.

During the three months and six months ended June 30, 2002, AGL Resources recorded an unrealized gain of $1.3 million and unrealized loss of ($1.0) million related to derivative instruments as a result of energy marketing and risk management activities, compared to a $1.2 million and $0.5 million unrealized gain for the three months and six months ended June 30, 2001.

Before natural gas was widely available in the Southeast, AGLC manufactured gas from coal and other fuels. Those manufacturing operations were known as manufactured gas plants (MGPs), which AGLC ceased operating in the 1950s. Because of recent environmental concerns, AGLC is required to investigate possible environmental contamination at those plants and, if necessary, clean up any contamination.

AGLC has been associated with 10 MGP sites in Georgia and 3 in Florida. Based on investigations to date, AGLC believes that some cleanup is likely at most of the sites. In Georgia, the investigation and cleanup of MGP sites is supervised by the state Environmental Protection Division (EPD). In Florida, the U.S. Environmental Protection Agency (EPA) has that responsibility.

As of June 2002, the remediation program was approximately 55% complete. The following seven of the thirteen sites have been remediated: Athens, GA, Brunswick, GA, Griffin, GA, Waycross, GA, Rome, GA, Macon, GA and St. Augustine, FL. These sites are currently in a monitoring phase. The Valdosta, GA site is currently being remediated and we expect it to be completed by the end of 2002. The Savannah, GA onsite remediation is expected to be complete in August 2003. Savannah, GA offsite, Augusta, GA, Sanford, FL, and Orlando, FL are currently in the preliminary investigation or engineering design phase. Additionally, a second Macon, GA site is non-active; the site currently meets an acceptable standard for non-residential commercial property.

AGLC has historically reported cleanup cost estimates for remediation based on probabilistic models of potential costs. As cleanup options and plans continue to develop and cleanup contracts are entered into, AGLC is increasingly able to provide conventional engineering estimates of the likely costs of many elements of its MGP program. Accordingly, AGLC has updated its MGP cleanup cost estimates, where possible, to reflect these engineering estimates. For those elements of the MGP program where AGLC has engineering cost estimates, AGLC believes that the most likely cost of future actions at its MGP sites will be $137.0 million. This estimate still contains various engineering uncertainties, and could increase or decrease as contracts are entered into. For those elements of the MGP program where AGLC still cannot perform engineering cost estimates, there remains considerable variability in available cost estimates. For these elements AGLC believes that the remaining cost of future actions at its MGP sites will be within a range of $6.1 million to $14.5 million. AGLC cannot at this time identify any single number within this range as a better estimate of its likely future costs. Consequently, as of June 30, 2002, AGLC has recorded the sum of $137.0 million plus the lower end of the remaining range, $6.1 million, or a total of $143.1 million, as a liability and a corresponding regulatory asset. This figure does not include other potential expenses, such as unasserted property damage, personal injury or natural resource damage claims, legal expenses, or other costs for which AGLC may be held liable, but with respect to which the amount cannot be reasonably forecast.

The decrease in the liability from $171.0 million reported as of December 31, 2001 to $143.1 million as of June 30, 2002 is primarily a result of expenditures for cleanup for the various sites. There were no offsetting increases to the liability for the six-month period.

AGLC has two ways of recovering investigation and cleanup costs. First, the GPSC has approved an ERC recovery rider. It allows the recovery of costs of investigation, testing, cleanup and litigation. Because of that rider, AGLC has recorded a regulatory asset for actual and projected future costs related to investigation and cleanup, to be recovered from customers in future years. During the three months and six months ended June 30, 2002, AGLC recovered $4.0 million and $8.0 million, respectively through its ERC recovery rider. The second way AGLC can recover costs is by exercising the legal rights AGLC believes it has to recover a share of its costs from other potentially responsible parties, typically former owners or operators of the MGP sites. There were no material recoveries from potentially responsible parties during the three and six months ended June 30, 2002.

