UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 FORM
10-Q
 
 [X]
                QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934
  
 For the quarterly period ended June 30, 2009
 
 or
 
 [   ]
                TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934
 
 Commission
File Number 1-7297
 
 
 NICOR
INC.
 (Exact
name of registrant as specified in its charter)
 
 Illinois
              36-2855175(State
      of Incorporation)
              (I.R.S.
      EmployerIdentification
      No.)
 
 1844
      Ferry RoadNaperville,
      Illinois 60563-9600
              (630)
      305-9500(Address
      of principal executive offices) (Zip Code)
              (Registrant’s
      telephone number, including area
code)
 
 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
[   ]
 
 Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months.  Yes [   ]   No
[   ]
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company.  See definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in rule 12b-2 of the Exchange
Act.
 
 Large
      accelerated filer    [X]
                Accelerated
      filer                    [   ]Non-accelerated
      filer      [   ]
                Smaller
      reporting
  company   [   ]
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  Yes [  ] No [X]
 
 Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.  Common stock, par value
$2.50, outstanding at July 24, 2009, were 45,221,593 shares.
 
 
 
  Table of Contents
 
 Glossary
                        
                        iiPart
      I - Financial InformationItem
      1.
                        Financial
      Statements (Unaudited)Condensed Consolidated Statements of Operations:
      Three
      and six months ended June 30, 2009 and 2008
                        1Condensed Consolidated Statements of Cash Flows: Six
      months ended June 30, 2009 and 2008
                        2Condensed Consolidated Balance Sheets: June 30, 2009 and
      2008, and December 31, 2008
                        3Notes to the Condensed Consolidated Financial
      Statements
                        4Item
      2.
                        Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
                        21Item
      3.
                        Quantitative and Qualitative Disclosures About Market
      Risk
                        34Item
      4.
                        Controls and Procedures
                        34Part
      II - Other InformationItem
      1.
                        Legal Proceedings
                        35Item
      2.
                        Unregistered Sales of Equity Securities and Use of
      Proceeds
                        35Item
      4.
                        Submission of Matters to a Vote of Security
      Holders
                        35Item
      6.
                        Exhibits
                        36Signature
                        38
 
   Table of Contents
  Glossary
 
 ALJs.Administrative
Law Judges.
 
 Chicago Hub.  A
venture of Nicor Gas, which provides natural gas storage and
transmission-related services to marketers and other gas distribution
companies.
 
 Degree day.The
extent to which the daily average temperature falls below 65 degrees
Fahrenheit.  Normal weather for Nicor Gas’ service territory, for
purposes of this report, is considered to be 5,600 degree days per year for 2009
and 5,830 degree days per year for 2008.
 
 EN Engineering.EN
Engineering, L.L.C.,a previously owned joint
venture that provides engineering and consulting services.  Nicor sold
its ownership on March 31, 2009.
 
 FASB.  Financial
Accounting Standards Board.
 
 FERC.Federal
Energy Regulatory Commission, the agency that regulates the interstate
transportation of natural
gas, oil and electricity.
 
 FSP.  FASB Staff
Position.
 
 GSA.  General
Services Administration, a governmental agency of the United
States.
 
 ICC.Illinois
Commerce Commission, the agency that establishes the rules and regulations
governing utility rates and services in Illinois.
 
 IRS.  Internal
Revenue Service.
 
 Jobs Act.  American
Jobs Creation Act of 2004.
 
 LIFO.  Last-in,
first-out.
 
 Mcf, MMcf,
Bcf.Thousand cubic feet, million cubic feet, billion cubic
feet.
 
 MMBtus.  Million
British thermal units.
 
 Nicor.  Nicor Inc.,
or the registrant.
 
 Nicor Advanced
Energy.  Prairie Point Energy, L.L.C. (doing business as Nicor
Advanced Energy), a wholly owned business that provides natural gas and related
services on an unregulated basis to residential and small commercial
customers.
 
 Nicor
Enerchange.Nicor Enerchange, L.L.C., a wholly owned business
that engages in wholesale marketing of natural gas supply services primarily in
the Midwest, administers the Chicago Hub for Nicor Gas, serves commercial and
industrial customers in the Chicago market area, and manages Nicor Solutions’
and Nicor Advanced Energy’s product risks, including the purchase of natural gas
supplies.
 
 Nicor Gas.Northern
Illinois Gas Company (doing business as Nicor Gas Company) is a
regulated  wholly owned public utility business and one of the
nation’s largest distributors of natural gas.
 
 Nicor
Services.Nicor Energy Services Company,a wholly owned business
that provides move connection services for other utilities and product warranty
contracts, heating, ventilation and air conditioning repair, maintenance and
installation services and equipment to retail markets, including residential and
small commercial customers.
   Table of Contents
  Nicor
Solutions.Nicor Solutions, L.L.C., a wholly owned business
that offers residential and small commercial customers energy-related products
that provide for natural gas cost stability and management of their utility
bill.
  NYMEX.  New York
Mercantile Exchange.
  PBR.Performance-based
rate, a regulatory plan which ended on January 1, 2003, that provided economic
incentives based on natural gas cost performance.
 
 PCBs.Polychlorinated
Biphenyls.
 
 PGA.  Purchased Gas
Adjustment, a rate rider that passes natural gas costs directly through to
customers without markup, subject to ICC review.
 
 SEC.The United
States Securities and Exchange Commission.
 
 SFAS.  Statement of
Financial Accounting Standards.
 
 TEL.Tropic
Equipment Leasing Inc., a wholly owned subsidiary of Nicor, holds the company’s
interests in Triton.
 
 TEU.Twenty-foot
equivalent unit, a measure of volume in containerized shipping equal to one
20-foot-long container.
 
 Triton.  Triton
Container Investments L.L.C., a cargo container leasing company in which Nicor
Inc. has an investment.
 
 Tropical
Shipping.A wholly owned business and a carrier of
containerized freight in the Bahamas and the Caribbean region.
 
 USEPA.  United
States Environmental Protection Agency.
 
  iii
 
 Table of Contents
 Part
      I - FINANCIAL INFORMATIONItem 1.   Financial StatementsNicor Inc.Condensed
      Consolidated Statements of Operations (Unaudited)(millions,
      except per share data)Three
      months ended
                                                          
                                                          
                                                          Six
      months endedJune
      30
                                                          
                                                          
                                                          June
      302009
                                                          
                                                          
                                                          2008
                                                          
                                                          
                                                          2009
                                                          
                                                          
                                                          2008Operating
      revenuesGas
      distribution (includes revenue taxes of $26.6, $36.7,$101.3
      and $117.0, respectively)
                                                          
                                                          $
                                                          326.3
                                                          
                                                          
                                                          $
                                                          560.1
                                                          
                                                          
                                                          $
                                                          1,310.3
                                                          
                                                          
                                                          $
                                                          2,024.3Shipping
                                                          
                                                          
                                                          83.8
                                                          
                                                          
                                                          
                                                          102.6
                                                          
                                                          
                                                          
                                                          173.2
                                                          
                                                          
                                                          
                                                          200.3Other
      energy ventures
                                                          
                                                          
                                                          51.2
                                                          
                                                          
                                                          
                                                          52.7
                                                          
                                                          
                                                          
                                                          128.3
                                                          
                                                          
                                                          
                                                          122.9Corporate
      and eliminations
                                                          
                                                          
                                                          (13.7
                                                          )
                                                          
                                                          
                                                          (15.6
                                                          )
                                                          
                                                          
                                                          (53.4
                                                          )
                                                          
                                                          
                                                          (52.0
                                                          )Total
      operating revenues
                                                          
                                                          
                                                          447.6
                                                          
                                                          
                                                          
                                                          699.8
                                                          
                                                          
                                                          
                                                          1,558.4
                                                          
                                                          
                                                          
                                                          2,295.5Operating
      expensesGas
      distributionCost
      of gas
                                                          
                                                          
                                                          156.6
                                                          
                                                          
                                                          
                                                          396.2
                                                          
                                                          
                                                          
                                                          873.0
                                                          
                                                          
                                                          
                                                          1,582.9Operating
      and maintenance
                                                          
                                                          
                                                          69.1
                                                          
                                                          
                                                          
                                                          59.7
                                                          
                                                          
                                                          
                                                          159.7
                                                          
                                                          
                                                          
                                                          148.3Depreciation
                                                          
                                                          
                                                          44.6
                                                          
                                                          
                                                          
                                                          42.9
                                                          
                                                          
                                                          
                                                          89.0
                                                          
                                                          
                                                          
                                                          85.7Taxes,
      other than income taxes
                                                          
                                                          
                                                          30.9
                                                          
                                                          
                                                          
                                                          40.6
                                                          
                                                          
                                                          
                                                          109.7
                                                          
                                                          
                                                          
                                                          124.4Shipping
                                                          
                                                          
                                                          81.3
                                                          
                                                          
                                                          
                                                          96.9
                                                          
                                                          
                                                          
                                                          164.1
                                                          
                                                          
                                                          
                                                          190.7Other
      energy ventures
                                                          
                                                          
                                                          38.5
                                                          
                                                          
                                                          
                                                          41.7
                                                          
                                                          
                                                          
                                                          113.0
                                                          
                                                          
                                                          
                                                          110.9Other
      corporate expenses and eliminations
                                                          
                                                          
                                                          (12.9
                                                          )
                                                          
                                                          
                                                          (18.8
                                                          )
                                                          
                                                          
                                                          (49.5
                                                          )
                                                          
                                                          
                                                          (51.2
                                                          )Total
      operating expenses
                                                          
                                                          
                                                          408.1
                                                          
                                                          
                                                          
                                                          659.2
                                                          
                                                          
                                                          
                                                          1,459.0
                                                          
                                                          
                                                          
                                                          2,191.7Operating
      income
                                                          
                                                          
                                                          39.5
                                                          
                                                          
                                                          
                                                          40.6
                                                          
                                                          
                                                          
                                                          99.4
                                                          
                                                          
                                                          
                                                          103.8Interest
      expense, net of amounts capitalized
                                                          
                                                          
                                                          8.8
                                                          
                                                          
                                                          
                                                          9.1
                                                          
                                                          
                                                          
                                                          18.1
                                                          
                                                          
                                                          
                                                          19.7Equity
      investment income, net
                                                          
                                                          
                                                          1.6
                                                          
                                                          
                                                          
                                                          2.8
                                                          
                                                          
                                                          
                                                          13.3
                                                          
                                                          
                                                          
                                                          4.3Interest
      income
                                                          
                                                          
                                                          .5
                                                          
                                                          
                                                          
                                                          4.2
                                                          
                                                          
                                                          
                                                          1.1
                                                          
                                                          
                                                          
                                                          5.5Other
      income, net
                                                          
                                                          
                                                          .3
                                                          
                                                          
                                                          
                                                          .2
                                                          
                                                          
                                                          
                                                          .5
                                                          
                                                          
                                                          
                                                          .2Income
      before income taxes
                                                          
                                                          
                                                          33.1
                                                          
                                                          
                                                          
                                                          38.7
                                                          
                                                          
                                                          
                                                          96.2
                                                          
                                                          
                                                          
                                                          94.1Income
      tax expense, net of benefits
                                                          
                                                          
                                                          10.2
                                                          
                                                          
                                                          
                                                          9.8
                                                          
                                                          
                                                          
                                                          29.5
                                                          
                                                          
                                                          
                                                          23.8Net
      income
                                                          
                                                          $
                                                          22.9
                                                          
                                                          
                                                          $
                                                          28.9
                                                          
                                                          
                                                          $
                                                          66.7
                                                          
                                                          
                                                          $
                                                          70.3Average
      shares of common stock outstandingBasic
                                                          
                                                          
                                                          
                                                          45.4
                                                          
                                                          
                                                          
                                                          45.3
                                                          
                                                          
                                                          
                                                          45.4
                                                          
                                                          
                                                          
                                                          45.3Diluted
                                                          
                                                          
                                                          45.5
                                                          
                                                          
                                                          
                                                          45.3
                                                          
                                                          
                                                          
                                                          45.5
                                                          
                                                          
                                                          
                                                          45.3Earnings
      per average share of common stockBasic
                                                          
                                                          
                                                          $
                                                          .50
                                                          
                                                          
                                                          $
                                                          .64
                                                          
                                                          
                                                          $
                                                          1.47
                                                          
                                                          
                                                          $
                                                          1.55Diluted
                                                          
                                                          
                                                          .50
                                                          
                                                          
                                                          
                                                          .64
                                                          
                                                          
                                                          
                                                          1.47
                                                          
                                                          
                                                          
                                                          1.55Dividends
      declared per share of common stock
                                                          
                                                          $
                                                          .465
                                                          
                                                          
                                                          $
                                                          .465
                                                          
                                                          
                                                          $
                                                          .930
                                                          
                                                          
                                                          $
                                                          .930The
      accompanying notes are an integral part of these
    statements.
   Table of Contents
 Nicor Inc.Condensed
      Consolidated Statements of Cash Flows (Unaudited)(millions)Six
      months endedJune
      302009
                                    
                                    
                                    2008Operating
      activitiesNet
      income
                                    
                                    $
                                    66.7
                                    
                                    
                                    $
                                    70.3Adjustments
      to reconcile net income to net cash flow provided from operating
      activities:Depreciation
                                    
                                    
                                    98.1
                                    
                                    
                                    
                                    95.1Deferred
      income tax expense (benefit)
                                    
                                    
                                    1.0
                                    
                                    
                                    
                                    (20.5
                                    )Gain
      on sale of equity investment
                                    
                                    
                                    (10.1
                                    )
                                    
                                    
                                    -Changes
      in assets and liabilities:Receivables, less allowances
                                    
                                    
                                    379.2
                                    
                                    
                                    
                                    128.2Gas in storage
                                    
                                    
                                    179.9
                                    
                                    
                                    
                                    78.3Deferred/accrued gas costs
                                    
                                    
                                    56.9
                                    
                                    
                                    
                                    41.2Derivative instruments
                                    
                                    
                                    (21.2
                                    )
                                    
                                    
                                    (163.4
                                    )Margin accounts - derivative instruments
                                    
                                    
                                    29.1
                                    
                                    
                                    
                                    91.2Other assets
                                    
                                    
                                    17.1
                                    
                                    
                                    
                                    (32.2
                                    )Accounts payable and customer credit balances and deposits
                                    
                                    
                                    (189.4
                                    )
                                    
                                    
                                    30.9Temporary LIFO inventory liquidation
                                    
                                    
                                    82.9
                                    
                                    
                                    
                                    399.2Other liabilities
                                    
                                    
                                    (29.6
                                    )
                                    
                                    
                                    (13.8
                                    )Other
      items
                                    
                                    
                                    9.6
                                    
                                    
                                    
                                    9.5Net
      cash flow provided from operating activities
                                    
                                    
                                    670.2
                                    
                                    
                                    
                                    714.0Investing
      activitiesAdditions
      to property, plant & equipment
                                    
                                    
                                    (111.2
                                    )
                                    
                                    
                                    (97.1
                                    )Purchases
      of held-to-maturity securities
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (1.1
                                    )Proceeds
      from maturities of held-to-maturity securities
                                    
                                    
                                    1.3
                                    
                                    
                                    
                                    1.4Net
      increase in other short-term investments
                                    
                                    
                                    (3.7
                                    )
                                    
                                    
                                    (5.5
                                    )Proceeds
      from sale of equity investment
                                    
                                    
                                    13.0
                                    
                                    
                                    
                                    -Business
      acquisition, net of cash acquired
                                    
                                    
                                    (.4
                                    )
                                    
                                    
                                    (5.6
                                    )Other
      investing activities
                                    
                                    
                                    2.3
                                    
                                    
                                    
                                    6.2Net
      cash flow used for investing activities
                                    
                                    
                                    (98.7
                                    )
                                    
                                    
                                    (101.7
                                    )Financing
      activitiesRepayments
      of long-term debt
                                    
                                    
                                    (50.0
                                    )
                                    
                                    
                                    -Net
      repayments of commercial paper
                                    
                                    
                                    (462.9
                                    )
                                    
                                    
                                    (351.0
                                    )Dividends
      paid
                                    
                                    
                                    (42.3
                                    )
                                    
                                    
                                    (42.2
                                    )Borrowing
      against cash surrender value of life insurance policies
                                    
                                    
                                    3.4
                                    
                                    
                                    
                                    -Repayment
      of loan against cash surrender value of life insurance
      policies
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (11.2
                                    )Other
      financing activities
                                    
                                    
                                    (1.8
                                    )
                                    
                                    
                                    (.1
                                    )Net
      cash flow used for financing activities
                                    
                                    
                                    (553.6
                                    )
                                    
                                    
                                    (404.5
                                    )Net
      increase in cash and cash equivalents
                                    
                                    
                                    17.9
                                    
                                    
                                    
                                    207.8Cash
      and cash equivalents, beginning of period
                                    
                                    
                                    26.0
                                    
                                    
                                    
                                    42.8Cash
      and cash equivalents, end of period
                                    
                                    $
                                    43.9
                                    
                                    
                                    $
                                    250.6The
      accompanying notes are an integral part of these
    statements.
  Table of Contents




Nicor Inc.


