Nicor (NICRL) 10-Q/A 2002 Q1 Quarterly report (amended)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q/A

Amendment No. 2

[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange

Act of 1934

For the quarterly period ended March 31, 2002

or

[  ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange

Act of 1934

Commission File Number	Registrant, State of Incorporation, Address and Telephone Number	I.R.S. Employer Identification Number
1-7297	Nicor Inc.	36-2855175
	(An Illinois Corporation)
	1844 Ferry Road
	Naperville, Illinois 60563-9600
	(630) 305-9500

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 [  ]

Shares of common stock, par value $2.50, outstanding at February 28, 2003, were 44,013,536.

Nicor Inc. Page i

Table of Contents

Introductory Note		1
Part I - Financial Information
Item 1.	Financial Statements – As Restated (Unaudited)	2
	Consolidated Statements of Operations:
	Three months ended
	March 31, 2002 and 2001	3
	Consolidated Statements of Cash Flows:
	Three months ended
	March 31, 2002 and 2001	4
	Consolidated Balance Sheets:
	March 31, 2002 and 2001, and
	December 31, 2001	5
	Notes to the Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial
	Condition and Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	36
Part II – Other Information
Item 1.	Legal Proceedings	36
Item 6.	Exhibits and Reports on Form 8-K	36
	Signature	37
	Certifications	38
	Exhibit Index	39

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.
ICC	Illinois Commerce Commission, the agency that regulates investor-owned Illinois utilities.
FERC	Federal Energy Regulatory Commission, the agency that regulates the interstate transportation of natural gas, oil and electricity.
Mcf, MMcf, Bcf	Thousand cubic feet, million cubic feet, billion cubic feet.
PBR	Performance-based rate, a regulatory plan that provides economic incentives based on natural gas cost performance.
TEU	Twenty-foot equivalent unit, a measure of volume in containerized shipping equal to one 20-foot-long container.

Nicor Inc. Page 1

INTRODUCTORY NOTE

This amendment to Nicor Inc.’s (Nicor) Interim Report on Form 10-Q/A (Amendment No. 1) initially filed with the Securities and Exchange Commission on August 14, 2002, is being filed to reflect the restatement of Nicor Inc.’s unaudited condensed consolidated financial statements for the quarters ended March 31, 2002 and 2001. Certain items were also reclassified within the financial statements. The restatements and reclassifications include adjustments for:

· Restatements – Gas distribution segment results have been restated to correct gas purchase accounting errors and errors in the computation of performance-based rate (PBR) plan results. Most of these adjustments were identified through an investigation of Nicor Gas’ natural gas purchases, sales, transportation and storage activities by a special committee of independent directors of Nicor. These adjustments reduced net income for the quarters ended March 31, 2002 and 2001 by $.4 million and $13.2 million, respectively.

In addition, Nicor has also recorded other miscellaneous adjustments unrelated to the gas purchase errors discussed above. These miscellaneous adjustments increased (decreased) previously reported net income for the quarters ended March 31, 2002 and 2001 by $1.4 million and $(2.3) million, respectively.

· Reclassifications – The accompanying unaudited interim financial information has been reclassified to conform to the presentation adopted by Nicor in the third quarter of 2002. In addition, Nicor changed its income statement presentation of revenues and expenses from its energy trading activities, the cost of gas used to operate company equipment and facilities, and various other items. These reclassifications had no impact on net income for the quarters ended March 31, 2002 and 2001, respectively.

The effects on the financial statements of the matters discussed above are more fully described in the Notes to the Consolidated Financial Statements – First Quarter Reclassifications As Filed on Form 10-Q/A Amendment No. 2 section (- Reclassifications) beginning on page 7 and the – First Quarter Restatement As Filed on Form 10-Q/A Amendment No. 1 section beginning on page 7 and – First Quarter Restatement As Filed on Form 10-Q/A Amendment No. 2 section beginning on page 10 (collectively referred to as - Restatement).

Caution Concerning Forward-Looking Statements

This document includes certain forward-looking statements about the expectations of Nicor Inc. and its subsidiaries. Although Nicor 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 and electricity prices; fair value accounting adjustments; healthcare costs; insurance costs; borrowing needs; interest rates; credit conditions; economic and market conditions; energy conservation; legislative and regulatory actions, results, or adjustments; additional adjustments related to Nicor’s retail energy marketing joint venture; asset sales 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 undertakes no obligation to publicly release any revision to these forward-looking statements to reflect events or circumstances after the date of this filing.

Nicor Inc. Page 2

PART I - FINANCIAL INFORMATION

Item 1.    Financial Statements

The following condensed unaudited consolidated financial statements of Nicor Inc. (Nicor) have been prepared by the company pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to SEC rules and regulations. The condensed financial statements should be read in conjunction with the financial statements and the notes thereto included in the company’s 2001 Annual Report on Form 10-K/A (Amendment No. 1).

The information furnished reflects, in the opinion of the company, all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the results for the interim periods presented. Results for the interim periods presented are not necessarily indicative of the results to be expected for the full fiscal year due to seasonal and other factors.

Nicor Inc. Page 3

Consolidated Statements of Operations (Unaudited) (As Restated⁽¹⁾ )

(millions, except per share data)

	Three months ended March 31
	2002			2001
Operating revenues
Gas distribution (includes revenue taxes of $36.4 and $66.5, respectively)	$	518.7		$	1,325.7
Shipping		59.8			58.7
Other		9.5			5.7
		588.0			1,390.1
Operating expenses
Gas distribution
Cost of gas		315.0			1,105.4
Operating and maintenance		49.4			52.4
Depreciation		56.6			55.3
Taxes, other than income taxes		40.3			69.9
Mercury-related costs (recoveries)		.2			—
Property sale (gains) losses		(3.4	)		(.2	)
Shipping		55.7			55.1
All other		9.2			5.6
		523.0			1,343.5
Operating income		65.0			46.6
Equity investment income (loss)		(2.3	)		(2.1	)
Other income (expense), net		1.1			2.5
Interest expense, net of amounts capitalized		9.7			14.4
Income before income taxes		54.1			32.6
Income taxes		17.6			9.3
Net income		36.5			23.3
Dividends on preferred stock		—			.1
Earnings applicable to common stock	$	36.5		$	23.2
Average shares of common stock outstanding
Basic		44.3			45.4
Diluted		44.5			45.6
Earnings per average share of common stock
Basic	$	.82		$	.51
Diluted		.82			.51
Dividends declared per share of common stock	$	.46		$	.44

⁽¹⁾ See Notes to the Consolidated Financial Statements - Reclassifications and - Restatement beginning on page 7.

The accompanying notes are an integral part of these statements.