AGLC expects the MGP program to be complete with respect to the significant cleanup by January 2005. The significant years for spending for this program are 2002, 2003 and 2004. The ERC recovery mechanism allows for recovery of expenditures over the five-year period subsequent to the period in which the expenditures were incurred. As of June 30, 2002, the MGP expenditures expected to be incurred over the next twelve months is reflected as a current liability of $46.2 million. In addition, AGLC expects to collect $13.8 million in revenues over the next twelve months under the ERC recovery rider, which is reflected as a current asset.

On May 31, 2002, AGL Resources entered into a 10-year lease with Ten Peachtree Place Associates for 226,779 square feet at Ten Peachtree Place, Atlanta, GA. The annual lease expense will be approximately $5.2 million beginning March 1, 2003. AGL Resources has entered into an agreement to sell AGL Resources' Caroline Street campus, where the majority of Atlanta based employees are located. This transaction is expected to close by December 31, 2002, AGL Resources anticipates upon closing, the estimated net gain will be approximately $10.0 million.

AGL Resources is organized into three operating segments:

Additionally, AGL Resources treats the Corporate segment as a nonoperating business segment. The Corporate segment includes AGL Resources Inc., AGSC, nonregulated financing and captive insurance subsidiaries, and intercompany eliminations.

Management evaluates segment performance based on EBIT which includes the effects of corporate expense allocations. Intersegment sales in the three months and six months ended June 30, 2002 and June 30, 2001 were eliminated from the condensed statements of consolidated income.

Identifiable assets are those assets used in each segment's operations. AGL Resources' corporate assets consist primarily of cash and cash equivalents and property, plant and equipment.

Sequent has a $15.0 million unsecured line of credit with Bank One, NA (line of credit), which is unconditionally guaranteed by AGL Resources. This line of credit expires on July 3, 2003, and bears interest at the federal funds effective rate plus 0.5%. As of June 30, 2002 the current rate was 2.2%. Sequent uses the line of credit for daily operating margin calls. The line of credit had an outstanding balance of $2.8 million as of June 30, 2002.

AGL Resources' reports, filings and other public announcements often include statements reflecting assumptions, expectations, projections, intentions or beliefs about future events. These statements are intended as "forward-looking statements" under the Private Securities Litigation Reform Act of 1995. These statements do not relate strictly to historical or current facts, and you can identify certain of these statements, but not necessarily all, by the use of the words, "anticipate", "indicate", "estimate", "believe", "predict", "forecast", "relies", "expect", and other words of similar meaning. The company assumes no obligation to update this information. These statements involve risk and uncertainty and some of the important factors that could cause actual results or liquidity to differ materially from those anticipated include:

AGL Resources is a registered public utility holding company that manages its business in three operating segments and one nonoperating segment.

The Distribution Operations segment includes the results of operations and financial condition of AGL Resources' three natural gas local distribution companies: AGLC, VNG and CGC. AGLC conducts its primary business, the distribution of natural gas, throughout most of Georgia. VNG distributes and sells natural gas in southeastern Virginia. CGC distributes and sells natural gas in the Chattanooga area of Tennessee. The GPSC regulates AGLC; the VSCC regulates VNG; and the TRA regulates CGC. The GPSC, the VSCC and the TRA regulate Distribution Operations with respect to rates, maintenance of accounting records and various other matters.

The Wholesale Services segment includes the results of operations and financial condition of Sequent, AGL Resources' asset optimization, gas supply services, and wholesale marketing and risk management subsidiary. Asset optimization focuses on capturing the value from idle or underutilized assets, typically by participating in transactions that balance the needs of varying markets and time horizons.

Although Sequent is a nonregulated business, some of its underlying assets are regulated. Under varying agreements and practices, Sequent acts as asset manager and/or gas management for AGL Resources' regulated utilities. In addition, Sequent procures from third parties storage and transportation rights on interstate pipelines to manage on its own behalf.

The Energy Investments segment includes AGL Resources' investments in SouthStar and US Propane and the results of operations and financial condition of AGL Networks.

