UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-K




[X]
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934For the fiscal year ended
      December 31, 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.
      Employer Identification No.)1844
      Ferry RoadNaperville,
      Illinois 60563-9600
            
            (630)
      305-9500(Address
      of principal executive offices) (Zip Code)
            
            (Registrant’s
      telephone number, including area
code)





Securities
registered pursuant to Section 12(b) of the Act:


Title
      of each class
            
            Name
      of each exchange on which registeredCommon
      Stock, par value $2.50 per share
            
            New
      York Stock ExchangeChicago
      Stock Exchange


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





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes
[X]   No [   ]





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.  Yes
[   ]   No [X]





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





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 the 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 Act).  Yes [   ] No [X]





The
aggregate market value of common stock (based on the June 30, 2009 closing price
of $34.62) held by non-affiliates of the registrant was approximately $1.5
billion.  As of February 17, 2010, there were 45,245,188 shares of
common stock outstanding.




DOCUMENTS
INCORPORATED BY REFERENCE





Portions
of the company’s 2010 Annual Meeting Definitive Proxy Statement, to be filed on
or about March 10, 2010, are incorporated by reference into Part
III.










Table of Contents


Nicor
Inc.





Table of
      ContentsItem No.
              Description
              Page No.Glossary
              iiPart I1.
              Business
              11A.
              Risk Factors
              71B.
              Unresolved Staff Comments
              132.
              Properties
              133.
              Legal Proceedings
              134.
              Submission of Matters to a Vote of Security Holders
              13Executive Officers of the Registrant
              14Part II5.
              Market for Registrant’s Common Equity, Related Stockholder
      Matters and Issuer Purchases of Equity Securities
              156.
              Selected Financial Data
              177.
              Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
              187A.
              Quantitative and Qualitative Disclosures About Market
      Risk
              388.
              Financial Statements and Supplementary Data
              409.
              Changes in and Disagreements With Accountants on Accounting
      and Financial Disclosure
              769A.
              Controls and Procedures
              769B.
              Other Information
              77Part III10.
              Directors, Executive Officers and Corporate
      Governance
              7811.
              Executive Compensation
              7812.
              Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder Matters
              7813.
              Certain Relationships and Related Transactions, and
      Director Independence
              7914.
              Principal Accounting Fees and Services
              79Part IV15.
              Exhibits, Financial Statement Schedules
              80Signatures
              82Exhibit Index
              83








i
 
 Table of Contents




Nicor
Inc.





Glossary





ALJs.  Administrative
Law Judges.





ARO.  Asset
retirement obligation.





Central
Valley.  Central Valley Gas Storage, L.L.C., a wholly owned
business that is developing a natural gas storage facility in the Sacramento
River valley of north-central California.





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 and 2007.





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.





FERC.Federal
Energy Regulatory Commission, the agency that regulates the interstate
transportation of natural gas, oil and electricity.





Horizon
Pipeline.Horizon Pipeline Company, L.L.C., a 50-percent-owned
joint venture that operates an interstate regulated natural gas pipeline of
approximately 70 miles, stretching from Joliet, Illinois to near the
Wisconsin/Illinois border.





ICC.Illinois
Commerce Commission, the agency that establishes the rules and regulations
governing utility rates and services in Illinois.




IDR.




IRS.







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.





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.







ii
 
 Table of Contents


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 customer move connection services for 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.





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.






PGA.Purchased Gas
Adjustment, a rate rider that passes natural gas costs directly through to
customers without markup, subject to ICC review.





Rider.A rate
adjustment mechanism that is part of a utility’s tariff which authorizes it to
provide specific services or assess specific charges.




SEC. The
United States Securities and Exchange
Commission.







TEL.Tropic
Equipment Leasing, Inc., a wholly owned subsidiary of Nicor, holds the company’s
interest 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.





U.S.United States
of America.








iii
 
 Table of Contents


PART
I





Item 1.
            Business





Nicor, an
Illinois corporation formed in 1976, is a holding company.  Gas
distribution is Nicor’s primary business.  Nicor’s major 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.  As a
consolidated group, Nicor had approximately 3,900 employees at year-end
2009.





Summary
financial information for Nicor’s major businesses is included in Item 8 – Notes
to the Consolidated Financial Statements – Note 15 – Business Segment and
Geographic Information.  The following sections describe Nicor’s
larger businesses.  Certain terms used herein are defined in the
glossary on pages ii and iii.





GAS
DISTRIBUTION





General





Nicor
Gas, a regulated natural gas distribution utility, serves 2.2 million customers
in a service territory that encompasses most of the northern third of Illinois,
excluding the city of Chicago.  The company’s service territory is
diverse, providing the company with a well-balanced mix of residential,
commercial and industrial customers.  Residential customers typically
account for approximately 50 percent of natural gas deliveries, while commercial
and industrial customers each typically account for approximately 25
percent.  See Gas Distribution Statistics on page 26 for operating
revenues, deliveries and number of customers by customer
classification.  Nicor Gas had approximately 2,200 employees at
year-end 2009.





Nicor Gas
maintains franchise agreements with most of the incorporated municipalities it
serves, allowing it to construct, operate and maintain distribution facilities
in those incorporated municipalities.  Franchise agreement terms range
up to 50 years.  Currently, about one-third of the agreements will
expire within five years.





Customers
have the option of purchasing their own natural gas supplies, with delivery of
the gas by Nicor Gas.  The larger of these transportation customers
also have options that include the use of Nicor Gas’ storage system and the
ability to choose varying supply backup levels.  The choice of
transportation service as compared to natural gas sales service results in less
revenue for Nicor Gas but has no direct impact on net operating
results.  Nicor Gas continues to deliver natural gas, maintain its
distribution system and respond to emergencies.





Nicor Gas
also operates the Chicago Hub, which provides natural gas storage and
transmission-related services to marketers and other gas distribution
companies.  The Chicago area is a major market hub for natural gas,
and demand exists for storage and transmission-related services by marketers,
other gas distribution companies and electric power-generation
facilities.  Nicor Gas’ Chicago Hub addresses that
demand.  Chicago Hub revenues are passed directly through to customers
as a credit to Nicor Gas’ PGA rider.







1
 
 Table of Contents


Sources of Natural Gas
Supply





Nicor Gas
purchases natural gas supplies in the open market by contracting with producers
and marketers.  It also purchases transportation and storage services
from interstate pipelines that are regulated by the FERC.  When firm
pipeline services are temporarily not needed, Nicor Gas may release the services
in the secondary market under FERC-mandated capacity release provisions, with
proceeds reducing the cost of natural gas charged to customers.





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





Natural gas
supply.  Nicor Gas maintains a diversified portfolio of natural
gas supply contracts.  Supply purchases are diversified by supplier,
producing region, quantity, credit limits and available
transportation.  Natural gas supply pricing is generally tied to
published price indices so as to approximate current market
prices.  These supply contracts also may require the payment of fixed
demand charges to ensure the availability of supplies on any given
day.  The company also purchases natural gas supplies on the spot
market to fulfill its supply requirements or to take advantage of favorable
short-term pricing.





As part
of its purchasing practices, Nicor Gas maintains a price risk hedging strategy
to reduce the risk of price volatility.  A disciplined approach is
used to systematically forward hedge a predetermined portion of forecasted
monthly volumes.





As noted
previously, transportation customers purchase their own natural gas
supplies.  About one-half of the natural gas that the company delivers
is purchased by transportation customers directly from producers and
marketers.





Pipeline
transportation.  The Nicor Gas distribution and storage system
is directly connected to eight interstate pipelines.  This provides
the company with direct access to most of the major natural gas producing
regions in North America.  The company has long-term transportation
contracts with nearly all of these interstate pipelines and generally has a
right-of-first-refusal for contract extensions.  The largest of these
long-term transportation contracts is with Natural Gas Pipeline Company of
America (“NGPL”) which provides approximately 70 percent of the firm
transportation capacity.In addition,
Nicor Gas enters into short-term winter-only transportation contracts and
market-area transportation contracts that enhance Nicor Gas’ operational
flexibility.





Storage.  Nicor Gas
owns and operates eight underground natural gas storage
facilities.  This storage system is one of the largest in the gas
distribution industry.  The storage reservoirs provide a total
inventory capacity of about 150 Bcf, approximately 135 Bcf of which can be
cycled on an annual basis.  The system is designed to meet about 50
percent of the company’s estimated peak-day deliveries and approximately 40
percent of its normal winter deliveries.  In addition to company-owned
facilities, Nicor Gas has about 40 Bcf of purchased storage services under
contracts with NGPL that expire in 2012 and 2013.  This level of
storage capability provides Nicor Gas with supply flexibility, improves the
reliability of deliveries, and can mitigate the risk associated with seasonal
price movements.








2
 
 Table of Contents


Competition/Demand





Nicor Gas
is the largest natural gas distributor in Illinois and is regulated by the
ICC.  The company is the sole distributor of natural gas in
essentially all of its service territory.   Substantially all
single-family homes in Nicor Gas’ service territory are heated with natural
gas.  In the commercial and industrial markets, the company’s natural
gas services compete with other forms of energy, such as electricity, coal,
propane and oil, based on such factors as price, service, reliability and
environmental impact.  In addition, the company has a tariff that
allows negotiation with potential bypass customers.  Nicor Gas also
offers commercial and industrial customers alternatives in rates and service,
increasing its ability to compete in these markets.  Other significant
factors that impact demand for natural gas include weather, conservation and
economic conditions.





Natural
gas deliveries are temperature-sensitive and seasonal since about one-half of
all deliveries are used for space heating.  Typically, about
three-quarters of the deliveries and revenues occur from October through
March.  Fluctuations in weather have the potential to significantly
impact year-to-year comparisons of operating income and cash flow.  It
is estimated that a 100 degree-day variation from normal weather impacts Nicor
Gas’ distribution margin, net of income taxes, by approximately $1.3 million
under the company’s current rate structure.





The
effect of weather variations on Nicor Gas’ results is offset, in part, due to
weather risks within the consolidated Nicor group related to the utility-bill
management products marketed by Nicor Solutions and Nicor Advanced
Energy.  The amount of this offset has approximated 30 percent to 65
percent and will vary depending upon the time of year, weather patterns, the
number of customers for these products and the market price for natural
gas.





Nicor
Gas’ large residential customer base provides for a relatively stable level of
natural gas deliveries during weak economic conditions.  The company’s
industrial and commercial customer base is well diversified, lessening the
impact of industry-specific economic swings.  However, during periods
of high natural gas prices, deliveries of natural gas can be negatively affected
by conservation and the use of alternative energy sources.





Regulation





Nicor Gas
is regulated by the ICC, which governs utility rates and services in
Illinois.  Those ICC orders and regulations that may significantly
affect business performance include the following:





·
            Base
      rates, which are set by the ICC, are designed to allow the company an
      opportunity to recover its costs and earn a fair return for
      investors.  On March 25, 2009, the ICC issued an order approving
      an increase in Nicor Gas’ base revenues of approximately $69 million, a
      rate of return on rate base of 7.58 percent and a rate of return on equity
      of 10.17 percent.  On October 7, 2009, the ICC increased the
      annual base revenues approved for Nicor Gas in the March 25, 2009 order by
      approximately $11 million as a result of a rehearing decision and
      increased the rate of return on rate base to 8.09
      percent.  Therefore, the total annual base revenue increase
      resulting from these ICC orders is approximately $80
      million.  For additional information about the rate proceeding,
      see Item 7 – Management’s Discussion and Analysis of Financial Condition
      and Results of Operations and Item 8 – Notes to the Consolidated Financial
      Statements – Note 19 – Regulatory
Proceedings.







3
 
 Table of Contents


·
            The
      company’s ICC-approved tariffs provide that the cost of natural gas
      purchased for customers will be fully charged to customers without
      markup.  Therefore, the company does not profit from the sale of
      natural gas.  Rather, the company earns income from fixed
      monthly charges and from variable transportation charges for delivering
      natural gas to customers.  Annually, the ICC initiates a review
      of the company’s natural gas purchasing practices for prudence, and may
      disallow the pass-through of costs considered imprudent.  The
      annual prudence reviews for calendar years 1999-2009 are open for
      review.





·
            As
      with the cost of natural gas, the company has ICC-approved tariffs that
      provide for the pass-through of prudently incurred environmental costs
      (related to the remediation of former manufactured gas plant sites) and,
      effective in 2009, franchise gas costs and costs associated with an energy
      efficiency program.  These costs are also subject to annual ICC
      review.




·
            On
      February 2, 2010, the ICC approved a bad debt rider that was filed for in
      2009.  The bad debt rider provides for the recovery from (or
      refund to) customers of the difference between the actual bad debt expense
      Nicor Gas incurs on an annual basis and the benchmark bad debt expense
      included in its base rates for the respective year.  For
      additional information about the bad debt rider, see Item 7 – Management’s
      Discussion and Analysis of Financial Condition and Results of Operations
      and Item 8 – Notes to the Consolidated Financial Statements – Note 19 –
      Regulatory Proceedings.





Nicor Gas
enters into various service agreements with Nicor and its
affiliates.  Nicor Gas, to the extent required, obtains ICC approvals
for these agreements.





The ICC
has other rules that impact the operations of utilities in
Illinois.





A 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 natural 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
results of the PBR plan are currently under ICC review.  Additional
information on the plan and the ICC review are presented in Item 8 – Notes to
the Consolidated Financial Statements – Note 21 – Contingencies – PBR
Plan.





Gas distribution,
transmission and storage system, and other properties





The gas
distribution, transmission and storage system includes approximately 34,000
miles of steel, plastic and cast iron main; approximately 2.0 million steel,
plastic/aluminum composite, plastic and copper services connecting the mains to
customers’ premises; and eight underground storage fields.  Other
properties include buildings, land, motor vehicles, meters, regulators,
compressors, construction equipment, tools, communication and computer
equipment, software and office equipment.





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





Substantially
all gas distribution properties are subject to the lien of the indenture
securing Nicor Gas’ First Mortgage Bonds.





Additional
information about Nicor Gas’ business is presented in Item 1A – Risk Factors,
Item 7 – Management’s Discussion and Analysis of Financial Condition and Results
of Operations and Item 8 – Notes to the Consolidated Financial
Statements.





4
 
 Table of Contents


SHIPPING





Tropical
Shipping is a transporter of containerized freight in the Bahamas and the
Caribbean, a region generally characterized by modest market growth and intense
competition.  The company is a major carrier of exports from the east
coast of the United States and Canada to these regions.  The company’s
shipments consist primarily of southbound cargo such as building materials, food
and other necessities for developers, manufacturers and residents in the
Caribbean and the Bahamas, as well as tourist-related shipments intended for use
in hotels and resorts, and on cruise ships.  The balance of Tropical
Shipping’s cargo consists primarily of interisland shipments and northbound
shipments of apparel and agricultural products.  Other related
services such as inland transportation and cargo insurance are also provided by
Tropical Shipping or other Nicor subsidiaries.





At
December 31, 2009, Tropical Shipping’s operating fleet consisted of 11 owned
vessels and 4 chartered vessels with a container capacity totaling approximately
5,270 TEUs.  In addition to the vessels, the company owns and/or
leases containers, container-handling equipment, chassis and other
equipment. Real
property, more than half of which is leased, includes office buildings, cargo
handling facilities and warehouses located in the United States, Canada and some
of the ports served.





Additional
information about Tropical Shipping’s business is presented in Item 1A – Risk
Factors, Item 7 – Management’s Discussion and Analysis of Financial Condition
and Results of Operations and Item 8 – Notes to the Consolidated Financial
Statements.





OTHER
ENERGY VENTURES





Nicor
owns several energy-related ventures, including three companies marketing
energy-related products and services and a wholesale natural gas marketing
company.  Nicor is also developing natural gas storage facilities and
owns an interest in an interstate natural gas pipeline.