Nicor Inc. Page 4

Consolidated Statements of Cash Flows (Unaudited) (As Restated⁽¹⁾ )

(millions)

	Three months ended March 31
	2002			2001
Operating activities
Net income	$	36.5		$	23.3
Adjustments to reconcile net income to net cash flow provided from operating activities:
Depreciation		60.8			59.3
Deferred income tax expense (benefit)		12.2			(7.3	)
Gain on sale of property, plant and equipment		(4.3	)		(.3	)
Changes in assets and liabilities:
Receivables, less allowances		(5.6	)		(25.4	)
Gas in storage		15.3			21.9
Deferred/accrued gas costs		(60.9	)		149.7
Prepaid pension costs		(3.2	)		(7.9	)
Other assets		10.6			38.7
Accounts payable		(70.5	)		(244.6	)
Accrued mercury-related costs		(3.4	)		(17.0	)
Temporary LIFO liquidation		124.5			180.5
Other liabilities		17.9			1.1
Other		4.2			1.4
Net cash flow provided from operating activities		134.1			173.4
Investing activities
Capital expenditures		(48.1	)		(27.8	)
Net decrease (increase) in short-term investments		5.5			(4.6	)
Purchase of equity investments other than joint ventures		—			(1.3	)
Loans to joint ventures		(39.1	)		—
Repayments from joint ventures		28.7			—
Net proceeds from sale of property, plant and equipment		5.0			.3
Other		1.3			—
Net cash flow used for investing activities		(46.7	)		(33.4	)
Financing activities
Net proceeds from issuing long-term debt		—			74.1
Disbursements to retire long-term debt		—			(50.0	)
Short-term borrowings (repayments), net		(60.0	)		(151.0	)
Dividends paid		(19.6	)		(19.0	)
Disbursements to reacquire stock		(11.4	)		(4.9	)
Other		3.6			(.1	)
Net cash flow used for financing activities		(87.4	)		(150.9	)
Net (decrease) increase in cash and cash equivalents		—			(10.9	)
Cash and cash equivalents, beginning of period		14.0			62.7
Cash and cash equivalents, end of period	$	14.0		$	51.8

⁽¹⁾ See Notes to the Consolidated Financial Statements - Reclassifications and - Restatement beginning on page 7.

The accompanying notes are an integral part of these statements.

Nicor Inc. Page 5

Consolidated Balance Sheets (Unaudited) (As Restated⁽¹⁾ )

(millions)

Assets	March 31 2002			December 31 2001			March 31 2001
Current assets
Cash and cash equivalents	$	14.0		$	14.0		$	51.8
Short-term investments, at cost which approximates market		28.7			34.2			47.6
Receivables, less allowances of $10.7, $12.3 and $21.7, respectively		356.6			351.0			684.9
Notes receivable—joint ventures		41.6			31.2			2.4
Gas in storage		28.1			43.4			12.2
Deferred income taxes		45.3			45.5			48.6
Other		25.8			36.2			15.6
		540.1			555.5			863.1
Property, plant and equipment, at cost
Gas distribution		3,455.4			3,425.6			3,327.0
Shipping		310.9			304.7			284.4
Other		3.3			2.7			1.9
		3,769.6			3,733.0			3,613.3
Less accumulated depreciation		2,017.5			1,964.4			1,903.9
		1,752.1			1,768.6			1,709.4
Prepaid pension costs		167.5			164.3			140.2
Other assets		117.0			118.8			85.0
	$	2,576.7		$	2,607.2		$	2,797.7
Liabilities and Capitalization
Current liabilities
Long-term obligations due within one year	$	—		$	—		$	75.0
Short-term borrowings		217.0			277.0			291.0
Accounts payable		384.6			455.1			417.0
Temporary LIFO liquidation		124.5			—			180.5
Accrued gas costs		47.3			108.2			74.2
Accrued mercury-related costs		6.3			7.0			61.0
Accrued dividends payable		20.4			19.6			20.0
Other		29.7			26.1			46.8
		829.8			893.0			1,165.5
Deferred credits and other liabilities
Deferred income taxes		337.0			324.1			295.0
Regulatory income tax liability		65.4			66.3			69.4
Unamortized investment tax credits		38.5			39.0			40.6
Accrued mercury-related costs		27.3			30.0			—
Other		112.8			98.1			96.9
		581.0			557.5			501.9
Capitalization
Long-term debt		445.8			446.4			421.4
Preferred stock		6.1			6.1			6.4
Common equity
Common stock		110.6			111.0			113.4
Retained earnings		602.3			593.5			591.0
Unearned compensation		(.4	)		—			—
Accumulated other comprehensive income (loss)		1.5			(.3	)		(1.9	)
		1,165.9			1,156.7			1,130.3
	$	2,576.7		$	2,607.2		$	2,797.7

⁽¹⁾ See Notes to the Consolidated Financial Statements - Reclassifications and - Restatement beginning on page 7.

The accompanying notes are an integral part of these statements.

Nicor Inc. Page 6

Notes to the Consolidated Financial Statements (Unaudited)

The following notes should be read in conjunction with the consolidated financial statement notes included in the Nicor Inc. (Nicor) 2001 Annual Report on Form 10-K/A (Amendment No. 1).

ACCOUNTING POLICIES

Gas in storage.    The gas distribution segment’s inventory is carried at cost on a last-in, first-out (LIFO) method on a calendar-year basis. For interim periods, the difference between current replacement cost and the LIFO cost for quantities of gas temporarily withdrawn from storage is recorded in cost of gas and in current liabilities as a temporary LIFO liquidation.

Regulatory assets and liabilities.    Nicor Gas, a wholly owned subsidiary of Nicor, 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) as follows (in millions):

	March 31 2002			December 31 2001			March 31 2001
Deferred (accrued) gas cost	$	(47.3	)	$	(108.2	)	$	(74.2	)
Regulatory income tax liability		(65.4	)		(66.3	)		(69.4	)
Unamortized loss on reacquired debt		19.9			20.0			15.2
Deferred (accrued) environmental costs		(4.0	)		(6.0	)		(.5	)
	$	(96.8	)	$	(160.5	)	$	(128.9	)

The unamortized loss on reacquired debt is classified in other noncurrent assets. Deferred (accrued) environmental costs are included in other current assets and other current 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 March 31, 2002, December 31, 2001 and March 31, 2001 was $589.2 million, $577.1 million and $541.2 million, respectively.

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 the quarters ended March 31, 2002 and 2001 were $35.5 million and $65.3 million, respectively.

Depreciation.    Depreciation for the gas distribution segment is calculated using a straight-line method for the calendar year. For interim periods, depreciation is allocated based on gas deliveries.

Nicor Inc. Page 7

Notes to the Consolidated Financial Statements (Unaudited) (continued)

FIRST QUARTER RESTATEMENT AS FILED ON FORM 10-Q/A AMENDMENT NO. 1

The company restated and reduced its first quarter 2002 results to correct for $4.3 million of pretax charges related to Nicor Energy and to defer a previously recognized $2.3 million pretax gain related to the termination of an interest rate hedging instrument. These restatements had the following effect on the first quarter of 2002 (in millions):

	As Previously Reported		As Restated
Income before income taxes	$	58.9	$	52.3
Net income		39.9		35.5
Earnings per average share of common stock:
Basic		.90		.80
Diluted		.90		.80

FIRST QUARTER RECLASSIFICATIONS AS FILED ON FORM 10-Q/A AMENDMENT NO. 2

The accompanying financial statements and unaudited interim financial information have been reclassified to conform to the presentation adopted by Nicor in the third quarter of 2002. In addition, Nicor changed its income statement presentation of revenues and expenses for its energy trading activities, the cost of gas used to operate company equipment and facilities, and various other items. None of these reclassifications had any impact on net income for any period presented. The impact of the reclassifications is summarized in the following tables, which are followed by a description of the most significant reclassifications recorded. The amounts in the following tables are in millions.