Condensed
Consolidated Balance Sheets (Unaudited)


(millions)


June
      30
                                
                                
                                December
      31
                                
                                
                                June
      302009
                                
                                
                                2008
                                
                                
                                2008AssetsCurrent
      assetsCash
      and cash equivalents
                                
                                $
                                43.9
                                
                                
                                $
                                26.0
                                
                                
                                $
                                250.6Short-term
      investments
                                
                                
                                72.4
                                
                                
                                
                                69.5
                                
                                
                                
                                53.2Receivables,
      less allowances of $51.9, $44.9 and $55.5, respectively
                                
                                
                                310.9
                                
                                
                                
                                690.1
                                
                                
                                
                                514.6Gas
      in storage
                                
                                
                                28.6
                                
                                
                                
                                208.5
                                
                                
                                
                                75.7Derivative
      instruments
                                
                                
                                53.3
                                
                                
                                
                                49.7
                                
                                
                                
                                226.4Margin
      accounts - derivative instruments
                                
                                
                                116.8
                                
                                
                                
                                134.4
                                
                                
                                
                                17.0Other
                                
                                
                                117.4
                                
                                
                                
                                160.7
                                
                                
                                
                                106.4Total
      current assets
                                
                                
                                743.3
                                
                                
                                
                                1,338.9
                                
                                
                                
                                1,243.9Property,
      plant and equipment, at costGas
      distribution
                                
                                
                                4,536.8
                                
                                
                                
                                4,460.6
                                
                                
                                
                                4,348.2Shipping
                                
                                
                                323.2
                                
                                
                                
                                315.1
                                
                                
                                
                                312.2Other
                                
                                
                                29.3
                                
                                
                                
                                26.7
                                
                                
                                
                                25.14,889.3
                                
                                
                                
                                4,802.4
                                
                                
                                
                                4,685.5Less
      accumulated depreciation
                                
                                
                                1,990.1
                                
                                
                                
                                1,943.8
                                
                                
                                
                                1,905.3Total
      property, plant and equipment, net
                                
                                
                                2,899.2
                                
                                
                                
                                2,858.6
                                
                                
                                
                                2,780.2Pension
      benefits
                                
                                
                                36.5
                                
                                
                                
                                36.4
                                
                                
                                
                                223.2Long-term
      investments
                                
                                
                                128.4
                                
                                
                                
                                136.8
                                
                                
                                
                                141.8Other
      assets
                                
                                
                                380.2
                                
                                
                                
                                413.3
                                
                                
                                
                                166.6Total
      assets
                                
                                $
                                4,187.6
                                
                                
                                $
                                4,784.0
                                
                                
                                $
                                4,555.7Liabilities and
    CapitalizationCurrent
      liabilitiesLong-term
      debt due within one year
                                
                                $
                                -
                                
                                
                                $
                                50.0
                                
                                
                                $
                                125.0Short-term
      debt
                                
                                
                                227.0
                                
                                
                                
                                739.9
                                
                                
                                
                                18.0Accounts
      payable
                                
                                
                                266.1
                                
                                
                                
                                411.3
                                
                                
                                
                                555.1Customer
      credit balances and deposits
                                
                                
                                143.1
                                
                                
                                
                                187.3
                                
                                
                                
                                138.5Temporary
      LIFO inventory liquidation
                                
                                
                                82.9
                                
                                
                                
                                -
                                
                                
                                
                                399.2Derivative
      instruments
                                
                                
                                152.4
                                
                                
                                
                                167.3
                                
                                
                                
                                66.4Other
                                
                                
                                104.5
                                
                                
                                
                                112.2
                                
                                
                                
                                259.2Total
      current liabilities
                                
                                
                                976.0
                                
                                
                                
                                1,668.0
                                
                                
                                
                                1,561.4Deferred
      credits and other liabilitiesRegulatory
      asset retirement cost liability
                                
                                
                                774.7
                                
                                
                                
                                751.7
                                
                                
                                
                                739.8Deferred
      income taxes
                                
                                
                                399.0
                                
                                
                                
                                400.0
                                
                                
                                
                                399.4Health
      care and other postretirement benefits
                                
                                
                                197.5
                                
                                
                                
                                196.6
                                
                                
                                
                                186.2Asset
      retirement obligation
                                
                                
                                188.9
                                
                                
                                
                                185.0
                                
                                
                                
                                181.6Other
                                
                                
                                146.9
                                
                                
                                
                                161.0
                                
                                
                                
                                129.5Total
      deferred credits and other liabilities
                                
                                
                                1,707.0
                                
                                
                                
                                1,694.3
                                
                                
                                
                                1,636.5Commitments
      and contingenciesCapitalizationLong-term
      obligationsLong-term
      debt, net of unamortized discount
                                
                                
                                498.1
                                
                                
                                
                                448.0
                                
                                
                                
                                372.9Mandatorily
      redeemable preferred stock
                                
                                
                                .6
                                
                                
                                
                                .6
                                
                                
                                
                                .6Total
      long-term obligations
                                
                                
                                498.7
                                
                                
                                
                                448.6
                                
                                
                                
                                373.5Common
      equityCommon
      stock
                                
                                
                                113.0
                                
                                
                                
                                113.0
                                
                                
                                
                                112.9Paid-in
      capital
                                
                                
                                52.2
                                
                                
                                
                                49.5
                                
                                
                                
                                46.6Retained
      earnings
                                
                                
                                854.6
                                
                                
                                
                                830.3
                                
                                
                                
                                823.5Accumulated
      other comprehensive income (loss), net
                                
                                
                                (13.9
                                )
                                
                                
                                (19.7
                                )
                                
                                
                                1.3Total
      common equity
                                
                                
                                1,005.9
                                
                                
                                
                                973.1
                                
                                
                                
                                984.3Total
      capitalization
                                
                                
                                1,504.6
                                
                                
                                
                                1,421.7
                                
                                
                                
                                1,357.8Total
      liabilities and capitalization
                                
                                $
                                4,187.6
                                
                                
                                $
                                4,784.0
                                
                                
                                $
                                4,555.7The
      accompanying notes are an integral part of these
    statements.






Table of Contents


Nicor
Inc.
 
 Notes to the Condensed Consolidated Financial Statements
(Unaudited)
 
 1.
              BASIS
      OF PRESENTATION
 
 The
unaudited Condensed Consolidated Financial Statements of Nicor have been
prepared by the company pursuant to the rules and regulations of the
SEC.  Certain information and note 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 unaudited Condensed Consolidated Financial
Statements and Notes should be read in conjunction with the financial statements
and the notes thereto included in the company’s 2008 Annual Report on Form 10-K.
 
 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.
 
 The
company’s management evaluated subsequent events for potential recognition and
disclosure through July 31, 2009, the date the financial statements were
issued.
 
 2.
              ACCOUNTING
      POLICIES
 
 Gas in storage.  Gas
distribution segment inventory is carried at cost on a LIFO
basis.  Inventory decrements occurring during interim periods that are
expected to be restored prior to year-end are charged to cost of gas at the
estimated annual replacement cost, and the difference between this cost and the
actual LIFO layer cost is recorded on the balance sheet as a temporary LIFO
inventory liquidation.  Interim inventory decrements not expected to
be restored prior to year-end are charged to cost of gas at the actual LIFO cost
of the layers liquidated.  The inventory decrement as of June 30, 2009
is expected to be restored prior to year-end.
 
 Nicor
Enerchange inventory is carried at the lower of weighted-average cost or market
(market is represented by the cash price per the close of business on the last
trading day of the period).  In 2009, Nicor Enerchange recorded a
charge of $2.8 million in the first quarter resulting from a lower of cost or
market valuation.
 
 Regulatory assets and
liabilities.  Nicor Gas is regulated by the ICC, which
establishes the rules and regulations governing utility rates and services in
Illinois.  As a rate-regulated company, Nicor Gas applies SFAS No. 71,
Accounting for the Effects of
Certain Types of Regulation, which requires Nicor Gas to recognize the
economic effects of rate regulation and, accordingly, has recorded regulatory
assets and liabilities.  Regulatory assets represent probable future
revenue associated with certain costs that are expected to be recovered from
customers through rate riders or base rates, upon approval by the
ICC.  Regulatory liabilities represent probable future reductions in
revenues collected from ratepayers through a rate rider or base rates, or
probable future expenditures.  If Nicor Gas’ operations become no
longer subject to the provisions of SFAS No. 71, a write-off of net regulatory
liabilities would be required.
 
  4
 
 Table of Contents
  The
company had regulatory assets and liabilities as follows (in
millions):
 
 June
      30
                        
                        
                        December
      31
                        
                        
                        June
      302009
                        
                        
                        2008
                        
                        
                        2008Regulatory
      assetsRegulatory
      postretirement asset – current
                        
                        $
                        23.3
                        
                        
                        $
                        23.3
                        
                        
                        $
                        5.2Regulatory
      postretirement asset – noncurrent
                        
                        
                        222.7
                        
                        
                        
                        232.3
                        
                        
                        
                        61.9Deferred
      gas costs – current
                        
                        
                        -
                        
                        
                        
                        31.5
                        
                        
                        
                        -Deferred
      gas costs – noncurrent
                        
                        
                        15.2
                        
                        
                        
                        22.5
                        
                        
                        
                        -Deferred
      environmental costs
                        
                        
                        11.8
                        
                        
                        
                        19.5
                        
                        
                        
                        8.0Unamortized
      losses on reacquired debt
                        
                        
                        14.8
                        
                        
                        
                        15.4
                        
                        
                        
                        15.9Other
                        
                        
                        15.0
                        
                        
                        
                        6.2
                        
                        
                        
                        4.3$
                        302.8
                        
                        
                        $
                        350.7
                        
                        
                        $
                        95.3
 
 Regulatory
      liabilitiesRegulatory
      asset retirement cost liability – current
                            
                            $
                            15.0
                            
                            
                            $
                            15.0
                            
                            
                            $
                            8.0Regulatory
      asset retirement cost liability – noncurrent
                            
                            
                            774.7
                            
                            
                            
                            751.7
                            
                            
                            
                            739.8Accrued
      gas costs
                            
                            
                            18.1
                            
                            
                            
                            -
                            
                            
                            
                            91.3Regulatory
      income tax liability
                            
                            
                            44.7
                            
                            
                            
                            46.3
                            
                            
                            
                            48.1Other
                            
                            
                            1.2
                            
                            
                            
                            .8
                            
                            
                            
                            6.1$
                            853.7
                            
                            
                            $
                            813.8
                            
                            
                            $
                            893.3
 
 The
current portion of the regulatory postretirement asset, the deferred gas costs
and $2.3 million of other regulatory assets are classified in current assets –
other.  All other regulatory assets are classified in noncurrent other
assets.  The current portion of the regulatory asset retirement cost
liability and accrued gas costs are classified in current liabilities –
other.  All other regulatory liabilities are classified in noncurrent
other liabilities.
 
 The ICC
does not presently allow Nicor Gas the opportunity to earn a return on its
regulatory postretirement asset.  The regulatory postretirement asset
is expected to be recovered from ratepayers over a period of approximately 10 to
13 years.  The regulatory assets related to debt are not included in
rate base, but are recovered over the term of the debt through the rate of
return authorized by the ICC.  Nicor Gas is allowed to recover and is
required to pay, using short-term interest rates, the carrying costs related to
temporary under or overcollections of natural gas costs and certain
environmental costs charged to its customers.
 
 Revenue taxes.Nicor Gas
classifies revenue taxes billed to customers as operating revenues and related
taxes incurred as operating expenses.  Revenue taxes included in
operating expense for the three and six months ended June 30, 2009 were $26.3
million and $99.9 million, respectively, and $36.1 million and $115.0 million,
respectively, for the same periods ending June 30, 2008.
 
 Derivative
instruments.Cash flows from derivative
instruments are recognized in the Condensed Consolidated Statements of Cash
Flows, and gains and losses are recognized in the Condensed Consolidated
Statements of Operations, in the same categories as the underlying
transactions.
 
 Cash flow
hedge accounting may be elected only for highly effective hedges, based upon an
assessment, performed at least quarterly, of the historical and probable future
correlation of cash flows from the derivative instrument to changes in the
expected future cash flows of the hedged item.  To the extent cash
flow hedge accounting is applied, the effective portion of any changes in the
fair value of the derivative instruments is reported as a component of
accumulated other comprehensive income.  Ineffectiveness, if any, is
immediately recognized in operating income.  The amount in accumulated
other comprehensive income is reclassified to earnings when the forecasted
transaction is recognized in the income statement,
  5
 Table of Contents
  even if
the derivative instrument is sold, extinguished or terminated prior to the
transaction occurring.  If the forecasted transaction is no longer
expected to occur, the amount in accumulated other comprehensive income is
immediately reclassified to earnings.
 
 Nicor
Gas.  Derivative instruments, such as futures contracts,
options and swap agreements, are utilized primarily in the purchase of natural
gas for customers.  These derivative instruments are reflected at fair
value.  Realized gains or losses on such instruments are included in
the cost of gas delivered and are passed directly through to customers, subject
to ICC review, and therefore have no direct impact on
earnings.  Unrealized changes in the fair value of these derivative
instruments are deferred as regulatory assets or liabilities and classified on
the balance sheet as deferred or accrued gas costs, respectively.
 
 At times,
Nicor Gas enters into futures contracts, options, swap agreements and
fixed-price purchase agreements to reduce the earnings volatility of certain
forecasted operating costs arising from fluctuations in natural gas prices, such
as the purchase of natural gas for use in company operations.  These
derivative instruments are carried at fair value, unless they qualify for the
normal purchases and normal sales exception, in which case they are carried at
cost.  To the extent hedge accounting is not elected, changes in such
fair values are immediately recorded in current period earnings as operating and
maintenance expense.
 
 Nicor
Enerchange.  Derivative instruments, such as futures contracts,
options, forward contracts, swap agreements and other energy-related contracts
are held by Nicor’s wholesale natural gas marketing business, Nicor Enerchange,
for trading purposes.  Certain of these derivative instruments are
used to economically hedge price risk associated with inventories of natural
gas, fixed-price purchase and sale agreements and other future natural gas
commitments.  Nicor Enerchange records such derivative instruments at
fair value and generally does not elect hedge accounting.  As a
result, changes in derivative fair values may have a material impact on Nicor’s
financial statements.  Other derivative instruments are used by Nicor
Enerchange to hedge price risks related to certain utility-bill management
products.  These derivative instruments are carried at fair value and
cash flow hedge accounting may or may not be elected.
 
 Nicor.  For derivative
instruments that were designated as hedges of interest payments on 30-year bonds
issued by Nicor Gas in December 2003, the amount deferred in accumulated other
comprehensive income is being amortized to interest expense on a straight-line
basis over the remaining life of the bonds.
 
 3.
              NEW
      ACCOUNTING PRONOUNCEMENTS
 
 Fair value measurements. 
Effective January 1, 2008, the company adopted SFAS No. 157, Fair Value Measurements,
which defines fair value, establishes a consistent framework for measuring fair
value, and expands disclosure requirements about fair value
measurements.  This Statement does not require any new fair value
measurements, rather it provides guidance on how to perform fair value
measurements as required or permitted under other accounting
pronouncements. It also provides for immediate recognition of trade-date
gains and losses related to certain derivative transactions whose fair value has
been determined using unobservable market inputs.  In 2008, Nicor
elected the one-year deferral allowed by FSP SFAS 157-2, Effective Date of FASB Statement No.
157,for
certain nonfinancial assets and liabilities.  As it applies to Nicor,
the deferral pertained to fair value measurements for business combinations,
impairment testing of goodwill and other intangible assets, as well as asset
retirement obligations.  The
effect of adopting SFAS No. 157, in its entirety, was not material to Nicor’s
results of operations or financial condition.
  6
 
 Table of Contents
  4.
              INVESTMENTS
 
 FSP No.
SFAS 115-2 and SFAS 124-2, Recognition and Presentation of
Other –Than-Temporary Impairments, is effective for interim reporting
periods ending after June 15, 2009.  This FSPextends existing
disclosure requirements for investments to interim reporting periods as well as
provides new disclosure requirements.
 