Nicor
Services, Nicor Solutions and Nicor Advanced Energy are businesses that provide
energy-related products and services to retail markets, including residential
and small commercial customers.  Nicor Services operates primarily in
northern Illinois and provides warranty and maintenance contracts, as well as
repair and installation services of heating, air conditioning and indoor
air-quality equipment, and customer move connection services for
utilities.  In conjunction with national expansion efforts, Nicor
Services began doing business under the Nicor National brand in
2009.  Nicor Solutions offers its residential and small commercial
customers, primarily in the Nicor Gas service territory, energy-related products
that provide for natural gas price stability and management of their utility
bill.  These products mitigate and/or eliminate the risks to customers
of colder than normal weather and/or changes in natural gas
prices.  Nicor Advanced Energy is certified by the ICC as an Alternate
Gas Supplier, authorizing it to be a non-utility marketer of natural gas for
residential and small commercial customers.  Nicor Advanced Energy
presently operates in northern Illinois, offering customers an alternative to
the utility as its natural gas supplier.





Nicor
Enerchange is a 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 purchases of natural gas supplies.





Central
Valley is developing a natural gas storage facility in the Sacramento River
valley of north-central California and plans to provide approximately 10 Bcf of
working natural gas capacity, offering flexible, high-deliverability multi-cycle
services and interconnection to regional pipelines.   Central
Valley currently expects to begin injections of natural gas starting in 2010 and
to begin to offer initial service in 2012.  Nicor also is evaluating
the development of other natural gas storage facilities in the United
States.








5
 
 Table of Contents


Horizon
Pipeline, a 50-percent-owned joint venture with NGPL, operates a natural gas
pipeline of approximately 70 miles, stretching from Joliet, Illinois to near the
Wisconsin/Illinois border.  Nicor Gas has contracted for approximately
80 percent of Horizon Pipeline’s capacity under an agreement expiring in 2012 at
rates that have been accepted by FERC.





EN
Engineering, a previously-owned joint venture between Nicor and A. Epstein &
Sons International, is an engineering and consulting firm that specializes in
the design, installation and maintenance of natural gas, petroleum and liquid
pipeline facilities.  EN Engineering provides engineering and
corrosion services to Nicor Gas.  Nicor sold its ownership on March
31, 2009.





Additional
information about Nicor’s other energy ventures is presented in Item 1A – Risk
Factors, Item 7 – Management’s Discussion and Analysis of Financial Condition
and Results of Operations and Item 8 – Notes to the Consolidated Financial
Statements.





CORPORATE





Nicor has
equity investments in a cargo container leasing business and certain affordable
housing investments.  Additional information on Nicor’s equity
investments are presented in Item 8 – Notes to the Consolidated Financial
Statements – Note 16 – Equity Investment Income, Net.





AVAILABLE
INFORMATION





Nicor
files various reports with the SEC.  These reports include the annual
reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K and amendments to those reports filed or furnished pursuant to Section 13
(a) of the Securities Exchange Act of 1934.  Nicor makes all of these
reports available without charge to the public on the investor section of the
company’s Internet site at www.nicor.com as soon
as reasonably practicable after Nicor files them with, or furnishes them to, the
SEC.








6
 
 Table of Contents


Item
1A.         Risk
Factors





The
following factors are the most significant factors that can impact year-to-year
comparisons and may affect the future performance of the company’s
businesses.  New risks may emerge and management cannot predict those
risks or estimate the extent to which they may affect the company’s financial
performance.





Regulation
of Nicor Gas, including changes in the regulatory environment in general, may
adversely affect the company’s results of operations, cash flows and financial
condition.





Nicor Gas
is regulated by the ICC, which has general regulatory power over practically all
phases of the public utility business in Illinois, including rates and charges,
issuance of securities, services and facilities, system of accounts,
investments, safety standards, transactions with affiliated interests and other
matters.





Nicor Gas
is permitted by the ICC’s PGA regulation to adjust the charge to its sales
customers on a monthly basis to recover the company’s prudently incurred actual
costs to acquire the natural gas it delivers to them.  The company’s
gas costs are subject to subsequent prudence reviews by the ICC for which the
company makes annual filings.  The annual prudence reviews for
calendar years 1999-2009 are open for review and any disallowance of costs in
those proceedings could adversely affect Nicor Gas’ results of operations, cash
flows and financial condition.





Additionally,
Nicor Gas is permitted by ICC regulations to periodically adjust the charge to
its customers to recover the company’s prudently incurred actual costs
associated with environmental remediation at former manufactured gas plant
sites, franchise payments to municipalities, energy efficiency programs and, as
approved in February 2010, bad debt expense.  These charges are
subject to subsequent prudence reviews by the ICC and any disallowance of costs
by the ICC could adversely affect Nicor Gas’ results of operations, cash flows
and financial condition.





Most of
Nicor Gas’ other charges are changed only through a rate case proceeding with
the ICC.  The charges established in a rate case proceeding are based
on an approved level of operating costs and investment in utility property and
are designed to allow the company an opportunity to recover those costs and to
earn a fair return on that investment based upon an estimated volume of annual
natural gas deliveries.  To the extent Nicor Gas’ actual costs to
provide utility service are higher than the levels approved by the ICC, or its
actual natural gas deliveries are less than the annual volume estimated by the
ICC, Nicor Gas’ results of operations, cash flows and financial condition could
be adversely affected until such time as it files for and obtains ICC approval
for new charges through a rate case proceeding.





Nicor Gas
is subject to rules and regulations pertaining to the integrity of its
distribution system and environmental compliance.  The company’s
results of operations, cash flows and financial condition could be
adversely affected by any additional laws or regulations that are enacted that
require significant increases in the amount of expenditures for system integrity
and environmental compliance.





The ICC
has other rules that impact the operations of utilities in
Illinois.  Changes in these rules could impact the company’s results
of operations, cash flows and financial condition.





Nicor Gas
enters into various service agreements with Nicor and its affiliates. Nicor Gas
obtains the required ICC approvals for these agreements.  The
company’s results of operations, cash flows and financial condition could be
adversely affected if, as a result of a change in law or action by the ICC, new
restrictions are imposed that limit or prohibit certain service agreements
between Nicor Gas and its affiliates.








7
 
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A
change in the ICC’s approved rate mechanism for recovery of environmental
remediation costs at former manufactured gas plant sites, or adverse decisions
with respect to the prudence of costs actually incurred, could adversely affect
the company’s results of operations, cash flows and financial
condition.





Current
environmental laws may require the cleanup of coal tar at certain former
manufactured gas plant sites for which the company may in part be
responsible.  Management believes that any such costs that are not
recoverable from other entities or from insurance carriers are recoverable
through rates for utility services under an ICC-approved mechanism for the
recovery of prudently incurred costs.  A change in this rate recovery
mechanism, however, or a decision by the ICC that some or all of these costs
were not prudently incurred, could adversely affect the company’s results of
operations, cash flows and financial condition.





An adverse
decision in the proceeding concerning Nicor Gas’ PBR plan could result in a
refund obligation which could adversely affect the company’s results of
operations, cash flows and financial condition.





In 2000,
Nicor Gas instituted a PBR plan for natural gas costs.  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 was terminated effective January 1, 2003.  There are allegations
that Nicor Gas acted improperly in connection with the PBR plan, and the ICC is
reviewing these allegations in a pending proceeding.  An adverse
decision in this proceeding could result in a refund to ratepayers or other
obligations which could adversely affect the company’s results of operations,
cash flows and financial condition.





Nicor Gas relies
on direct connections to eight interstate pipelines and extensive underground
storage capacity.  If these pipelines or storage facilities were
unable to deliver natural gas for any reason it could impair Nicor Gas’ ability
to meet its customers’ full requirements which could adversely affect the
company’s results of operations, cash flows and financial
condition.





Nicor Gas
meets its customers’ peak day, seasonal and annual gas requirements through
deliveries of natural gas transported on interstate pipelines, with which it or
its natural gas suppliers have contracts, and through withdrawals of natural gas
from storage fields it owns or leases.  Nicor Gas contracts with
multiple pipelines for transportation services.  If a pipeline were to
fail to perform transportation or storage service, including as a result of war,
acts or threats of terrorism, mechanical problems or natural disaster, on a peak
day or other day with high volume gas requirements, Nicor Gas’ ability to meet
all of its customers’ natural gas requirements may be impaired unless or until
alternative arrangements for delivery of supply were put in
place.  Likewise, if a storage field owned by Nicor Gas, or a
principal Nicor Gas-owned transmission or distribution pipeline used to deliver
natural gas to the market, were to be out of service for any reason, including
as a result of war, acts or threats of terrorism, mechanical problems or natural
disaster, this could impair Nicor Gas’ ability to meet its customers’ full
requirements which could adversely affect the company’s results of operations,
cash flows and financial condition.





Fluctuations
in weather, economic conditions and use of alternative fuel sources have the
potential to adversely affect the company’s results of operations, cash flows
and financial condition.





When
weather conditions are milder than normal, Nicor Gas has historically delivered
less natural gas, and consequently may earn less income.  Nicor Gas’
natural gas deliveries are temperature-sensitive and seasonal since about
one-half of all deliveries are used for space heating.  Typically,
about three-quarters of the deliveries and revenues occur from October through
March.  Mild weather in the future could adversely affect the
company’s results of operations, cash flows and financial
condition.  In addition, factors including, but not limited to,
conservation, economic conditions and the use of alternative fuel sources could
also result in lower customer demand.







8
 
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Conversely,
results from products sold by Nicor Solutions and Nicor Advanced Energy
generally benefit from milder than normal weather.  Nicor Solutions
and Nicor Advanced Energy offer utility-bill management products that mitigate
and/or eliminate the risks to customers of variations in
weather.  Benefits or costs related to these products resulting from
variances from normal weather are recorded primarily at the corporate level as a
result of an agreement between the parent company and certain of its
subsidiaries.  To the extent weather is colder than normal in the
future, Nicor Solutions and Nicor Advanced Energy’s results of operations, cash
flows and financial condition could be adversely affected.





Conservation
could adversely affect the company's results of operations, cash flows and
financial condition.





As a
result of recent legislative and regulatory initiatives, the company is putting
in place programs to promote additional energy efficiency by its
customers.  Funding for such programs will be recovered through a cost
recovery rider.  However, the adverse impact of lower deliveries and
resulting reduced margin could adversely affect the company's results of
operations, cash flows and financial condition until such time as it files for
and obtains ICC approval for new charges through a rate case
proceeding.





Possible
legislation or regulation intended to address concerns about climate change
could adversely affect the company’s results of operations, cash flows and
financial condition.





Governmental
agencies are evaluating changes in laws to address concerns about the possible
effects of greenhouse gas emissions on climate.  Among other things,
future laws may mandate reductions in future emissions by the company and its
customers.  If enacted, such laws could require the company to reduce
emissions and to incur compliance costs that could adversely affect the
company’s results of operations, cash flows and financial
condition.





Natural
gas commodity price changes may affect the operating costs and competitive
positions of the company’s businesses which could adversely affect its results
of operations, cash flows and financial condition.





Nicor’s
energy-related businesses are sensitive to changes in natural gas prices.
Natural gas prices historically have been volatile and may continue to be
volatile in the future.  Prices for natural gas are subject to a
variety of factors that are beyond Nicor’s control.  These factors
include, but are not limited to, the level of consumer demand for, and the
supply of, natural gas, processing, gathering and transportation availability,
the level of imports of, and the price of foreign natural gas, the price and
availability of alternative fuel sources, weather conditions, natural disasters
and political conditions or hostilities in natural gas producing
regions.





Any
changes in natural gas prices could affect the prices Nicor’s energy-related
businesses charge, operating costs and the competitive position of products and
services.  In accordance with the ICC’s PGA regulations, Nicor Gas
adjusts its gas cost charges to sales customers on a monthly basis to account
for changes in the price of natural gas.  However, changes in natural
gas prices can also impact certain operating and financing costs that can only
be reflected in Nicor Gas’ charges to customers if approved by the ICC in a rate
case.  Increases in natural gas prices can also have an adverse effect
on natural gas distribution margin because such increases can result in lower
customer demand.





Nicor’s
other energy businesses are also subject to natural gas commodity price risk,
arising primarily from fixed-price purchase and sale agreements, natural gas
inventories and utility-bill management arrangements.  Derivative
instruments such as futures, options, forwards and swaps may be used to hedge
these risks.









9
 
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Nicor’s
use of derivative instruments could adversely affect the company’s results of
operations, cash flows and financial condition.





Nicor
uses derivative instruments, including futures, options, forwards and swaps,
either traded on exchanges or executed over-the-counter with natural gas
merchants as well as financial institutions, to hedge natural gas price
risk.  Fluctuating natural gas prices cause earnings and financing
costs of Nicor to be impacted.  The use of derivative instruments that
are not perfectly matched to the exposure could adversely affect the company’s
results of operations, cash flows and financial condition.  Also, when
Nicor’s derivative instruments do not qualify for hedge accounting treatment or
for which hedge accounting is not elected, the company’s results of operations,
cash flows and financial condition could be adversely affected.





Nicor is
subject to margin requirements in connection with the use of derivative
financial instruments and these requirements could escalate if prices move
adversely.





Adverse
decisions in lawsuits seeking a variety of damages allegedly caused by mercury
spillage could adversely affect the company’s results of operations, cash flows
and financial condition.





Nicor Gas
has incurred, and expects to continue to incur, costs related to its historical
use of mercury in various kinds of equipment.  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.   Adverse decisions regarding these claims, if
not fully covered by such insurance, could adversely affect the company’s
results of operations, cash flows and financial condition.





Transporting
and storing natural gas involves numerous risks that may result in accidents and
other operating risks and costs that could adversely affect the company’s
results of operations, cash flows and financial condition.





Nicor
Gas’ activities involve a variety of inherent hazards and operating risks, such
as leaks, accidents and mechanical problems, which could cause substantial
financial losses.  In addition, these risks could result in loss of
human life, significant damage to property, environmental pollution and
impairment of Nicor Gas’ operations, which in turn could lead to substantial
losses.  In accordance with customary industry practice, Nicor Gas
maintains insurance against some, but not all, of these risks and
losses.  The location of pipelines and storage facilities near
populated areas, including residential areas, commercial business centers and
industrial sites, could increase the level of damages resulting from these
risks.  The occurrence of any of these events if not fully covered by
insurance could adversely affect the company’s results of operations, cash flows
and financial condition.





A
significant decline in the market value of investments held within the pension
trust maintained by Nicor Gas adversely affects the company’s results of
operations, cash flows and financial condition.





Nicor Gas
sponsors a defined benefit pension plan and, over the years, has made
contributions to a trust to fund future benefit obligations of the pension plan
participants.  A significant decline in the market value of
investments held in the trust of the pension plan unfavorably impacts the
benefit costs associated with the pension plan and could adversely affect Nicor
Gas’ liquidity if additional contributions to the trust are required. These
impacts, either individually or in aggregate, may adversely affect the company’s
results of operations, cash flows and financial condition.







10
 
 Table of Contents


An
inability to access financial markets could affect the execution of Nicor’s
business plan and could adversely affect the company’s results of operations,
cash flows and financial condition.





Nicor
relies on access to both short- and long-term capital markets as a significant
source of liquidity for capital and operating requirements not satisfied by the
cash flows from its operations.  Management believes that Nicor and
its subsidiaries will maintain sufficient access to these financial markets
based upon current credit ratings.  However, certain disruptions
outside of Nicor’s control or events of default under its debt agreements may
increase its cost of borrowing or restrict its ability to access one or more
financial markets. Such disruptions could include an economic downturn, the
bankruptcy of an unrelated energy company or downgrades to Nicor’s credit
ratings.  Restrictions on Nicor’s ability to access financial markets
may affect its ability to execute its business plan as scheduled and could
adversely affect the company’s results of operations, cash flows and financial
condition.





Changes
in the rules and regulations of certain regulatory agencies could adversely
affect the results of operations, cash flows and financial condition of Tropical
Shipping.





Tropical
Shipping is subject to the International Ship and Port-facility Security Code
and is also subject to the United States Maritime Transportation Security Act,
both of which require extensive security assessments, plans and
procedures.  Tropical Shipping is also subject to the regulations of
both the Federal Maritime Commission, and the Surface Transportation Board,
other federal agencies as well as local laws, where
applicable.  Additional costs that could result from changes in the
rules and regulations of these regulatory agencies would adversely affect the
results of operations, cash flows and financial condition of Tropical
Shipping.





Tropical
Shipping’s business is dependent on general economic
conditions.  Changes or downturns in the economy could adversely
affect the results of operations, cash flows and financial condition of Tropical
Shipping.