SouthStar is a joint venture in which a subsidiary of AGL Resources is a 50% owner; a subsidiary of Dynegy Inc. is a 20% owner; and a subsidiary of Piedmont Natural Gas Company is a 30% owner (collectively the Owners). Although AGL Resources owns 50% of SouthStar, it does not have a controlling interest as most matters of significance require the unanimous vote of each Owner's representative to the governing board of SouthStar. SouthStar offers a combination of unregulated energy products and services to industrial, commercial and residential customers in the southeastern United States. SouthStar was formed and began marketing energy services in Georgia, under the trade name Georgia Natural Gas Services in 1998, when that state became the first in the Southeast to fully open to retail natural gas competition.

AGL Resources owns 22.36% of the limited partnership interests in US Propane and 22.36% of the limited liability company that serves as US Propane's general partner. The other limited partners of US Propane are subsidiaries of TECO Energy, Inc., Piedmont Natural Gas Company, and Atmos Energy Corporation. These other companies also are owners of US Propane's general partner. US Propane owns all of the general partnership interest directly or indirectly and approximately 29% or 4,641,282 common units of the limited partnership interests in Heritage (NYSE: HPG), a marketer of propane through a nationwide retail distribution network. Heritage competes with electricity, natural gas and fuel oil, as well as with other companies in the retail propane distribution business. The propane business, like natural gas, is seasonal, with weather conditions significantly affecting the demand for propane.

AGL Networks was formed on August 15, 2000, to serve the demand for high-speed network capacity in metropolitan areas within the Southeastern United States. Based in Atlanta, AGL Networks is licensed as a Competitive Local Exchange Carrier by the GPSC. AGL Networks provides last-mile infrastructure and fiber solutions to local, regional and national telecommunication companies and other commercial entities. In addition to conduit and dark fiber leasing, services also include custom built point-to-point networks including permitting, engineering and program management.

The Corporate segment includes the results of operations and financial condition of AGL Resources' nonoperating business units, including AGSC and AGL Capital Corporation. AGSC is a service company established in accordance with PUHCA. AGL Capital Corporation was established to finance the acquisition of VNG, refinance existing short-term debt, and provide for the ongoing financing needs of AGL Resources through a commercial paper program, the issuance of various debt and hybrid securities, and other financing mechanisms. All costs associated with AGSC, as well as financing costs associated with AGL Capital Corporation, are allocated to the operating segments in accordance with PUHCA. The corporate segment also includes intercompany eliminations for transactions between operating business segments.

The selection and application of critical accounting policies is an important process that has progressed as AGL Resources' business activities and accounting rules has evolved. Accounting rules generally do not involve a selection among alternatives, but rather involve an implementation and interpretation of existing rules and the use of judgment as to the specific set of circumstances existing in our business. Each of the critical accounting policies involve complex situations requiring a high degree of judgment either in the application and interpretation of existing literature or in the development of estimates that impact AGL Resources' financial statements.

The transactions within the Distribution Operations segment are accounted for according to the provisions of SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation". The application of these accounting policies allows the Distribution Operations to defer expenses and income on the condensed consolidated balance sheet as regulatory assets and liabilities when it is probable that those expenses and income will be allowed in the rate setting process in a period different from the period in which they would have been reflected in the condensed statements of consolidated income of an unregulated company. These deferred regulatory assets and liabilities are then recognized in the condensed statement of consolidated income in the period in which the same amounts are reflected in rates. If, for any reason, the Distribution Operations cease to meet the criteria for application of regulatory accounting treatment for all or part of its operations, the regulatory assets and liabilities related to tho se portions ceasing to meet such criteria are eliminated from the condensed statements of consolidated balance sheet and included in the condensed statement of consolidated income for the period in which the discontinuance of regulatory accounting treatment occurs.

AGLC has recorded a regulatory liability as of June 30, 2002 of $484.1 million that represents engineering estimates for remaining capital expenditure costs in the pipeline replacement program. The pipeline replacement program represents an approved settlement between AGLC and the staff of the GPSC that detailed a 10-year replacement of 2,300 miles of cast iron and bare steel pipe. The costs are recoverable through a combination of SFV rates and a pipeline safety revenue rider.