 The
company’s investments are as follows (in millions):
 
 June
      30
                          
                          
                          December
      31
                          
                          
                          June
      302009
                          
                          
                          2008
                          
                          
                          2008Money
      market funds
                          
                          $
                          100.8
                          
                          
                          $
                          81.2
                          
                          
                          $
                          290.5Corporate
      bonds
                          
                          
                          3.5
                          
                          
                          
                          4.8
                          
                          
                          
                          7.1Certificates
      of deposit
                          
                          
                          .7
                          
                          
                          
                          .6
                          
                          
                          
                          .7Other
      investments
                          
                          
                          3.2
                          
                          
                          
                          2.0
                          
                          
                          
                          2.2Total
      investments
                          
                          $
                          108.2
                          
                          
                          $
                          88.6
                          
                          
                          $
                          300.5
 
 Investments
are classified on the Condensed Consolidated Balance Sheets as follows (in
millions):
 
 June
      30
                        
                        
                        December
      31
                        
                        
                        June
      302009
                        
                        
                        2008
                        
                        
                        2008Cash
      equivalents
                        
                        $
                        31.2
                        
                        
                        $
                        15.3
                        
                        
                        $
                        240.5Short-term
      investments
                        
                        
                        72.4
                        
                        
                        
                        69.5
                        
                        
                        
                        53.2Long-term
      investments
                        
                        
                        4.6
                        
                        
                        
                        3.8
                        
                        
                        
                        6.8Total
      investments
                        
                        $
                        108.2
                        
                        
                        $
                        88.6
                        
                        
                        $
                        300.5
 
 Money
market funds held by domestic subsidiaries are included in cash equivalents,
whereas such funds held by non-U.S subsidiaries are included in short-term
investments.
 
 Investments
categorized as trading (including money market funds) are carried at fair value,
and totaled $102.2 million, $82.2 million and $291.7 million at June 30, 2009,
December 31, 2008 and June 30, 2008, respectively.  Corporate bonds
are categorized as held-to-maturity, and their carrying value approximates fair
value.  The contractual maturities of the held-to-maturity corporate
bonds at June 30, 2009 are as follows (in millions):
 Years to
maturity
 Less
                            than
      1
                            year
                          
                          
                          1-5
                            Years
                          
                          
                          Total$
                          2.7
                          
                          
                          $
                          .8
                          
                          
                          $
                          3.5
 
 Nicor’s
investments also include certain restricted investments, including certificates
of deposit and bank accounts, maintained to fulfill statutory or contractual
requirements.  These investments totaled $2.5 million, $1.6 million
and $1.7 million at June 30, 2009, December 31, 2008 and June 30, 2008,
respectively.
 
 Any gains
or losses included in earnings resulting from the sale of investments were not
significant.
  7
 
 Table of Contents
  5.
              SHORT-TERM
      AND LONG-TERM DEBT
 
 In
February 2009, the $50 million 5.37 percent First Mortgage Bond series matured
and was retired.  On July 30, 2009, Nicor Gas, through a private
placement, issued $50 million First Mortgage Bonds at 4.70 percent, due in
2019.  As a result of this issuance, the company reclassified $50
million of short-term debt outstanding as of June 30, 2009 as a long-term
obligation.
 
 In August
2008, Nicor Gas, through a private placement, issued $75 million First Mortgage
Bonds at 6.25 percent, due in 2038.  Nicor Gas retired the $75 million
5.875 percent First Mortgage Bond series that became due in August
2008.
 
 In May
2009, Nicor Gas established a $550 million, 364-day revolver, expiring May 2010,
to replace the $600 million, 9-month seasonal revolver, which expired in May
2009.  In September 2005, Nicor and Nicor Gas established a $600
million, five-year revolver, expiring September 2010.  These
facilities were established with major domestic and foreign banks and serve as
backup for the issuance of commercial paper.  The company had $277.0
million, $739.9 million and $18.0 million of commercial paper borrowings
outstanding at June 30, 2009, December 31, 2008 and June 30, 2008,
respectively.
 
 The
company believes it is in compliance with all debt covenants.
 
 6.         INCOME
TAXES
 
 The
effective income tax rate for the three months ended June 30, 2009 increased to
30.9 percent from 25.3 percent in the prior-year period.  The
effective income tax rate for the six months ended June 30, 2009 increased to
30.7 percent from 25.3 percent in the prior-year period.  The higher
effective income tax rate for the three and six months ended June 30, 2009 is
due primarily to higher forecasted annual pretax income (which causes a higher
effective income tax rate since permanent differences and tax credits are a
smaller share of pretax income).
 
 In 2006,
the company reorganized certain shipping and related operations.  The
reorganization allows the company to take advantage of certain provisions of the
Jobs Act that provide the opportunity for tax savings subsequent to the date of
the reorganization.  Generally, to the extent foreign shipping
earnings are not repatriated to the United States, such earnings are not
expected to be subject to current taxation.  In addition, to the
extent such earnings are determined to be indefinitely reinvested offshore, no
deferred income tax expense would be recorded by the company.  For the
six months ended June 30, 2009, income tax expense has not been provided on
approximately $5 million of foreign company shipping earnings that are expected
to be indefinitely reinvested offshore compared to approximately $3 million for
the three and six months ended June 30, 2008.  As of June 30, 2009,
Nicor has not recorded deferred income taxes of approximately $53 million on
approximately $151 million of cumulative undistributed foreign earnings that are
expected, in management’s judgment, to be indefinitely reinvested
offshore.
 
 The
company has approximately $6 million of net interest receivable accrued at June
30, 2009 compared with $9 million of interest receivable as of December 31,
2008.  The change is due primarily to the settlement of interest in
the first quarter of 2009 related to a state income tax matter.
 
 The
balance of unamortized investment tax credits at June 30, 2009, December 31,
2008 and June 30, 2008 was $24.7 million, $26.0 million and $26.4 million,
respectively.
  8
 
 Table of Contents
  7.         ACCRUED
UNBILLED REVENUES
 
 Receivables
include accrued unbilled revenues of $31.9 million, $199.1 million and $58.6
million at June 30, 2009, December 31, 2008 and June 30, 2008, respectively,
related primarily to gas distribution operations.  Nicor Gas accrues
revenues for estimated deliveries to customers from the date of their last bill
until the balance sheet date.
 
 8.         FAIR
VALUE MEASUREMENTS
 
 SFAS No.
157, Fair Value
Measurements, defines a three-level hierarchy which prioritizes the
inputs to valuation techniques used to measure fair value into three broad
levels, with Level 1 considered the most reliable.  For assets and
liabilities measured at fair value on a recurring basis on the Condensed
Consolidated Balance Sheets, the tables below categorize those fair values
across the three levels (in millions):
 Fair
      value amountQuoted
      prices in active markets
                          
                          
                          Significant
      observable inputs
                          
                          
                          Significant
      unobservable inputs(Level
      1)
                          
                          
                          (Level
      2)
                          
                          
                          (Level
      3)
                          
                          
                          TotalJune
      30, 2009AssetsMoney
      market funds
                          
                          $
                          100.8
                          
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          100.8Derivatives
                          
                          
                          29.9
                          
                          
                          
                          25.5
                          
                          
                          
                          8.1
                          
                          
                          
                          63.5Total
                          
                          $
                          130.7
                          
                          
                          $
                          25.5
                          
                          
                          $
                          8.1
                          
                          
                          $
                          164.3LiabilitiesDerivatives
                          
                          $
                          143.0
                          
                          
                          $
                          28.8
                          
                          
                          $
                          2.8
                          
                          
                          $
                          174.6
 
 December
      31, 2008AssetsMoney
      market funds
                          
                          $
                          81.2
                          
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          81.2Derivatives
                          
                          
                          33.8
                          
                          
                          
                          21.7
                          
                          
                          
                          8.5
                          
                          
                          
                          64.0Total
                          
                          $
                          115.0
                          
                          
                          $
                          21.7
                          
                          
                          $
                          8.5
                          
                          
                          $
                          145.2LiabilitiesDerivatives
                          
                          $
                          161.4
                          
                          
                          $
                          28.0
                          
                          
                          $
                          6.9
                          
                          
                          $
                          196.3
 
 June
      30, 2008AssetsMoney
      market funds
                                  
                                  $
                                  290.5
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  290.5Derivatives
                                  
                                  
                                  158.1
                                  
                                  
                                  
                                  62.9
                                  
                                  
                                  
                                  10.0
                                  
                                  
                                  
                                  231.0Total
                                  
                                  $
                                  448.6
                                  
                                  
                                  $
                                  62.9
                                  
                                  
                                  $
                                  10.0
                                  
                                  
                                  $
                                  521.5LiabilitiesDerivatives
                                  
                                  $
                                  53.2
                                  
                                  
                                  $
                                  10.2
                                  
                                  
                                  $
                                  3.1
                                  
                                  
                                  $
                                  66.5
 
 When
available and appropriate, the company uses quoted market prices in active
markets to determine fair value, and classifies such items within Level
1.  For derivatives, Level 1 values include only those derivative
instruments traded on the NYMEX.  The company enters into
over-the-counter instruments with values that are similar to, and correlate
with, quoted prices for exchange-traded instruments in active markets; these
over-the-counter items are classified within Level 2.  In certain
instances, the company
  9
 Table of Contents
  may be
required to use one or more significant unobservable inputs for a model-derived
valuation; the resulting valuation is classified as Level 3.
 
 The net
fair value of derivatives relates largely to Nicor Gas.  The majority
of derivatives held by Nicor Gas are for the purpose of hedging natural gas
purchases for its customers, and therefore their fair values do not affect net
income, as their settlement is passed directly through to customers without
markup, subject to ICC review.  The change in fair value for these
derivatives is accounted for through regulatory assets and
liabilities.
 
 The
following table presents a reconciliation of the Level 3 beginning and ending
net derivative asset balances (in millions):
  Three
      months ended
                              June
      30
                            
                            
                            Six
      months ended
                              June
      302009
                            
                            
                            2008
                            
                            
                            2009
                            
                            
                            2008Beginning
      of period
                            
                            $
                            15.7
                            
                            
                            $
                            9.3
                            
                            
                            $
                            1.6
                            
                            
                            $
                            8.2Net
      realized/unrealized gains (losses)Included
      in regulatory assets andliabilities
                            
                            
                            (1.6
                            )
                            
                            
                            -
                            
                            
                            
                            (1.7
                            )
                            
                            
                            5.9Included
      in net income
                            
                            
                            .9
                            
                            
                            
                            -
                            
                            
                            
                            10.3
                            
                            
                            
                            2.5Settlements,
      net of purchases
                            
                            
                            .2
                            
                            
                            
                            (1.0
                            )
                            
                            
                            1.3
                            
                            
                            
                            (8.2
                            )Transfers
      in and/or out of Level 3
                            
                            
                            (9.9
                            )
                            
                            
                            (1.4
                            )
                            
                            
                            (6.2
                            )
                            
                            
                            (1.5
                            )End
      of period
                            
                            $
                            5.3
                            
                            
                            $
                            6.9
                            
                            
                            $
                            5.3
                            
                            
                            $
                            6.9Net
      realized/unrealized gains (losses) included in net income relating to
      derivatives still held at June 30
                            
                            $
                            2.2
                            
                            
                            $
                            -
                            
                            
                            $
                            11.5
                            
                            
                            $
                            2.5
 Net
realized/unrealized gains (losses) included in net income are attributable to
Nicor Enerchange and are classified as operating revenues.
 
 Nicor
maintains margin accounts related to financial derivative
transactions.  The company’s policy is not to offset the fair value of
assets and liabilities recognized for derivative instruments or any related
margin account.  The following table represents the balances of margin
accounts related to derivative instruments (in millions):
  June
      30
                              
                              
                              December
      31
                              
                              
                              June
      302009
                              
                              
                              2008
                              
                              
                              2008AssetsMargin
      accounts – derivative instruments
                              
                              $
                              116.8
                              
                              
                              $
                              134.4
                              
                              
                              $
                              17.0Other
      – noncurrent
                              
                              
                              17.7
                              
                              
                              
                              29.3
                              
                              
                              
                              -LiabilitiesOther
      – current
                              
                              $
                              -
                              
                              
                              $
                              .1
                              
                              
                              $
                              79.4
 
 In
addition, the recorded amount of restricted short-term investments and
short-term borrowings approximates fair value.  Long-term debt
outstanding, including current maturities, is recorded at the principal balance
outstanding, net of unamortized discounts.  The principal balance of
Nicor Gas’ First Mortgage Bonds outstanding at June 30, 2009 was $450 million
and at December 31, 2008 and June 30, 2008 was $500
million.  Based on quoted market interest rates, the fair value of the
company’s First Mortgage Bonds outstanding was approximately $485 million
at June 30, 2009, $520 million at December 31, 2008 and $503 million
at June 30, 2008.
  10
 
 Table of Contents
  9.         DERIVATIVE
INSTRUMENTS
 
 A
description of the company’s objectives and strategies for using derivative
instruments, and related accounting policies, is included in Note 2 – Accounting
Policies – Derivative instruments.  All derivatives recognized on the
Condensed Consolidated Balance Sheets are measured at fair value, as described
in Note 8 – Fair Value Measurements.
 
 Balance
sheet.  Derivative assets and liabilities as of June 30, 2009,
carried at fair value on the Condensed Consolidated Balance Sheets, are shown in
the table below (in millions):
 
 Derivatives
                              designated
                              as
      hedging instruments
                            
                            
                            Derivatives
                              not
      designated
                              ashedging
                              instrumentsAssetsDerivative
      instruments
                            
                            $
                            .1
                            
                            
                            $
                            53.2Other
      – noncurrent
                            
                            
                            -
                            
                            
                            
                            10.2Total
                            
                            $
                            .1
                            
                            
                            $
                            63.4LiabilitiesDerivative
      instruments
                            
                            $
                            3.5
                            
                            
                            $
                            148.9Other
      – noncurrent
                            
                            
                            .2
                            
                            
                            
                            22.0Total
                            
                            $
                            3.7
                            
                            
                            $
                            170.9
 
 Volumes.  As of June
30, 2009, Nicor Gas held outstanding derivative contracts of approximately 71
Bcf to hedge natural gas purchases for customer use, spanning approximately
three years.  Commodity price-risk exposure arising from Nicor
Enerchange’s activities and Nicor Gas’ natural gas purchases for company use is
mitigated with derivative instruments that total to a net short position of 1.6
Bcf as of June 30, 2009.  The above volumes exclude contracts such as
variable-priced contracts and basis swaps, which are accounted for as
derivatives but are not directly impacted by changes in commodity
prices.
 
 Income statement– cash flow hedges. 
Changes in the fair value of derivatives designated as a cash flow hedge are
recognized in other comprehensive income until the hedged transaction is
recognized in the income statement.  Cash flow hedges used by the
company’s other energy ventures, to hedge utility-bill management products, are
eventually recognized within operating revenues.  Cash flow hedges used by
Nicor Gas, to hedge purchases of natural gas for company use, are
eventually recorded within operating and maintenance expense.  Cash
flow hedges affected accumulated other comprehensive income and income as shown
in the following tables (in millions):
 
 Three
      months ended June 30, 2009Pretax
      gain (loss)
                        recognized
      in other comprehensive income
                        (Effective
      portion)
                      
                      Location
                      
                      Pretax
      gain(loss)
                        reclassified
      from
                        accumulated
      other
                        comprehensive
      income
                        into
      income
                        (Effective
      portion)
                      
                      
                      Pretax
      gain (loss) recognized in income(Ineffective
      portion)$
                      (.2)
                      
                      Operating
      revenues
                      
                      $
                      (1.7)
                      
                      
                      $
                      -.1
                      
                      Operating
      and maintenance
                      
                      
                      (1.2)
                      
                      
                      
                      -$
                      (.1)
                      
                      
                      
                      $
                      (2.9)
                      
                      
                      $
                      -
  11
 
 Table of Contents
  
 Six
      months ended June 30, 2009Pretax
      gain (loss)
                          recognized
      in other
                          comprehensive
      income
                          (Effective
      portion)
                        
                        Location
                        
                        Pretax
      gain(loss)
                          reclassified
      from
                          accumulated
      other
                          comprehensive
      income
                          into
      income
                          (Effective
      portion)
                        
                        
                        Pretax
      gain (loss) recognized in income
                          (Ineffective
      portion)$
                        (2.8)
                        
                        Operating
      revenues
                        
                        $
                        (10.0)
                        
                        
                        $
                        .2(3.8)
                        
                        Operating
      and maintenance
                        
                        
                        (5.7)
                        
                        
                        
                        -$
                        (6.6)
                        
                        
                        
                        $
                        (15.7)
                        
                        
                        $
                        .2
 As of
June 30, 2009, the time horizon of cash flow hedges of natural gas purchases for
Nicor Gas company use and for utility-bill management products sold by Nicor’s
other energy ventures extends to as long as 17 months.  For these
hedges, the total pretax loss deferred in accumulated other comprehensive income
at June 30, 2009 was $4.4 million (or $2.6 million after taxes), of which $4.1
million (or $2.5 million after taxes) is expected to be reclassified to earnings
within the next 12 months.
 