Tropical
Shipping’s business consists primarily of the shipment of building materials,
food and other necessities from the United States and Canada to developers,
manufacturers and residents in the Bahamas and the Caribbean region, as well as
tourist-related shipments intended for use in hotels and resorts, and on cruise
ships.  As a result, Tropical Shipping’s results of operations, cash
flows and financial condition can be significantly affected by adverse general
economic conditions in the United States, Bahamas, Caribbean region and
Canada.  Also, a shift in buying patterns that results in such goods
being sourced directly from other parts of the world, including China and India,
rather than the United States and Canada, could significantly affect Tropical
Shipping’s results of operations, cash flows and financial
condition.





The
occurrence of hurricanes, storms and other natural disasters in Tropical
Shipping’s area of operations could adversely affect its results of operations,
cash flows and financial condition.





Tropical
Shipping’s operations are affected by weather conditions in Florida, Canada, the
Bahamas and Caribbean regions.  During hurricane season in the summer
and fall, Tropical Shipping may be subject to revenue loss, higher operating
expenses, business interruptions, delays, and ship, equipment and facilities
damage which could adversely affect Tropical Shipping’s results of operations,
cash flows and financial condition.









11
 
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Nicor
has credit risk that could adversely affect the company’s results of operations,
cash flows and financial condition.





Nicor
extends credit to its counterparties.  Despite what the company
believes to be prudent credit policies and the maintenance of netting
arrangements, the company is exposed to the risk that it may not be able to
collect amounts owed to it.  If counterparties fail to perform and any
collateral the company has secured is inadequate, it could adversely affect the
company’s results of operations, cash flows and financial
condition.





The
company is involved in legal or administrative proceedings before various courts
and governmental bodies that could adversely affect the company’s results of
operations, cash flows and financial condition.





The
company is involved in legal or administrative proceedings before various courts
and governmental bodies with respect to general claims, rates, taxes,
environmental issues, billing, credit and collection matters, intersegment
services, gas cost prudence reviews and other matters.  Adverse
decisions regarding these matters, to the extent they require the company to
make payments in excess of amounts provided for in its financial statements,
could adversely affect the company’s results of operations, cash flows and
financial condition.





Changes
in taxation could adversely affect the company’s results of operations, cash
flows and financial condition.





Various
tax and fee increases may occur in locations in which the company
operates.  The company cannot predict whether legislation or
regulation will be introduced, the form of any legislation or regulation, or
whether any such legislation or regulation will be passed by the legislatures or
other governmental bodies.  New taxes or an increase in tax rates
would increase tax expense and could adversely affect the company’s results of
operations, cash flows and financial condition.





Changes
in the laws and regulations regarding the sale and marketing of products and
services offered by Nicor’s other energy ventures could adversely affect the
results of operations, cash flows and financial condition of Nicor.





Nicor’s
other energy ventures provide various energy-related products and
services.  These include sales of natural gas and utility-bill
management services to residential and small commercial customers, the sale,
repair, maintenance and warranty of heating, air conditioning and indoor air
quality equipment and wholesale natural gas supply services.  The sale
and marketing of these products and services by Nicor’s other energy ventures
are subject to various state and federal laws and
regulations.  Changes in these laws and
regulations could impose additional costs on, or restrict or prohibit certain
activities by, Nicor’s other energy ventures which could adversely affect the
results of operations, cash flows and financial condition of Nicor.





The risks
described above should be carefully considered in addition to the other
cautionary statements and risks described elsewhere, and the other information
contained in this report and in Nicor’s other filings with the SEC, including
its subsequent reports on Forms 10-Q and 8-K.  The risks and
uncertainties described above are not the only risks Nicor faces although they
are the most significant risks.  See Item 7 – Management’s Discussion
and Analysis of Financial Condition and Results of Operations, Item 7A –
Quantitative and Qualitative Disclosures About Market Risk, and Item 8 – Notes
to the Consolidated Financial Statements – Note 10 – Income Taxes and Note 21 –
Contingencies for further discussion of these and other risks Nicor
faces.








12
 
 Table of Contents


Item
1B.         Unresolved Staff
Comments





None.





Item
      2.
            Properties





Information
concerning Nicor and its major subsidiaries’ properties is included in Item 1 –
Business, and is incorporated herein by reference.  These properties
are suitable, adequate and utilized in the company’s operations.





Item 3.
            Legal
      Proceedings





Illinois Attorney General
Subpoena.On February 8,
2010, the Office of the Attorney General for the State of Illinois (“IOAG”)
issued a subpoena to Nicor to provide documents in connection with an IOAG
investigation pursuant to the Illinois Whistleblower Reward and Protection
Act.  According to the subpoena, the IOAG investigation relates to
billing practices used with certain customer accounts involving government
funds.  While the company believes its billing practices comply with
ICC requirements, the company is unable to predict the outcome of this matter or
reasonably estimate its potential exposure, if any, and has not recorded a
liability associated with this matter.





Also see
Item 8 – Notes to the Consolidated Financial Statements – Note 21 –
Contingencies, which is incorporated herein by reference.





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





None.







13
 
 Table of Contents


Executive
Officers of the Registrant





Name
            
            Age
            
            Position
      and Business Experience during past five yearsRuss
      M. Strobel
            
            57
            
            Chairman,
      Nicor and Nicor Gas (since 2005); Chief Executive Officer, Nicor (since
      2005); Chief Executive Officer, Nicor Gas (since 2003); President, Nicor
      and Nicor Gas (since 2002).Richard
      L. Hawley
            
            60
            
            Executive
      Vice President and Chief Financial Officer, Nicor and Nicor Gas (since
      2003).Rocco
      J. D’Alessandro
            
            51
            
            Executive
      Vice President Operations, Nicor Gas (since 2006); Senior Vice President
      Operations, Nicor Gas (2002-2006).Daniel
      R. Dodge
            
            56
            
            Executive
      Vice President Diversified Ventures, Nicor (since 2007); Senior Vice
      President Diversified Ventures and Corporate Planning, Nicor and Nicor Gas
      (2002-2007).Claudia
      J. Colalillo
            
            60
            
            Senior
      Vice President Human Resources and Corporate Communications, Nicor (since
      2002) and Nicor Gas (since 2006); Senior Vice President Human Resources
      and Customer Care, Nicor Gas (2002-2006).Paul
      C. Gracey, Jr.
            
            50
            
            Senior
      Vice President, General Counsel and Secretary, Nicor and Nicor Gas (since
      2006); Vice President, General Counsel and Secretary, Nicor and Nicor Gas
      (2002-2006).Gerald
      P. O’Connor
            
            58
            
            Senior
      Vice President Finance and Strategic Planning, Nicor and Nicor Gas (since
      2007); Senior Vice President Finance and Treasurer, Nicor and Nicor Gas
      (2007); Vice President Administration and Finance, Nicor and Nicor Gas
      (2004-2006).Karen
      K. Pepping
            
            45
            
            Vice
      President and Controller, Nicor and Nicor Gas (since 2006); Assistant Vice
      President and Controller, Nicor and Nicor Gas (2005-2006); Assistant
      Controller, Nicor and Nicor Gas (2003-2005).Douglas
      M. Ruschau
            
            51
            
            Vice
      President and Treasurer, Nicor and Nicor Gas (since 2007); Vice President
      Finance and Treasurer, Peoples Energy Corporation
    (2002-2007).Rick
      Murrell
            
            63
            
            Chairman
      and President, Tropical Shipping and Construction Company Limited (since
      2006); President and CEO, Tropical Shipping and Birdsall Inc.
      (1986-2005).








14
 
 Table of Contents


PART
II





Item
      5.
            Market for
      Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity
Securities





Nicor
common stock is listed on the New York and Chicago Stock
Exchanges.  At February 17, 2010, there were approximately 17,700
common stockholders of record and the closing stock price was
$39.92.





Stock
      price
            
            
            DividendsQuarter
            
            
            High
            
            
            Low
            
            
            Declared2009First
            
            
            $
            36.34
            
            
            $
            27.50
            
            
            $
            .465Second
            
            
            
            35.37
            
            
            
            30.28
            
            
            
            .465Third
            
            
            
            38.08
            
            
            
            32.83
            
            
            
            .465Fourth
            
            
            
            43.39
            
            
            
            34.96
            
            
            
            .4652008First
            
            
            $
            42.70
            
            
            $
            32.35
            
            
            $
            .465Second
            
            
            
            44.55
            
            
            
            33.33
            
            
            
            .465Third
            
            
            
            51.99
            
            
            
            38.01
            
            
            
            .465Fourth
            
            
            
            48.42
            
            
            
            32.53
            
            
            
            .465





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 2009 or 2008.  As of December 31, 2009, $21.5 million
remained authorized for the repurchase of common stock.







15
 
 Table of Contents


STOCK
PERFORMANCE GRAPH





The
following graph shows a five-year comparison of cumulative total returns for
Nicor Common Stock, the S&P Utilities Index and the S&P 500 Index (both
of which include Nicor Common Stock) as of December 31 of each of the years
indicated, assuming $100 was invested on January 1, 2005, and all dividends were
reinvested.





Comparison
of Five-Year Cumulative Total Return









2005
            
            
            2006
            
            
            2007
            
            
            2008
            
            
            2009Nicor
            
            $
            111
            
            
            $
            139
            
            
            $
            131
            
            
            $
            113
            
            
            $
            144S&P
      Utilities
            
            
            117
            
            
            
            141
            
            
            
            168
            
            
            
            120
            
            
            
            134S&P
      500
            
            
            105
            
            
            
            121
            
            
            
            128
            
            
            
            81
            
            
            
            102







Table of Contents




Nicor
      Inc.Item 6.Selected Financial
      Data(in
      millions, except per share data)Year
      ended December 312009
            
            
            2008
            
            
            2007
            
            
            2006
            
            
            2005Operating
      revenues
            
            $
            2,652.1
            
            
            $
            3,776.6
            
            
            $
            3,176.3
            
            
            $
            2,960.0
            
            
            $
            3,357.8Operating
      income
            
            $
            220.3
            
            
            $
            185.0
            
            
            $
            206.5
            
            
            $
            202.5
            
            
            $
            201.7Net
      income
            
            
            $
            135.5
            
            
            $
            119.5
            
            
            $
            135.2
            
            
            $
            128.3
            
            
            $
            136.3Earnings
      per average share of common stockBasic
            
            
            $
            2.99
            
            
            $
            2.64
            
            
            $
            2.99
            
            
            $
            2.88
            
            
            $
            3.08Diluted
            
            
            2.98
            
            
            
            2.63
            
            
            
            2.99
            
            
            
            2.87
            
            
            
            3.07Dividends
      declared per common share
            
            $
            1.86
            
            
            $
            1.86
            
            
            $
            1.86
            
            
            $
            1.86
            
            
            $
            1.86Property,
      plant and equipmentGross
            
            
            $
            4,961.0
            
            
            $
            4,802.4
            
            
            $
            4,611.7
            
            
            $
            4,479.7
            
            
            $
            4,351.3Net
            
            
            
            2,939.1
            
            
            
            2,858.6
            
            
            
            2,757.3
            
            
            
            2,714.7
            
            
            
            2,659.1Total
      assets
            
            $
            4,435.7
            
            
            $
            4,784.0
            
            
            $
            4,271.3
            
            
            $
            4,137.2
            
            
            $
            4,453.4CapitalizationLong-term
      debt, net ofunamortized discount
            
            $
            498.2
            
            
            $
            448.0
            
            
            $
            422.8
            
            
            $
            497.5
            
            
            $
            485.8Mandatorily
      redeemable preferred stock
            
            
            .1
            
            
            
            .6
            
            
            
            .6
            
            
            
            .6
            
            
            
            .6Common
      equity
            
            
            1,037.7
            
            
            
            973.1
            
            
            
            945.2
            
            
            
            876.1
            
            
            
            814.8$
            1,536.0
            
            
            $
            1,421.7
            
            
            $
            1,368.6
            
            
            $
            1,374.2
            
            
            $
            1,301.2See
      Item 1A - Risk Factors and Item 7 - Management's Discussion and Analysis
      of Financial Condition and Results of
      Operations for factors that can impact year-to-year comparisons and may
      affect the future performance of Nicor's business.






Table of Contents




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





The
purpose of this financial review is to explain changes in operating results and
financial condition from 2007 to 2009 and to discuss business trends that might
affect Nicor.  Certain terms used herein are defined in the glossary
on pages ii and iii.  The discussion is organized into six sections –
Summary, Results of Operations, Financial Condition and Liquidity, Outlook,
Contingencies and Critical Accounting Estimates.





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):




2009
            
            
            2008
            
            
            2007Net
      income
            
            $
            135.5
            
            
            $
            119.5
            
            
            $
            135.2Diluted
      earnings per common share
            
            $
            2.98
            
            
            $
            2.63
            
            
            $
            2.99





When
comparing 2009 results to 2008, net income and diluted earnings per common share
for 2008 include pretax mercury-related costs of $0.6 million ($.01 per
share).  Year over year comparisons (excluding the effect of the
mercury-related costs) reflect improved operating results in the company’s gas
distribution business and other energy-related businesses and higher equity
investment income, partially offset by lower operating income in the company’s
shipping business, lower interest income and a higher effective income tax
rate.





When
comparing 2008 results to 2007, net income and diluted earnings per common share
for 2007 include pretax mercury-related recoveries of $8.0 million ($.11 per
share) associated with Nicor Gas’ mercury inspection and repair program which
included a reduction of $7.2 million to the company’s previously established
reserve and $0.8 million in cost recoveries.  Net income and diluted
earnings per common share for 2008 include pretax mercury-related costs of $0.6
million ($.01 per share).  Year over year comparisons (excluding the
effects of the items noted above) reflect improved operating results in the
company’s gas distribution business and higher equity investment income, which
were more than offset by lower operating income in the company’s shipping
business and other energy-related businesses, lower corporate operating results
and higher interest expense.







Table of Contents


Rate proceeding.  On
March 25, 2009, the ICC issued an order approving an increase in base revenues
of approximately $69 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 the rates approved in
the March 25, 2009 order into effect on April 3, 2009.





On April
24, 2009, Nicor Gas 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.  On May
13, 2009, the ICC agreed to conduct a rehearing concerning the capital structure
but denied the remainder of the company’s request.  On October 7,
2009, the ICC issued its decision on rehearing in which it increased the annual
base revenues approved for Nicor Gas in the March 25, 2009 order by
approximately $11 million, increasing the rate of return on rate base to 8.09
percent.  Nicor Gas placed the rates approved in the rehearing
decision into effect on a prospective basis on October 15,
2009.  Therefore, the total annual base revenue increase resulting
from the rate case originally filed by the company in April 2008 is
approximately $80 million.  In December 2009, Nicor Gas withdrew
appeals of the
ICC rate orders that it previously had filed in state appellate
court.  The ICC’s decision on rehearing, therefore, is final and no
longer subject to appeal.





As a
result of the rates placed into effect in 2009, 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.





Bad debt rider.  In
September 2009, Nicor Gas filed for approval of a bad debt rider with the ICC
under an Illinois state law which took effect in July 2009.  On
February 2, 2010, the ICC issued an order approving the company’s proposed bad
debt rider.  This rider will provide for recovery from customers of
the amount over the benchmark for bad debt expense established in the company’s
rate cases.  It will also provide for refunds to customers if bad debt
expense is below such benchmarks.





As a
result of the February order, Nicor Gas will record in the first quarter of 2010
a net recovery related to 2008 and 2009 of approximately $32 million;
substantially all of this amount is expected to be collected in
2010.  The benchmark, against which 2010 actual bad debt expense will
be compared, is approximately $63 million.





Capital market
environment.The volatility in the capital markets over the
past two years has caused general concern over the valuations of investments,
exposure to increased credit risk and pressures on liquidity.  The
company continues to review its investments, exposure to credit risk and sources
of liquidity and does not currently expect any future material adverse impacts
relating to these items.





Operating
income.Operating income (loss) by the company’s major
businesses is presented below (in millions):





2009
            
            
            2008
            
            
            2007Gas
      distribution
            
            $
            149.7
            
            
            $
            124.4
            
            
            $
            128.7Shipping
            
            
            29.2
            
            
            
            39.3
            
            
            
            45.4Other
      energy ventures
            
            
            45.5
            
            
            
            25.3
            
            
            
            34.0Corporate
      and eliminations
            
            
            (4.1
            )
            
            
            (4.0
            )
            
            
            (1.6
            )$
            220.3
            
            
            $
            185.0
            
            
            $
            206.5







Table of Contents


The
following summarizes operating income (loss) comparisons by the company’s major
businesses:





·
            Gas
      distribution operating income increased $25.3 million in 2009 compared to
      the prior year due to higher gas distribution margin ($39.0 million
      increase), partially offset by higher depreciation expense ($6.5 million
      increase) and operating and maintenance expense ($5.8 million
      increase).