Nicor Inc. Page 8

Notes to the Consolidated Financial Statements (Unaudited) (continued)

Consolidated Statements of Operations (Before Restatement)

For the three months ended March 31

	As Previously Classified					As Reclassified
	2002			2001		2002			2001
Operating revenues
Gas distribution	$	519.5		$	1,346.5	$	519.5		$	1,346.5
Shipping		59.8			58.7		59.8			58.7
Other		37.7			68.5		9.3			5.7
		617.0			1,473.7		588.6			1,410.9
Operating expenses
Gas distribution
Cost of gas		318.2			1,111.6		315.0			1,105.4
Operating and maintenance		46.4			45.9		49.5			51.3
Depreciation		56.6			54.5		56.6			55.3
Taxes, other than income taxes		40.3			69.9		40.3			69.9
Mercury-related costs (recoveries)		.2			—		.2			—
Property sale (gains) losses		—			—		(3.4	)		(.2	)
Shipping		56.6			55.4		55.7			55.4
All other		37.1			68.4		9.2			5.5
		555.4			1,405.7		523.1			1,342.6
Operating income		61.6			68.0		65.5			68.3
Equity investment income (loss)		(4.6	)		1.9		(4.6	)		1.9
Other income (expense), net		5.0			2.7		1.1			2.4
Interest expense, net of amounts capitalized		9.7			14.3		9.7			14.3
Income before income taxes		52.3			58.3		52.3			58.3
Income taxes		16.8			19.5		16.8			19.5
Net income	$	35.5		$	38.8	$	35.5		$	38.8

Nicor Inc. Page 9

Notes to the Consolidated Financial Statements (Unaudited) (continued)

Consolidated Balance Sheets (Before Restatement)

As of March 31

	As Previously Classified (1)				As Reclassified
	2002		2001		2002		2001
Assets
Cash and cash equivalents	$	12.3	$	49.0	$	14.0	$	51.8
Short-term investments		28.7		47.6		28.7		47.6
Receivables, less allowances		357.1		707.2		357.1		707.2
Notes receivable—joint ventures		41.6		2.4		41.6		2.4
Gas in storage		25.0		11.5		25.0		11.5
Deferred income taxes		33.7		60.2		39.4		48.6
Other		22.8		15.7		24.1		15.6
Total current assets		521.2		893.6		529.9		884.7
Property, plant and equipment		3,769.6		3,600.8		3,769.6		3,600.8
Less accumulated depreciation		2,017.5		1,902.9		2,017.5		1,902.9
Net property, plant and equipment		1,752.1		1,697.9		1,752.1		1,697.9
Prepaid pension costs		167.5		151.0		167.5		151.0
Other assets		120.0		89.5		120.0		89.4
	$	2,560.8	$	2,832.0	$	2,569.5	$	2,823.0
Liabilities and Capitalization
Long-term obligations due within one year	$	—	$	75.0	$	—	$	75.0
Short-term borrowings		217.0		291.0		217.0		291.0
Accounts payable		334.3		398.3		337.1		401.1
Temporary LIFO liquidation		115.0		125.7		115.0		125.7
Accrued gas costs		58.9		128.7		50.7		128.0
Accrued mercury-related costs		6.3		61.0		6.3		61.0
Accrued dividends payable		20.4		20.0		20.4		20.0
Other		29.7		73.1		43.8		62.1
Total current liabilities		781.6		1,172.8		790.3		1,163.9
Deferred income taxes		340.9		300.3		340.9		300.3
Regulatory income tax liability		65.4		69.4		65.4		69.4
Unamortized investment tax credits		38.5		40.6		38.5		40.6
Accrued mercury-related costs		27.3		—		27.3		—
Other		118.9		100.6		118.9		100.5
Total deferred credits and other liabilities		591.0		510.9		591.0		510.8
Long-term debt		445.8		421.4		445.8		421.4
Preferred stock		6.1		6.3		6.1		6.3
Common equity		736.3		720.6		736.3		720.6
Total capitalization		1,188.2		1,148.3		1,188.2		1,148.3
	$	2,560.8	$	2,832.0	$	2,569.5	$	2,823.0

(1) Reflects revised format to present dividends payable separate from other current liabilities.

Nicor Inc. Page 10

Notes to the Consolidated Financial Statements (Unaudited) (continued)

Energy trading activities.    Nicor has changed its presentation of the results of operations of the energy trading activities of Nicor Enerchange. Under the new presentation, all cost of gas and all mark-to-market gains and losses, whether realized or unrealized, are included in (netted against) revenues. The reclassification of these gains and losses decreased both other operating revenues and other operating expenses in equal and offsetting amounts, and thus did not impact operating income. The amounts reclassified for the quarters ended March 31, 2002 and 2001 were $29.4 million and $63.1 million, respectively.

Cost of gas used in company operations.    Nicor Gas has changed its method of reporting the cost of gas used to operate company equipment and facilities. Such gas cost, previously reported in cost of gas, is now reported in operating and maintenance expense, a presentation commonly used in the gas distribution industry. The amounts reclassified for the quarters ended March 31, 2002 and 2001 were $3.2 million and $6.2 million, respectively.

Other income (expense) items.    Nicor has also changed its presentation of various items previously reported as nonoperating. The company believes these items are more commonly reflected in operating income.

FIRST QUARTER RESTATEMENT AS FILED ON FORM 10-Q/A AMENDMENT NO. 2

Beginning in July of 2002, an investigation of natural gas purchases, sales, transportation and storage activities was undertaken by a special committee of independent Nicor directors. The special committee of independent directors identified various accounting and other errors. As a result, the annual financial statements for 2001, 2000, and 1999 and the interim financial statements for 2002 and 2001 have been restated to correct these errors, as well as to correct other errors unrelated to the investigation of the special committee. In addition, certain reclassifications were made as discussed in the First Quarter Reclassifications as Filed on Form 10-Q/A Amendment No. 2 note beginning on page 7.

The impact of the adjustments is summarized in the following tables, which are followed by a description of the significant adjustments recorded. The amounts in the following tables are in millions, except for the earnings per share amounts.

