See Notes to Unaudited Condensed Consolidated Financial Statements.

See Notes to Unaudited Condensed Consolidated Financial Statements.

AGL Resources Inc. 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 GAAP. 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 the assets that it manages are regulated. Under varying agreements and practices, Sequent acts as asset manager 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 VSCC approved an asset management agreement, which provides for a sharing of profits between Sequent and VNG's customers. Sequent and CGC have an agreement whereby Sequent pays CGC's ratepayers an annual fee for the right to act as CGC's asset manager. Sequent also operates as asset manager for AGLC. By statute, profits earned by Sequent from AGLC asset transactions that constitute off-system sales or capacity release transactions are required to be shared with Georgia's Universal Service Fund. See, Note 6. "Commitments and Contingencies."

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 the Owners' representatives to the governing board of SouthStar. SouthStar offers a combination of unregulated energy products and services to industrial, commercial and residential customers, principally in Georgia. 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 only state 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 are no outstanding balances from prior capital contributions made pursuant to the capital contribution agreement, and there was no activity related to the capital contribution agreement during the nine months ended September 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 companies are also the other 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 seeks to serve the demand for high-speed network capacity in metropolitan areas within the United States. Under a certificate of authority from the GPSC, AGL Networks provides last-mile conduit and dark fiber infrastructure solutions to a variety of customers in metro Atlanta, including local, regional and national telecommunication companies, wireless service providers, educational institutions, and other commercial entities. Conduit and dark fiber is typically provided to these customers under a lease arrangement with term lengths that vary from 3 to 20 years. In addition to conduit and dark fiber leasing, AGL Networks provides turnkey telecommunications network construction services.

The Corporate segment includes the results of operations and financial condition of AGL Resources' nonoperating business units, including AGSC and AGL Capital. AGSC is a service company established in accordance with PUHCA. AGL Capital 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, 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 GAAP 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 GAAP 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 nine months ended September 30, 2002 are not necessarily indicative of the results to be expected for the year ending December 31, 2002 or any other interim period.

Recent Accounting Pronouncements. 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 standard applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) normal use of the asset.

SFAS 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which the obligation is incurred, if a reasonable estimate of fair value can be made. The fair value of the liability is added to the carrying amount of the associated asset. This additional carrying amount is then depreciated over the life of the asset. The liability is increased due to the passage of time based on the time value of money until the obligation is settled.

AGL Resources is required and plans to adopt the provisions of SFAS 143 as of January 1, 2003. To accomplish this, AGL Resources must identify any legal obligations for asset retirement obligations, and determine the fair value of these obligations on the date of adoption. The determination of fair value is complex and requires gathering market information and developing cash flow models. Additionally, AGL Resources will be required to develop processes to track and monitor any identified obligations. AGL Resources is currently assessing the new standard but has not yet determined the financial statement impact of this statement.

In June 2002, the EITF reached a partial consensus on EITF Issue No. 02-03, "Accounting for Contracts Involved in Energy Trading and Risk Management Activities" (EITF 02-03), and EITF Issue No. 00-17, "Measuring the Fair Value of Energy-Related Contracts in Applying Issue No. 98-10." The EITF concluded that, effective for periods ending after July 15, 2002, mark-to-market gains and losses on energy trading contracts (including those to be physically settled) must be shown on a net basis in the income statement. Comparative financial statements for prior periods must be reclassified to reflect presentation on a net basis. Also, companies must disclose volumes of physically settled energy trading contracts. AGL Resources adopted EITF 02-03 in the third quarter of 2002 and restated revenues and cost of sales in the comparative consolidated financial statements. There was no impact to operating margin or net income as a result of the adoption of EITF 02-03.

On October 25, 2002, the EITF voted to rescind EITF 98-10, effective December 15, 2002. AGL Resources has not yet determined the effect this rescission will have on its consolidated financial statements.

Network Lease Accounting. Revenues attributable to leases of dark fiber pursuant to indefeasible rights-of-use (IRU) agreements are recognized as services are provided. Dark fiber IRU agreements generally require the customer to make a down payment upon execution of the agreement; however, in some cases AGL Networks receives up to the entire lease payment at inception of the lease and recognizes revenue ratably over the lease term. This results in deferred revenue being recorded on the Company's condensed consolidated balance sheet.

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.