Gas
distribution operating income decreased $4.3 million in 2008 compared to the
prior year due primarily to higher operating and maintenance expense ($24.8
million increase), the absence of $8.0 million in mercury-related recoveries
recorded in 2007, higher depreciation expense ($5.3 million increase) and lower
gains on property sales ($1.2 million decrease), partially offset by higher gas
distribution margin ($35.7 million increase).





·
            Shipping
      operating income decreased $10.1 million in 2009 compared to the prior
      year due to lower operating revenues ($72.6 million decrease), which were
      partially offset by lower operating costs ($62.5 million
      decrease).  Lower operating revenues were attributable to lower
      volumes shipped and lower average rates.  Operating costs were
      lower due primarily to lower transportation-related costs, charter costs
      and payroll and benefit-related
costs.





Shipping
operating income decreased $6.1 million in 2008 compared to the prior year as
higher operating revenues ($21.3 million increase) were more than offset by
higher operating costs ($27.4 million increase).  Higher operating
revenues were attributable to higher average rates, partially offset by lower
volumes shipped.  Operating costs were higher due primarily to higher
transportation-related costs.





·
            Nicor’s
      other energy ventures operating income increased $20.2 million in 2009
      compared to the prior year due primarily to higher operating income at
      Nicor’s wholesale natural gas marketing business, Nicor Enerchange ($18.2
      million increase) and at Nicor’s energy-related products and services
      businesses ($1.7 million increase).  Higher operating income at
      Nicor Enerchange was due primarily to favorable 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 income at
      Nicor’s energy-related products and services businesses was due to lower
      operating expenses ($7.0 million decrease), partially offset by lower
      operating revenues ($5.3 million
decrease).





Nicor’s
other energy ventures operating income decreased $8.7 million in 2008 compared
to the prior year due primarily to lower operating income at Nicor Enerchange
($11.9 million decrease), partially offset by higher operating income at Nicor’s
energy-related products and services businesses ($4.8 million
increase).  Lower operating income at Nicor Enerchange was due
primarily to unfavorable changes in valuations of derivative instruments used to
hedge purchases and sales of natural gas inventory 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 the favorable costing of
physical sales activity.  Improved operating results at Nicor’s
energy-related products and services businesses were due to lower operating
expenses ($12.2 million decrease), partially offset by lower operating revenues
($7.4 million decrease).







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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 derivatives that either do
not meet the requirements for hedge accounting or for which hedge accounting is
not elected, the changes in fair value are recorded in operating results in the
period of change.  As a result, earnings are subject to volatility as
the fair value of derivatives change.  The volatility resulting from
this accounting can be significant from period to period.





·
            Corporate
      and eliminations’ operating income for 2009, 2008 and 2007 was impacted by
      the following items:





In 2009
and 2008, corporate and eliminations’ operating income included costs of $3.7
million and $6.2 million, respectively, associated with Nicor’s other energy
ventures’ utility-bill management products attributable to colder than normal
weather.  Both periods exclude costs of approximately $0.6 million
recorded within other energy ventures.  In 2007, there was no material
weather impact related to other energy ventures’ utility-bill management
contracts.  The above noted 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 business 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.





In 2008,
corporate and eliminations’ operating income included recoveries of previously
incurred legal costs of $3.1 million.  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 business (recorded as a reduction to operating and maintenance
expense).











Table of Contents





RESULTS
OF OPERATIONS





Details
of various financial and operating information by major business 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 the company’s major businesses
are presented below (in millions):





2009
            
            
            2008
            
            
            2007Gas
      distribution
            
            $
            2,140.8
            
            
            $
            3,206.9
            
            
            $
            2,627.5Shipping
            
            
            352.6
            
            
            
            425.2
            
            
            
            403.9Other
      energy ventures
            
            
            239.0
            
            
            
            230.3
            
            
            
            244.5Corporate
      and eliminations
            
            
            (80.3
            )
            
            
            (85.8
            )
            
            
            (99.6
            )$
            2,652.1
            
            
            $
            3,776.6
            
            
            $
            3,176.3





Gas
distribution operating revenues are impacted by changes in natural gas costs,
which are passed directly through to customers without markup, subject to ICC
review.  Gas distribution operating revenues decreased $1,066.1
million in 2009 compared to the prior year due primarily to lower natural gas
costs (approximately $900 million decrease), warmer weather in 2009
(approximately $140 million decrease) and lower demand unrelated to weather
(approximately $60 million decrease), partially offset by the impact of the
increase in base rates (approximately $60 million increase).





Gas
distribution operating revenues increased $579.4 million in 2008 compared to the
prior year due primarily to higher natural gas costs (approximately $370 million
increase) and colder weather in 2008 (approximately $185 million
increase).





Shipping
operating revenues decreased $72.6 million in 2009 compared to the prior year
due to lower volumes shipped ($44.2 million decrease) and lower average rates
($28.4 million decrease).  Volumes shipped were adversely impacted by
the economic slowdown.  Lower average rates were attributable to lower
cost-recovery surcharges for fuel.





Shipping
operating revenues increased $21.3 million in 2008 compared to the prior year
due to higher average rates ($39.9 million increase), partially offset by lower
volumes shipped ($18.6 million decrease).  Rates were higher due
primarily to cost-recovery surcharges for fuel.  Volumes shipped were
adversely impacted by decreased construction cargo, decreased tourism and
increased competition.





Nicor’s
other energy ventures operating revenues increased $8.7 million in 2009 compared
to the prior year due primarily to higher operating revenues at Nicor Enerchange
($13.9 million increase) partially offset by lower operating revenues at Nicor’s
energy-related products and services businesses ($5.3 million
decrease).  Higher operating revenues at Nicor Enerchange were due to
favorable 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
revenues at Nicor’s energy-related products and services businesses were due to
lower average revenue per utility-bill management contract, partially offset by
higher average contract volumes.





Nicor’s
other energy ventures operating revenues decreased $14.2 million in 2008
compared to the prior year due primarily to lower revenues at Nicor’s
energy-related products and services businesses ($7.4 million decrease) and
Nicor Enerchange ($6.7 million decrease).  Lower revenues at Nicor’s
energy-related products and services businesses were due to lower average
revenue per utility-bill management








Table of Contents




contract,
attributable to product mix.  Lower revenues at Nicor Enerchange were
due primarily to unfavorable
changes in valuations of derivative instruments used to hedge purchases and
sales of natural gas inventory 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 the
favorable costing of physical sales activity.





Corporate
and eliminations primarily reflects 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.  The 2009 rate orders included a franchise gas cost recovery
rider and a rider to recover the costs associated with energy efficiency
programs.  As a result, changes in revenue included in gas
distribution margin attributable to these items are expected to generally be
offset by changes within operating and maintenance expense.





A
reconciliation of gas distribution revenues and margin follows (in
millions):





2009
            
            
            2008
            
            
            2007Gas
      distribution revenues
            
            $
            2,140.8
            
            
            $
            3,206.9
            
            
            $
            2,627.5Cost
      of gas
            
            
            (1,345.7
            )
            
            
            (2,427.8
            )
            
            
            (1,906.5
            )Revenue
      tax expense
            
            
            (148.1
            )
            
            
            (171.1
            )
            
            
            (148.7
            )Gas
      distribution margin
            
            $
            647.0
            
            
            $
            608.0
            
            
            $
            572.3





Gas
distribution margin increased $39.0 million in 2009 compared to the prior year
due to the impact of the increase in base rates (approximately $60 million
increase), partially offset by warmer weather (approximately $8 million
decrease), lower demand unrelated to weather (approximately $5 million decrease)
and lower revenue from cost recovery riders (approximately $3 million
decrease).  As a result of the 2009 rate orders, Nicor Gas will
recover annual franchise gas costs over a twelve-month period beginning the
subsequent May.  Prior to the 2009 rate orders, such costs were
recovered based upon a fixed amount determined periodically through a rate case
proceeding.  As a result of this change, franchise gas cost recoveries
in 2009 are lower than prior periods with minimal impact on operating
income.  In 2009, the company also began recovering costs associated
with an energy efficiency program.





Gas
distribution margin increased $35.7 million in 2008 compared to the prior year
due primarily to colder weather (approximately $15 million increase) and the
impact of customer interest (approximately $12 million increase).





Gas distribution operating and
maintenance expense.Gas distribution operating and
maintenance expense increased $5.8 million in 2009 compared to the prior year
due primarily to higher payroll and benefit-related costs ($26.5 million
increase of which $21.8 million relates to higher pension expense, net of
capitalization), the absence of prior year cost recoveries of previously
incurred costs ($3.9 million, of which $2.0 million relates to a 2007
investigation of the presence of PCBs in the company’s distribution system and
$1.9 million relates to legal cost recoveries from a counterparty with whom
Nicor previously did business during the PBR timeframe), higher postage charges
($2.0 million increase) and higher costs on legal matters ($1.8 million
increase).  Partially offsetting these amounts were lower bad debt
expense ($17.5 million decrease due to lower revenues attributable principally
to lower natural gas costs), lower company use and storage-related gas costs
($7.3 million decrease) and lower costs associated with the aforementioned cost
recovery riders approved in the 2009 rate orders ($5.7 million
decrease).







Table of Contents


Gas
distribution operating and maintenance expense increased $24.8 million in 2008
compared to the prior year due primarily to higher bad debt expense ($17.7
million increase) and payroll and benefit-related costs ($4.9 million
increase).  Higher bad debt expense is attributable to higher revenues
and worsening economic conditions.  Also included in gas distribution
operating and maintenance expense for 2008 were the recoveries of previously
incurred costs ($3.9 million) mentioned above.





Other gas distribution operating
expenses.Mercury-related costs (recoveries), net reflect the
estimated costs, recoveries and reserve adjustments associated with the
company’s mercury inspection and repair program.  Mercury-related
costs in 2008 were $0.6 million.  Mercury-related recoveries in 2007
reflect a $7.2 million favorable reserve adjustment and $0.8 million in cost
recoveries.  Additional information about the company’s mercury
inspection and repair program is presented in Item 8 – Notes to the Consolidated
Financial Statements – Note 21 – Contingencies – Mercury.





Property
sale gains and losses vary from year-to-year depending upon property sales
activity.  During 2008 and 2007, Nicor Gas realized pretax gains of
$0.8 million and $2.0 million, respectively.  The company periodically
assesses its ownership of certain real estate holdings.





Shipping operating
expenses.  Shipping operating expenses decreased $62.5 million
in 2009 compared to the prior year due primarily to lower transportation-related
costs ($36.9 million decrease, largely attributable to lower volumes shipped and
fuel prices), charter costs ($10.1 million decrease) and payroll and
benefit-related costs ($5.8 million decrease).





Shipping
operating expenses increased $27.4 million in 2008 compared to the prior year
due primarily to higher transportation-related costs ($20.7 million increase)
attributable primarily to increased fuel costs.





Other energy ventures operating
expenses.Nicor’s other energy ventures operating expenses
decreased $11.5 million in 2009 compared to the prior yeardue primarily to a
decrease in operating expenses at Nicor’s energy-related products and services
businesses ($7.0 million decrease) and at Nicor Enerchange ($4.3 million
decrease).  The decrease in operating expenses at Nicor’s
energy-related products and services businesses was due to lower average costs
associated with utility-bill management contracts, partially offset by higher
average contract volumes and higher selling, general and administrative costs
attributable to business growth.  The decrease in operating expenses
at Nicor Enerchange was due primarily to lower transportation and storage
charges attributable to lower natural gas prices.





Nicor’s
other energy ventures operating expenses decreased $5.5 million in 2008 compared
to the prior yeardue to a decrease in
operating expenses at Nicor’s energy-related products and services businesses
($12.2 million decrease), partially offset by an increase in operating expenses
at Nicor Enerchange ($5.2 million increase).  The decrease in
operating expenses at Nicor’s energy-related products and services businesses
was due to lower average costs associated with utility-bill management
contracts, attributable to product mix.  Higher operating expenses at
Nicor Enerchange were due primarily to an increase in charges resulting from
increased transportation capacity.





Other corporate expenses and
eliminations.  Other corporate operating expenses (income) were
$0.6 million, ($2.0) million and $1.8 million in 2009, 2008 and 2007,
respectively.  In 2008, Nicor recorded a benefit of $3.1 million
related to recoveries of previously incurred legal costs.  Also
included in the amounts for all years presented are certain business development
costs.





Intercompany
eliminations were ($76.7) million, ($79.8) million and ($99.8) million in 2009,
2008 and 2007, respectively, and related primarily to utility-bill management
products.





Table of Contents


Interest
expense.Interest expense decreased $1.4 million in 2009
compared to the prior year due to lower average interest rates ($5.3 million
decrease), partially offset by the impact of higher interest on income tax
matters ($1.9 million increase) and bank commitment fees ($1.5 million
increase).





Interest
expense increased $2.2 million in 2008 compared to the prior
year.  This increase reflects the impacts of higher interest on income
tax matters ($5.4 million increase) and higher average borrowing levels,
partially offset by lower average interest rates.  In 2007, Nicor
recorded the effects of a settlement with the IRS related to the timing of
certain deductions taken as part of a change in accounting method on its 2002
tax return.  As a result of the settlement, Nicor reduced its reserve
for interest payable by $9.6 million.





Net equity investment
income.Net equity investment income increased $6.4 million in
2009 compared to the prior year due primarily to a $10.1 million gain recognized
on the sale of the company’s 50-percent interest in EN Engineering in the first
quarter of 2009, partially offset by the absence of income from the company’s
investment in EN Engineering ($2.8 million decrease) and a decrease in income
from the company’s investment in Triton ($1.1 million decrease).





Net
equity investment income increased $3.1 million in 2008 compared to the prior
year due primarily to higher income from Triton ($1.3 million increase) and EN
Engineering ($1.3 million increase).





Equity
investment results include $5.3 million, $6.4 million and $5.1 million for 2009,
2008 and 2007, respectively, for Nicor’s share of income from
Triton.





Interest
income.  Interest income decreased $6.5 million in 2009
compared to the prior year due primarily to the impact of lower average interest
rates ($2.5 million decrease), interest on tax matters ($2.2 million decrease)
and average investment balances ($1.5 million decrease).





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 expected to be
indefinitely reinvested offshore, no deferred income tax expense would be
recorded by the company.  For the years ended December 31, 2009, 2008
and 2007, income tax expense has not been provided on approximately $19 million,
$23 million and $39 million, respectively, of foreign company shipping
earnings.





At
December 31, 2009, Nicor has approximately $12 million of deferred income tax
liabilities related to approximately $34 million of cumulative undistributed
earnings of its foreign subsidiaries.  Nicor has not recorded deferred
income taxes of approximately $58 million on approximately $165 million of
cumulative undistributed foreign earnings.





The
effective income tax rate was 32.4 percent, 27.0 percent and 26.6 percent for
2009, 2008 and 2007, respectively.  The higher effective income tax
rate in 2009 compared to 2008 reflects higher pretax income in 2009 (which
causes a higher effective income tax rate since permanent differences and tax
credits are a smaller share of pretax income), as well as a decrease in untaxed
foreign earnings and the absence of the 2008 tax reserve
adjustments.  The higher effective income tax rate in 2008 compared to
2007 reflects a decrease in untaxed foreign earnings in 2008, offset, in part,
by tax reserve adjustments.