Nicor Inc. Page 11

Notes to the Consolidated Financial Statements (Unaudited) (continued)

Consolidated Statement of Operations

For the quarter ended March 31, 2002

	As Previously Reported (1)			Gas Purchase and Other Adjustments			As Restated
Operating revenues
Gas distribution	$	519.5		$	(.8	)	$	518.7
Shipping		59.8			—			59.8
Other		9.3			.2			9.5
		588.6			(.6	)		588.0
Operating expenses
Gas distribution
Cost of gas		315.0			—			315.0
Operating and maintenance		49.5			(.1	)		49.4
Depreciation		56.6			—			56.6
Taxes, other than income taxes		40.3			—			40.3
Mercury-related costs (recoveries)		.2			—			.2
Property sale (gains) losses		(3.4	)		—			(3.4	)
Shipping		55.7			—			55.7
All other		9.2			—			9.2
		523.1			(.1	)		523.0
Operating income		65.5			(.5	)		65.0
Equity investment income (loss)		(4.6	)		2.3			(2.3	)
Other income (expense), net		1.1			—			1.1
Interest expense, net of amounts capitalized		9.7			—			9.7
Income before income taxes		52.3			1.8			54.1
Income taxes		16.8			.8			17.6
Net income	$	35.5		$	1.0		$	36.5
Earnings per average share of common stock
Basic	$	.80					$	.82
Diluted		.80						.82

(1) Includes the restatement discussed in the First Quarter Restatement as Filed on Form 10-Q/A Amendment No. 1 section on page 7, and certain reclassifications discussed in the First Quarter Reclassifications as Filed on Form 10-Q/A Amendment No. 2 section beginning on page 7.

Nicor Inc. Page 12

Notes to the Consolidated Financial Statements (Unaudited) (continued)

Consolidated Statement of Operations

For the quarter ended March 31, 2001

	As Previously Reported (1)			Gas Purchase and Other Adjustments			As Restated
Operating revenues
Gas distribution	$	1,346.5		$	(20.8	)	$	1,325.7
Shipping		58.7			—			58.7
Other		5.7			—			5.7
		1,410.9			(20.8	)		1,390.1
Operating expenses
Gas distribution
Cost of gas		1,105.4			—			1,105.4
Operating and maintenance		51.3			1.1			52.4
Depreciation		55.3			—			55.3
Taxes, other than income taxes		69.9			—			69.9
Mercury-related costs (recoveries)		—			—			—
Property sale (gains) losses		(.2	)		—			(.2	)
Shipping		55.4			(.3	)		55.1
All other		5.5			.1			5.6
		1,342.6			.9			1,343.5
Operating income		68.3			(21.7	)		46.6
Equity investment income (loss)		1.9			(4.0	)		(2.1	)
Other income (expense), net		2.4			.1			2.5
Interest expense, net of amounts capitalized		14.3			.1			14.4
Income before income taxes		58.3			(25.7	)		32.6
Income taxes		19.5			(10.2	)		9.3
Net income	$	38.8		$	(15.5	)	$	23.3
Earnings per average share of common stock
Basic	$	.85					$	.51
Diluted		.85						.51

(1) Includes the restatement discussed in the First Quarter Restatement as Filed on Form 10-Q/A Amendment No. 1 section on page 7, and certain reclassifications discussed in the First Quarter Reclassifications as Filed on Form 10-Q/A Amendment No. 2 section beginning on page 7.

Nicor Inc. Page 13

Notes to the Consolidated Financial Statements (Unaudited) (continued)

Balance Sheet Restatements

The following summarizes major changes in balance sheet line items:

	As Previously Reported (1)		Adjustments			As Restated
As of March 31, 2002
Assets
Receivables, less allowances	$	357.1	$	(.5	)	$	356.6
Gas in storage		25.0		3.1			28.1
Deferred income taxes		39.4		5.9			45.3
Other current assets		24.1		1.7			25.8
Other noncurrent assets		120.0		(3.0	)		117.0
Total assets		2,569.5		7.2			2,576.7
Liabilities and capitalization
Accounts payable		337.1		47.5			384.6
Temporary LIFO liquidation		115.0		9.5			124.5
Accrued gas costs		50.7		(3.4	)		47.3
Other current liabilities		43.8		(14.1	)		29.7
Common equity		736.3		(22.3	)		714.0
As of March 31, 2001
Assets
Receivables, less allowances	$	707.2	$	(22.3	)	$	684.9
Gas in storage		11.5		.7			12.2
Property, plant and equipment, net		1,697.9		11.5			1,709.4
Prepaid pension costs		151.0		(10.8	)		140.2
Total assets		2,823.0		(25.3	)		2,797.7
Liabilities and capitalization
Accounts payable		401.1		15.9			417.0
Temporary LIFO liquidation		125.7		54.8			180.5
Accrued gas costs		128.0		(53.8	)		74.2
Other current liabilities		62.1		(15.3	)		46.8
Deferred income taxes		300.3		(5.3	)		295.0
Other deferred credits and liabilities		100.5		(3.6	)		96.9
Common equity		720.6		(18.1	)		702.5

(1) Includes the restatement discussed in the First Quarter Restatement as Filed on Form 10-Q/A Amendment No. 1 section on page 7, and certain reclassifications discussed in the First Quarter Reclassifications as Filed on Form 10-Q/A Amendment No. 2 section beginning on page 7.

Nicor Inc. Page 14

Notes to the Consolidated Financial Statements (Unaudited) (continued)

Gas purchase adjustments.    Gas distribution segment results have been restated to reflect corrections of gas purchase accounting errors and errors in the computation of performance-based rate (PBR) plan results. Most of the errors were identified through an investigation of Nicor Gas’ natural gas purchases, sales, transportation and storage activities by a special committee of independent directors discussed in the Contingencies - Performance-Based Rate Plan note beginning on page 18. These adjustments reduced operating revenues for the quarters ended March 31, 2002 and 2001 by $.7 million and $20.8 million, respectively, for revised PBR plan results, and resulted in increased operating costs of $1.0 million in the 2001 quarter. These adjustments reduced March 31, 2002 and 2001 quarterly net income by $.4 million and $13.2 million, respectively. In addition, certain balance sheet accounts were also significantly affected at March 31, 2002 and 2001 including receivables, gas in storage, accounts payable, temporary LIFO liquidation, accrued gas costs and the related tax accounts. These changes are reflected in the Balance Sheet Restatements table on page 13.

Other adjustments.    Nicor has also recorded adjustments related to certain matters other than the gas purchase adjustments discussed above. Those matters included primarily adjustments to previously recorded equity in earnings of Nicor Energy, a 50-percent-owned retail energy marketing joint venture. The adjustments for these other matters increased (reduced) previously reported net income for the quarters ended March 31, 2002 and 2001 by $1.4 million and $(2.3) million, respectively.

NEW ACCOUNTING PRONOUNCEMENTS

Business combinations.    In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (FAS) No. 141,Business Combinations, and No. 142,Goodwill and Other Intangible Assets. FAS 141 was effective for business combinations completed after June 30, 2001, and FAS 142 was effective for 2002. Goodwill amortization was $.7 million in 2001. The implementation of these standards did not have a material impact on the company’s financial position or results of operations.

Asset retirement obligations.    In August 2001, the FASB issued FAS 143,Accounting for Asset Retirement Obligations.The standard requires entities to record the fair value of a liability for an asset retirement 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 implementation of 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.

Nicor Inc. Page 15

Notes to the Consolidated Financial Statements (Unaudited) (continued)

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 will apply this standard on a prospective basis.