Wholesale Services. AGL Resources accounts for transactions in connection with energy marketing and risk management activities under the mark-to-market method of accounting, in accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" and EITF Issue No. 98-10 (EITF 98-10), "Accounting for Contracts Involved in Energy Trading and Risk Management Activities." Under this method, AGL Resources records energy commodity contracts, including both physical transactions and financial instruments, at fair value. The market prices or fair values used in determining the value of these contracts are our best estimates utilizing information such as commodity exchange prices, over-the-counter quotes, volatility and time value, counterparty credit and the potential impact on market prices of liquidating positions in an orderly manner over a reasonable period of time under current market conditions. When the portfolio market value changes, primarily due to newly originated transacti ons and the effect of price changes, AGL Resources recognizes the change as a gain or loss in the period of change. When market prices are not readily available or determinable, AGL Resources values certain contracts at fair value using an alternate approach such as model pricing. The determination of market value can be complex and relies upon judgments concerning future prices and liquidity, among other things, particularly in the case of contracts that are longer in term. AGL Resources adjusts the modeling process as appropriate to account for uncertainties such as physical limitations of relevant pipeline systems, distribution requirements, and regulatory uncertainty. AGL Resources recognizes revenue and related expenses from physical commodity transactions on a gross basis, and recognizes financial transactions on a net basis, as allowed by EITF 98-10. AGL Resources will adopt EITF Issue No. 02-03 (EITF 02-03), "Accounting for Contracts Involved in Energy Trading and Risk Management Activities," in th e third quarter of 2002. EITF 02-03 requires all energy-trading entities within the scope of EITF 98-10 to present gains and losses from energy-trading activities on a net basis and requires additional disclosures for energy-trading activities. Beginning in the third quarter of 2002, AGL Resources will adopt the requirements of EITF 02-03 and will restate revenues and cost of sales in its comparative financial statements.

AGL Resources' accounting for contingencies policies cover a variety of business activities, including contingencies for potentially uncollectible receivables, rate matters and legal and environmental exposures. AGL Resources accrues for these contingencies when its assessments indicate that it is probable that a liability has been incurred or an asset will not be recovered, and an amount can be reasonably estimated in accordance with SFAS No. 5, "Accounting for Contingencies." AGL Resources' estimates for these liabilities are based on currently available facts and its estimates of the ultimate outcome or resolution of the liability in the future. Actual results may differ from estimates, and estimates can be, and often are, revised either negatively or positively, depending upon actual outcomes or expectations based on the facts surrounding each potential exposure.

Environmental Matters. AGLC has historically reported MGP cleanup cost estimates for remediation based on probabilistic models of potential costs. As cleanup options and plans continue to develop and cleanup contracts are entered into, AGLC is increasingly able to provide conventional engineering estimates of the likely costs of many elements of its MGP program. Accordingly, AGLC has updated its MGP cleanup cost estimates, where possible, to reflect these engineering estimates. For those elements of the MGP program where AGLC has engineering cost estimates, AGLC believes that the most likely cost of future actions at its MGP sites will be $137.0 million. This estimate still contains various engineering uncertainties, and could increase as contracts are entered into. For those elements of the MGP program where AGLC still cannot perform engineering cost estimates, there remains considerable variability in available cost estimates. For these elements AGLC believes that the remaining cost of future action s at its MGP sites will be within a range of $6.1 million to $14.5 million. AGLC cannot at this time identify any single number within this range as a better estimate of its likely future costs. Consequently, as of June 30, 2002, AGLC has recorded the sum of $137.0 million plus the lower end of the remaining range, $6.1 million, or a total of $143.1 million as a liability. Investigation and cleanup costs incurred decrease the regulatory liability, but does not have an impact to the condensed statement of consolidated income. This figure does not include other potential expenses, such as unasserted property damage, personal injury or natural resource damage claims, legal expenses, or other costs for which AGLC may be held liable, but with respect to which the amount cannot be reasonably forecast. There is a corresponding regulatory asset of $224.0 million, which represents unrecovered investigation and cleanup costs.