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Nicor
      Inc.Gas
      Distribution Statistics2009
            
            
            2008
            
            
            2007Operating revenues(millions)SalesResidential
            
            $
            1,377.9
            
            
            $
            2,176.2
            
            
            $
            1,791.4Commercial
            
            
            350.4
            
            
            
            551.4
            
            
            
            426.2Industrial
            
            
            38.2
            
            
            
            61.9
            
            
            
            47.61,766.5
            
            
            
            2,789.5
            
            
            
            2,265.2TransportationResidential
            
            
            47.1
            
            
            
            40.9
            
            
            
            31.1Commercial
            
            
            79.1
            
            
            
            82.2
            
            
            
            76.7Industrial
            
            
            39.4
            
            
            
            38.3
            
            
            
            37.5Other
            
            
            4.1
            
            
            
            25.7
            
            
            
            10.6169.7
            
            
            
            187.1
            
            
            
            155.9Other
      revenuesRevenue
      taxes
            
            
            150.3
            
            
            
            174.0
            
            
            
            149.6Environmental
      cost recovery
            
            
            12.5
            
            
            
            9.7
            
            
            
            10.9Chicago
      Hub
            
            
            7.7
            
            
            
            11.3
            
            
            
            19.0Other
            
            
            34.1
            
            
            
            35.3
            
            
            
            26.9204.6
            
            
            
            230.3
            
            
            
            206.4$
            2,140.8
            
            
            $
            3,206.9
            
            
            $
            2,627.5Deliveries(Bcf)SalesResidential
            
            
            199.8
            
            
            
            214.4
            
            
            
            201.8Commercial
            
            
            52.7
            
            
            
            54.7
            
            
            
            48.7Industrial
            
            
            6.3
            
            
            
            6.4
            
            
            
            5.7258.8
            
            
            
            275.5
            
            
            
            256.2TransportationResidential
            
            
            25.4
            
            
            
            25.6
            
            
            
            19.7Commercial
            
            
            89.6
            
            
            
            93.1
            
            
            
            84.6Industrial
            
            
            102.1
            
            
            
            103.9
            
            
            
            107.8217.1
            
            
            
            222.6
            
            
            
            212.1475.9
            
            
            
            498.1
            
            
            
            468.3Year-end customers(thousands)SalesResidential
            
            
            1,763
            
            
            
            1,760
            
            
            
            1,789Commercial
            
            
            132
            
            
            
            130
            
            
            
            128Industrial
            
            
            8
            
            
            
            8
            
            
            
            71,903
            
            
            
            1,898
            
            
            
            1,924TransportationResidential
            
            
            218
            
            
            
            222
            
            
            
            191Commercial
            
            
            50
            
            
            
            53
            
            
            
            54Industrial
            
            
            5
            
            
            
            5
            
            
            
            5273
            
            
            
            280
            
            
            
            2502,176
            
            
            
            2,178
            
            
            
            2,174Other
      statisticsDegree
      days
            
            
            6,106
            
            
            
            6,348
            
            
            
            5,756Colder
      (warmer) than normal (1)
            
            
            9%
            
            
            
            9%
            
            
            
            (1%)Average
      gas cost per Mcf sold
            
            $
            5.06
            
            
            $
            8.76
            
            
            $
            7.36(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 and 2007.







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Shipping
      Statistics
            
            2009
            
            
            2008
            
            
            2007TEUs
      shipped (thousands)
            
            
            176.6
            
            
            
            197.1
            
            
            
            206.6Revenue
      per TEU
            
            $
            1,997
            
            
            $
            2,158
            
            
            $
            1,955At
      end of periodPorts
      served
            
            
            25
            
            
            
            25
            
            
            
            26Vessels
      operated
            
            
            15
            
            
            
            17
            
            
            
            19





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.Net cash flow provided from (used for) operating
activities was $570.8 million, ($27.4) million and $252.2 million in 2009, 2008
and 2007, respectively.  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.





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 was
$211.5 million, $265.3 million and $193.9 million in 2009, 2008 and 2007,
respectively.





Capital expenditures.Capital expenditures is
an internal measure utilized by management that represents cash additions to
property, plant and equipment, adjusted for items including the accrual of work
performed through period end and other non-cash items, contributions in aid of
construction and expenditures associated with asset retirement obligations.Capital
expenditures by the company’s major businesses are presented in the following
table (in millions):





Estimated2010
            
            
            2009
            
            
            2008
            
            
            2007Gas
      distribution
            
            $
            195
            
            
            $
            203
            
            
            $
            229
            
            
            $
            159Shipping
            
            
            65
            
            
            
            22
            
            
            
            17
            
            
            
            14Other
      energy ventures
            
            
            60
            
            
            
            6
            
            
            
            4
            
            
            
            4$
            320
            
            
            $
            231
            
            
            $
            250
            
            
            $
            177







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Gas
distribution capital expenditures decreased in 2009 versus 2008 due to the
impact of lower customer additions (approximately $10 million decrease),
information technology improvements (approximately $10 million decrease),
facility construction (approximately $9 million decrease) and lower expenditures
associated with gas distribution, transmission and storage system improvements
(approximately $7 million decrease), partially offset by higher capitalized
overhead costs attributable to higher postretirement benefit costs
(approximately $9 million increase).





Gas
distribution capital expenditures increased in 2008 versus 2007 due to higher
expenditures associated with gas distribution, transmission and storage system
improvements (approximately $55 million increase), facility construction
(approximately $15 million increase) and information technology improvements
(approximately $10 million increase), partially offset by the impact of lower
customer additions (approximately $10 million decrease).





Gas
distribution capital expenditures are expected to decrease in 2010 versus 2009
due to lower expenditures associated with gas distribution, transmission and
storage system improvements, partially offset by the impact of new service
additions and information technology improvements.





Shipping
capital expenditures increased in 2009 due primarily to progress payments on the
construction of a new vessel, partially offset by a decrease in facility
expansion.





Shipping
capital expenditures increased in 2008 due to an increase in container
replacements, partially offset by a decrease in facility expansion and freight
handling equipment expenditures.





Shipping
capital expenditures are expected to increase in 2010 versus 2009 due primarily
to the budgeted purchase of two vessels, increased expenditures related to
containers, and port and facility expansion.





Nicor’s
capital budget in 2010 also includes approximately $55 million for the continued
development of a natural gas storage field.  Central Valley is
developing an underground natural gas storage facility north of Sacramento,
California.  Central Valley currently expects to start initial
injections beginning in 2010 and full service by 2012.





Additional investing
activities.  Yearly fluctuations in additional investing
activities include the following items:


·
            All
      three years reflect increased short-term investments primarily at the
      company’s shipping business.


·
            In
      March 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.


·
            The
      release of $10.0 million from escrow in 2007 associated with the
      settlement of the company’s SEC
inquiry.







Table of Contents


Financing
activities.The current credit ratings for Nicor Inc. and
Nicor Gas are as follows:





Standard
              &
      Poor’s
            
            Moody’s
            
            FitchNicor Inc.Commercial
      Paper
            
            A-1+
            
            P-2
            
            F-1Senior
      Unsecured Debt
            
            AA
            
            n/a
            
            ACorporate
      Credit Rating
            
            AA
            
            n/a
            
            n/a





Nicor GasCommercial
      Paper
            
            A-1+
            
            P-1
            
            F-1Senior
      Secured Debt
            
            AA
            
            Aa3
            
            AA-Senior
      Unsecured Debt
            
            AA
            
            A2
            
            A+Corporate
      Credit Rating
            
            AA
            
            n/a
            
            n/a





In the
third quarter of 2009, Moody’s upgraded Nicor Gas’ senior secured debt rating to
“Aa3” from “A1.”  The rating revision by Moody’s reflects an upgrade
to the majority of senior secured debt ratings of investment-grade regulated
utilities by one notch.





Long-term
debt.  The company typically uses the net proceeds from
long-term debt for refinancing outstanding debt, for construction programs (to
the extent not provided by internally generated funds) and for general corporate
purposes.





In July
2009, Nicor Gas, through a private placement, issued $50 million in First
Mortgage Bonds at 4.70 percent, due in 2019.  In February 2009, the
$50 million 5.37 percent First Mortgage Bond series matured and was
retired.





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.





Substantially
all gas distribution properties are subject to the lien of the indenture
securing Nicor Gas’ First Mortgage Bonds.





At
December 31, 2009, Nicor Gas had the capacity to issue approximately $440
million of additional First Mortgage Bonds under the terms of its
indenture.  On February 25, 2009, Nicor Gas filed a new shelf
registration with a $225 million capacity, which became effective on March 20,
2009.





Nicor
believes it is in compliance with its debt covenants.  Nicor’s
long-term debt agreements do not include ratings triggers or material adverse
change provisions.





Short-term debt.In May 2009, Nicor
Gas established a $550 million, 364-day revolver, expiring May 2010, to replace
the $600 million, nine-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 $494.0
million and $739.9 million of commercial paper outstanding at December 31, 2009
and 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.





Common stock.Nicor maintained its
quarterly common stock dividend rate during 2009 of $0.465 per common
share.  The company paid dividends on its common stock of $84.8
million, $84.4 million and $84.1 million in 2009, 2008 and 2007,
respectively.  Nicor currently has no contractual or regulatory
restrictions on the payment of dividends.








Table of Contents




Nicor
currently has a dividend reinvestment program that offers the opportunity to
holders of Nicor common and preferred shares to purchase additional shares of
Nicor common stock by reinvesting the dividends paid on all of their shares
and/or making direct cash purchases.  Shares are acquired by Nicor on
behalf of participants through purchases in the open market.  Nicor
amended the program in 2009 to allow Nicor to issue new shares of common stock
as opposed to purchasing them in the open market.  Proceeds from newly
issued shares will be used for advances to or equity investments in its
subsidiaries, for other investment opportunities, or for general corporate
purposes.   In 2009, no new shares were issued under the dividend
reinvestment program.





In 2001,
Nicor announced a $50 million common stock repurchase
program.  Purchases may be made as market conditions permit through
open market transactions and to the extent cash flow is available after other
cash needs and investment opportunities.  There were no purchases
under this program in 2009, 2008 and 2007, and at December 31, 2009, $21.5
million remained authorized for the repurchase of common stock.





Preferred
Stock.  In 2009 and 2007, Nicor redeemed 10,150 and 100 shares,
respectively, of 4.48 percent Mandatorily Redeemable Preferred Stock, $50 par
value, at an average redemption price of $46.43 and $43.00 per share,
respectively, plus accrued unpaid dividends.  There were 1,431 shares
of the 4.48 percent Series Mandatorily Redeemable Preferred Stock, $50 par
value, outstanding at December 31, 2009.





Off-balance sheet
arrangements.  Nicor has certain guarantees, as further
described in Item 8 – Notes to the
Consolidated Financial Statements – Note 20 – Guarantees and
Indemnities.  The company believes the likelihood of any such payment
under these guarantees is remote.  No liability has been recorded for
these guarantees.





Contractual
obligations.  At December 31, 2009, Nicor had contractual
obligations with payments due as follows (in millions):





Payments
      due by periodLess
              than
      1
              year
            
            
            1-3
              years
            
            
            3-5
              years
            
            
            More
              than
      5
              years
            
            
            TotalPurchase
      obligations
            
            $
            640.4
            
            
            $
            287.9
            
            
            $
            48.7
            
            
            $
            12.5
            
            
            $
            989.5Long-term
      debt
            
            
            -
            
            
            
            75.0
            
            
            
            -
            
            
            
            425.0
            
            
            
            500.0Fixed
      interest on long-term debt
            
            
            30.6
            
            
            
            51.7
            
            
            
            51.3
            
            
            
            368.4
            
            
            
            502.0Operating
      leases
            
            
            15.2
            
            
            
            16.2
            
            
            
            5.9
            
            
            
            22.2
            
            
            
            59.5$
            686.2
            
            
            $
            430.8
            
            
            $
            105.9
            
            
            $
            828.1
            
            
            $
            2,051.0





In
addition to the contractual obligations included in the table above, Nicor has
potential liabilities to taxing authorities (unrecognized tax benefits) which
are dependent on the resolution of particular income tax
positions.  The timing of future cash outflows, if any, associated
with such potential liabilities is uncertain.  The company has accrued
a liability for estimated unrecognized tax benefits of $9.6 million at December
31, 2009, of which approximately $6 million is reasonably expected to be paid
within the next 12 months.





The
company also has long-term obligations for postretirement benefits which are not
included in the above table.  Information regarding the company’s
obligations for postretirement benefits can be found in Item 8 – Notes to the
Consolidated Financial Statements – Note 11 – Postretirement
Benefits.





Purchase
obligations consist primarily of natural gas purchase agreements, and natural
gas transportation and storage contracts in the gas distribution and wholesale
natural gas marketing businesses.  Natural gas









Table of Contents





purchase
agreements include obligations to purchase natural gas at future market prices,
calculated using NYMEX futures prices as of December 31, 2009.





Operating
leases are primarily for vessels, containers and equipment in the shipping
business, office space and equipment in the gas distribution business and office
space for the other energy ventures.  Tropical Shipping has certain
equipment operating leases which include purchase and/or renewal options, at
fair market amounts at the time of purchase or renewal.  Rental expense
under operating leases was $31.4 million, $41.7 million and $41.3 million in
2009, 2008 and 2007, respectively.





OTHER
MATTERS





Recent Illinois
Legislation.  In July 2009, a new Illinois state law took
effect that requires 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 bill
payment assistance program for low-income customers was implemented on a pilot
basis beginning in 2009.  The legislation also requires utilities to
develop and implement energy efficiency measures to obtain prescribed reductions
in customer deliveries.  Funding for the energy efficiency program,
excluding the adverse impact on Nicor Gas of lower deliveries and resulting
reduced margin, will be through a rate adjustment mechanism.  The
legislation also allows utility companies to implement, subject to ICC approval,
a rider for bad debt expense starting with expense incurred in the 2008 fiscal
year.  As previously noted, the ICC approved a bad debt rider for
Nicor Gas on February 2, 2010.





Petition for Re-approval of Operating
Agreement.On July 1, 2009, Nicor Gas filed a petition seeking
re-approval from the ICC of the operating agreement that governs many
inter-company transactions between Nicor Gas and its affiliates.  The
petition was filed pursuant to a requirement contained in the ICC order
approving the company’s most recent general rate increase.  A number
of parties have intervened in the proceeding.  Changes to the
operating agreement by the ICC that restrict or prohibit inter-company
transactions that currently are permitted could adversely impact 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 provides
for, among other things, general wage increases and changes to various employee
benefits, and it is not expected to have a material impact on the company’s
results of operations, cash flows and financial condition.





Other.Restrictions
imposed by regulatory agencies and loan agreements limiting the amount of
subsidiary net assets that can be transferred to Nicor are not expected to have
a material impact on the company’s ability to meet its cash
obligations.





OUTLOOK





Nicor’s
2010 outlook assumes weather based on historical patterns, but excludes, among
other things, the ICC’s PBR plan/PGA review or other
contingencies.  The company’s outlook also does not reflect the
additional variability in earnings due to fair value accounting adjustments at
Nicor Enerchange and other impacts that could occur because of future volatility
in the natural gas markets.  While these items could materially affect
2010 earnings, they are currently not estimable.





Gas
distribution.  Nicor Gas expects operating results to increase
in 2010 resulting from a full year of rate relief from the 2009 rate orders,
offset, in part, by higher operating costs and estimated weather warmer than in
2009.  Additionally, the ICC approved the company’s bad debt rider in
February 2010 which will add approximately $32 million, pretax, to 2010
operating results related to net bad debt recoveries for 2008 and
2009.







Table of Contents





The
company estimates that a 100-degree day variation from normal weather affects
Nicor Gas’ distribution margin, net of income taxes, by approximately $1.3
million under the company’s current rate structure.  The consolidated
impact, however, is generally reduced somewhat because of the natural weather
hedge attributable to the utility-bill management products offered by certain of
Nicor’s other energy ventures.





Shipping.  Tropical
Shipping’s operating results are expected to be similar to 2009 as we believe
the challenging economic environment will continue in the Bahamas and the
Caribbean region.  The company
also continues to expect relatively low tax costs on operating earnings in 2010
attributable to the 2006 reorganization of certain shipping and related
operations.





Other energy
ventures.  The company expects lower operating results from its
other energy ventures due primarily to a decline in earnings recognized at its
wholesale natural gas marketing company.





Other.  The company
also expects lower income from equity investments due to the absence of the
$10.1 million gain recognized in 2009 on the sale of its equity investment in EN
Engineering.





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 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









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, CUB filed a motion for $27 million in sanctions against the
company in the ICC Proceedings.  In that motion, 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 assigned to the proceeding issued
a ruling denying CUB’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 CUB or other parties to the ICC Proceedings.