Energy trading accounting methods.    In October 2002, the Emerging Issues Task Force (EITF) voted to rescind EITF 98-10,Accounting for Contracts Involved in Energy Trading and Risk Management Activities, effective in 2003. EITF 98-10 applies to Nicor’s wholesale natural gas marketing business, Nicor Enerchange. Effective with the rescission, Nicor Enerchange will apply accrual accounting, rather than fair value accounting, to gas in storage and certain energy-related contracts, such as storage contracts.

Energy trading revenues.    In June 2002, the EITF reached a consensus on one item under review in Issue 02-03 requiring all mark-to-market gains and losses arising from energy trading contracts (whether realized or unrealized) to be shown net in revenue with a corresponding reclassification of prior years’ financial statements. Although the EITF’s October 2002 rescission of the consensus reached in Issue 98-10 affected certain elements of the consensus reached in Issue 02-03, the conclusion that all mark-to-market gains and losses arising from trading energy derivative contracts should be reported net in revenues continues in effect. Previously reported results of operations have been reclassified to conform with the presentation specified in Issue 02-03. The implementation of this change reduced the revenues and operating expenses of Nicor in equal and offsetting amounts. It did not have any impact on Nicor’s financial condition or results of operations.

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 on 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. The disclosure requirements in the interpretation are effective for financial statements for periods ending after December 15, 2002. Nicor has not yet determined the impact of this interpretation on its financial condition or results of operations.

ACCRUED UNBILLED REVENUE

Receivables include accrued unbilled revenue of $65.3 million, $89.7 million and $188.1 million at March 31, 2002, December 31, 2001, and March 31, 2001, respectively, related primarily to gas distribution operations.

INCOME TAXES

The company’s effective income tax rate increased for the 2002 three-month period, despite the favorable completion of an income tax audit in the first quarter of 2002, because tax credits and permanent tax differences are a smaller share of higher pretax income.

Nicor Inc. Page 16

Notes to the Consolidated Financial Statements (Unaudited) (continued)

BUSINESS SEGMENT INFORMATION

Financial data by business segment is presented below (in millions):

	Three months ended March 31
	2002			2001
Operating revenues
Gas distribution	$	518.7		$	1,325.7
Shipping		59.8			58.7
Other energy ventures		9.3			5.7
Corporate and eliminations		.2			—
	$	588.0		$	1,390.1
Operating income (loss)
Gas distribution	$	60.6		$	42.9
Shipping		4.1			3.6
Other energy ventures		.6			.9
Corporate and eliminations		(.3	)		(.8	)
	$	65.0		$	46.6

EQUITY INVESTMENT INCOME (LOSS)

Equity investment income (loss) includes the following (in millions):

	Three months ended March 31
	2002			2001
Nicor Energy	$	(2.9	)	$	(2.2	)
Cargo container leasing business		1.0			1.0
All other		(.4	)		(.9	)
	$	(2.3	)	$	(2.1	)

Nicor Inc. Page 17

Notes to the Consolidated Financial Statements (Unaudited) (continued)

OTHER INCOME (EXPENSE), NET

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

	Three months ended March 31
	2002			2001
Interest income	$	.9		$	2.5
Other income		.3			.1
Other expense		(.1	)		(.1	)
	$	1.1		$	2.5

COMPREHENSIVE INCOME

Other comprehensive income (loss) includes unrealized gains and losses from derivative financial instruments accounted for as cash flow hedges.

Total comprehensive income (loss) consisted of the following (in millions):

	Three months ended March 31
	2002		2001
Net income	$	36.5	$	23.3
Other comprehensive income (loss), net of tax		1.8		(1.0	)
Total comprehensive income	$	38.3	$	22.3

Other comprehensive income (loss) for Nicor consists primarily of unrealized gains and losses from derivative financial instruments accounted for as cash flow hedges, including Nicor’s share of such amounts from joint ventures.

Nicor Inc. Page 18

Notes to the Consolidated Financial Statements (Unaudited) (continued)

RELATED PARTY TRANSACTIONS

At March 31, 2002, Nicor had $31.7 million of short-term notes receivable at market interest rates due from Horizon Pipeline, a 50/50 joint venture between Nicor and Natural Gas Pipeline Company of America. The notes cover a portion of the initial construction costs of the pipeline. In May 2002, Horizon Pipeline financed the project with partnership equity and non-recourse third-party long-term debt and repaid the short-term loans. Nicor’s contribution for its share of equity was $16.5 million. 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, Nicor Technologies, a wholly owned subsidiary of Nicor, began purchasing gas distribution engineering services from EN Engineering, a 50-percent-owned joint venture. EN Engineering charged Nicor Technologies $1.1 million for these services for the three - month period ended March 31, 2002.

At March 31, 2002, Nicor had $9.9 million of short-term notes receivable at market interest rates due from Nicor Energy, a 50/50 joint venture with Dynegy Inc. In addition, Nicor has entered into various transactions with Nicor Energy, which are described within the Nicor Energy section of Contingencies on page 20.

CONTINGENCIES

The following contingencies of Nicor 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’s 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 are 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 allegations that the company acted improperly in connection with the PBR plan. The company has

Nicor Inc. Page 19

Notes to the Consolidated Financial Statements (Unaudited) (continued)

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.

Having undertaken a re-audit, Nicor and Nicor Gas have restated their 2001, 2000 and 1999 financial statements, and have restated their 2002 and 2001 interim results. In addition, Nicor Gas recorded charges in the fourth quarter of 2002. Net income was reduced by $.4 million and $13.2 million for the first quarter of 2002 and 2001, 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 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 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

Nicor Inc. Page 20

Notes to the Consolidated Financial Statements (Unaudited) (continued)

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 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.

Nicor Energy.    Nicor is a 50-percent owner of Nicor Energy, a retail energy marketing joint venture with Dynegy Marketing and Trade (Dynegy). In the second quarter of 2002, as a result of negative adjustments identified as part of Nicor Energy’s 2001 year-end audit, the owners of the venture and new Nicor Energy management commenced a review of Nicor Energy’s business strategy, accounting practices, controls and financial results. The review process identified irregularities in accounting and additional accounting errors and adjustments at Nicor Energy. The adjustments, irregularities and errors at Nicor Energy related primarily to estimates of unbilled revenues and unrecorded liabilities. The review process has continued and no additional material corrections have been identified since the second quarter of 2002. All error corrections relating to 2001 and 2000 have been reflected in Nicor’s restated 2001 and 2000 financial statements.

Nicor’s maximum exposure under its guarantee commitments on behalf of Nicor Energy at January 31, 2003 was about $29 million. Nicor may, at its discretion, provide additional guarantees. At January 31, 2003 there was $5.2 million of outstanding accounts payable under these guarantees. While it is reasonably possible that Nicor will be required to make payments under the guarantees, Nicor does not believe it is probable and cannot estimate the amount of any such payment. Accordingly, no liability has been recorded.