 Income statement – derivatives not
designated as hedges.  The earnings of the company are subject
to volatility for those derivatives not designated as
hedges.  Non-designated derivatives used by the company’s other energy
ventures, to hedge energy trading activities and utility-bill management
products, are recorded in operating revenues.  Non-designated
derivatives used by Nicor Gas, to hedge purchases of natural gas for company
use, are recorded within operating and maintenance expense.  Pretax
earnings effects of these items are summarized in the table below for the
periods ended June 30, 2009 (in millions):
 
 Net
      gain (loss) recognized in incomeLocation
                              
                              Three
      months ended
                              
                              
                              Six
      months endedOperating
      revenues
                              
                              $
                              (7.9
                              )
                              
                              $
                              (8.7
                              )Operating
      and maintenance
                              
                              
                              (.1
                              )
                              
                              
                              (1.8
                              )$
                              (8.0
                              )
                              
                              $
                              (10.5
                              )
 
 Nicor
Gas’ derivatives to hedge the purchase of natural gas for its customers are also
not designated as hedging instruments.  Gains or losses on these
derivatives are not recognized in pretax earnings, but are deferred as
regulatory assets or liabilities until the related revenue is
recognized.  Net losses of $8.4 million and $125.5 million were
recognized in regulatory assets for the three and six months ended June 30,
2009, respectively.
 
  12
 
 Table of Contents
  Credit-risk-related contingent
features.  Provisions within certain derivative agreements
require the company to post collateral if the company’s net liability position
exceeds a specified threshold.  Also, certain derivative agreements
contain credit-risk-related contingent features, whereby the company would be
required to provide additional collateral or pay the amount due to the
counterparty when a credit event occurs, such as if the company’s credit rating
was to be lowered.  As of June 30, 2009, for agreements with such
features, derivative contracts with liability fair values totaled approximately
$25 million, for which the company had posted no collateral to its
counterparties.  If it was assumed that the company had to post the
maximum contractually specified collateral or settle the liability, the company
would have been required to pay approximately $22 million.
 
 Concentrations of credit
risk.  In instances in which the company holds an
uncollateralized net asset per an over-the-counter derivative contract, there is
potential credit risk in the event the counterparty defaults on a settlement or
fails to perform under the agreed-upon terms.  To manage this credit
risk, the company maintains prudent credit policies to determine and monitor the
creditworthiness of counterparties, seeks guarantees or collateral, in the form
of cash or letters of credit, acquires credit insurance in certain instances and
limits its exposure to any one counterparty.  The company also, in
some instances, enters into netting arrangements to mitigate counterparty credit
risk.
 
 10.
              POSTRETIREMENT
      BENEFITS
 
 Nicor Gas
maintains a noncontributory defined benefit pension plan covering substantially
all employees hired prior to 1998.  Pension benefits are based on
years of service and highest average salary for management employees and job
level for collectively bargained employees.  The benefit obligation
related to collectively bargained benefits considers the company’s past practice
of regular benefit increases to reflect current wages.  Nicor Gas also
provides health care and life insurance benefits to eligible retired employees
under a plan that includes a limit on the company’s share of cost for employees
hired after 1982.
 
 The
company’s postretirement benefit costs have historically been considered in rate
proceedings in the period they are accrued.  As a regulated utility,
Nicor Gas expects continued rate recovery of the eligible costs of its defined
benefit postretirement plans and, accordingly, associated changes in the plan’s
funded status have been deferred as a regulatory asset or liability until
recognized in income, instead of being recorded in accumulated other
comprehensive income.  However, to the extent Nicor Gas employees
perform services for non-regulated affiliates and to the extent such employees
are eligible to participate in these plans, the affiliates are charged for the
cost of these benefits and the changes in the funded status relating to these
employees are recorded in accumulated other comprehensive income.
 
 About
one-fourth of the net periodic benefit cost or credit related to these plans has
been capitalized as a cost of constructing gas distribution facilities and the
remainder is included in gas distribution operating and maintenance expense, net
of amounts charged to affiliates.  Net periodic benefit cost (credit)
included the following components (in millions):
  Pension
      benefits
                          
                          
                          Health
      care and
                            other
      benefits2009
                          
                          
                          2008
                          
                          
                          2009
                          
                          
                          2008Three
      months ended June 30Service
      cost
                          
                          $
                          2.1
                          
                          
                          $
                          2.2
                          
                          
                          $
                          .5
                          
                          
                          $
                          .5Interest
      cost
                          
                          
                          4.1
                          
                          
                          
                          3.9
                          
                          
                          
                          3.0
                          
                          
                          
                          3.0Expected
      return on plan assets
                          
                          
                          (6.3
                          )
                          
                          
                          (10.0
                          )
                          
                          
                          -
                          
                          
                          
                          -Recognized
      net actuarial loss
                          
                          
                          3.9
                          
                          
                          
                          -
                          
                          
                          
                          1.2
                          
                          
                          
                          1.1Amortization
      of prior service cost
                          
                          
                          .1
                          
                          
                          
                          .1
                          
                          
                          
                          -
                          
                          
                          
                          -Net
      periodic benefit cost (credit)
                          
                          $
                          3.9
                          
                          
                          $
                          (3.8
                          )
                          
                          $
                          4.7
                          
                          
                          $
                          4.6
 13
 Table of Contents
 Pension
      benefits
                          
                          
                          Health
      care and
                            other
      benefits2009
                          
                          
                          2008
                          
                          
                          2009
                          
                          
                          2008Six
      months ended June 30Service
      cost
                          
                          $
                          4.3
                          
                          
                          $
                          4.3
                          
                          
                          $
                          1.1
                          
                          
                          $
                          1.0Interest
      cost
                          
                          
                          8.2
                          
                          
                          
                          7.9
                          
                          
                          
                          6.0
                          
                          
                          
                          6.0Expected
      return on plan assets
                          
                          
                          (12.6
                          )
                          
                          
                          (20.0
                          )
                          
                          
                          -
                          
                          
                          
                          -Recognized
      net actuarial loss
                          
                          
                          7.7
                          
                          
                          
                          -
                          
                          
                          
                          2.3
                          
                          
                          
                          2.3Amortization
      of prior service cost
                          
                          
                          .2
                          
                          
                          
                          .2
                          
                          
                          
                          -
                          
                          
                          
                          -Net
      periodic benefit cost (credit)
                          
                          $
                          7.8
                          
                          
                          $
                          (7.6
                          )
                          
                          $
                          9.4
                          
                          
                          $
                          9.3
 Due to
the significant decline in the fair value of the pension plan’s assets during
2008, the expected return on plan assets has decreased in 2009 as compared to
2008.  Also, the fair value decline in 2008 has created an actuarial
loss that is being amortized over the average remaining service lives of
employees covered by the plan.
 
 11.
              EQUITY
      INVESTMENT INCOME, NET
 
 On March
31, 2009, the company sold its 50-percent interest in EN
Engineering.  The company’s share of the sale price is $16.0 million,
with an additional $1.5 million which is contingent on EN Engineering’s 2010
performance and would be due in 2011.  After closing costs and other
adjustments, Nicor received cash of $13.0 million and recorded a gain on the
sale of $10.1 million.  Equity investment income also includes
investment income from Triton of $1.3 million and $2.5 million for the three and
six months ended June 30, 2009, respectively, and $2.2 million and $3.2 million,
for the same periods ended June 30, 2008, respectively.  Nicor
received cash distributions from equity investees for the three and six months
ended June 30, 2009 of $3.7 million and $6.5 million, respectively, and $4.0
million and $7.3 million, respectively for the same periods ended June 30,
2008.
 
 12.      COMPREHENSIVE
INCOME
 
 Total
comprehensive income is as follows (in millions):
 
 Three
      months ended
                    
                    
                    Six
      months endedJune
      30
                    
                    
                    June
      302009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Net
      income
                    
                    $
                    22.9
                    
                    
                    $
                    28.9
                    
                    
                    $
                    66.7
                    
                    
                    $
                    70.3Other
      comprehensive income, after tax
                    
                    
                    1.8
                    
                    
                    
                    4.0
                    
                    
                    
                    5.8
                    
                    
                    
                    9.2Total
      comprehensive income
                    
                    $
                    24.7
                    
                    
                    $
                    32.9
                    
                    
                    $
                    72.5
                    
                    
                    $
                    79.5
  Other
comprehensive income consists primarily of net unrealized gains and losses from
derivative financial instruments accounted for as cash flow hedges, including
Nicor’s share of such amounts from joint ventures and other equity-method
investees.
  14
 
 Table of Contents
  13.         BUSINESS
SEGMENT INFORMATION
 
 Financial
data by major business segment is presented below (in millions):
 
 Gas
      distribution
                    
                    
                    Shipping
                    
                    
                    Other
      energy ventures
                    
                    
                    Corporate
      and
                      eliminations
                    
                    
                    ConsolidatedThree
      months ended June 30, 2009Operating
      revenuesExternal
      customers
                    
                    $
                    318.4
                    
                    
                    $
                    83.8
                    
                    
                    $
                    45.4
                    
                    
                    $
                    -
                    
                    
                    $
                    447.6Intersegment
                    
                    
                    7.9
                    
                    
                    
                    -
                    
                    
                    
                    5.8
                    
                    
                    
                    (13.7
                    )
                    
                    
                    -$
                    326.3
                    
                    
                    $
                    83.8
                    
                    
                    $
                    51.2
                    
                    
                    $
                    (13.7
                    )
                    
                    $
                    447.6Operating
      income (loss)
                    
                    $
                    25.1
                    
                    
                    $
                    2.5
                    
                    
                    $
                    12.7
                    
                    
                    $
                    (.8
                    )
                    
                    $
                    39.5Three
      months ended June 30, 2008Operating
      revenuesExternal
      customers
                    
                    $
                    543.3
                    
                    
                    $
                    102.6
                    
                    
                    $
                    53.9
                    
                    
                    $
                    -
                    
                    
                    $
                    699.8Intersegment
                    
                    
                    16.8
                    
                    
                    
                    -
                    
                    
                    
                    (1.2
                    )
                    
                    
                    (15.6
                    )
                    
                    
                    -$
                    560.1
                    
                    
                    $
                    102.6
                    
                    
                    $
                    52.7
                    
                    
                    $
                    (15.6
                    )
                    
                    $
                    699.8Operating
      income
                    
                    $
                    20.7
                    
                    
                    $
                    5.7
                    
                    
                    $
                    11.0
                    
                    
                    $
                    3.2
                    
                    
                    $
                    40.6Six
      months ended June 30, 2009Operating
      revenuesExternal
      customers
                    
                    $
                    1,283.2
                    
                    
                    $
                    173.2
                    
                    
                    $
                    102.0
                    
                    
                    $
                    -
                    
                    
                    $
                    1,558.4Intersegment
                    
                    
                    27.1
                    
                    
                    
                    -
                    
                    
                    
                    26.3
                    
                    
                    
                    (53.4
                    )
                    
                    
                    -$
                    1,310.3
                    
                    
                    $
                    173.2
                    
                    
                    $
                    128.3
                    
                    
                    $
                    (53.4
                    )
                    
                    $
                    1,558.4Operating
      income (loss)
                    
                    $
                    78.9
                    
                    
                    $
                    9.1
                    
                    
                    $
                    15.3
                    
                    
                    $
                    (3.9
                    )
                    
                    $
                    99.4Six
      months ended June 30, 2008Operating
      revenuesExternal
      customers
                    
                    $
                    1,976.0
                    
                    
                    $
                    200.3
                    
                    
                    $
                    119.2
                    
                    
                    $
                    -
                    
                    
                    $
                    2,295.5Intersegment
                    
                    
                    48.3
                    
                    
                    
                    -
                    
                    
                    
                    3.7
                    
                    
                    
                    (52.0
                    )
                    
                    
                    -$
                    2,024.3
                    
                    
                    $
                    200.3
                    
                    
                    $
                    122.9
                    
                    
                    $
                    (52.0
                    )
                    
                    $
                    2,295.5Operating
      income (loss)
                    
                    $
                    83.0
                    
                    
                    $
                    9.6
                    
                    
                    $
                    12.0
                    
                    
                    $
                    (.8
                    )
                    
                    $
                    103.8
 
 The
majority of intersegment revenues represent revenues related to customers
entering into utility-bill management contracts with Nicor
Solutions.  Under the utility-bill management contracts, Nicor
Solutions bills a fixed amount to a customer, regardless of changes in natural
gas prices or weather, and in exchange pays the customer’s utility bills from
Nicor Gas.  Intersegment revenues are eliminated in the Condensed
Consolidated Financial Statements.
 
 Costs
associated with Nicor’s other energy ventures’ utility-bill management contracts
attributable to colder than normal weather for the three and six months ended
June 30, 2009 were $0.3 million and $2.9 million, respectively, and $0.2 million
and $4.0 million, respectively for the same periods in 2008.  This
cost is recorded at the corporate level as a result of an agreement between the
parent company and certain of its subsidiaries.  The weather impact of
these contracts generally serves to partially offset the gas distribution
segment’s weather risk.
 
 
  15
 
 Table of Contents
  14.      RATE
PROCEEDING
 
 On April
29, 2008, Nicor Gas filed with the ICC for an overall increase in
rates.  The company sought a revenue increase of $140.4 million for a
rate of return on rate base of 9.27 percent, which reflects an 11.15 percent
cost of common equity.  The increase is needed to recover higher
operating costs and increased capital investments.
 
 In its
rate filing, Nicor Gas proposed some new rate adjustment
mechanisms.  These included mechanisms that would adjust rates to
reflect certain changes in the company’s bad debt expense and cost of gas used
for operations.  Also included were a volume balancing rider that
would adjust rates to recover fixed costs, an energy efficiency rider that would
fund energy efficiency programs and a rider that would adjust rates to recover a
portion of capital expenditures incurred to replace certain older
infrastructure.
 
 On March
25, 2009, the ICC issued an order approving an increase in base revenues of
$69.0 million, a rate of return on rate base of 7.58 percent and a rate of
return on equity of 10.17 percent.  The order also approved an energy
efficiency rider.  Nicor Gas placed its new rates into effect on April
3, 2009.
 
 On April
24, 2009, the company filed a request for rehearing with the ICC concerning the
capital structure and return on equity contained in the ICC’s rate order
contending the company’s return on rate base should be higher.  The
Attorney General’s office, Citizen’s Utility Board and the Environmental Law and
Policy Center also filed requests for rehearing on items including the
management structure of the Energy Efficiency Plan and the rate design for
residential customers.  These other parties do not raise issues about
the amount of the rate increase granted to Nicor Gas.  On May 13,
2009, the ICC agreed to conduct a rehearing concerning the capital structure but
denied the remainder of the company’s request.  The ICC also denied
all the rehearing requests by other parties.  The ICC has until
October 13, 2009 to issue a ruling on rehearing.  Any changes in rates
as a result of rehearing would be effective prospectively.  Nicor Gas
has also filed an appeal of the ICC’s rate order in state appellate
court.  That appeal has been stayed until the ICC issues its ruling on
rehearing.
 
 15.
              GUARANTEES
      AND INDEMNITIES
 
 Nicor and
certain subsidiaries enter into various financial and performance guarantees and
indemnities providing assurance to third parties.
 
 Financial
guarantees.TEL has an obligation to restore to zero any
deficit in its equity account for income tax purposes in the unlikely event that
Triton is liquidated and a deficit balance remains.  This obligation
continues for the life of the Triton partnerships and any payment is effectively
limited to the assets of TEL, which were approximately $13 million at June 30,
2009.  Nicor believes the likelihood of any such payment by TEL is
remote.  No liability has been recorded for this
obligation.
 
 Performance guarantees.Nicor Services markets separately priced product warranty contracts that
provide, over a period of one to fifteen years, for the repair of heating,
ventilation and air conditioning equipment, natural gas lines, and other
appliances within homes.  Revenues from these product warranty
contracts are recognized ratably over the coverage period, and related repair
costs are charged to expense as incurred.  Repair expenses of $1.8
million and $3.7 million were incurred in the three and six months ended June
30, 2009, respectively, and $1.6 million and $3.3 million, respectively, for the
same periods in 2008.
 
 
  16
 
 Table of Contents
  Indemnities.  In
certain instances, Nicor has undertaken to indemnify current property owners and
others against costs associated with the effects and/or remediation of
contaminated sites for which the company may be responsible under applicable
federal or state environmental laws, generally with no limitation as to the
amount.  These indemnifications relate primarily to ongoing coal tar
cleanup, as discussed in Note 16 – Contingencies – Manufactured Gas Plant
Sites.  Nicor believes that the likelihood of payment under its other
environmental indemnifications is remote.  No liability has been
recorded for such indemnifications.
 