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 Entergy-Koch Trading, LP (“EKT”), a natural gas,
storage and transportation trader and consultant with whom Nicor did business
under the PBR plan.  Review of additional information completed in
2004 resulted in the $1.8 million adjustment to the previously recorded
liability referenced above.





The
evidentiary hearings on this matter were stayed in 2004 in order to permit the
parties to undertake additional third party discovery from EKT.  In
December 2006, the additional third party discovery from EKT was obtained and
the ALJs issued a scheduling order that provided for Nicor Gas to submit direct
testimony by April 13, 2007.  In its direct testimony, 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.  In
September 2009, the staff of the ICC, IAGO and CUB submitted direct testimony to
the ICC requesting refunds of $109 million, $255 million and $286 million,
respectively.  No date has been set for evidentiary hearings on this
matter.





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 December 31,
2009.





Mercury.  Information
about mercury contingencies is presented in Item 8 – Notes to the Consolidated
Financial Statements – Note 21 – 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
8 – Notes to the Consolidated Financial Statements – Note 21 – Contingencies –
Manufactured Gas Plant Sites.









Table of Contents





Municipal tax
matters.  Information about municipal tax contingencies is
presented in Item 8 – Notes to the Consolidated Financial Statements – Note 21 –
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 8 – Notes to the Consolidated Financial
Statements – Note 21 – Contingencies – Other.





CRITICAL
ACCOUNTING ESTIMATES





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





The use
of estimates and the selection of accounting policies affect Nicor’s reported
results and financial condition.  The company has adopted several
significant accounting policies and is required to make significant accounting
estimates that are important to understanding its financial
statements.  These significant policies and estimates are described
throughout Item 8 – Notes to the Consolidated Financial Statements.





Although
there are numerous areas in which Nicor’s management makes significant
accounting estimates, it believes its critical estimates are those that require
management’s most difficult and subjective or complex
judgments.  Nicor’s management has a practice of reviewing its
critical accounting estimates and policy decisions with the audit committee of
its board of directors.  Its critical estimates typically involve loss
contingencies, derivative instruments, pension and other postretirement
benefits, income taxes, credit risk, unbilled revenues and regulatory assets and
liabilities because they are estimates which could materially impact Nicor’s
financial statements.





Loss
contingencies.Nicor and its subsidiaries record contingent
losses as liabilities when a loss is both probable and the amount or range of
loss, including related legal defense costs, is reasonably
estimable.  When only a range of potential loss is estimable, the
company records a liability for the minimum anticipated loss.  Nicor
and its subsidiaries and affiliates are involved in various legal and regulatory
proceedings and are exposed to various loss contingencies.  These loss
contingencies are in some cases resolved in stages over time, estimates may
change significantly from period to period, and the company’s ultimate
obligations may differ materially from its recorded amounts.  Of
particular note is the PBR plan contingency at Nicor Gas described in Item 8 –
Notes to the Consolidated Financial Statements – Note 21 –
Contingencies.





Derivative
instruments.The rules for determining whether a contract
meets the definition of a derivative instrument or qualifies for hedge
accounting treatment are numerous and complex.  The treatment of a
single contract may vary from period to period depending upon accounting
elections, changes in management’s assessment of the likelihood of future hedged
transactions or new interpretations of accounting rules.  As a result,
management judgment is required in the determination of the appropriate
accounting treatment.  In addition, the estimated fair value of
derivative instruments may change significantly from period to period depending
upon market conditions, and changes in hedge effectiveness may impact the
accounting treatment.  These determinations and changes in estimates
may have a material impact on reported results.









Table of Contents


Pension and other postretirement
benefits.The company’s cost of providing postretirement
benefits is dependent upon various factors and assumptions, including life
expectancies, the discount rate used in determining the projected benefit
obligation, the expected long-term rate of return on plan assets, the long-term
rate of compensation increase and anticipated health care
costs.  Actual experience in any one period, particularly the actual
return on plan assets, often varies significantly from these mostly long-term
assumptions.  When cumulatively significant, the gains and losses
generated from such variances are amortized into operating income over the
remaining service lives of employees covered by the plans (approximately 10
years for the pension plan and 12 years for the health care
plan).  Additional information is presented in Item 8 – Notes to the
Consolidated Financial Statements – Note 11 – Postretirement Benefits, including
plan asset investment allocation, estimated future benefit payments, general
descriptions of the plans, significant assumptions, the impact of certain
changes in assumptions and significant changes in estimates.





The
company’s postretirement benefit expense (net of capitalization) included in
operating income was $24.6 million, $2.7 million and $4.8 million in 2009, 2008
and 2007, respectively. Significant market declines in the values of plan assets
in 2008 caused the increase in postretirement benefit expense for 2009 when
compared to prior years.  The company expects to record postretirement
benefit expense (net of capitalization) for 2010 of $19.6
million.  The decrease in postretirement benefit expense in 2010
compared to 2009 is due to the positive impact on the value of plan assets of
the partial capital market recovery in 2009, which was somewhat offset by the
negative impact of decreases in the discount rates.Actuarial
assumptions affecting 2010 include an expected long-term rate of return on plan
assets of 8.25 percent and discount rates of 5.45 percent for the company’s
defined benefit pension plan and 5.75 percent for the health care and other
benefit plans, compared with a 8.50 percent rate of return on plan assets and
discount rates of 6.35 percent and 6.00 percent, respectively, in the prior
year.  The discount rates for each plan were determined by performing
a cash flow matching study using the Citigroup Pension Discount
Curve.  The Citigroup Pension Discount Curve is constructed from a
Treasury yield curve and adjusted by adding a corporate bond
spread.  The corporate bond spread is developed from a large pool of
high quality corporate bonds and mitigates the risks associated with selecting
individual corporate bonds whose values may not be representative of the broader
market.





The
discount rate is critical to the measurement of the plans’ obligations and
costs.  Additionally, the assumed rate of return on plan assets is
critical to the determination of the pension plan’s cost.  The
following table illustrates the effect of a one-percentage-point change in these
actuarial assumptions (in millions).





Actuarial
      assumption
            
            
            Increase
      (decrease)
            
            
            Effect
      on net benefit cost
            
            
            Effect
      on benefit obligationDiscount
      rate
            
            
            
            1.0%
            
            
            $
            (6.2)
            
            
            $
            (59.8)(1.0%)
            
            
            
            7.4
            
            
            
            73.4Rate
      of return on plan assets
            
            
            
            1.0%
            
            
            
            (3.5)
            
            
            
            -(1.0%)
            
            
            
            3.5
            
            
            
            -





Income taxes.  A
deferred income tax liability is not recorded on undistributed foreign earnings
that are expected in management’s judgment to be indefinitely reinvested
offshore.  Management considers, among other factors, actual cash
investments offshore as well as projected cash requirements in making this
determination.  Changes in management’s investment or repatriation
plans or circumstances could result in a different deferred income tax
liability.








Table of Contents


The
company records unrecognized tax benefits based on a recognition threshold and
valuation method to recognize and measure an income tax position taken, or
expected to be taken, in a tax return.  The evaluation is based on a
two-step approach.  The first step requires the company to evaluate
whether the tax position would “more likely than not,” based upon its technical
merits, be sustained upon examination by the appropriate taxing
authority.  The second step requires the tax position to be measured
at the largest amount of tax benefit that is greater than 50 percent likely of
being realized upon settlement.  Changes between what the company
recognizes as an unrecognized tax benefit and what is actually settled with the
taxing authority could be materially different.





Credit risk.The
company is required to estimate counterparty credit risk in estimating the fair
values of certain derivative instruments.  The company’s
counterparties consist primarily of major energy companies and financial
institutions.  This concentration of counterparties may materially
impact the company’s exposure to credit risk resulting from market, economic or
regulatory conditions.  To manage this credit risk, the company
believes it maintains prudent credit policies to determine and monitor the
creditworthiness of counterparties.  In doing so, the company seeks
guarantees or collateral, in the form of cash or letters of credit, acquires
credit insurance in certain instances, limits its exposure to any one
counterparty, and, in some instances, enters into netting arrangements to
mitigate counterparty credit risk.  However, the volatility in the
capital markets over the past two years has made it more difficult for the
company to assess the creditworthiness of its counterparties.  Based
on this uncertainty, actual losses relating to credit risk could materially vary
from Nicor’s estimates.





The
company maintains an allowance for doubtful accounts for estimated losses from
the failure of its customers to make required payments.  Such
estimates are based on historical experience, existing economic conditions and
certain collection-related patterns.  Circumstances which could affect
these estimates include, but are not limited to, customer credit issues, natural
gas prices, customer deposits and economic conditions.  Actual credit
losses could vary materially from Nicor’s estimates.  Nicor’s
allowance for doubtful accounts at December 31, 2009, 2008 and 2007 was $33.0
million, $44.9 million and $35.1 million, respectively, as presented on Schedule
II in Item 15 – Exhibits, Financial Statement Schedules.





On
February 2, 2010, the ICC approved a bad debt rider that was filed for in 2009
by Nicor Gas.  The bad debt rider provides for the recovery from (or
refund to) customers of the difference between the actual bad debt expense Nicor
Gas incurs on an annual basis and the benchmark bad debt expense included in its
rates for the respective year.





Unbilled
revenues.Nicor Gas accrues revenues for natural gas
deliveries not yet billed to customers from the last billing date to
month-end.  Accrued unbilled revenue estimates are dependent upon a
number of customer-usage factors which require management judgment, including
weather factors.  These estimates are adjusted when actual billings
occur, and variances in estimates can be material.  Accrued unbilled
revenues for Nicor Gas at December 31, 2009 and 2008 were $137.7 million and
$196.1 million, respectively.





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 is required 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 rate regulation, a write-off of net regulatory liabilities
would be required.  Additional information on regulatory assets and
liabilities is presented in Item 8 – Notes to the Consolidated Financial
Statements – Note 1 – Accounting Policies.







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NEW
ACCOUNTING PRONOUNCEMENT





For
information concerning fair value measurements, see Item 8 – Notes to the
Consolidated Financial Statements – Note 2 – New Accounting
Pronouncement.





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.







Table of Contents


Item
7A.         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.





Commodity price
risk.  With regard to commodity price risk, the company has
established policies and procedures with respect to the management of such risks
and the use of derivative instruments to hedge its exposure to such
risks.  Company management oversees compliance with such policies and
procedures.  The company utilizes various techniques to limit, measure
and monitor market risk, including limits based on volume, dollar amounts,
maturity, and in some cases value at risk (“VaR”).





VaR is a
tool to assess the potential loss for an instrument or portfolio from adverse
changes in market factors, for a specified time period and at a specified
confidence level.  The company has established exposure limits at such
a level that material adverse economic results are not expected.  The
company’s commodity price risk policies and procedures continue to evolve with
its businesses and are subject to ongoing review and modification.





In
accordance with SEC disclosure requirements, Nicor performs sensitivity analyses
to assess the potential loss in earnings based upon a hypothetical 10 percent
adverse change in market prices.  Management does not believe that
sensitivity analyses alone provide an accurate or reliable method for monitoring
and controlling risks and therefore also relies on the experience and judgment
of its management to revise strategies and adjust positions as deemed
necessary.  Losses in excess of the amounts determined in sensitivity
analyses could occur if market prices exceed the 10 percent shift used for the
analyses.





As a
regulated utility, Nicor Gas’ exposure to market risk caused by changes in
commodity prices is substantially mitigated because of Illinois rate regulation
allowing for the recovery of prudently incurred natural gas supply costs from
customers.  However, substantial changes in natural gas prices may
impact Nicor Gas’ earnings by increasing or decreasing the cost of gas used by
the company, storage-related gas costs, and other operating and financing
expenses.  The company expects to purchase in 2010 about 2 Bcf of
natural gas for its own use and to cover storage-related gas
costs.  The volume of natural gas purchased by the company, which is
exposed to market risk, has declined as a result of certain changes approved in
the 2009 rate orders.  The level of natural gas prices may also impact
customer gas consumption and therefore gas distribution margin.  The
actual impact of natural gas price fluctuations on Nicor Gas’ earnings is
dependent upon several factors, including the company’s hedging
practices.  The company generally hedges its forecasted company use
and storage-related gas costs through the use of fixed-price purchase and swap
agreements.





On
February 2, 2010, the ICC approved a bad debt rider that was filed for in 2009
by Nicor Gas.  The bad debt rider provides for the recovery from (or
refund to) customers of the difference between the actual bad debt expense Nicor
Gas incurs on an annual basis and the benchmark bad debt expense included in its
rates for the respective year.





Nicor’s
other energy businesses are subject to natural gas commodity price risk, arising
primarily from purchase and sale agreements, transportation agreements, natural
gas inventories and utility-bill management contracts.  Derivative
instruments such as futures, options, forwards and swaps may be used to hedge
these risks.  Based on Nicor’s other energy businesses unhedged
positions at December 31, 2009, a 10 percent adverse change in natural gas
prices would have decreased Nicor’s earnings for the periods ended December 31,
2009 and 2008 by about $0.2 million and $1.0 million, respectively.







Table of Contents





At
December 31, 2009,Nicor
Enerchange, Nicor’s wholesale natural gas marketing business, held derivative
contracts with the following net asset fair values (in millions):





MaturitySource
      of Fair Value
            
            
            Total
              Fair
      Value
            
            
            Less
      than
              1
      Year
            
            
            1
      to 3
              YearsPrices
      actively quoted
            
            
            $
            (2.9
            )
            
            $
            (2.4
            )
            
            $
            (.5
            )Prices
      correlated to external sources
            
            
            
            10.3
            
            
            
            7.9
            
            
            
            2.4Prices
      based on models and other valuation methods
            
            
            
            5.3
            
            
            
            3.9
            
            
            
            1.4Total
            
            
            $
            12.7
            
            
            $
            9.4
            
            
            $
            3.3





Actively
quoted prices are for those derivative instruments traded on the
NYMEX.  Nicor Enerchange enters into over-the-counter derivative
instruments with values that are similar to, and correlate with, quoted prices
for exchange-traded instruments in active markets.  Nicor Enerchange
uses one or more significant unobservable inputs for model-derived
valuations.





Tropical
Shipping’s objective is to substantially mitigate its exposure to higher fuel
costs through fuel surcharges.





Credit risk.  The
company has a diversified customer base, which limits its exposure to
concentrations of credit risk in any one industry or income class and believes
that it maintains prudent credit policies.  Additionally, the gas
distribution business offers options to help customers manage their bills, such
as energy assistance programs for low-income customers and a budget payment plan
that spreads gas bills more evenly throughout the year.  This risk has
been substantially mitigated by the previously mentioned bad debt
rider.





The
company is also exposed to credit risk in the event a counterparty, customer or
supplier defaults on a contract to pay for or deliver product at agreed-upon
terms and conditions.  To manage this credit risk, the company
believes it maintains prudent credit policies to determine and monitor the
creditworthiness of counterparties.  In doing so, the company seeks
guarantees or collateral, in the form of cash or letters of credit, acquires
credit insurance in certain instances, limits its exposure to any one
counterparty, and, in some instances, enters into netting arrangements to
mitigate counterparty credit risk.  However, the volatility in the
capital markets over the past two years has made it more difficult for the
company to assess the creditworthiness of its counterparties.  Based
on this uncertainty, the company has taken additional steps including, but not
limited to, reducing available credit to some of its
counterparties.





Interest rate
risk.Nicor is exposed to changes in interest
rates.  The company manages its interest rate risk by issuing
primarily fixed-rate long-term debt with varying maturities, refinancing certain
debt and, at times, hedging the interest rate on anticipated
borrowings.  If market rates were to hypothetically increase by 10
percent from Nicor’s weighted-average floating interest rate on commercial
paper, interest expense would have increased causing Nicor’s earnings to
decrease by approximately $0.1 million in 2009.  For further
information about debt securities, interest rates and fair values, see Item 8 –
Consolidated Statements of Capitalization, Note 7 – Short-Term and Long-Term
Debt and Note 8 – Fair Value Measurements.







Table of Contents




Nicor
      Inc.





Item
      8.
            Financial Statements
      and Supplementary Data




PageReport of Independent Registered Public Accounting
      Firm
            41Financial
      Statements:Consolidated Statements of Operations
            43Consolidated Statements of Cash Flows
            44Consolidated Balance Sheets
            45Consolidated Statements of Capitalization
            46Consolidated Statements of Common Equity
            47Consolidated Statements of Comprehensive Income
            47Notes to the Consolidated Financial Statements
            48










Table of Contents





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM




To the
Board of Directors and Stockholders of Nicor Inc.