In April 2002, Nicor and Dynegy renegotiated their joint venture agreement, extending the original agreement, which would have expired in mid-2002, by five years. Nicor Energy is dependent on the financial support of both equity investors, and Dynegy is the joint venture’s primary energy supplier. Nicor is taking steps to withdraw, as soon as practicable, from its continued involvement with Nicor Energy. Nicor Energy is in the process of disposing of its customer acccounts, and in February 2003 Nicor Energy announced that it disposed of approximately 132,000 commercial and residential customer accounts, representing about 40 percent of its estimated annual revenue. At September 30, 2002, Nicor’s investment in Nicor Energy was written down to zero due to the likelihood at that time that Nicor ultimately would not recover its investment balance. In addition, in October 2002, Dynegy announced it is exiting the marketing and trading business. Dynegy has indicated its intention to discontinue its role as Nicor Energy’s primary energy supplier after March 31, 2003. If either equity investor fails to continue its support of the joint venture, the effect on Nicor Energy could cause Nicor to make payments under the guarantees noted above.

SEC and U.S. Attorney Inquiries.    In 2002, the staff of the SEC informed Nicor Inc. and Nicor Energy, L.L.C. (Nicor Energy) that the SEC is conducting a formal inquiry regarding the PBR plan and Nicor Energy. On January 28, 2003, Nicor Energy was advised by the SEC Division of Enforcement that it intended to recommend to the SEC that it bring a civil injunctive action against Nicor Energy, alleging that it violated Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934. A representative of the Office of the United States Attorney for the Northern District of Illinois has notified Nicor that that office is conducting an inquiry on the same matters that the SEC is investigating, and a grand jury is also reviewing these matters.

Nicor Inc. Page 21

Notes to the Consolidated Financial Statements (Unaudited) (continued)

Securities Class Actions.    Following Nicor’s July 18, 2002 press release concerning Nicor Energy and the PBR plan, several purported class actions were brought against Nicor, Thomas Fisher (Chairman and CEO) and Kathleen Halloran (Executive Vice President Finance and Administration). The actions were brought in the United States District Court for the Northern District of Illinois, Eastern Division, and have been consolidated. On February 14, 2003, plaintiffs filed an amended complaint adding as defendants George Behrens (Vice President of Administration and Treasurer), Philip Cali (former Executive Vice President of Operations) and Arthur Andersen LLP, the company’s former outside auditor. The plaintiffs seek to represent a class consisting of all persons or entities who purchased Nicor common stock on the open market during the period from November 24, 1999 through and including July 19, 2002. They allege that the defendants violated Section 10(b) and Section 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. Plaintiffs allege that during the class period defendants misrepresented the PBR program, Nicor’s historical financial condition and results of operations and its future prospects. The class is seeking compensatory damages, prejudgment interest, and attorneys’ fees and costs. Nicor is unable to predict the outcome of this litigation or Nicor’s potential exposure related thereto and has not recorded a liability associated with the outcome of this contingency.

Shareholder Derivative Lawsuits.    Also following Nicor’s issuance of the press release concerning Nicor Energy and the PBR plan, three purported derivative lawsuits were brought against Thomas Fisher (Chairman and CEO), Kathleen Halloran (Executive Vice President Finance and Administration) and all members of Nicor’s Board of Directors (the “individual defendants”). Nicor was named as a nominal defendant in all three suits, which have since been consolidated in an amended complaint filed on January 27, 2003. The actions were brought in the Circuit Court of Cook County, Illinois, Chancery Division. The plaintiffs allege that the individual defendants breached their fiduciary duties to Nicor by allegedly causing or allowing Nicor to disseminate to the market materially misleading and inaccurate information, and failing to establish and maintain adequate accounting controls. Plaintiffs also contend that two of the defendants (Mr. Fisher and Mr. Birdsall) engaged in improper insider selling of Nicor stock at inflated prices. The plaintiffs seek compensatory and punitive damages, attorneys’ fees and costs, and other relief against the individual defendants on behalf of Nicor but do not seek any damages against the company. Nicor and the individual defendants filed a motion to dismiss this action on February 26, 2003.

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.

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 (“ICFA”) 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

Nicor Inc. Page 22

Notes to the Consolidated Financial Statements (Unaudited) (continued)

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 which purports to state claims under the ICFA and for breach of contract. On January 9, 2003, Nicor Services moved to dismiss the amended complaint. Nicor is unable to predict the outcome of this litigation or to reasonably estimate its potential exposure related thereto and has not recorded a liability associated with this contingency.

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.

Horizon Pipeline Lien.    The general contractor on the construction of the Horizon Pipeline (Horizon), filed a $5.7 million Notice of Claim for Lien against Horizon. The contractor has since asserted that an additional $3 million is due. Nicor is unable to predict the outcome of this matter, Horizon’s potential exposure related thereto or any potential impact on Nicor’s investment in Horizon.

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.

Nicor Inc. Page 23

Notes to the Consolidated Financial Statements (Unaudited) (continued)

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 will pay 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.

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 March 31, 2002, the company incurred $105.4 million in associated costs, leaving a $33.6 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. 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 $106.7 million in associated costs, leaving a $23.3 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

Nicor Inc. Page 24

Notes to the Consolidated Financial Statements (Unaudited) (continued)

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 March 31, 2002, Nicor Gas had recognized recoveries, net of related expenses, of $2.8 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.

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 continued testing and analysis should determine to what extent additional remediation is necessary and may provide a basis for estimating any additional future costs which, based on industry experience, could be significant. 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

Nicor Inc. Page 25

Notes to the Consolidated Financial Statements (Unaudited) (concluded)

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 Oak Park Park District, 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.

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.

Nicor Inc. Page 26

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the Management’s Discussion and Analysis section of the Nicor Inc. (Nicor) 2001 Annual Report on Form 10-K/A (Amendment No. 1).

The company has restated its financial statements for 2001, 2000 and 1999, and the interim financial statements for 2002 and 2001. The accompanying financial information presented in this Management’s Discussion and Analysis gives effect to the restatement. For further information about the restatement, see Contingencies - Performance-Based Rate Plan beginning on page 29 and the Notes to the Consolidated Financial Statements - First Quarter Restatement as Filed on Form 10-Q/A Amendment No. 1 on page 7, - - First Quarter Reclassifications as Filed on Form 10-Q/A Amendment No. 2 beginning on page 7, - First Quarter Restatement as Filed on Form 10-Q/A Amendment No. 2 beginning on page 10, and - Contingencies - Performance-Based Rate Plan beginning on page 18.

SUMMARY

Nicor’s first quarter 2002 diluted earnings per common share was $.82 compared to $.51 in the first quarter 2001. Net income for the 2002 quarter increased to $36.5 million compared with $23.3 million a year ago. The 2002 increase was primarily related to higher operating income in the gas distribution segment, resulting from reduced performance-based rate (PBR) plan losses. Also contributing to the improvement was lower net interest expense. Per share results were favorably affected by the company’s common stock repurchase program.