 Nicor has
also indemnified, to the fullest extent permitted under the laws of the State of
Illinois and any other applicable laws, its present and former directors,
officers and employees against expenses they may incur in
connection with litigation they are a party to by reason of their association
with the company.  There is generally no limitation as to the
amount.  In 2007, the SEC filed a civil injunctive action against
three former officers of Nicor relating to the PBR Plan.  Defense
costs that are being incurred by these former officers in connection with the
SEC action currently are being tendered to, and paid by, the company’s
insurer.  While the company does not expect to incur significant costs
relating to the indemnification of present and former directors, officers and
employees after taking into account available insurance, it is not possible to
estimate the maximum future potential payments.
 
 16.
              CONTINGENCIES
 
 The
following contingencies of Nicor are in various stages of investigation or
disposition.  Although in some cases 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.
 
 PBR Plan.Nicor
Gas’ PBR plan for natural gas costs went into effect in 2000 and was terminated
by the company effective January 1, 2003.  Under the PBR plan, Nicor
Gas’ total gas supply costs were compared to a market-sensitive
benchmark.  Savings and losses relative to the benchmark were
determined annually and shared equally with sales customers.  The PBR
plan is currently under ICC review.  There are allegations that the
company acted improperly in connection with the PBR plan, and the ICC and others
are 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
Office (“CCSAO”), the staff of the ICC and CUB entered into a stipulation
providing for additional discovery.  The Illinois Attorney General’s
Office (“IAGO”) has also intervened in this matter.  In addition, the
IAGO 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 company
has committed to cooperate fully in the reviews of the PBR plan.
 
 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.  The special
committee presented the report of its counsel (“Report”) to Nicor’s Board of
Directors on October 28, 2002.
 
 In
response, the Nicor Board of Directors directed the company’s management to,
among other things, make appropriate adjustments to account for, and fully
address, the adverse consequences to ratepayers of the items noted in the
Report, and conduct a detailed study of the adequacy of internal accounting and
regulatory controls.  The adjustments were made in prior years’
financial statements resulting in a $24.8 million liability.  Included
in such $24.8 million liability is a $4.1 million loss contingency.  A
$1.8
   Table of Contents
  million
adjustment to the previously recorded liability, which is discussed below, was
made in 2004 increasing the recorded liability to $26.6
million.  Nicor Gas estimates that there is $26.9 million due to the
company from the 2002 PBR plan year, which has not been recognized in the
financial statements due to uncertainties surrounding the PBR
plan.  In addition, interest due to the company on certain components
of these amounts has not been recognized in the financial statements due to the
same uncertainties.  By the end of 2003, the company completed steps
to correct the weaknesses and deficiencies identified in the detailed study of
the adequacy of internal controls.
 
 Pursuant
to the agreement of all parties, including the company, the ICC re-opened the
1999 and 2000 purchased gas adjustment filings for review of certain
transactions related to the PBR plan and consolidated the reviews of the
1999-2002 purchased gas adjustment filings with the PBR plan
review.
 
 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 additional refunds to
consumers.  On March 5, 2003, the ICC staff filed a response brief in
support of CUB’s motion for sanctions.  On May 1, 2003, the ALJs
issued a ruling denying CUB and CCSAO’s motion for sanctions.  CUB has
filed an appeal of the motion for sanctions with the ICC, and the ICC has
indicated that it will not rule on the appeal until the final disposition of the
ICC Proceedings.  It is not possible to determine how the ICC will
resolve the claims of CCSAO, CUB or other parties to the ICC
Proceedings.
 
 In
November 2003, the ICC staff, CUB, CCSAO and the IAGO filed their respective
direct testimony in the ICC Proceedings.  The ICC staff is seeking
refunds to customers of approximately $108 million and CUB and CCSAO were
jointly seeking refunds to customers of approximately $143
million.  The IAGO direct testimony alleges adjustments in a range
from $145 million to $190 million.  The IAGO testimony as filed is
presently unclear as to the amount which IAGO seeks to have refunded to
customers.  On February 27, 2004, the above referenced intervenors
filed their rebuttal testimony in the ICC Proceedings.  In such
rebuttal testimony, CUB and CCSAO amended the alleged amount to be refunded to
customers from approximately $143 million to $190 million.  In 2004,
the evidentiary hearings on this matter were stayed in order to permit the
parties to undertake additional third party discovery from Entergy-Koch Trading,
LP (“EKT”), a natural gas, storage and transportation trader and consultant with
whom Nicor did business under the PBR plan.  In December 2006, the
additional third party discovery from EKT was obtained, Nicor Gas withdrew its
previously filed testimony and the ALJs issued a scheduling order that provided
for Nicor Gas to submit direct testimony by April 13, 2007.  In its
direct testimony filed pursuant to the scheduling order, Nicor Gas seeks a
reimbursement of approximately $6 million, which includes interest due to the
company, as noted above, of $1.6 million, as of March 31, 2007.  No
date has been set for evidentiary hearings on this matter.
 
 In 2004,
the company became aware of additional information relating to the activities of
individuals affecting the PBR plan for the period from 1999 through 2002,
including information consisting of third party documents and recordings of
telephone conversations from EKT.  Review of additional information
completed in 2004 resulted in the $1.8 million adjustment to the previously
recorded liability referenced above.
 
 Although
the Report of the special committee’s counsel did not find that there was
criminal activity or fraud, a review of this additional information (which was
not available to the independent counsel who prepared the Report) and
re-interviews of certain Nicor Gas personnel in 2004 indicated that certain
former Nicor Gas personnel may have engaged in potentially fraudulent conduct
regarding the PBR plan in violation of company policy, and in possible violation
of SEC rules and applicable law.  Further, certain former Nicor Gas
personnel also may have attempted to conceal their conduct in connection with an
ICC review of the PBR plan.  The company has reviewed all third party
information it has obtained and will continue to review any additional third
party information the company may obtain.  The company terminated four
employees in connection with this matter in 2004.
   Table of Contents
  Nicor is
unable to predict the outcome of the ICC’s review or the company’s potential
exposure thereunder.  Because the PBR plan and historical gas costs
are still under ICC review, the final outcome could be materially different than
the amounts reflected in the company’s financial statements as of June 30,
2009.
 
 Mercury.  Nicor Gas
has incurred, and expects to continue to incur, costs related to its historical
use of mercury in various kinds of company equipment.
 
 As of
June 30, 2009, Nicor Gas had remaining an estimated liability of $2.3 million
related to inspection, cleanup and legal defense costs.  This
represents management’s best estimate of future costs based on an evaluation of
currently available information.  Actual costs may vary from this
estimate.  Nicor Gas remains a defendant in several private lawsuits,
all in the Circuit Court of Cook County, Illinois, seeking a variety of
unquantified damages (including bodily injury and property damages) allegedly
caused by mercury spillage resulting from the removal of mercury-containing
regulators.  Potential liabilities relating to these claims have been
assumed by a contractor’s insurer subject to certain limitations.
 
 The final
disposition of these mercury-related matters is not expected to have a material
adverse impact on the company’s liquidity or financial condition.
 
 Manufactured Gas Plant
Sites.  Manufactured gas plants were used in the 1800’s and
early to mid 1900’s to produce manufactured 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.
 
 Nicor Gas
has identified properties for which it may have some
responsibility.  Most of these properties are not presently owned by
the company.  Nicor Gas and Commonwealth Edison Company (“ComEd”) were
parties to an interim agreement to cooperate in cleaning up residue at many of
these properties.  Under the interim agreement, mutually agreed costs
were to be evenly split between Nicor Gas and ComEd until such time as they are
finally allocated either through negotiation or arbitration.  On
January 3, 2008, Nicor Gas and ComEd entered into a definitive agreement
concerning final cost allocations.  The definitive agreement allocates
to Nicor Gas 51.73 percent of cleanup costs for 24 sites, no portion of the
cleanup costs for 14 other sites and 50 percent of general remediation program
costs that do not relate exclusively to particular sites.  The
definitive agreement required approval of the ICC, which was obtained in the
second quarter of 2009.  Information regarding preliminary site
reviews has been presented to the Illinois Environmental Protection Agency for
certain properties.  More detailed investigations and remedial
activities are complete, in progress or planned at many of these
sites.  The results of the detailed site-by-site investigations will
determine the extent additional remediation is necessary and provide a basis for
estimating additional future costs.  As of June 30, 2009, the company
had recorded a liability in connection with these matters of $17.3
million.  In accordance with ICC authorization, the company has been
recovering, and expects to continue to recover, these costs from its customers,
subject to annual prudence reviews.
 
 In April
2002, Nicor Gas was named as a defendant, together with ComEd, 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 the United
States District Court for the Northern District of
Illinois.  Management cannot predict the outcome of this litigation or
the company’s potential exposure thereto, if any, and has not recorded a
liability associated with this contingency.
 
 Since
costs and recoveries relating to the cleanup of manufactured gas plant sites are
passed directly through to customers in accordance with ICC regulations, subject
to an annual ICC prudence review, the
   Table of Contents
  final
disposition of manufactured gas plant matters is not expected to have a material
impact on the company’s financial condition or results of
operations.
 
 PCBs.In June 2007,
Nicor Gas notified the USEPA of the discovery by Nicor Gas of PCBs at four homes
in Park Ridge, Illinois.  Nicor Gas has cleaned up the PCBs at these
four homes.  In July 2007, the USEPA issued a subpoena to Nicor Gas
pursuant to Section 11 of the Toxic Substances Control Act.  In the
subpoena, the USEPA indicated that it was investigating Nicor Gas’
identification of PCB-contaminated liquids in its distribution
system.  The subpoena sought documents related to Nicor Gas’ pipeline
liquids and the extent and location of PCBs contained therein.  The
Illinois Attorney General made a similar request for information from Nicor
Gas.  Nicor Gas has provided documentation to the USEPA and the
Illinois Attorney General, including information about the presence of PCBs in
its system, and has conducted sample testing at additional customer
locations.  The company believes that the USEPA and the Illinois
Attorney General have concluded their investigations and does not expect either
agency to assess fines to, or pursue any enforcement actions, against Nicor Gas
with respect to this matter.
 
 Municipal Tax
Matters.  Many municipalities in Nicor Gas’ service territory
have enacted ordinances that impose taxes on gas sales to customers within
municipal boundaries.  Most of these municipal taxes are imposed on
Nicor Gas based on revenues generated by Nicor Gas within the
municipality.  Other municipal taxes are imposed on natural gas
consumers within the municipality but are collected from consumers and remitted
to the municipality by Nicor Gas.  A number of municipalities have
instituted audits of Nicor Gas’ tax remittances.  In May 2007, five of
those municipalities filed an action against Nicor Gas in state court in DuPage
County, Illinois relating to these tax audits.  Following a dismissal
of this action without prejudice by the trial court, the municipalities filed an
amended complaint in August 2008.  The amended complaint seeks, among
other things, compensation for alleged unpaid taxes.  Nicor Gas is
contesting the claims in the amended complaint.  In December 2007, 25
additional municipalities, all represented by the same audit firm involved in
the lawsuit, issued assessments to Nicor Gas claiming that it failed to provide
information requested by the audit firm and owed the municipalities back
taxes.  Nicor Gas believes the assessments are improper and has
challenged them.  In April 2009, a purported class action lawsuit was
filed against Nicor Gas in state court in Cook County, Illinois on behalf of
customers who have been charged a municipal utility tax by the company but who
are not residents of the taxing municipality.  After Nicor Gas filed a
motion to dismiss the purported class action, the plaintiff agreed to dismiss
the lawsuit without prejudice.  While the company is unable to predict
the outcome of these matters or to reasonably estimate its potential exposure
related thereto, if any, and has not recorded a liability associated with this
contingency, the final disposition of these matters is not expected to have a
material adverse impact on the company’s liquidity or financial
condition.
 
 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 general claims,
taxes, environmental, gas cost prudence reviews and other
matters.  Although unable to determine the ultimate outcome of these
other contingencies, management believes that these amounts are appropriately
reflected in the financial statements, including the recording of appropriate
liabilities when reasonably estimable.
 
 
  20
 
 Table of Contents
  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 2008 Annual Report on Form
10-K.  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.
 
 SUMMARY
 
 Nicor is
a holding company.  Gas distribution is Nicor’s primary
business.  Nicor’s subsidiaries include Nicor Gas, one of the nation’s
largest distributors of natural gas, and Tropical Shipping, a transporter of
containerized freight in the Bahamas and the Caribbean region.  Nicor
also owns several energy-related ventures, including Nicor Services, Nicor
Solutions and Nicor Advanced Energy, which provide energy-related products and
services to retail markets, and Nicor Enerchange, a wholesale natural gas
marketing company.  Nicor also has equity interests in a cargo
container leasing business, a FERC-regulated natural gas pipeline and certain
affordable housing investments.
 
 Net
income and diluted earnings per common share are presented below (in millions,
except per share data):
  Three
      months ended
                    
                    
                    Six
      months endedJune
      30
                    
                    
                    June
      302009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Net
      income
                    
                    $
                    22.9
                    
                    
                    $
                    28.9
                    
                    
                    $
                    66.7
                    
                    
                    $
                    70.3Diluted
      earnings per common share
                    
                    $
                    .50
                    
                    
                    $
                    .64
                    
                    
                    $
                    1.47
                    
                    
                    $
                    1.55
 Comparisons
of the three months ended results reflect higher operating income in the
company’s gas distribution and other energy-related businesses, more than offset
by lower operating income in the company’s shipping business, lower corporate operating
results, lower interest income and lower equity investment income, and a higher
effective income tax rate.  Comparisons of the six months ended
results reflect lower operating income in the company’s gas distribution and
shipping businesses, lower corporate operating results and interest income, and
a higher effective income tax rate, partially offset by higher operating income
in the company’s other energy-related businesses and higher equity investment
income.
 
 Rate proceeding.On
April 29, 2008, Nicor Gas filed with the ICC for an overall increase in
rates.  The company sought a revenue increase of $140.4 million for a
rate of return on rate base of 9.27 percent, which reflects an 11.15 percent
cost of common equity.  The increase is needed to recover higher
operating costs and increased capital investments.
 
 In its
rate filing, Nicor Gas proposed some new rate adjustment
mechanisms.  These included mechanisms that would adjust rates to
reflect certain changes in the company’s bad debt expense and cost of gas used
for operations.  Also included were a volume balancing rider that
would adjust rates to recover fixed costs, an energy efficiency rider that would
fund energy efficiency programs and a rider that would adjust rates to recover a
portion of capital expenditures incurred to replace certain older
infrastructure.
 
 On March
25, 2009, the ICC issued an order approving an increase in base revenues of
$69.0 million, a rate of return on rate base of 7.58 percent and a rate of
return on equity of 10.17 percent.  The order also approved an energy
efficiency rider.  Nicor Gas placed its new rates into effect on April
3, 2009.  As a result of the new rates, it is estimated that a
100-degree day variation from normal (5,600 degree days annually) impacts Nicor
Gas’ distribution margin, net of income taxes, by approximately $1.3
million.
   Table of Contents
 
 On April
24, 2009, the company filed a request for rehearing with the ICC concerning the
capital structure and return on equity contained in the ICC’s rate order
contending the company’s return on rate base should be higher.  The
Attorney General’s office, Citizen’s Utility Board and the Environmental Law and
Policy Center also filed requests for rehearing on items including the
management structure of the Energy Efficiency
Plan and the rate design for residential customers.  These other
parties do not raise issues about the amount of the rate increase granted to
Nicor Gas.  On May 13, 2009, the ICC agreed to conduct a rehearing
concerning the capital structure but denied the remainder of the company’s
request.  The ICC also denied all the rehearing requests by other
parties.  The ICC has until October 13, 2009 to issue a ruling on
rehearing.  Any changes in rates as a result of rehearing would be
effective prospectively.  Nicor Gas has also filed an appeal of the
ICC’s rate order in state appellate court.  That appeal has been
stayed until the ICC issues its ruling on rehearing.
 
 Capital market
environment.The volatility in the capital markets during 2008
and 2009has caused
general concern over the valuations of investments, exposure to increased credit
risk and pressures on liquidity.  The company has reviewed its
investments, exposure to credit risk and sources of liquidity and does not
currently expect any future material adverse impacts relating to these
items.
 