We have
audited the accompanying consolidated balance sheets and statements of
capitalization of Nicor Inc. and subsidiaries (the “Company”) as of December 31,
2009 and 2008, and the related consolidated statements of operations, common
equity, comprehensive income and cash flows for each of the three years in the
period ended December 31, 2009.  Our audits also included the
financial statement schedule at Item 15(a)(2).  We also have audited
the Company’s internal control over financial reporting as of December 31, 2009,
based on criteria established in Internal Control — Integrated
Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission.  The Company's management is responsible for
these financial statements and financial statement schedule, for maintaining
effective internal control over financial reporting, and for its assessment of
the effectiveness of internal control over financial reporting, included in the
accompanying Management’s Report on Internal Control Over Financial
Reporting.  Our responsibility is to express an opinion on these
financial statements and financial statement schedule and an opinion on the
Company's internal control over financial reporting based on our
audits.




We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects.  Our audits of the financial statements included examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement
presentation.  Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk.  Our audits also included performing such other
procedures as we considered necessary in the circumstances.  We
believe that our audits provide a reasonable basis for our
opinions.




A
company's internal control over financial reporting is a process designed by, or
under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles.  A company's internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.




Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis.  Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.









Table of Contents




REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (concluded)





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 2009 and 2008, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 2009, in conformity with
accounting principles generally accepted in the United States of
America.  Also, in our opinion, such financial statement schedule,
when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly, in all material respects, the information set forth
therein.  Also, in our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2009, based on the criteria established in Internal Control — Integrated
Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission.







/s/
DELOITTE & TOUCHE LLP






Chicago,
Illinois


February
24, 2010









Table of Contents


Nicor
      Inc.Consolidated Statements of Operations(millions,
      except per share data)Year
      ended December 312009
              
              
              2008
              
              
              2007Operating
      revenuesGas
      distribution (includes revenue taxes of $150.3,$174.0
      and $149.6, respectively)
              
              $
              2,140.8
              
              
              $
              3,206.9
              
              
              $
              2,627.5Shipping
              
              
              352.6
              
              
              
              425.2
              
              
              
              403.9Other
      energy ventures
              
              
              239.0
              
              
              
              230.3
              
              
              
              244.5Corporate
      and eliminations
              
              
              (80.3
              )
              
              
              (85.8
              )
              
              
              (99.6
              )Total
      operating revenues
              
              
              2,652.1
              
              
              
              3,776.6
              
              
              
              3,176.3Operating
      expensesGas
      distributionCost
      of gas
              
              
              1,345.7
              
              
              
              2,427.8
              
              
              
              1,906.5Operating
      and maintenance
              
              
              300.4
              
              
              
              294.6
              
              
              
              269.8Depreciation
              
              
              177.4
              
              
              
              170.9
              
              
              
              165.6Taxes,
      other than income taxes
              
              
              167.6
              
              
              
              189.4
              
              
              
              166.9Mercury-related
      costs (recoveries), net
              
              
              -
              
              
              
              .6
              
              
              
              (8.0
              )Property
      sale gains
              
              
              -
              
              
              
              (.8
              )
              
              
              (2.0
              )Shipping
              
              
              323.4
              
              
              
              385.9
              
              
              
              358.5Other
      energy ventures
              
              
              193.5
              
              
              
              205.0
              
              
              
              210.5Other
      corporate expenses and eliminations
              
              
              (76.2
              )
              
              
              (81.8
              )
              
              
              (98.0
              )Total
      operating expenses
              
              
              2,431.8
              
              
              
              3,591.6
              
              
              
              2,969.8Operating
      income
              
              
              220.3
              
              
              
              185.0
              
              
              
              206.5Interest
      expense, net of amounts capitalized
              
              
              38.7
              
              
              
              40.1
              
              
              
              37.9Equity
      investment income, net
              
              
              15.8
              
              
              
              9.4
              
              
              
              6.3Interest
      income
              
              
              2.3
              
              
              
              8.8
              
              
              
              8.8Other
      income, net
              
              
              .9
              
              
              
              .7
              
              
              
              .6Income
      before income taxes
              
              
              200.6
              
              
              
              163.8
              
              
              
              184.3Income
      tax expense, net of benefits
              
              
              65.1
              
              
              
              44.3
              
              
              
              49.1Net
      income
              
              $
              135.5
              
              
              $
              119.5
              
              
              $
              135.2Average
      shares of common stock outstandingBasic
              
              
              45.4
              
              
              
              45.3
              
              
              
              45.2Diluted
              
              
              45.5
              
              
              
              45.4
              
              
              
              45.3Earnings
      per average share of common stockBasic
              
              $
              2.99
              
              
              $
              2.64
              
              
              $
              2.99Diluted
              
              
              2.98
              
              
              
              2.63
              
              
              
              2.99The
      accompanying notes are an integral part of these
    statements.


Table of Contents





Nicor
      Inc.Consolidated Statements of Cash Flows(millions)Year
      ended December 312009
            
            
            2008
            
            
            2007Operating
      activitiesNet
      income
            
            $
            135.5
            
            
            $
            119.5
            
            
            $
            135.2Adjustments
      to reconcile net income to net cash flowprovided
      from (used for) operating activities:Depreciation
            
            
            195.8
            
            
            
            189.8
            
            
            
            184.2Deferred
      income tax expense (benefit)
            
            
            4.9
            
            
            
            (3.4
            )
            
            
            (4.6
            )Net
      gain on sale of property, plant and equipment
            
            
            (.8
            )
            
            
            (1.0
            )
            
            
            (1.8
            )Gain
      on sale of equity investment
            
            
            (10.1
            )
            
            
            -
            
            
            
            -Changes
      in assets and liabilities:Receivables,
      less allowances
            
            
            198.3
            
            
            
            (47.3
            )
            
            
            (94.2
            )Gas
      in storage
            
            
            71.3
            
            
            
            (54.5
            )
            
            
            32.0Deferred/accrued
      gas costs
            
            
            24.7
            
            
            
            (104.1
            )
            
            
            .1Derivative
      instruments
            
            
            (85.2
            )
            
            
            133.3
            
            
            
            (72.8
            )Margin
      accounts - derivative instruments
            
            
            103.7
            
            
            
            (134.9
            )
            
            
            16.3Pension
      benefits
            
            
            (21.5
            )
            
            
            179.1
            
            
            
            (54.5
            )Regulatory
      postretirement asset
            
            
            39.6
            
            
            
            (186.3
            )
            
            
            44.1Other
      assets
            
            
            16.0
            
            
            
            (64.3
            )
            
            
            (13.4
            )Accounts
      payable
            
            
            (57.4
            )
            
            
            (16.9
            )
            
            
            64.0Customer
      credit balances and deposits
            
            
            (45.6
            )
            
            
            (47.2
            )
            
            
            36.6Health
      care and other postretirement benefits
            
            
            3.5
            
            
            
            12.2
            
            
            
            4.7Litigation
      charge
            
            
            -
            
            
            
            -
            
            
            
            (10.0
            )Other
      liabilities
            
            
            (9.1
            )
            
            
            (.9
            )
            
            
            (25.4
            )Other
      items
            
            
            7.2
            
            
            
            (.5
            )
            
            
            11.7Net
      cash flow provided from (used for) operating activities
            
            
            570.8
            
            
            
            (27.4
            )
            
            
            252.2Investing
      activitiesAdditions
      to property, plant and equipment
            
            
            (220.3
            )
            
            
            (249.9
            )
            
            
            (173.2
            )Release
      of restricted short-term investments
            
            
            -
            
            
            
            -
            
            
            
            10.0Purchases
      of available-for-sale securities
            
            
            -
            
            
            
            -
            
            
            
            (218.9
            )Proceeds
      from sales of available-for-sale securities
            
            
            -
            
            
            
            -
            
            
            
            218.9Purchases
      of held-to-maturity securities
            
            
            -
            
            
            
            (1.1
            )
            
            
            (1.6
            )Proceeds
      from maturities of held-to-maturity securities
            
            
            3.5
            
            
            
            3.7
            
            
            
            2.3Net
      increase in other short-term investments
            
            
            (11.4
            )
            
            
            (20.4
            )
            
            
            (32.8
            )Net
      proceeds from sale of property, plant and equipment
            
            
            1.8
            
            
            
            1.3
            
            
            
            1.2Proceeds
      from sale of equity investment
            
            
            13.0
            
            
            
            -
            
            
            
            -Other
      investing activities
            
            
            1.9
            
            
            
            1.1
            
            
            
            .2Net
      cash flow used for investing activities
            
            
            (211.5
            )
            
            
            (265.3
            )
            
            
            (193.9
            )Financing
      activitiesProceeds
      from issuing long-term debt
            
            
            50.0
            
            
            
            75.0
            
            
            
            -Disbursements
      to retire long-term obligations
            
            
            (50.5
            )
            
            
            (75.0
            )
            
            
            -Net
      issuances (repayments) of commercial paper
            
            
            (245.9
            )
            
            
            370.9
            
            
            
            19.0Dividends
      paid
            
            
            (84.8
            )
            
            
            (84.4
            )
            
            
            (84.1
            )Borrowing
      against cash surrender value of life insurance policies
            
            
            3.4
            
            
            
            -
            
            
            
            -Repayment
      of loan against cash surrender value of life insurance
      policies
            
            
            -
            
            
            
            (11.2
            )
            
            
            -Proceeds
      from exercise of stock options
            
            
            .3
            
            
            
            1.7
            
            
            
            8.2Other
      financing activities
            
            
            (2.1
            )
            
            
            (1.1
            )
            
            
            .3Net
      cash flow provided from (used for) financing activities
            
            
            (329.6
            )
            
            
            275.9
            
            
            
            (56.6
            )Net
      increase (decrease) in cash and cash equivalents
            
            
            29.7
            
            
            
            (16.8
            )
            
            
            1.7Cash
      and cash equivalents, beginning of year
            
            
            26.0
            
            
            
            42.8
            
            
            
            41.1Cash
      and cash equivalents, end of year
            
            $
            55.7
            
            
            $
            26.0
            
            
            $
            42.8Supplemental
      informationIncome
      taxes paid, net
            
            $
            46.8
            
            
            $
            71.2
            
            
            $
            77.9Interest
      paid, net of amounts capitalized
            
            
            30.8
            
            
            
            50.2
            
            
            
            38.3The
      accompanying notes are an integral part of these
    statements.









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Nicor
      Inc.Consolidated Balance Sheets(millions)December
      312009
            
            
            2008AssetsCurrent
      assetsCash
      and cash equivalents
            
            $
            55.7
            
            
            $
            26.0Short-term
      investments
            
            
            78.0
            
            
            
            69.5Receivables,
      less allowances of $33.0 and $44.9, respectively
            
            
            492.1
            
            
            
            690.1Gas
      in storage
            
            
            137.2
            
            
            
            208.5Derivative
      instruments
            
            
            30.9
            
            
            
            49.7Margin
      accounts - derivative instruments
            
            
            46.1
            
            
            
            134.4Other
            
            
            163.3
            
            
            
            160.7Total
      current assets
            
            
            1,003.3
            
            
            
            1,338.9Property,
      plant and equipment, at costGas
      distribution
            
            
            4,598.2
            
            
            
            4,460.6Shipping
            
            
            330.0
            
            
            
            315.1Other
            
            
            32.8
            
            
            
            26.74,961.0
            
            
            
            4,802.4Less
      accumulated depreciation
            
            
            2,021.9
            
            
            
            1,943.8Total
      property, plant and equipment, net
            
            
            2,939.1
            
            
            
            2,858.6Long-term
      investments
            
            
            128.8
            
            
            
            136.8Other
      assets
            
            
            364.5
            
            
            
            449.7Total
      assets
            
            $
            4,435.7
            
            
            $
            4,784.0Liabilities and
    CapitalizationCurrent
      liabilitiesLong-term
      debt due within one year
            
            $
            -
            
            
            $
            50.0Short-term
      debt
            
            
            494.0
            
            
            
            739.9Accounts
      payable
            
            
            353.9
            
            
            
            411.3Customer
      credit balances and deposits
            
            
            141.7
            
            
            
            187.3Derivative
      instruments
            
            
            72.3
            
            
            
            167.3Other
            
            
            106.2
            
            
            
            112.2Total
      current liabilities
            
            
            1,168.1
            
            
            
            1,668.0Deferred
      credits and other liabilitiesRegulatory
      asset retirement liability
            
            
            796.8
            
            
            
            751.7Deferred
      income taxes
            
            
            409.9
            
            
            
            400.0Health
      care and other postretirement benefits
            
            
            199.7
            
            
            
            196.6Asset
      retirement obligation
            
            
            191.6
            
            
            
            185.0Other
            
            
            133.6
            
            
            
            161.0Total
      deferred credits and other liabilities
            
            
            1,731.6
            
            
            
            1,694.3Commitments
      and contingenciesCapitalizationLong-term
      obligationsLong-term
      debt, net of unamortized discount
            
            
            498.2
            
            
            
            448.0Mandatorily
      redeemable preferred stock
            
            
            .1
            
            
            
            .6Total
      long-term obligations
            
            
            498.3
            
            
            
            448.6Common
      equity
            
            
            1,037.7
            
            
            
            973.1Total
      capitalization
            
            
            1,536.0
            
            
            
            1,421.7Total
      liabilities and capitalization
            
            $
            4,435.7
            
            
            $
            4,784.0The
      accompanying notes are an integral part of these
    statements.









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Nicor
      Inc.Consolidated Statements of Capitalization(millions,
      except share data)December
      312009
            
            
            2008First
      Mortgage Bonds5.37%
      Series due 2009
            
            $
            -
            
            
            
            
            
            $
            50.06.625%
      Series due 2011
            
            
            75.0
            
            
            
            
            
            
            75.07.20%
      Series due 2016
            
            
            50.0
            
            
            
            
            
            
            50.04.70%
      Series due 2019
            
            
            50.0
            
            
            
            
            
            
            -5.80%
      Series due 2023
            
            
            50.0
            
            
            
            
            
            
            50.06.58%
      Series due 2028
            
            
            50.0
            
            
            
            
            
            
            50.05.90%
      Series due 2032
            
            
            50.0
            
            
            
            
            
            
            50.05.90%
      Series due 2033
            
            
            50.0
            
            
            
            
            
            
            50.05.85%
      Series due 2036
            
            
            50.0
            
            
            
            
            
            
            50.06.25%
      Series due 2038
            
            
            75.0
            
            
            
            
            
            
            75.0500.0
            
            
            
            
            
            
            500.0Less:  
      Amount due within one year
            
            
            -
            
            
            
            
            
            
            50.0Unamortized
      debt discount, net of premium
            
            
            1.8
            
            
            
            
            
            
            2.0Total
      long-term debt
            
            
            498.2
            
            
            
            32.4%
            
            
            
            448.0
            
            
            
            31.5
      %Mandatorily
      redeemable preferred and preference stockCumulative,
      $50 par value, 1,600,000 preferred shares
      authorized; and cumulative,without
      par value, 20,000,000 preference shares authorized (1,431
      and 11,581shares
      of 4.48% series redeemablepreferred stock outstanding,
      respectively)
            
            
            .1
            
            
            
            -
            
            
            
            .6
            
            
            
            -Common
      equityCommon
      stock, $2.50 par value, 160,000,000 shares authorized
      (3,600,378and
      2,901,400 shares reserved for share-based awards and other purposes,and
      45,245,409and 45,198,779 shares outstanding,
      respectively)
            
            
            113.1
            
            
            
            
            
            
            
            113.0Paid-in
      capital
            
            
            54.6
            
            
            
            
            
            
            
            49.5Retained
      earnings
            
            
            881.0
            
            
            
            
            
            
            
            830.3Accumulated
      other comprehensive lossCash
      flow hedges
            
            
            (4.0
            )
            
            
            
            
            
            
            (11.7
            )Postretirement
      benefit plans
            
            
            (6.5
            )
            
            
            
            
            
            
            (7.7
            )Foreign
      currency translation adjustment
            
            
            (.5
            )
            
            
            
            
            
            
            (.3
            )Total
      accumulated other comprehensive loss
            
            
            (11.0
            )
            
            
            
            
            
            
            (19.7
            )Total
      common equity
            
            
            1,037.7
            
            
            
            67.6
            
            
            
            973.1
            
            
            
            68.5Total
      capitalization
            
            $
            1,536.0
            
            
            
            100.0
      %
            
            
            $
            1,421.7
            
            
            
            100.0
      %The
      accompanying notes are an integral part of these
    statements.