Operating income.    Operating income (loss) by major business segment is presented below (in millions):

	Three months ended March 31
	2002			2001
Gas distribution	$	60.6		$	42.9
Shipping		4.1			3.6
Other energy ventures		.6			.9
Corporate and eliminations		(.3	)		(.8	)
	$	65.0		$	46.6

The following summarizes operating income comparisons for major business segments:

· Gas distribution operating income increased from $42.9 million in the first quarter of 2001 to $60.6 million in 2002. The gas distribution segment’s operating income included a $2.2 million gain from the PBR plan in the first quarter of 2002 compared to a $18.3 million loss in the 2001 quarter. The positive effect of the improved PBR plan results on the quarter-to-quarter comparison was offset partially by smaller pension credits ($3.5 million) in the 2002 period. In addition, the 2002 quarter’s operating results were negatively impacted by warmer weather ($6.3 million) compared to the prior year. The negative effect of the warmer weather on operating income was offset partially by the impact of increased weather protection benefits ($3.5 million) recorded in 2002.

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Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

· Containerized shipping’s operating income increased $.5 million compared to a year ago. The positive effects of higher volumes shipped ($3.2 million), increased property sale gains ($.9 million), and lower general and administrative expenses ($.5 million) were partially offset by higher operating and maintenance expenses ($2.4 million) and lower average rates ($2.0 million), resulting from soft economic conditions in the U.S. and Caribbean region.

· Operating income from Nicor’s other energy ventures reflects improved results at Nicor’s wholesale natural gas marketing business ($.4 million), lower operating results at Nicor’s energy system development business ($.3 million) and losses from energy system development contracts ($.4 million).

Equity investment income (loss).    Equity investment income (loss) decreased to ($2.3) million in the first quarter of 2002 from ($2.1) million a year ago. Lower results at Nicor Energy ($.7 million) were partially offset by smaller losses from the company’s investments in affordable housing partnerships ($.3 million).

Other income (expense).    Other income (expense) decreased from $2.5 million in the first quarter of 2001 to $1.1 million in the first quarter of 2002 due to lower interest income ($1.6 million) in 2002. The decrease in interest income was related to both lower interest rates and investment levels.

Interest expense.    Interest expense for the three-month period decreased $4.7 million to $9.7 million in 2002 due to the effect of lower average borrowing levels and interest rates. Reduced gas procurement costs contributed to the lower borrowing levels.

Income taxes.    The company’s effective income tax rate increased for the 2002 three-month period, despite the favorable completion of an income tax audit in the first quarter of 2002, because tax credits and permanent tax differences are a smaller share of higher pretax income.

RESULTS OF OPERATIONS

The following discussion summarizes the major items impacting Nicor’s results of operations.

Operating revenues.    Operating revenues by major business segment are presented below (in millions):

	Three months ended March 31
	2002		2001
Gas distribution	$518.7	$	1,325.7
Shipping	59.8		58.7
Other energy ventures	9.3		5.7
Corporate and eliminations	.2		—
	$588.0		$1,390.1

Nicor Inc. Page 28

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Gas distribution revenues declined significantly in the first quarter of 2002 compared with a year ago due primarily to lower natural gas costs, which are passed directly through to customers without markup. The revenue effect of the lower natural gas costs in 2002 is approximately $770 million. First quarter 2002 shipping revenues reflect the effect of a small increase in volumes shipped ($3.2 million) compared to a year ago partially offset by lower average rates ($2.0 million). The increase in volume-related revenues relates primarily to an acquisition. The slow economy in the Caribbean region continues to put pressure on shipping segment average rates. The increase in revenues for other energy ventures was due primarily to new customers and products at Nicor Services ($1.6 million), a retail energy-related products and services business.

Gas distribution margin.    Gas distribution margin, defined as operating revenues less cost of gas and revenue taxes, which are both passed directly through to customers without markup, increased $13.2 million to $168.2 million in the first quarter of 2002. The increase was primarily the result of a $2.2 million gain from the PBR plan recorded in the first quarter of 2002 compared to a $18.3 million loss recorded in the first quarter of 2001. Negatively affecting margin in 2002 were lower customer finance charges ($3.3 million) and the impact of lower deliveries resulting from 12 percent warmer weather than the prior year ($6.3 million), the effects of which were partially offset by $3.5 million of weather protection benefits recorded in 2002.

Gas distribution operating and maintenance expense.    Gas distribution operating and maintenance expenses decreased $3.0 million in the first quarter of 2002 to $49.4 million. The decrease from the prior year period was due primarily to lower costs of natural gas used to operate company equipment and facilities ($3.0 million), decreased bad debt expense ($2.9 million) and lower information technology costs ($1.0 million). The decreases in the costs to operate company equipment and facilities and bad debt expense resulted from lower natural gas prices. Partially offsetting these positive factors were smaller pension credits ($3.5 million) and higher health care costs ($1.2 million).

Shipping operating expenses.    Shipping segment operating expenses rose to $55.7 million in the first quarter of 2002 from $55.1 million in the 2001 period due primarily to higher operating and maintenance expenses related to increased volumes shipped. Increased costs related to the higher volumes included higher transportation expenses ($2.0 million) and greater leased equipment costs ($1.0 million). These increased costs were partially offset by increased property sale gains ($.9 million), lower general and administrative expenses ($.5 million) and lower fuel costs ($.3 million).

All other operating expenses.    The increase in all other operating expenses was due primarily to increased expenses at Nicor Services ($1.4 million) associated largely with the addition of new customers and products. Increased expenses related to energy system development contracts ($1.1 million) also contributed to the higher operating expenses.

Nicor Inc. Page 29

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

FINANCIAL CONDITION AND LIQUIDITY

Operating cash flows.    Net cash flow provided from operating activities decreased $39.3 million to $134.1 million in the first quarter from $173.4 million in the year earlier period. Year-to-year changes in operating cash flow result largely from fluctuations in working capital items occurring mainly in the gas distribution segment due to factors such as weather, the price of 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.

Financing activities.    Nicor Inc. and Nicor Gas maintain short-term line of credit agreements with major domestic and foreign banks. At March 31, 2002, these agreements, which serve as backup for the issuance of commercial paper, allowed for borrowings up to $415 million, and the company had $217 million of commercial paper borrowings outstanding.

Under an existing common stock repurchase program, Nicor purchased and retired 261,000 common shares during the first quarter of 2002 at an aggregate cost of $10.9 million. Purchases may be made from time to time through open market transactions and to the extent cash flow is available after other investment opportunities.

FACTORS AFFECTING BUSINESS PERFORMANCE

Accounting policies.    The Financial Accounting Standards Board issued key accounting pronouncements in 2001 and in 2002. For further information about these pronouncements, see the Notes to the Consolidated Financial Statements—New Accounting Pronouncements beginning on page 14.

Contingencies.    The following contingencies of Nicor 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’s 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 are 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

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Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

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.

Having undertaken a re-audit, Nicor and Nicor Gas have restated their 2001, 2000 and 1999 financial statements, and have restated their 2002 and 2001 interim results. 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 requiring 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

Nicor Inc. Page 31

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

recorded by Nicor Gas as a PBR plan loss contingency liability in the fourth quarter of 2002. The largest correction relates 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 relate 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 do 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 do 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 relating to the Report, as a result of management and audit reviews, the company also increased 2001 gas costs for 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. In addition, net income was reduced by $.4 million and $13.2 million for the first quarter of 2002 and 2001, 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 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

Nicor Inc. Page 32

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

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 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 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 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.