AGL Capital is a party to 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 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 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 September 30, 2002, the current rate was 3.1%. The expiration date of the Swaps is May 15, 2041, unless terminated earlier or called. Each quarter, under hedge accounting treatment, AGL Capital records a "long-term asset or liability" and a corresponding adjustment to "subsidiaries obligated mandatorily redeemable preferred securities" to reflect the assessed change in fair value of the Swaps to AGL Capital. The fair value change s as interest rates change from those that were in effect on the original settlement date. The fair value of these Swaps at September 30, 2002 and December 31, 2001, was $4.6 million and ($2.2) million, respectively.

Sequent follows SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," EITF Issue No. 98-10 (EITF 98-10), "Accounting for Contracts Involved in Energy Trading and Risk Management Activities" and EITF 02-03 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.

During the three months and nine months ended September 30, 2002, AGL Resources recorded unrealized gains of $1.3 million and $0.2 million, respectively related to derivative instruments as a result of energy marketing and risk management activities.

Before natural gas was widely available in the Southeast, AGLC and predecessor companies manufactured gas from coal and other fuels. Those manufacturing facilities 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 ten MGP sites in Georgia and three 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 September 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 is expected to be completed by the end of 2002. The Savannah, GA onsite remediation is expected to be complete in August 2003. Sites in or around a second Savannah, GA site, 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 because the site currently meets an acceptable standard for non-residential commercial property.

AGLC has historically reported estimates of future remediation costs 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. These estimates contain various engineering uncertainties, and AGLC continuously attempts to refine and update these engineering estimates. In addition, we continue to review technologies available for the cleanup of our two largest sites, Augusta and Savannah, which, if proven, could have the effect of reducing our total future expenditures by approximately $10 to $30 million. Until these reviews and updates are concluded, AGLC believes that the June 30, 2002 estimate of $137.0 million remains a reasonable engineering cost estimate of future action. For those remaining elements of the MGP program where AGLC still cannot perform engineering cost estimates, there remains cons iderable variability in available future cost estimates. For these elements AGLC believes that the June 30, 2002 estimate of the remaining cost of future actions at its MGP sites of $6.1 to $14.5 million remains reasonable. AGLC cannot at this time identify any single number within this range as a better estimate of its likely future costs. Consequently, as of September 30, 2002, AGLC has recorded the sum of $137.0 million plus the lower end of the remaining range, $6.1 million, less the cash payments made during the quarter of $4.5 million, or a total of $138.6 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. This figure also does not include either the refinements to the cost estimates or the potential cost savings as desc ribed above.

The decrease in the liability from $171.0 million reported at December 31, 2001 to $138.6 million at September 30, 2002 is primarily a result of expenditures paid for cleanup for the various sites. There were no offsetting increases to the liability for the nine-month period ending September 30, 2002.

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 nine months ended September 30, 2002, AGLC recovered $3.9 million and $11.9 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 nine months ended September 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 September 30, 2002, the MGP expenditures expected to be incurred over the next twelve months is reflected as a current liability of $21.2 million. In addition, AGLC expects to collect $13.2 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, previously expected to close by December 31, 2002, is now expected to close no later than May 30, 2003, to provide the purchaser additional time to obtain appropriate zoning and other administrative approvals for its planned development. AGL Resources anticipates upon closing, the estimated net gain will be approximately $10.0 million.

On May 24, 2002, one of AGLC's AMR vendors, IMServ, Inc., sent AGLC a notice under the AMR agreement, alleging various breaches of contract by AGLC and asserting that it had incurred damages in excess of $8.0 million. AGLC does not believe it has breached the AMR agreement as alleged. AGLC and IMServ have been pursuing a contractually mandated process, including mediation, to attempt to resolve their differences under the agreement. AGLC has established a reserve during the three months ended September 30, 2002 that management believes will be sufficient to cover any costs related to this matter.

Sequent manages assets in multiple jurisdictions under various asset management arrangements for the utilities in AGL Resources' system of companies. AGL Resources has sharing mechanisms for certain transactions into which the asset manager enters. Because of uncertainty related to the application of regulatory sharing to other transactions, AGL Resources maintains a regulatory reserve for exposure related to disputes that might arise from time to time with respect to its liability under the various asset management arrangements. AGL Resources believes this reserve is adequate.