 The
company sponsored defined benefit pension plan experienced significant declines
in the market values of its investments in 2008.  These market value
declines adversely impact the company’s future postretirement benefit costs in
two ways.  First, the expected return on the pension plan’s assets
(which serves to reduce postretirement benefit costs) declined as a result of
the lower asset market values.  Second, the pension plan’s 2008
actuarial losses (largely due to the decline in asset market values) are being
amortized over the average remaining service life of plan
participants.  As a regulated utility, Nicor Gas expects continued
rate recovery of the eligible costs of its defined benefit postretirement plans
and, accordingly, associated changes in the plan’s funded status have been
deferred as a regulatory asset or liability until recognized in income, instead
of being recorded in accumulated other comprehensive income.  The
adverse impact of both factors on 2009 postretirement benefit costs compared to
2008 costs is approximately $30 million.  About one-fourth of this
added cost will be capitalized as a cost of constructing gas distribution
facilities and the remainder will be included in gas distribution operating and
maintenance expense, net of any amounts charged to affiliates.  The
company does not expect to make any contributions to the pension plan in
2009.  However, if market values of the pension plan assets continue
to significantly decline, the company may be required to make future
contributions.
 
 Operating income by
segment.Operating income (loss) by major business segment is
presented below (in millions):
  Three
      months ended
                            
                            
                            Six
      months endedJune
      30
                            
                            
                            June
      302009
                            
                            
                            2008
                            
                            
                            2009
                            
                            
                            2008Gas
      distribution
                            
                            $
                            25.1
                            
                            
                            $
                            20.7
                            
                            
                            $
                            78.9
                            
                            
                            $
                            83.0Shipping
                            
                            
                            2.5
                            
                            
                            
                            5.7
                            
                            
                            
                            9.1
                            
                            
                            
                            9.6Other
      energy ventures
                            
                            
                            12.7
                            
                            
                            
                            11.0
                            
                            
                            
                            15.3
                            
                            
                            
                            12.0Corporate
      and eliminations
                            
                            
                            (.8
                            )
                            
                            
                            3.2
                            
                            
                            
                            (3.9
                            )
                            
                            
                            (.8
                            )$
                            39.5
                            
                            
                            $
                            40.6
                            
                            
                            $
                            99.4
                            
                            
                            $
                            103.8
 
 The
following summarizes operating income (loss) comparisons by major business
segment:
 
 ·
              Gas
      distribution operating income increased $4.4 million for the three months
      ended June 30, 2009 compared to the prior year due to higher gas
      distribution margin ($15.6 million increase), partially offset by higher
      operating and maintenance expense ($9.4 million increase) and depreciation
      expense ($1.7 million increase).
   Table of Contents
  Operating
income decreased $4.1 million for the six months ended June 30, 2009 compared to
the prior year due primarily to higher operating and maintenance expense ($11.4
million increase) and depreciation expense ($3.3 million increase), partially
offset by higher gas distribution margin ($11.0 million increase).
 
 ·
              Shipping
      operating income decreased $3.2 million and $0.5 million for the three and
      six months ended June 30, 2009, respectively, compared to the prior year
      due to lower operating revenues ($18.8 million and $27.1 million
      decreases, respectively), which were partially offset by lower operating
      costs ($15.6 million and $26.6 million decreases,
      respectively). Operating revenues were lower for both periods due to
      lower volumes shipped ($12.8 million and $23.8 million decreases,
      respectively) and lower average rates ($6.0 million and $3.3 million
      decreases, respectively).  Operating costs were lower for both
      periods due primarily to lower transportation-related costs ($11.9 million
      and $20.3 million decreases, respectively, largely attributable to lower
      fuel prices and lower volumes shipped) and charter costs ($2.8 million and
      $3.8 million decreases,
respectively).
 
 ·
              Nicor’s
      other energy ventures operating income increased $1.7 million for the
      three months ended June 30, 2009 compared to the prior year due primarily
      to higher operating income at Nicor’s energy-related products and services
      businesses ($1.4 million increase) and at Nicor’s wholesale natural gas
      marketing business, Nicor Enerchange ($0.2 million
      increase).  Higher operating income at Nicor’s energy-related
      products and services businesses was due to lower operating expenses ($1.6
      million decrease), partially offset by lower operating revenues ($0.2
      million decrease). Higher operating income at Nicor Enerchange was
      due primarily to favorable changes in valuations of derivative instruments
      used to hedge purchases and sales of natural gas inventory, partially
      offset by unfavorable costing of physical sales activity and lower results
      from the company’s risk management activities associated with hedging the
      product risks of the utility-bill management contracts offered by Nicor’s
      energy-related products and services
businesses.
 
 Nicor’s
other energy ventures operating income increased $3.3 million for the six months
ended June 30, 2009 compared to the prior year due to higher operating income at
Nicor’s wholesale natural gas marketing business, Nicor Enerchange ($4.7 million
increase), partially offset by lower operating income at Nicor’s energy-related
products and services businesses ($1.1 million decrease).  Higher operating
income at Nicor Enerchange was due primarily to favorable changes in valuations
of derivative instruments used to hedge purchases and sales of natural gas
inventory, partially offset by unfavorable costing of physical sales activity
and lower results from the company’s risk management activities associated with
hedging the product risks of the utility-bill management contracts offered by
Nicor’s energy-related products and services businesses.  Lower
operating income at Nicor’s energy-related products and services businesses was
due to higher operating expenses ($3.2 million increase), partially offset by
higher operating revenues ($2.1 million increase).
 
 Nicor
Enerchange uses derivatives to mitigate commodity price risk in order to
substantially lock-in the profit margin that will ultimately be
realized.  A source of commodity price risk arises as Nicor Enerchange
purchases and holds natural gas in storage to earn a profit margin from its
ultimate sale.  However, gas stored in inventory is required to be
accounted for at the lower of weighted-average cost or market, whereas the
derivatives used to reduce the risk associated with a change in the value of the
inventory are carried at fair value, with changes in fair value recorded in
operating results in the period of change.  In addition, Nicor
Enerchange also uses derivatives to mitigate the commodity price risks of the
utility-bill management products offered by Nicor’s energy-related products and
services businesses.  The gains and losses associated with the
utility-bill management products are recognized in the months that the services
are provided.  However, the underlying derivatives used to hedge the
price exposure are carried at fair value.  For those derivatives
that do not meet the requirements for hedge accounting, the changes in fair
value are recorded in operating results in the period of change.  As a
result, earnings are subject to volatility
   Table of Contents
  as the
fair value of derivatives change.  The volatility resulting from this
accounting can be significant from period to period.
 
 ·
              Corporate
      and eliminations operating results decreased $4.0 million for the three
      months ended June 30, 2009 compared to the prior year due to the absence
      of prior year recoveries of previously incurred legal costs ($3.1 million
      decrease) and the absence of prior year benefits realized on life
      insurance contracts ($1.0 million decrease).  The legal cost
      recoveries were from a counterparty with whom Nicor previously did
      business during the PBR timeframe.  The total recovery was $5.0
      million, of which $3.1 million was allocated to corporate and $1.9 million
      was allocated to the gas distribution segment (recorded as a reduction to
      operating and maintenance expense).
 
 Corporate
and eliminations operating results decreased $3.1 million for the six months
ended June 30, 2009 compared to the prior year due to the previously mentioned
prior year recoveries of legal costs ($3.1 million decrease) and the absence of
prior year benefits realized on life insurance contracts ($1.3 million
decrease), partially offset by lower costs of a natural weather hedge associated
with the utility-bill management products offered by Nicor’s energy-related
products and services businesses ($1.1 million decrease).  The company
recorded $2.9 million of costs associated with the natural weather hedge in the
current year compared to $4.0 million of costs recorded in the prior
year. Benefits or costs resulting from variances from normal weather
related to these products are recorded primarily at the corporate level as a
result of an agreement between the parent company and certain of its
subsidiaries.  The weather impact of these contracts generally serves
to partially offset the gas distribution segment’s weather risk.  The
amount of the offset attributable to the utility-bill management products
marketed by Nicor’s other energy ventures will vary depending upon a number of
factors including the time of year, weather patterns, the number of customers
for these products and the market price for natural gas.
 
 RESULTS
OF OPERATIONS
 
 Details
of various financial and operating information by segment can be found in the
tables throughout this review.  The following discussion summarizes
the major items impacting Nicor’s operating income.
 
 Operating
revenues.  Operating revenues by major business segment are
presented below (in millions):
 
 Three
      months ended
                    
                    
                    Six
      months endedJune
      30
                    
                    
                    June
      302009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Gas
      distribution
                    
                    $
                    326.3
                    
                    
                    $
                    560.1
                    
                    
                    $
                    1,310.3
                    
                    
                    $
                    2,024.3Shipping
                    
                    
                    83.8
                    
                    
                    
                    102.6
                    
                    
                    
                    173.2
                    
                    
                    
                    200.3Other
      energy ventures
                    
                    
                    51.2
                    
                    
                    
                    52.7
                    
                    
                    
                    128.3
                    
                    
                    
                    122.9Corporate
      and eliminations
                    
                    
                    (13.7
                    )
                    
                    
                    (15.6
                    )
                    
                    
                    (53.4
                    )
                    
                    
                    (52.0
                    )$
                    447.6
                    
                    
                    $
                    699.8
                    
                    
                    $
                    1,558.4
                    
                    
                    $
                    2,295.5
 
 Gas
distribution revenues are impacted by changes in natural gas costs, which are
passed directly through to customers without markup, subject to ICC
review.  Gas distribution revenues decreased $233.8 million for the
three months ended June 30, 2009 compared to the prior year due primarily to
lower natural gas costs (approximately $215 million decrease) and lower demand
unrelated to weather (approximately $15 million decrease), partially offset by
the impact of the recent base rate increase (approximately $20 million
increase).  Gas distribution revenues decreased $714.0 million for the
six months ended June 30, 2009 compared to the prior year due primarily to lower
natural gas costs (approximately $585 million decrease), lower demand unrelated
to weather (approximately $75 million decrease) and warmer weather
(approximately $65 million decrease), partially offset by the impact of the
recent base rate increase (approximately $20 million increase).
   Table of Contents
 
 Shipping
segment operating revenues decreased $18.8 million and $27.1 million for the
three and six months ended June 30, 2009, respectively, compared to the prior
year due to lower volumes shipped ($12.8 million and $23.8 million decreases,
respectively) and lower average rates ($6.0 million and $3.3 million decreases,
respectively).  Volumes shipped were adversely impacted by the
economic slowdown.  Lower average rates were attributable to lower
cost-recovery surcharges for fuel. During the second quarter of 2008,
Tropical Shipping completed an acquisition of the assets of Caribtran, Inc.,
which added approximately 4 percent to shipping revenues on an annualized
basis.
 
 Nicor’s
other energy ventures operating revenues decreased $1.5 million for the three
months ended June 30, 2009 compared to the prior year due primarily to lower
operating revenues at Nicor Enerchange ($1.2 million decrease) and at Nicor’s
energy-related products and services businesses ($0.2 million
decrease).  Lower operating revenues at Nicor Enerchange were due
primarily to unfavorable costing of physical sales activity and lower results
from the company’s risk management activities associated with hedging the
product risks of the utility-bill management contracts offered by Nicor’s
energy-related products and services businesses, partially offset by favorable
changes in valuations of derivative instruments used to hedge purchases and
sales of natural gas inventory.  Lower operating revenues at Nicor’s
energy-related products and services businesses were due to lower average
revenue per utility-bill management contract attributable, in part, to product
mix, partially offset by higher average contract
volumes.
 
 Operating
revenues increased $5.4 million for the six months ended June 30, 2009 compared
to the prior year due to higher operating revenues at Nicor Enerchange ($3.3
million increase) and at Nicor’s energy-related products and services businesses
($2.1 million increase).  Higher operating revenues at Nicor
Enerchange were due primarily to favorable changes in valuations of derivative
instruments used to hedge purchases and sales of natural gas inventory,
partially offset by unfavorable costing of physical sales activity and lower
results from the company’s risk management activities associated with hedging
the product risks of the utility-bill management contracts offered by Nicor’s
energy-related products and services businesses.  Higher operating
revenues at Nicor’s energy-related products and services businesses were
attributable to higher average contract volumes, partially offset by lower
average revenue per utility-bill management contract, attributable primarily to
product mix.
 
 Corporate
and eliminations reflects primarily the elimination of revenues against Nicor
Solutions’ expenses for customers purchasing the utility-bill management
products.
 
 Gas distribution
margin.Nicor utilizes a measure it refers to as “gas
distribution margin” to evaluate the operating income impact of gas distribution
revenues.  Gas distribution revenues include natural gas costs, which
are passed directly through to customers without markup, subject to ICC review,
and revenue taxes, for which Nicor Gas earns a small administrative
fee.  These items often cause significant fluctuations in gas
distribution revenues, with equal and offsetting fluctuations in cost of gas and
revenue tax expense, with no direct impact on gas distribution
margin.
 
 A
reconciliation of gas distribution revenues and margin follows (in
millions):
 
 Three
      months ended
                        
                        
                        Six
      months endedJune
      30
                        
                        
                        June
      302009
                        
                        
                        2008
                        
                        
                        2009
                        
                        
                        2008Gas
      distribution revenues
                        
                        $
                        326.3
                        
                        
                        $
                        560.1
                        
                        
                        $
                        1,310.3
                        
                        
                        $
                        2,024.3Cost
      of gas
                        
                        
                        (156.6
                        )
                        
                        
                        (396.2
                        )
                        
                        
                        (873.0
                        )
                        
                        
                        (1,582.9
                        )Revenue
      tax expense
                        
                        
                        (26.3
                        )
                        
                        
                        (36.1
                        )
                        
                        
                        (99.9
                        )
                        
                        
                        (115.0
                        )Gas
      distribution margin
                        
                        $
                        143.4
                        
                        
                        $
                        127.8
                        
                        
                        $
                        337.4
                        
                        
                        $
                        326.4
 
 25
 
 Table of Contents
  Gas
distribution margin increased $15.6 million for the three months ended June 30,
2009 compared to the prior year due to the impact of the recent base rate
increase (approximately $20 million increase), partially offset by lower demand
unrelated to weather (approximately $2 million decrease).  Gas
distribution margin increased $11.0 million for the six months ended June 30,
2009 compared to the prior year due to the impact of the recent base rate
increase (approximately $20 million increase), partially offset by lower demand
unrelated to weather (approximately $6 million decrease) and warmer weather
(approximately $2 million decrease).
 
 Gas distribution operating and
maintenance expense.  Gas distribution operating and
maintenance expense increased$9.4 million for the
three months ended June 30, 2009 compared to the prior year due to higher
payroll and benefit-related costs ($7.1 million increase, of which $5.5 million
relates to higher pension expense, net of capitalization) and the absence of
prior year recoveries of previously incurred costs ($3.9 million, of which $2.0
million relates to a recovery of costs associated with the PCB matter and $1.9
million relates to legal cost recoveries from a counterparty with whom
Nicor previously did business during the PBR timeframe).  Operating
and maintenance expense increased$11.4 million for the
six months ended June 30, 2009 compared to the prior year due primarily to
higher payroll and benefit-related costs ($14.3 million increase, of which $10.9
million relates to higher pension expense, net of capitalization), the absence
of the previously mentioned cost recoveries ($3.9 million) and higher company
use and storage-related gas costs ($2.4 million increase), partially offset by
lower franchise gas costs ($6.7 million decrease) and lower bad debt expense
($6.0 million decrease due to lower revenues attributable principally to lower
natural gas costs).  As a result of the recent rate order, which
became effective on March 25, 2009, the expense for franchise gas costs will be
deferred until the related revenue, recovered through a cost recovery rider, is
recognized.
 
 Shipping operating
expenses.  Shipping segment operating expenses decreased $15.6
million and $26.6 million for the three and six months ended June 30, 2009,
respectively, compared to the prior year due primarily to lower
transportation-related costs ($11.9 million and $20.3 million decreases,
respectively, largely attributable to lower fuel prices and lower volumes
shipped) and charter costs ($2.8 million and $3.8 million decreases,
respectively).
 
 Other energy ventures
operating
expenses.Other energy ventures operating expenses decreased
$3.2 million for the three months ended June 30, 2009 compared to the prior year
due primarily to a decrease in operating expenses at Nicor’s energy-related
products and services businesses ($1.6 million decrease) and at Nicor Enerchange
($1.4 million decrease).  The decrease in operating expenses at
Nicor’s energy-related products and services businesses was due primarily to
lower average cost per utility-bill management contract, partially offset by
higher average contract volumes.  The decrease in operating expenses
at Nicor Enerchange was due to lower transportation and storage
charges.  Operating expenses increased $2.1 million for the six months
ended June 30, 2009 compared to the prior year due primarily to an increase in
operating expenses at Nicor’s energy-related products and services businesses
($3.2 million increase), partially offset by a decrease in operating expense at
Nicor Enerchange ($1.4 million decrease).  The increase in operating
expenses at Nicor’s energy-related products and services businesses was due
primarily to higher average contract volumes.  The decrease in
operating expenses at Nicor Enerchange was due to lower transportation and
storage charges.
 