Nicor Energy.    Significant developments have occurred since 2001 relating to Nicor’s 50-percent interest in Nicor Energy. Information about these developments is presented within the Notes to the Consolidated Financial Statements – Contingencies – Nicor Energy on page 20.

SEC and U.S. Attorney Inquiries.    In 2002, the staff of the SEC informed Nicor Inc. and Nicor Energy, L.L.C. (Nicor Energy) that the SEC is conducting a formal inquiry regarding the PBR plan and Nicor Energy. On January 28, 2003, Nicor Energy was advised by the SEC Division of Enforcement that it intended to recommend to the SEC that it bring a civil injunctive action against Nicor Energy, alleging that it violated Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934. A representative of the Office of the United States Attorney for the Northern District of Illinois has notified Nicor that that office is conducting an inquiry on the same matters that the SEC is investigating, and a grand jury is also reviewing these matters.

Securities Class Actions.    Nicor and certain of its executives are defendants in a consolidated class action lawsuit. Information about this action is presented within the Notes to the Consolidated Financial Statements – Contingencies – Securities Class Actions beginning on page 21.

Nicor Inc. Page 33

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Shareholder Derivative Lawsuits.Certain Nicor executives and all members of its Board of Directors are defendants in a consolidated lawsuit. Information about this lawsuit is presented within the Notes to the Consolidated Financial Statements – Contingencies – Shareholder Derivative Lawsuits on page 21.

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 22.

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 in the Notes to the Consolidated Financial Statements – Contingencies – Manufactured Gas Plant Sites beginning on page 24.

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 18.

Market risk.Nicor 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, electricity and fuel commodity prices and interest rates. There has been no material change in the company’s exposure to market risk since the filing of the 2001 Annual Report on Form 10-K/A (Amendment No. 1).

Nicor Inc. Page 34

Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

GAS DISTRIBUTION STATISTICS

Operating revenues, deliveries, customers and other statistics are presented below.

	Three months ended March 31
	2002		2001
Operating revenues (millions)
Sales
Residential	$	340.2	$	993.2
Commercial		64.3		188.5
Industrial		10.7		29.9
		415.2		1,211.6
Transportation
Residential		3.1		2.9
Commercial		25.7		27.8
Industrial		11.0		12.0
Other		2.5		3.9
		42.3		46.6
Other revenues
Revenue taxes		36.4		66.5
Environmental cost recovery		12.0		10.3
Performance-based rate plan		2.2		(18.3	)
Chicago Hub		3.3		2.8
Other		7.3		6.2
		61.2		67.5
	$	518.7	$	1,325.7
Deliveries (Bcf)
Sales
Residential		94.7		102.4
Commercial		17.2		19.3
Industrial		3.1		3.1
		115.0		124.8
Transportation
Residential		3.2		3.0
Commercial		39.8		40.9
Industrial		37.7		39.7
		80.7		83.6
		195.7		208.4
Customers at end of period (thousands)
Sales
Residential		1,777.0		1,756.7
Commercial		105.5		101.1
Industrial		6.9		6.7
		1,889.4		1,864.5
Transportation
Residential		58.2		51.3
Commercial		64.7		67.2
Industrial		6.9		7.3
		129.8		125.8
		2,019.2		1,990.3
Other statistics
Degree days		2,723		3,104
Average gas cost per Mcf sold	$	2.71	$	8.83

Nicor Inc. Page 35

Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations (concluded)

SHIPPING STATISTICS

	Three months ended March 31
	2002		2001
TEUs shipped (thousands)
Southbound		31.9		31.0
Northbound		4.2		4.6
Interisland		3.0		1.5
		39.1		37.1
Other statistics
Revenue per TEU	$	1,532	$	1,583
Ports served		21		22
Vessels operated		16		17

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Item 3.    Quantitative and Qualitative Disclosures about Market Risk

For disclosures about market risk, see Management’s Discussion and Analysis - Market Risk on page 33, which is incorporated herein by reference.

PART II – OTHER INFORMATION

Item 1.    Legal Proceedings

For information concerning legal proceedings, see Management’s Discussion and Analysis - Contingencies beginning on page 29 and the Notes to the Consolidated Financial Statements - Contingencies beginning on page 18, which are incorporated herein by reference.

Item 6.    Exhibits and Reports on Form 8-K

(a)    See Exhibit Index beginning on page 39 filed herewith.

(b)    The company did not file a report on Form 8-K during the first quarter of 2002.

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Signature

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Nicor Inc.
DateMarch 7, 2003	By:	/s/    KATHLEEN L. HALLORAN
		Kathleen L. Halloran Executive Vice President Finance and Administration

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CERTIFICATIONS

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

1) I have reviewed this quarterly report on Form 10-Q/A of Nicor Inc.;

2) Based on my knowledge, this quarterly 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 quarterly report; and

3) Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report.

DateMarch 7, 2003	/s/    THOMAS L. FISHER
	Thomas L. Fisher Chairman and Chief Executive Officer

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

1) I have reviewed this quarterly report on Form 10-Q/A of Nicor Inc.;

2) Based on my knowledge, this quarterly 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 quarterly report; and

3) Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report.

DateMarch 7, 2003	/s/    KATHLEEN L. HALLORAN
	Kathleen L. Halloran Executive Vice President Finance and Administration

Nicor Inc. Page 39

Exhibit Index

Exhibit Number	Description of Document
3.01 *	Articles of Incorporation of the company. (File No. 2-55451, Form S-14, Nicor Inc., Exhibit 1-03 and Exhibit B of Amendment No. 1 thereto.)
3.02 *	Amendment to Articles of Incorporation of the company. (Proxy Statement dated April 20, 1979, Nicor Inc., Item 3 thereto.)
3.03 *	Amendment to Articles of Incorporation of the company. (File No. 2-68777, Form S-16, Nicor Inc., Exhibit 2-01.)
3.04 *	Amendment to Articles of Incorporation of the company. (File No. 1-7297, Form 10-K for 1985, Nicor Inc., Exhibit 3-03.)
3.05 *	Amendment to Articles of Incorporation of the company. (Proxy Statement dated March 12, 1987, Nicor Inc., Exhibit A and Exhibit B thereto.)
3.06 *	Amendment to Articles of Incorporation of the company. (File No. 1-7297, Form 10-K for 1992, Nicor Inc., Exhibit 3-06.)
3.07 *	Amendments to Articles of Incorporation of the company. (Proxy Statement dated March 9, 1994, Nicor Inc., Exhibit A-1 and Exhibit B thereto.)
3.08 *	Amendment to Articles of Incorporation of the company. (Proxy Statement dated March 6, 1998, Nicor Inc., Item 2 thereto.)
3.09 *	By-Laws of the company as amended by the company’s Board of Directors on May 3, 1995. (File No. 1-7297, Form 10-Q for March 1995, Nicor Inc., Exhibit 3(ii).01.)
10.01 *	2002 Long-Term Incentive Program. (File No. 1-7297, Form 10-Q for March 2002, Nicor Inc., Exhibit 10.01.)
10.02 *	2002 Incentive Compensation Plan. (File No. 1-7297, Form 10-Q for March 2002, Nicor Inc., Exhibit 10.02.)
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.

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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.