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. As an indicator of AGL Resources' operating performance or liquidity, EBIT should not be considered an alternative to, or more meaningful than, net income or cash flow as determined in accordance with GAAP. AGL Resources' EBIT may not be comparable to a similarly titled measure of another company. Intersegment sales in the three months and nine months ended September 30, 2002 and September 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.

AGL Resources Inc., as full and unconditional guarantor, raises short-term capital under a commercial paper program through its wholly owned subsidiary, AGL Capital. AGL Capital's outstanding commercial paper at September 30, 2002 consists of short-term unsecured promissory notes with maturities ranging from 2 days to 67 days. The commercial paper program is supported by two credit facilities (Credit Facilities). Under the Credit Facilities, amounts may be borrowed, repaid and reborrowed in the form of Eurodollar loans, adjustable-rate loans (based on SunTrust Bank's prime rate, or based on the federal funds effective rate plus 0.5%) and letters of credit (up to $75 million). On August 8, 2002, AGL Capital replaced its existing 364-day $450.0 million credit facility which was scheduled to expire on October 3, 2002 with a $200 million 364-day Credit Facility and a $300 million three-year Credit Facility. The $200 million Credit Facility terminates on August 7, 2003 and the $300 million Credit Facility terminates on August 7, 2005. Loans outstanding on the date the $200 million Credit Facility terminates may be converted into a term loan, which will mature in one installment no later than August 7, 2004. As of October 25, 2002, there were no outstanding borrowings under the Credit Facilities.

Sequent has a $15.0 million unsecured line of credit with Bank One, NA, that is used solely for the posting of exchange deposits, and is unconditionally guaranteed by AGL Resources Inc. This line of credit expires on July 3, 2003, and bears interest at the federal funds effective rate plus 0.5%. As of September 30, 2002 the rate was 2.4%. The line of credit had an outstanding balance of $4.2 million as of September 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", "assume", "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 Inc. 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 the assets that it manages are regulated. Under varying agreements and practices, Sequent acts as asset manager 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 VSCC approved an asset management agreement, which provides for a sharing of profits between Sequent and VNG's customers. Sequent and CGC have an agreement whereby Sequent pays CGC's ratepayers an annual fee for the right to act as CGC's asset manager. Sequent also operates as asset manager for AGLC. By statute, profits earned by Sequent from AGLC asset transactions that constitute off-system sales or capacity release transactions are required to be shared with Georgia's Universal Service Fund. See "Regulatory Risk", contained in Item 3 of Part I under the caption "Quantitative and Qualitative Disclosure about Market Risk."

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 the Owners' representatives to the governing board of SouthStar. SouthStar offers a combination of unregulated energy products and services to industrial, commercial and residential customers, principally in Georgia. 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 only state 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 companies are also the other 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 seeks to serve the demand for high-speed network capacity in metropolitan areas within the United States. Under a certificate of authority from the GPSC, AGL Networks provides last-mile conduit and dark fiber infrastructure solutions to a variety of customers in metro Atlanta, including local, regional and national telecommunication companies, wireless service providers, educational institutions, and other commercial entities. Conduit and dark fiber is typically provided to these customers under a lease arrangement with term lengths that vary from 3 to 20 years. In addition to conduit and dark fiber leasing, AGL Networks provides turnkey telecommunications network construction services.

The Corporate segment includes the results of operations and financial condition of AGL Resources' nonoperating business units, including AGSC and AGL Capital. AGSC is a service company established in accordance with PUHCA. AGL Capital 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, 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 have 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 involves 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.

Transactions within 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 this accounting policy allows 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 any portion of Distribution Operations ceased to continue to meet the criteria for application of regulatory accounting treatment for all or part of its operations, the regulatory assets and liabilities related to those portions ceasing to meet such criteria would be eliminated from the condensed statements of the consolidated balance sheet and included in the condensed statement of consolidated income for the period in which the discontinuance of regulatory accounting treatment occurred.

Pipeline replacement. AGLC has recorded a regulatory liability as of September 30, 2002 of $474.0 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 replacement revenue rider.