 Interest
expense.  Interest expense decreased$0.3 million and $1.6
million for the three and six months ended June 30, 2009, respectively, compared
to the prior year due primarily to lower average interest rates, partially
offset by higher average borrowing levels.
 
 
  26
 
 Table of Contents
  Net equity investment
income.  Net equity investment income decreased $1.2
million for the three months ended June 30, 2009, compared to the
prior year due primarily to a decrease in income from the company’s
investment in Triton ($0.9 million decrease).  Net equity investment
income increased $9.0 million for the six months ended June 30, 2009, compared
to the prior year.  On March 31, 2009, the company sold its
50-percent interest in EN Engineering and recognized a gain on the sale of $10.1
million.
 
 Interest
income.  Interest income decreased $3.7 million and $4.4
million for the three and six months ended June 30, 2009, respectively, compared
to the prior year due primarily to the impact of lower average investment
balances, lower interest on tax matters and lower average interest
rates.
 
 Income tax
expense.  In 2006, the company reorganized certain shipping and
related operations.  The reorganization allows the company to take
advantage of certain provisions of the Jobs Act that provide the opportunity for
tax savings subsequent to the date of the reorganization.  Generally,
to the extent foreign shipping earnings are not repatriated to the United
States, such earnings are not expected to be subject to current
taxation.  In addition, to the extent such earnings are determined to
be indefinitely reinvested offshore, no deferred income tax expense would be
recorded by the company.  For the six months ended June 30, 2009,
income tax expense has not been provided on approximately $5 million of foreign
company shipping earnings that are expected to be indefinitely reinvested
offshore compared to approximately $3 million for the three and six months ended
June 30, 2008.  As of June 30, 2009, Nicor has not recorded deferred
income taxes of approximately $53 million on approximately $151 million of
cumulative undistributed foreign earnings that are expected in management’s
judgment to be indefinitely reinvested offshore.
 
 The
effective income tax rate for the three months ended June 30, 2009 increased to
30.9 percent from 25.3 percent in the prior-year period.  The
effective income tax rate for the six months ended June 30, 2009 increased to
30.7 percent from 25.3 percent in the prior-year period.  The higher
effective income tax rate for the three and six months ended June 30, 2009 is
due primarily to higher forecasted annual pretax income (which causes a higher
effective income tax rate since permanent differences and tax credits are a
smaller share of pretax income).


Table of Contents


Nicor
      Inc.Gas
      Distribution StatisticsThree
      months ended
                                                    
                                                    
                                                    Six
      months endedJune
      30
                                                    
                                                    
                                                    June
      302009
                                                    
                                                    
                                                    2008
                                                    
                                                    
                                                    2009
                                                    
                                                    
                                                    2008Operating revenues(millions)SalesResidential
                                                    
                                                    $
                                                    195.5
                                                    
                                                    
                                                    $
                                                    363.1
                                                    
                                                    
                                                    $
                                                    843.6
                                                    
                                                    
                                                    $
                                                    1,376.3Commercial
                                                    
                                                    
                                                    50.6
                                                    
                                                    
                                                    
                                                    101.9
                                                    
                                                    
                                                    
                                                    220.6
                                                    
                                                    
                                                    
                                                    351.6Industrial
                                                    
                                                    
                                                    5.9
                                                    
                                                    
                                                    
                                                    11.1
                                                    
                                                    
                                                    
                                                    25.3
                                                    
                                                    
                                                    
                                                    42.1252.0
                                                    
                                                    
                                                    
                                                    476.1
                                                    
                                                    
                                                    
                                                    1,089.5
                                                    
                                                    
                                                    
                                                    1,770.0TransportationResidential
                                                    
                                                    
                                                    10.1
                                                    
                                                    
                                                    
                                                    8.0
                                                    
                                                    
                                                    
                                                    24.4
                                                    
                                                    
                                                    
                                                    21.2Commercial
                                                    
                                                    
                                                    14.3
                                                    
                                                    
                                                    
                                                    11.8
                                                    
                                                    
                                                    
                                                    39.4
                                                    
                                                    
                                                    
                                                    43.0Industrial
                                                    
                                                    
                                                    8.7
                                                    
                                                    
                                                    
                                                    7.6
                                                    
                                                    
                                                    
                                                    19.0
                                                    
                                                    
                                                    
                                                    19.4Other
                                                    
                                                    
                                                    .6
                                                    
                                                    
                                                    
                                                    5.5
                                                    
                                                    
                                                    
                                                    4.3
                                                    
                                                    
                                                    
                                                    22.733.7
                                                    
                                                    
                                                    
                                                    32.9
                                                    
                                                    
                                                    
                                                    87.1
                                                    
                                                    
                                                    
                                                    106.3Other
      revenuesRevenue
      taxes
                                                    
                                                    
                                                    26.6
                                                    
                                                    
                                                    
                                                    36.7
                                                    
                                                    
                                                    
                                                    101.3
                                                    
                                                    
                                                    
                                                    117.0Environmental
      cost recovery
                                                    
                                                    
                                                    2.3
                                                    
                                                    
                                                    
                                                    1.1
                                                    
                                                    
                                                    
                                                    8.0
                                                    
                                                    
                                                    
                                                    6.1Chicago
      Hub
                                                    
                                                    
                                                    1.8
                                                    
                                                    
                                                    
                                                    2.5
                                                    
                                                    
                                                    
                                                    3.8
                                                    
                                                    
                                                    
                                                    5.9Other
                                                    
                                                    
                                                    9.9
                                                    
                                                    
                                                    
                                                    10.8
                                                    
                                                    
                                                    
                                                    20.6
                                                    
                                                    
                                                    
                                                    19.040.6
                                                    
                                                    
                                                    
                                                    51.1
                                                    
                                                    
                                                    
                                                    133.7
                                                    
                                                    
                                                    
                                                    148.0$
                                                    326.3
                                                    
                                                    
                                                    $
                                                    560.1
                                                    
                                                    
                                                    $
                                                    1,310.3
                                                    
                                                    
                                                    $
                                                    2,024.3Deliveries(Bcf)SalesResidential
                                                    
                                                    
                                                    25.8
                                                    
                                                    
                                                    
                                                    26.1
                                                    
                                                    
                                                    
                                                    122.2
                                                    
                                                    
                                                    
                                                    130.3Commercial
                                                    
                                                    
                                                    7.4
                                                    
                                                    
                                                    
                                                    7.9
                                                    
                                                    
                                                    
                                                    32.4
                                                    
                                                    
                                                    
                                                    33.7Industrial
                                                    
                                                    
                                                    1.0
                                                    
                                                    
                                                    
                                                    .9
                                                    
                                                    
                                                    
                                                    3.9
                                                    
                                                    
                                                    
                                                    4.234.2
                                                    
                                                    
                                                    
                                                    34.9
                                                    
                                                    
                                                    
                                                    158.5
                                                    
                                                    
                                                    
                                                    168.2TransportationResidential
                                                    
                                                    
                                                    3.3
                                                    
                                                    
                                                    
                                                    3.1
                                                    
                                                    
                                                    
                                                    15.5
                                                    
                                                    
                                                    
                                                    14.8Commercial
                                                    
                                                    
                                                    12.4
                                                    
                                                    
                                                    
                                                    11.7
                                                    
                                                    
                                                    
                                                    50.8
                                                    
                                                    
                                                    
                                                    52.2Industrial
                                                    
                                                    
                                                    23.2
                                                    
                                                    
                                                    
                                                    23.1
                                                    
                                                    
                                                    
                                                    53.6
                                                    
                                                    
                                                    
                                                    55.438.9
                                                    
                                                    
                                                    
                                                    37.9
                                                    
                                                    
                                                    
                                                    119.9
                                                    
                                                    
                                                    
                                                    122.473.1
                                                    
                                                    
                                                    
                                                    72.8
                                                    
                                                    
                                                    
                                                    278.4
                                                    
                                                    
                                                    
                                                    290.6Customers at end of period(thousands)SalesResidential
                                                    
                                                    
                                                    1,760
                                                    
                                                    
                                                    
                                                    1,777Commercial
                                                    
                                                    
                                                    131
                                                    
                                                    
                                                    
                                                    128Industrial
                                                    
                                                    
                                                    7
                                                    
                                                    
                                                    
                                                    71,898
                                                    
                                                    
                                                    
                                                    1,912TransportationResidential
                                                    
                                                    
                                                    221
                                                    
                                                    
                                                    
                                                    205Commercial
                                                    
                                                    
                                                    50
                                                    
                                                    
                                                    
                                                    53Industrial
                                                    
                                                    
                                                    5
                                                    
                                                    
                                                    
                                                    5276
                                                    
                                                    
                                                    
                                                    2632,174
                                                    
                                                    
                                                    
                                                    2,175Other
      statisticsDegree
      days
                                                    
                                                    
                                                    686
                                                    
                                                    
                                                    
                                                    690
                                                    
                                                    
                                                    
                                                    3,871
                                                    
                                                    
                                                    
                                                    3,962Colder
      than normal (1)
                                                    
                                                    
                                                    11%
                                                    
                                                    
                                                    
                                                    0%
                                                    
                                                    
                                                    
                                                    10%
                                                    
                                                    
                                                    
                                                    7%Average
      gas cost per Mcf sold
                                                    
                                                    $
                                                    4.42
                                                    
                                                    
                                                    $
                                                    11.29
                                                    
                                                    
                                                    $
                                                    5.38
                                                    
                                                    
                                                    $
                                                    9.37(1)
      Normal weather for Nicor Gas' service territory, for purposes of this
      report, is considered to be 5,600 degree days per year for 2009 and 5,830
      degree days per year for 2008.






Table of Contents


Shipping
Statistics


Three
      months ended
                    
                    
                    Six
      months endedJune
      30
                    
                    
                    June
      302009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008TEUs
      shipped (thousands)
                    
                    
                    42.7
                    
                    
                    
                    48.8
                    
                    
                    
                    85.3
                    
                    
                    
                    96.8Revenue
      per TEU
                    
                    $
                    1,960
                    
                    
                    $
                    2,098
                    
                    
                    $
                    2,030
                    
                    
                    $
                    2,068At
      end of periodPorts
      served
                    
                    
                    25
                    
                    
                    
                    25Vessels
      operated
                    
                    
                    16
                    
                    
                    
                    17





FINANCIAL
CONDITION AND LIQUIDITY





The
company believes it has access to adequate resources to meet its needs for
capital expenditures, debt redemptions, dividend payments and working
capital.  These resources include net cash flow from operating
activities, access to capital markets, lines of credit and short-term
investments.  Capital market conditions are not currently expected to
have a material adverse impact on the company’s ability to access
capital.





Operating cash
flows.  The gas distribution business is highly seasonal and
operating cash flow may fluctuate significantly during the year and from
year-to-year due to factors such as weather, natural gas prices, the timing of
collections from customers, natural gas purchasing, and storage and hedging
practices.  The company relies on short-term financing to meet
seasonal increases in working capital needs.  Cash requirements
generally increase over the last half of the year due to increases in natural
gas purchases, gas in storage and accounts receivable.  During the
first half of the year, positive cash flow generally results from the sale of
gas in storage and the collection of accounts receivable.  This cash
is typically used to substantially reduce, or eliminate, short-term debt during
the first half of the year.  Net cash flow provided from operating
activities decreased$43.8 million for the
six months ended June 30, 2009 compared to the prior year.





Nicor
maintains margin accounts related to financial derivative
transactions.  These margin accounts may cause large fluctuations in
cash needs or sources in a relatively short period of time due to daily
settlements resulting from changes in natural gas futures prices.  The
company manages these fluctuations with short-term borrowings and
investments.





Investing
activities.Net cash flow used for investing activities
decreased $3.0 million for the six months ended June 30, 2009 compared to the
prior year.





On March
31, 2009, the company sold its 50-percent interest in EN
Engineering.  The company’s share of the sale price is $16.0 million,
with an additional $1.5 million which is contingent on EN Engineering’s 2010
performance and would be due in 2011.  After closing costs and other
adjustments, Nicor received cash of $13.0 million and recorded a gain on the
sale of $10.1 million.





Capital expenditures.Nicor’s capital budget
for 2009 included approximately $40 million for the planned development of
natural gas storage fields.  The company has revised their 2009
capital budget for these projects and now expects it to be approximately $7
million.  This revision is due to the timing of planned
expenditures.





Nicor’s
capital budget also included approximately $50 million for the purchase of two
vessels and freight handling equipment in the shipping segment.  The
company has revised its capital budget for the shipping segment and now expects
it to be approximately $25 million.  This revision is attributable to
the decision to defer the purchases of a vessel and certain freight
equipment.





Table of Contents




Financing
activities.  The current credit ratings for Nicor and Nicor Gas
have not changed since the filing of the 2008 Annual Report on Form 10-K.In the
second quarter of 2009, Moody’s and Standard & Poor’s affirmed their credit
ratings on both Nicor and Nicor Gas.





The
company believes it is in compliance with all debt covenants.





Long-term debt.In
February 2009, the $50 million 5.37 percent First Mortgage Bond series matured
and was retired.  On July 30, 2009, Nicor Gas, through a private
placement, issued $50 million First Mortgage Bonds at 4.70 percent, due in
2019.  As a result of this issuance, the company reclassified $50
million of short-term debt outstanding as of June 30, 2009 as a long-term
obligation.  On February 25, 2009, Nicor Gas filed a new shelf
registration for the purpose of issuing additional First Mortgage
Bonds.  The shelf registration became effective on March 20,
2009.





In August
2008, Nicor Gas, through a private placement, issued $75 million First Mortgage
Bonds at 6.25 percent, due in 2038.  Nicor Gas retired the $75 million
5.875 percent First Mortgage Bond series that became due in August
2008.





Short-term debt.In May 2009, Nicor Gas
established a $550 million, 364-day revolver, expiring May 2010, to replace the
$600 million, 9-month seasonal revolver, which expired in May
2009.  In September 2005, Nicor and Nicor Gas established a $600
million, five-year revolver, expiring September 2010.  These
facilities were established with major domestic and foreign banks and serve as
backup for the issuance of commercial paper.  The company had $277.0
million, $739.9 million and $18.0 million of commercial paper borrowings
outstanding at June 30, 2009, December 31, 2008 and June 30, 2008,
respectively.  The company expects that funding from commercial paper
and related backup line-of-credit agreements will continue to be available in
the foreseeable future and sufficient to meet estimated cash
requirements.





Dividends.  Nicor
maintained its quarterly common stock dividend rate of $0.465 per common share
during the three months ended June 30, 2009.  This quarterly dividend
rate was also applicable in 2008.  The company paid dividends on its
common stock of $42.3 million and $42.2 million for the six months ended June
30, 2009 and 2008, respectively.  Nicor currently has no contractual
or regulatory restrictions on the payment of dividends.





OTHER
MATTERS.





Recent Illinois
Legislation.  In July 2009, a new Illinois state law took
effect that will require utility companies to participate in bill payment
assistance programs for low-income customers.  Funding for the
programs is expected to be provided largely through federal and state government
contributions, as well as through an increase in monthly utility-customer
charges.  The legislation also requires utilities to develop and
implement energy efficiency measures to obtain prescribed reductions in customer
deliveries.  Funding for the program, excluding the adverse impact on
Nicor Gas of lower deliveries and resulting reduced margin, will be through a
rate adjustment mechanism.  In addition, the legislation allows
utility companies to implement, subject to ICC approval, a rate adjustment
mechanism for bad debt expense.  Certain provisions of the legislation
will be implemented on a pilot basis beginning in 2009.  The company
is currently evaluating the impact of this legislation on the company’s results
of operations, cash flows and financial condition.





Labor
negotiations.  On April 17, 2009, Nicor Gas announced that the
International Brotherhood of Electrical Workers Local 19 ratified a new labor
contract which expires on February 28, 2014.  The agreement covers
approximately 1,400 employees of Nicor Gas.  The new contract will
provide for, among other things, general wage increases and changes to various
employee benefits, and is not expected to have a material impact on the
company’s results of operations, cash flows and financial
condition.




30
 
 Table of Contents


CONTINGENCIES





The
following contingencies of Nicor are in various stages of investigation or
disposition.  Although in some cases 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.