Results of Operations, three-month and six-month periods ended June 30, 2002 and 2001.

Distribution Operations. The increase in EBIT of $3.0 million for the three months ended June 30, 2002 was largely driven by a reduction in operating expenses of approximately $9.0 million. This reduction in operating expenses included a reduction in headcount of approximately 230 within the segment, a decrease in overall corporate costs that are allocated to the segment, a decrease in bad debt expenses at VNG and CGC, and a decrease in depreciation expenses due to new performance based rate plan.

Operating margin declined $5.9 million for the three months ended June 30, 2002. This decrease was primarily the result of AGLC's rate decrease, a decrease in the average number of end-use customers receiving service from utilities within the segment, and a one-time adjustment of $4.9 million recorded in the quarter ended June 30, 2001 related to natural gas stored underground inventory costs.

On May 1, 2002, a $10.0 million annual rate decrease for AGLC went into effect, which decreased operating margin for the quarter by $1.7 million. The decrease in operating margin is offset by a decrease of depreciation expense of $2.0 million. The average depreciation rates on a quarter over quarter basis decreased from 3.0% to 2.8%, as a result of the decrease in depreciation rates agreed to in the settlement with the GPSC.

The decline in average end-use customers contributed to a reduction of approximately $0.3 million in operating margin on a quarter over quarter basis, which indicates a trend that we are monitoring. Most of the decline exists at AGLC, which has been partially offset by increases in average customers at VNG. The decline at AGLC is primarily a result of disconnection of customers who do not have the ability to pay bills received from Marketers. The state of Georgia has passed legislation requiring a regulated provider be designated in order to provide service for those who are unable to receive service from a marketer, either as a result of their credit history or because of their lack of ability to pay.

The increase in EBIT of $7.3 million for the six months ending June 30, 2002 compared to the same period last year was due to decreases in operating expenses of approximately $12.5 million. This was comprised of lower operating costs at VNG, reductions in bad debt expenses at VNG and CGC, decreases in depreciation expenses and increases in other income as a result of gas storage carrying costs.

Operating margin decreased $6.9 million for the six-month period ended June 30, 2002. Contributing to the decrease in operating margin was warmer than normal weather in the VNG service territory that reduced operating margins by $3.5 million; the effect of the rate settlement with the GPSC for AGLC of $1.7 million; the effect of loss in customers at AGLC of $0.3 million; a one-time adjustment of $4.9 million related to natural gas stored underground inventory costs recorded in the prior year. This was offset by an increase in AGLC's pipeline replacement recovery revenue of $2.4 million and an increase in CGC's operating margin of $0.5 million.

Wholesale Services. The decrease in EBIT of $0.9 million for the three months ended June 30, 2002 was due to increases in operating expenses due primarily to an increase in payroll and benefits of $2.0 million and decreases in other income of $1.1 million as a result of a reclassification recorded in the second quarter of 2001 on energy marketing and risk management activities. This was offset by increases in operating margin of $1.7 million due to growth in the business and the addition of the VNG asset management contract, which was offset by mild weather in the Southeast and limited volatility in the marketplace, and a reduction in allocation expenses of $0.6 million.

The decrease in EBIT of $5.1 million for the six months ended June 30, 2002 was primarily caused by increases in operating expenses due to increased payroll and benefit costs of $2.8 million, along with decreases in margin of $2.1 million due primarily to warmer than normal weather in the Southeast, and large storage balances which limited volatility in the marketplace.

Sequent's opportunities within the energy trading industry have increased as a result of financial difficulties incurred by other energy trading companies. However, the continued warm weather and large storage balances have limited volatility in the natural gas marketplace, which has limited the earnings potential for the three and six months ended June 30, 2002.

Energy Investments. The increase in EBIT of $2.2 million for the three months ended June 30, 2002 was primarily due to increases in equity income of $2.1 million from SouthStar due to lower gas costs, increases in equity income from US Propane of $0.7 million, and decreases in operating expenses at AGL Networks of $0.2 million. This was offset by increases of $0.4 million in operating expenses.