Environmental Matters. AGLC has historically reported estimates of future remediation cost 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. These estimates contain various engineering uncertainties, and AGLC continuously attempts to refine and update these engineering estimates. In addition, we continue to review technologies available for the cleanup of our two largest sites, Augusta and Savannah, which, if proven, could have the effect of reducing our total future expenditures by approximately $10 to $30 million. Until these reviews and updates are concluded, AGLC believes that the June 30, 2002 estimate of $137.0 million remains a reasonable engineering cost estimate of future action. For those remaining elements of the MGP program where AGLC still cannot perform engineering cost estimates, there remains considerable variability in available future cost estimates. For these elements AGLC believes that the June 30, 2002 estimate of the remaining cost of future actions at its MGP sites of $6.1 to $14.5 million remains reasonable. AGLC cannot at this time identify any single number within this range as a better estimate of its likely future costs. Consequently, as of September 30, 2002, AGLC has recorded the sum of $137.0 million plus the lower end of the remaining range, $6.1 million, less the cash payments made during the quarter of $4.5 million, or a total of $138.6 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. This figure also does not include either the refinements to the cost estimates or the potential cost savings as described above. There is a corresponding regulatory asset of $219.4 million, which represents unrecovered investigation and cleanup costs.

Unbilled revenue. VNG and CGC employ rate structures that include volumetric rate designs that allow recovery of costs through gas usage. VNG and CGC recognize revenues from sales of natural gas and transportation services in the same period in which they deliver the related volumes to customers. VNG and CGC bill and recognize sales revenues from residential and certain commercial and industrial customers on the basis of scheduled meter readings. In addition, VNG and CGC record revenues for estimated deliveries of gas, not yet billed to these customers, from the meter reading date to the end of the accounting period. AGL Resources includes these revenues in the condensed consolidated balance sheets as unbilled revenue. Included in the rates charged by CGC is a WNA factor, which offsets the impact of unusually cold or warm weather on operating margin. As of September 30, 2002, VNG's rates did not include such a factor, but beginning in November 2002, VNG's rates will include an expe rimental WNA program for two years. For wholesale and other commercial and industrial customers, VNG and CGC recognize revenues based upon actual deliveries during the accounting period.

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 transactio ns 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 adopted 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 Se quent to disclose volumes of physically settled energy trading contracts. AGL Resources has restated prior periods' revenues and cost of sales in the comparative financial statements.

On October 25, 2002, the EITF voted to rescind EITF 98-10, effective December 15, 2002. AGL Resources has not yet determined the effect this rescission will have on its consolidated financial statements.

AGL Networks. Revenues attributable to leases of dark fiber pursuant to indefeasible rights-of-use (IRU) agreements are recognized as services are provided. Dark fiber IRU agreements generally require the customer to make a down payment upon execution of the agreement; however, in some cases AGL Networks receives up to the entire lease payment at inception of the lease and recognizes revenue ratably over the lease term. This results in deferred revenue being recorded on the Company's condensed consolidated balance sheet.

AGL Resources has a defined-benefit pension plan for the benefit of substantially all full-time employees. AGL Resources uses several statistical and other factors, which attempt to anticipate future events and to calculate the expense and liability related to the plan. These factors include assumptions about the discount rate, expected return on plan assets and rate of future compensation increases as determined by AGL Resources. In addition, the actuarial consultants also use subjective factors such as withdrawal and mortality rates to estimate the projected benefit obligation. The actuarial assumptions used may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates or longer or shorter life spans of participants. These differences may result in a significant impact on the amount of pension expense recorded in future periods.

The combination of poor market performance and historically low corporate bond rates has created a divergence in the potential value of the pension liability and the actual value of the pension assets. These conditions could result in an increase in AGL Resources' unfunded ABO and future pension expense. The primary assumptions that drive the value of the unfunded ABO are the discount rate and expected return on plan assets.

As reflected in AGL Resources' Form 10-K, the value of the pension asset and the ABO as of September 30, 2001 was $250.4 million and $250.0 million, respectively. As of September 30, 2002 the asset value was approximately $206.9 million. This decline is a result of the conditions mentioned above. A one-percentage point increase or decrease in the assumed discount rate could have approximately a negative or positive $38.0 million impact to the ABO. AGL Resources is currently unable to determine the impact of these changes until an updated actuarial valuation of the pension liability is performed, and asset value is determined, as of December 31, 2002. If we elect not to make a contribution to plan assets equal to the unfunded ABO, there could be an adjustment to other comprehensive income.

Management evaluates segment performance based on EBIT, which includes the effects of corporate expense allocations. As an indicator of AGL Resources' operating performance or liquidity, EBIT should not be considered an alternative to, or more meaningful than, net income or cash flow as determined in accordance with GAAP. AGL Resources' EBIT may not be comparable to a similarly titled measure of another company.