PBR plan.  Nicor
Gas’ PBR plan for natural gas costs went into effect in 2000 and was terminated
by the company effective January 1, 2003.  Under the PBR plan, Nicor
Gas’ total gas supply costs were compared to a market-sensitive
benchmark.  Savings and losses relative to the benchmark were
determined annually and shared equally with sales customers.  The PBR
plan is currently under ICC review.  There are allegations that the
company acted improperly in connection with the PBR plan, and the ICC and others
are 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
Office (“CCSAO”), the staff of the ICC and CUB entered into a stipulation
providing for additional discovery.  The Illinois Attorney General’s
Office (“IAGO”) has also intervened in this matter.  In addition, the
IAGO 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 company
has committed to cooperate fully in the reviews of the PBR plan.





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.  The special
committee presented the report of its counsel (“Report”) to Nicor’s Board of
Directors on October 28, 2002.  A copy of the Report is available at
the Nicor website and has been previously produced to all parties in the ICC
Proceedings.





In
response, the Nicor Board of Directors directed the company’s management to,
among other things, make appropriate adjustments to account for, and fully
address, the adverse consequences to ratepayers of the items noted in the
Report, and conduct a detailed study of the adequacy of internal accounting and
regulatory controls.  The adjustments were made in prior years’
financial statements resulting in a $24.8 million liability.  Included
in such $24.8 million liability is a $4.1 million loss contingency.  A
$1.8 million adjustment to the previously recorded liability, which is discussed
below, was made in 2004 increasing the recorded liability to $26.6
million.  Nicor Gas estimates that there is $26.9 million due to the
company from the 2002 PBR plan year, which has not been recognized in the
financial statements due to uncertainties surrounding the PBR
plan.  In addition, interest due to the company on certain components
of these amounts has not been recognized in the financial statements due to the
same uncertainties.  By the end of 2003, the company completed steps
to correct the weaknesses and deficiencies identified in the detailed study of
the adequacy of internal controls.





Pursuant
to the agreement of all parties, including the company, the ICC re-opened the
1999 and 2000 purchased gas adjustment filings for review of certain
transactions related to the PBR plan and consolidated the reviews of the
1999-2002 purchased gas adjustment filings with the PBR plan
review.





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 additional refunds to
consumers.  On March 5, 2003, the ICC staff filed a response brief in
support of CUB’s motion for sanctions.  On May 1, 2003, the
ALJs






Table of Contents




issued a
ruling denying CUB and CCSAO’s motion for sanctions.  CUB has filed an
appeal of the motion for sanctions with the ICC, and the ICC has indicated that
it will not rule on the appeal until the final disposition of the ICC
Proceedings.  It is not possible to determine how the ICC will resolve
the claims of CCSAO, CUB or other parties to the ICC Proceedings.





In
November 2003, the ICC staff, CUB, CCSAO and the IAGO filed their respective
direct testimony in the ICC Proceedings.  The ICC staff is seeking
refunds to customers of approximately $108 million and CUB and CCSAO were
jointly seeking refunds to customers of approximately $143
million.  The IAGO direct testimony alleges adjustments in a range
from $145 million to $190 million.  The IAGO testimony as filed is
presently unclear as to the amount which IAGO seeks to have refunded to
customers.  On February 27, 2004, the above referenced intervenors
filed their rebuttal testimony in the ICC Proceedings.  In such
rebuttal testimony, CUB and CCSAO amended the alleged amount to be refunded to
customers from approximately $143 million to $190 million.  In 2004,
the evidentiary hearings on this matter were stayed in order to permit the
parties to undertake additional third party discovery from Entergy-Koch Trading,
LP (“EKT”), a natural gas, storage and transportation trader and consultant with
whom Nicor did business under the PBR plan.  In December 2006, the
additional third party discovery from EKT was obtained, Nicor Gas withdrew its
previously filed testimony and the ALJs issued a scheduling order that provided
for Nicor Gas to submit direct testimony by April 13, 2007.  In its
direct testimony filed pursuant to the scheduling order, Nicor Gas seeks a
reimbursement of approximately $6 million, which includes interest due to the
company, as noted above, of $1.6 million, as of March 31, 2007.  No
date has been set for evidentiary hearings on this matter.





In 2004,
the company became aware of additional information relating to the activities of
individuals affecting the PBR plan for the period from 1999 through 2002,
including information consisting of third party documents and recordings of
telephone conversations from EKT.  Review of additional information
completed in 2004 resulted in the $1.8 million adjustment to the previously
recorded liability referenced above.





Although
the Report of the special committee’s counsel did not find that there was
criminal activity or fraud, a review of this additional information (which was
not available to the independent counsel who prepared the Report) and
re-interviews of certain Nicor Gas personnel in 2004 indicated that certain
former Nicor Gas personnel may have engaged in potentially fraudulent conduct
regarding the PBR plan in violation of company policy, and in possible violation
of SEC rules and applicable law.  Further, certain former Nicor Gas
personnel also may have attempted to conceal their conduct in connection with an
ICC review of the PBR plan.  The company has reviewed all third party
information it has obtained and will continue to review any additional third
party information the company may obtain.  The company terminated four
employees in connection with this matter in 2004.





Nicor is
unable to predict the outcome of the ICC’s review or the company’s potential
exposure thereunder.  Because the PBR plan and historical gas costs
are still under ICC review, the final outcome could be materially different than
the amounts reflected in the company’s financial statements as of June 30,
2009.





Mercury.  Information
about mercury contingencies is presented in Item 1 – Notes to the Condensed
Consolidated Financial Statements – Note 16 – Contingencies –
Mercury.





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 Item
1 – Notes to the Condensed Consolidated Financial Statements – Note 16 –
Contingencies – Manufactured Gas Plant Sites.





PCBs.  Information
about PCB contingencies is presented in Item 1 – Notes to the Condensed
Consolidated Financial Statements – Note 16 – Contingencies – PCBs.








Table of Contents




Municipal tax
matters.  Information about municipal tax contingencies is
presented in Item 1 – Notes to the Condensed Consolidated Financial Statements –
Note 16 – Contingencies – Municipal Tax Matters.





Other.The company is involved
in legal or administrative proceedings before various courts and agencies with
respect to general claims, taxes, environmental, gas cost prudence reviews and
other matters.  See Item 1 – Notes to the Condensed Consolidated
Financial Statements – Note 16 – Contingencies – Other.





CRITICAL
ACCOUNTING ESTIMATES





See Item
7 – Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Critical Accounting Estimates in the 2008 Annual Report on Form
10-K for a discussion of the company’s critical accounting
estimates.





NEW
ACCOUNTING PRONOUNCEMENTS





For
information concerning SFAS No. 157, Fair Value Measurements, see
Item 1 – Notes to the Condensed Consolidated Financial Statements – Note 3 – New
Accounting Pronouncements.





CAUTION
CONCERNING FORWARD-LOOKING STATEMENTS





This
document includes certain forward-looking statements about the expectations of
Nicor and its subsidiaries and affiliates.  Although Nicor believes
these statements are based on reasonable assumptions, actual results may vary
materially from stated expectations.  Such forward-looking statements
may be identified by the use of forward-looking words or phrases such as
“anticipate,” “believe,” “expect,” “intend,” “may,” “planned,” “potential,”
“should,” “will,” “would,” “project,” “estimate,” “ultimate,” or similar
phrases.  Actual results may differ materially from those indicated in
the company’s
forward-looking statements due to the direct or indirect effects of legal
contingencies (including litigation) and the resolution of those issues,
including the effects of an ICC review, and undue reliance should not be placed
on such statements.





Other
factors that could cause materially different results include, but are not
limited to, weather conditions; natural disasters; natural gas and other fuel
prices; fair value accounting adjustments; inventory valuation; health care
costs; insurance costs or recoveries; legal costs; borrowing needs; interest
rates; credit conditions; economic and market conditions; accidents, leaks,
equipment failures, service interruptions, environmental pollution, and other
operating risks; tourism and construction in the Bahamas and Caribbean region;
energy conservation; legislative and regulatory actions; tax rulings or audit
results; asset sales; significant unplanned capital needs; future
mercury-related charges or credits; changes in accounting principles,
interpretations, methods, judgments or estimates; performance of major
customers, transporters, suppliers and contractors; labor relations; and acts of
terrorism.





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.





33
 
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Item
3.   Quantitative and Qualitative
Disclosures About 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 and fuel
commodity prices and interest rates.  Nicor’s practice is to manage
these risks utilizing derivative instruments and other methods, as deemed
appropriate.





There has
been no material change in the company’s exposure to market risk since the
filing of the 2008 Annual Report on Form 10-K.





Item
4.   Controls and Procedures





The
company carried out an evaluation under the supervision and with the
participation of the company’s management, including its Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of
the company’s disclosure controls and procedures as of the end of the period
covered by this Quarterly Report on Form 10-Q (the “Evaluation”).





In
designing and evaluating the disclosure controls and procedures, management
recognizes that any disclosure controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and management is required to apply its judgment in
evaluating the cost-benefit relationship of possible disclosure controls and
procedures.  These disclosure controls and procedures are designed so
that required information is accumulated and communicated to the registrant’s
management, including its principal executive officer and principal financial
officer, as appropriate to allow timely decisions regarding required
disclosures.  Based on the Evaluation, the company’s Chief Executive
Officer and Chief Financial Officer concluded that the company’s disclosure
controls and procedures, as of the end of the period covered by this Quarterly
Report on Form 10-Q, were effective at the reasonable assurance level to ensure
that information required to be disclosed by the company in reports that it
files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in United
States Securities and Exchange Commission rules and forms.





There has
been no change in the company’s internal controls over financial reporting
during the company’s most recent fiscal quarter that has materially affected, or
is reasonably likely to materially affect, the company’s internal control over
financial reporting.





34
 
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PART
II - OTHER INFORMATION





Item
1.  Legal
Proceedings





See Part
II, Item 1 – Legal Proceedings in the March 31, 2009 Quarterly Report on Form
10-Q for disclosure relating to a notice of proposed debarment from the
GSA.





See Part
I, Item 1 – Notes to the Condensed Consolidated Financial Statements – Note 14 –
Rate Proceeding and Note 16 – Contingencies, which are incorporated herein by
reference.





Item
2.   Unregistered Sales of Equity
Securities and Use of Proceeds





In 2001,
Nicor announced a $50 million common stock repurchase program, under which Nicor
may purchase its common stock as market conditions permit through open market
transactions and to the extent cash flow is available after other cash needs and
investment opportunities.  There have been no repurchases under this
program during the first six months of 2009 or 2008.  As of June 30,
2009, $21.5 million remained authorized for the repurchase of common
stock.





Item
4. Submission of Matters to a
Vote of Security Holders





The
Annual Meeting of Stockholders of the company was held on April 23,
2009.  Proxies for the meeting were solicited pursuant to Section
14(a) of the Securities Exchange Act of 1934 and there was no solicitation in
opposition to the board of directors’ solicitation.  Voting results
reported below are for shares eligible to vote as of the record date, February
24, 2009.





Nominees
for directors, as listed in the proxy statement, were elected as indicated
below.  There were no “broker nonvotes.”  Votes were cast as
follows:





Nominee
                  
                  For
                  
                  WithheldRobert
      M. Beavers
                  
                  36,635,038
                  
                  2,444,293Bruce
      P. Bickner
                  
                  38,109,241
                  
                  970,090John
      H. Birdsall, III
                  
                  36,678,355
                  
                  2,400,976Norman
      R Bobins
                  
                  37,814,657
                  
                  1,264,674Brenda
      J. Gaines
                  
                  38,127,170
                  
                  952,161Raymond
      A. Jean
                  
                  36,850,787
                  
                  2,228,544Dennis
      J. Keller
                  
                  36,632,068
                  
                  2,447,263R.
      Eden Martin
                  
                  36,969,245
                  
                  2,110,086Georgia
      R. Nelson
                  
                  37,491,820
                  
                  1,587,511Armando
      J. Olivera
                  
                  38,254,548
                  
                  824,783John
      Rau
                  
                  36,649,205
                  
                  2,430,126John
      C. Staley
                  
                  38,213,276
                  
                  866,055Russ
      M. Strobel
                  
                  38,127,150
                  
                  952,181





The
stockholders ratified the appointment of Deloitte & Touche LLP as the
company’s independent registered public accounting firm for
2009.  There were no “broker nonvotes.”  Votes were cast as
follows:





For
                  
                  Against
                  
                  Abstain38,424,371
                  
                  445,993
                  
                  208,967





35
 
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Item
6.   Exhibits





ExhibitNumber
              
              Description of Document3.01
              *
              Amended
      and Restated Articles of Incorporation of Nicor Inc., as further amended
      by the amendment filed with the Illinois Secretary of State on June 2,
      2008. (File No. 1-7297, Form 10-Q for June 30, 2008, Nicor Inc., Exhibit
      3.01.)3.02
              *
              Nicor
      Inc. Amended and Restated By-laws effective as of July 24,
      2008.  (File No. 1-7297, Form 8-K for July 28, 2008, Nicor Inc.,
      Exhibit 3.1.)3.03
              *
              Nicor
      Inc. Amendment to Amended and Restated By-laws.  (File No.
      1-7297, Form 8-K for November 20, 2008, Nicor Inc., Exhibit
      3.1.)4.01
              
              Supplemental Indenture, dated July 23,
      2009, of Nicor Gas to BNY Mellon Trust Company, Trustee, under Indenture
      dated as of January 1, 1954.10.01
              *
              Second
      Amendment to Nicor Inc. Stock Deferral Plan (as in effect on October 3,
      2004 for Pre-2005 benefits).  (File No. 1-7297, Form 8-K for
      July 27, 2009, Nicor Inc., Exhibit 10.01.)10.02
              *
              First
      Amendment to Nicor Inc. Stock Deferral Plan (as Amended and Restated for
      Post-2004 Benefits).  (File No. 1-7297, Form 8-K for July 27,
      2009, Nicor Inc., Exhibit 10.02.)10.03
              *
              Second
      Amendment to Nicor Inc. 2006 Long Term Incentive Plan.  (File
      No. 1-7297, Form 8-K for July 27, 2009, Nicor Inc., Exhibit
      10.03.)10.04
              *
              First
      Amendment to Nicor Inc. 2008 Long Term Incentive Program.  (File
      No. 1-7297, Form 8-K for July 27, 2009, Nicor Inc., Exhibit
      10.04.)10.05
              *
              First
      Amendment to Nicor Inc. 2009 Long Term Incentive Program.  (File
      No. 1-7297, Form 8-K for July 27, 2009, Nicor Inc., Exhibit
      10.05.)10.06
              *
              First
      Amendment to Nicor Inc. 2006 Long Term Incentive Plan Restricted Stock
      Unit Agreement dated March 27, 2008 between Nicor Inc. and Rick
      Murrell.  (File No. 1-7297, Form 8-K for July 27, 2009, Nicor
      Inc., Exhibit 10.06.)10.07
              *
              First
      Amendment to Nicor Inc. 2006 Long Term Incentive Plan Restricted Stock
      Unit Agreement dated March 26, 2009 between Nicor Inc. and Rick
      Murrell.  (File No. 1-7297, Form 8-K for July 27, 2009, Nicor
      Inc., Exhibit 10.07.)10.08
              *
              First
      Amendment to Nicor Inc. 2006 Long Term Incentive Plan Performance Cash
      Unit Agreement dated March 27, 2008 between Nicor Inc. and Rick
      Murrell.  (File No. 1-7297, Form 8-K for July 27, 2009, Nicor
      Inc., Exhibit 10.08.)10.09
              *
              First
      Agreement to Nicor Inc. 2006 Long Term Incentive Plan Performance Cash
      Unit Agreement dated March 26, 2009 between Nicor Inc. and Rick
      Murrell.  (File No. 1-7297, Form 8-K for July 27, 2009, Nicor
      Inc., Exhibit 10.09.)10.10
              *
              First
      Amendment to Tropical Shipping Company Long-Term Performance Incentive
      Plan.  (File No. 1-7297, Form 8-K for July 27, 2009, Nicor Inc.,
      Exhibit 10.10.)








Table of Contents


ExhibitNumber
              
              Description of Document10.11
              *
              First
      Amendment to Tropical Shipping Company Annual Incentive Compensation
      Plan.  (File No. 1-7297, Form 8-K for July 27, 2009, Nicor Inc.,
      Exhibit 10.11.)10.12
              
              364-Day Credit Agreement Dated as of May 11,
      2009.


31.01
              
              Rule 13a-14(a)/15d-14(a)
      Certification.31.02
              
              Rule 13a-14(a)/15d-14(a)
      Certification.32.01
              
              Section 1350
      Certification.32.02
              
              Section 1350
      Certification.





*
            These
      exhibits have been previously filed with the SEC as exhibits to
      registration statements or to other filings with the SEC 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.


37
 
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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.July
      31, 2009
                  
                  /s/
      KAREN K. PEPPING(Date)
                  
                  Karen
      K. PeppingVice
      President and Controller(Principal
      Accounting Officer andDuly
      Authorized Officer)