The decrease in EBIT of $3.5 million for the six months ended June 30, 2002 was primarily due to a $10.9 million gain from the sale of Utilipro, a former customer care subsidiary, that was recorded in the first quarter of last year, and increases in operating expenses, excluding the effect of Utilipro, of $1.3 million. This was offset by an increase of $7.3 million in additional equity income from SouthStar as a result of lower gas costs and operating losses Utilipro incurred during the six months ended June 30, 2001 of $1.2 million.

Corporate. The decrease in EBIT of $2.1 million and $3.0 million for the three and six months ended June 30, 2002, respectively, was primarily due to increases in accrued liabilities that were not allocated out to the operating segments.

The decrease in interest expense of $2.0 million and $4.8 million for the three and six months ended June 30, 2002, respectively, was a result of lower interest rates on commercial paper and favorable interest rate swaps. This was offset by slightly higher average debt balances.

The increase in average debt outstanding of $38.3 million and $51.3 million for the three and six months ended June 30, 2002, respectively, was primarily due to increases in working capital needs.

Income tax expense was $6.7 million and $34.2 million for the three and six months ended June 30, 2002 and $5.5 million and $34.5 million for the same periods last year, respectively. The increases in 2002 are a result of increases in income before taxes of $4.2 million and $0.5 million for the three and six months ended June 30, 2002, respectively. The effective tax rate (income tax expense expressed as a percentage of pre-tax income) for the three and six months ended June 30, 2002 was 35.3% and 35.4% compared to 37.2% and 35.9% for the same periods last year, respectively.

Core earnings (net income excluding one time items) for the six months ended June 30, 2002 were $62.4 million or $1.12 per basic share. For the six months ended June 30, 2001, core earnings were $54.5 or $1.00 per basic share, which excludes from net income for the period a $7.1 million gain on the sale of Utilipro. The increase in core earnings of $7.9 million was the result of continual operational improvements and increased contributions from our investment in SouthStar, offset by decreases in EBIT related to wholesale services.

AGL Resources relies upon operating cash flow along with borrowings under the commercial paper program, which is backed by a Credit Facility for its short-term liquidity and capital resource requirements. The availability of borrowings under the Credit Facility is subject to specified conditions, which AGL Resources currently meets. These conditions include compliance with the financial covenants required by such agreements, and continued accuracy of representations and warranties contained in such agreements.

Cash flow provided from operations was $186.3 million for the six months ended June 30, 2002 as compared to $100.2 for the same period last year. The increase of $86.1 million is primarily the result of increases in commodity and trade payables, decreased gas inventories, and increased deferred seasonal rates. This was partially offset by increases in energy marketing and risk management receivables.

Cash flow used in financing activities was $121.1 million for the six months ended June 30, 2002 which included $60.2 million in commercial paper payments (net of borrowings), payments of scheduled medium-term notes of $45.0 million and $26.4 million in dividend payments on common shares. Cash flow used in financing activities was $51.0 million for the six months ended June 30, 2001, which included $459.6 million in commercial paper payments (net of borrowings), $27.0 million in dividend payments on common shares, and $20.0 million of scheduled medium-term notes. This was offset by borrowings from the issuance of senior notes for $300.0 million and issuance of trust preferred securities for $150.0 million, which were used primarily to repay commercial paper.

Cash flow used in investing activities was $83.2 million for the six months ended June 30, 2002 as compared to $46.7 million for the same period last year. The increase in cash flow used in investing activities of $36.5 million is a result of increased property, plant and equipment expenditures of $13.9 million and cash received from the sale of Utilipro of $17.8 million in March 2001 and other investing activities.

Capitalization Ratios. AGL Resources is required by financial covenants in our credit facility and PUHCA requirements to maintain a ratio of total debt to total capitalization of no greater than 70.0%. As of June 30, 2002, AGL Resources' total debt to total capitalization ratio was 65.4%. The components of our capital structure at June 30, 2002 and December 31, 2001 are summarized in the following table.