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Nicor
      Inc.Consolidated Statements of Common
    Equity(millions,
      except per share data)Year
      ended December 312009
            
            
            2008
            
            
            2007Common
      stockBalance
      at beginning of year
            
            $
            113.0
            
            
            $
            112.8
            
            
            $
            112.3Issued
      and converted stock, net of cancellations
            
            
            .1
            
            
            
            .2
            
            
            
            .5Balance
      at end of year
            
            
            113.1
            
            
            
            113.0
            
            
            
            112.8Paid-in
      capitalBalance
      at beginning of year
            
            
            49.5
            
            
            
            44.8
            
            
            
            34.1Issued
      and converted stock
            
            
            5.3
            
            
            
            5.0
            
            
            
            11.4Reacquired
      and cancelled stock
            
            
            (.2
            )
            
            
            (.3
            )
            
            
            (.7
            )Balance
      at end of year
            
            
            54.6
            
            
            
            49.5
            
            
            
            44.8Retained
      earningsBalance
      at beginning of year
            
            
            830.3
            
            
            
            795.5
            
            
            
            743.0Net
      income
            
            
            135.5
            
            
            
            119.5
            
            
            
            135.2Dividends
      on common stock ($1.86 per share for 2009 to 2007)
            
            
            (84.8
            )
            
            
            (84.5
            )
            
            
            (84.1
            )Other
            
            
            -
            
            
            
            (.2
            )
            
            
            1.4Balance
      at end of year
            
            
            881.0
            
            
            
            830.3
            
            
            
            795.5Accumulated
      other comprehensive lossBalance
      at beginning of year
            
            
            (19.7
            )
            
            
            (7.9
            )
            
            
            (13.3
            )Other
      comprehensive income (loss)
            
            
            8.7
            
            
            
            (11.8
            )
            
            
            5.4Balance
      at end of year
            
            
            (11.0
            )
            
            
            (19.7
            )
            
            
            (7.9
            )Total
      common equity
            
            $
            1,037.7
            
            
            $
            973.1
            
            
            $
            945.2Consolidated Statements of Comprehensive
      Income(millions)Year
      ended December 312009
            
            
            
            2008
            
            
            
            2007Net
      income
            
            $
            135.5
            
            
            $
            119.5
            
            
            $
            135.2Other
      comprehensive income (loss)Loss
      on cash flow hedges (net of income tax of ($2.8), ($2.4)and
      ($1.0), respectively)
            
            
            (4.3
            )
            
            
            (3.6
            )
            
            
            (2.0
            )Reclassifications
      of hedge (gains) losses to net income (net ofincome
      tax of $7.9, ($1.4) and $3.8, respectively)
            
            
            12.0
            
            
            
            (2.1
            )
            
            
            6.3Postretirement
      gains (losses) (net of income tax of $0.9, ($3.9) and
      $0.9, respectively)
            
            
            1.2
            
            
            
            (6.0
            )
            
            
            1.4Foreign
      currency translation adjustment
            
            
            (.2
            )
            
            
            (.1
            )
            
            
            (.3
            )Other
      comprehensive income (loss), net of tax
            
            
            8.7
            
            
            
            (11.8
            )
            
            
            5.4Comprehensive
      income
            
            $
            144.2
            
            
            $
            107.7
            
            
            $
            140.6The
      accompanying notes are an integral part of these
    statements.









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Notes to the
Consolidated Financial Statements





Certain
terms used herein are defined in the glossary on pages ii and iii.





1.      ACCOUNTING
POLICIES





Consolidation.  The
consolidated financial statements include the accounts of Nicor and all
majority-owned subsidiaries.  Nicor’s key subsidiaries are described
in Note 15 – Business Segment and Geographic Information.  All
significant intercompany balances and transactions have been
eliminated.





Use of
estimates.  The preparation of the financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates that affect reported
amounts.  Actual results could differ from those estimates and such
differences could be material.  Accounting estimates requiring
significant management judgment involve accrued unbilled revenues, derivative
instruments, regulatory assets and liabilities, pension and other postretirement
benefits, potential asset impairments, asset retirement obligations, loss
contingencies including environmental contingencies, credit risk and income
taxes.





Subsequent
events.The company’s management evaluated subsequent events
for potential recognition and disclosure through February 24, 2010, the date
these financial statements were issued.





Cash and cash
equivalents.  Cash equivalents are comprised of highly liquid
investments of domestic subsidiaries with an initial maturity of three months or
less.  The carrying value of these investments approximates fair
value.





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 is required 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 rate regulation, a write-off of net regulatory liabilities
would be required.









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The
company had regulatory assets and liabilities at December 31 as follows (in
millions):





2009
            
            
            2008Regulatory
      assets - currentRegulatory
      postretirement asset
            
            $
            20.6
            
            
            $
            23.3Deferred
      gas costs
            
            
            24.9
            
            
            
            31.5Other
            
            
            5.4
            
            
            
            -Regulatory
      assets - noncurrentRegulatory
      postretirement asset
            
            
            195.4
            
            
            
            232.3Deferred
      gas costs
            
            
            4.4
            
            
            
            22.5Deferred
      environmental costs
            
            
            18.1
            
            
            
            19.5Unamortized
      losses on reacquired debt
            
            
            14.2
            
            
            
            15.4Other
            
            
            8.9
            
            
            
            6.2$
            291.9
            
            
            $
            350.7Regulatory
      liabilities - currentRegulatory
      asset retirement liability
            
            $
            14.5
            
            
            $
            15.0Other
            
            
            2.7
            
            
            
            -Regulatory
      liabilities - noncurrentRegulatory
      asset retirement liability
            
            
            796.8
            
            
            
            751.7Regulatory
      income tax liability
            
            
            39.1
            
            
            
            46.3Other
            
            
            .8
            
            
            
            .8$
            853.9
            
            
            $
            813.8





All items
listed above are classified in Other on the Consolidated Balance Sheets, with
the exception of the noncurrent portion of the Regulatory asset retirement
liability, which is stated separately.





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
12 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.





Investments.The
company’s investments in marketable securities are categorized at the date of
acquisition as trading, held-to-maturity, or
available-for-sale.  Trading securities, which include money market
funds, are carried at fair value and are classified as current assets unless
held to satisfy a long-term obligation.  The company classifies money
market funds held by its non-U.S. subsidiaries as short-term investments and all
others are classified as cash equivalents.  Securities are categorized
as held-to-maturity when the company has the date positive intent and
ability to hold the securities to maturity.  Held-to-maturity
securities are included in either short-term or long-term investments based upon
their contractual maturity date.  The company carries held-to-maturity
securities at amortized cost, which approximates fair
value.  Available-for-sale securities are carried at fair value, with
unrealized gains and losses, net of tax, reported in common equity as a
component of accumulated other comprehensive
income.  Available-for-sale securities are classified as noncurrent
assets unless the intent is to sell the security within 12
months.  The specific identification method is used to determine
realized gains or losses on the sale of marketable securities.





Equity
investments.  The company invests in partnerships and limited
liability companies that are accounted for under the equity
method.  Related investment balances classified as long-term
investments at December 31, 2009 and 2008 were $99.6 million and $107.5 million,
respectively, and include $84.8 million and $88.0 million at December 31, 2009
and 2008, respectively, related to Triton.









Table of Contents





Goodwill.  Goodwill
is the excess cost of an acquired business over the fair value of assets
acquired and liabilities assumed in a business combination.  Tropical
Shipping had goodwill of $20.9 million and $19.0 million at December 31, 2009
and 2008, respectively.  The increase in goodwill from December 31,
2008 to December 31, 2009 is due primarily to an acquisition in the fourth
quarter of 2009.  Nicor Services had goodwill of $4.0 million at both
December 31, 2009 and 2008.  Goodwill is classified in noncurrent
other assets and is tested for impairment annually.





Asset retirement
obligations.  The company records legal obligations associated
with the retirement of long-lived assets in the period in which the obligation
is incurred, if sufficient information exists to reasonably estimate the fair
value of the obligation.  When an asset retirement obligation is
recorded as a liability, a corresponding amount is recorded as an asset
retirement cost (an additional cost of the long-lived
asset).  Subsequently, the asset retirement obligation is accreted to
the expected settlement amount and the asset retirement cost is depreciated over
the life of the asset on a straight-line basis.





Subject
to rate regulation, Nicor Gas continues to accrue all future asset retirement
costs through depreciation over the lives of its assets even when a legal
retirement obligation does not exist or insufficient information exists to
determine the fair value of the obligation.  Amounts charged to
depreciation by Nicor Gas for future retirement costs, in excess of the normal
depreciation and accretion described above, are classified as a regulatory asset
retirement liability.





Derivative
instruments.Cash flows from derivative
instruments are recognized in the Consolidated Statements of Cash Flows, and
gains and losses are recognized in the 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 Consolidated Statement of Operations, 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 operating income.





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.





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 the current period 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










Table of Contents





instruments
at fair value and generally cannot 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 of loss deferred
at settlement in accumulated other comprehensive income is being amortized to
interest expense on a straight-line basis over the remaining life of the
bonds.





Credit risk and
concentrations.  Nicor’s major subsidiaries have diversified
customer bases and the company believes that it maintains prudent credit
policies which mitigate customer receivable, supplier performance and derivative
counterparty credit risk.The company is
exposed to credit risk in the event a customer or supplier defaults on a
contract to pay for or deliver product at agreed-upon terms and conditions, or a
counterparty to a derivative instrument defaults on a settlement or otherwise
fails to perform under contractual terms.  To manage this risk, the
company has established procedures to determine and monitor the creditworthiness
of counterparties, to seek guarantees or collateral back-up in the form of cash
or letters of credit, to acquire credit insurance in certain instances, and to
limit its exposure to any one counterparty.  Nicor also, in some
instances, enters into netting arrangements to mitigate counterparty credit
risk.  Credit losses are accrued when probable and reasonably
estimable.





On
February 2, 2010, the ICC approved a bad debt rider that was filed for in 2009
by Nicor Gas.  The bad debt rider provides for the recovery from (or
refund to) customers of the difference between the actual bad debt expense Nicor
Gas incurs on an annual basis and the benchmark bad debt expense included in its
rates for the respective year.





Revenue
recognition.  Gas distribution revenues are recognized when
natural gas is delivered to customers.  In accordance with ICC
regulations and subject to its review, the cost of gas delivered is charged to
customers without markup, although the timing of cost recovery can
vary.  Temporary under and overcollections of gas costs are deferred
or accrued as a regulatory asset or liability with a corresponding decrease or
increase to cost of gas, respectively.





Nicor Gas
accrues revenues for estimated deliveries to customers from the date of their
last bill until the balance sheet date.  Receivables include accrued
unbilled revenues of $141.0 million and $199.1 million at December 31, 2009 and
2008, respectively, related primarily to gas distribution
operations.





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 2009, 2008 and 2007 were $148.1 million, $171.1 million
and $148.7 million, respectively.





In the
shipping business, revenues and related delivery costs are recognized at the
time vessels depart from port.  While alternative methods of
recognizing shipping revenue and related costs exist, the difference between
those methods and the company’s policy does not have a material impact on
operating results.





Nicor
Enerchange presents revenue from natural gas sales, cost of sales, and related
derivative instruments, which are entered into for trading purposes, on a net
basis.  For Nicor Solutions and Nicor Advanced Energy, revenue is
recognized on their 12-month utility-bill management contracts as the lesser of
cumulative earned or cumulative billed amounts.  Nicor Services
recognizes revenue for warranty and repair contracts on a straight-line basis
over the contract term.  Revenue for maintenance services is
recognized at the time such services are performed.









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Repair and maintenance
expense.  Nicor records expense for repair and maintenance
costs as incurred.  The shipping business uses the direct expensing
method for planned major maintenance related to dry-docking and major repairs of
its owned vessels.





Legal defense
costs.  The company accrues estimated legal defense costs
associated with loss contingencies in the period in which it determines that
such costs are probable of being incurred and are reasonably
estimable.





Depreciation.  Property,
plant and equipment are depreciated over estimated useful lives on a
straight-line basis.  The gas distribution business composite
depreciation rate is 4.1 percent, which includes all estimated future retirement
costs.  Upon the retirement of these assets, no gain or loss is
recognized.  In the shipping business, the estimated useful lives of
vessels range from 20 to 25 years.





Income
taxes.Deferred income taxes are provided at the current
statutory income tax rate for temporary differences between the tax basis
(adjusted for related unrecognized tax benefits, if any) of an asset or
liability and its reported amount in the financial statements.  In the
gas distribution business, investment tax credits and regulatory income tax
liabilities for deferred taxes in excess of the current statutory rate are
amortized to income over the lives of the related properties.





A
deferred income tax liability is not recorded on undistributed foreign earnings
that are expected in management’s judgment to be indefinitely reinvested
offshore.  Management considers, among other factors, actual cash
investments offshore as well as projected cash requirements in making this
determination.  Changes in management’s investment or repatriation
plans or circumstances could result in a different deferred income tax
liability.





The
company records unrecognized tax benefits based on a recognition threshold and
valuation method to recognize and measure an income tax position taken, or
expected to be taken, in a tax return.  The evaluation is based on a
two-step approach.  The first step requires the company to evaluate
whether the tax position would “more likely than not,” based upon its technical
merits, be sustained upon examination by the appropriate taxing
authority.  The second step requires the tax position to be measured
at the largest amount of tax benefit that is greater than 50 percent likely of
being realized upon settlement.  The company recognizes accrued
interest related to unrecognized tax benefits in interest expense and interest
income.  Penalties, if any, are recorded in operating
expense.





2.      NEW
ACCOUNTING PRONOUNCEMENT





Fair value measurements. 
Effective January 1, 2008, the company adopted the new requirements for fair
value measurements and disclosures.  These requirements define fair
value, establish a consistent framework for measuring fair value and expand
disclosure requirements about fair value.  These new requirements do
not establish any new fair value measurements, but rather provide guidance on
how to perform fair value measurements as required or permitted under other
accounting standards.  They also provide for immediate recognition of
trade-date gains and losses related to certain derivative transactions whose
fair value has been determined using unobservable market
inputs.  Nicor elected the one-year deferral allowed by the new
requirementsfor
certain nonfinancial assets and liabilities.  As it applies to Nicor,
the deferral pertains to fair value measurements for business combinations,
asset retirement obligations and impairment testing of goodwill and other
intangible assets.  The effect of adopting these new requirements in
2009 and 2008 was not material to Nicor’s results of operations or financial
condition.








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3.      INVESTMENTS





The
company’s investments at December 31 are as follows (in millions):





2009
            
            
            2008Money
      market funds
            
            $
            121.1
            
            
            $
            81.2Corporate
      bonds
            
            
            1.3
            
            
            
            4.8Certificates
      of deposit
            
            
            .7
            
            
            
            .6Other
      investments
            
            
            4.1
            
            
            
            2.0$
            127.2
            
            
            $
            88.6





Investments
are classified on the Consolidated Balance Sheets at December 31 as follows (in
millions):





2009
            
            
            2008Cash
      equivalents
            
            $
            43.8
            
            
            $
            15.3Short-term
      investments
            
            
            78.0
            
            
            
            69.5Long-term
      investments
            
            
            5.4
            
            
            
            3.8$
            127.2
            
            
            $
            88.6





Investments
categorized as trading (including money market funds) totaled $122.7 million and
$82.2 million at December 31, 2009 and 2008, respectively.  Corporate
bonds are categorized as held-to-maturity.  The contractual maturities
of the held-to-maturity corporate bonds at December 31, 2009 are as follows (in
millions):





Years to
maturity


Less
              than
      1year
            
            
            1-5years
            
            
            Total$
            .5
            
            
            $
            .8
            
            
            $
            1.3





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 $3.1 million and $1.6 million
at December 31, 2009 and 2008, respectively.





Gains or
losses included in earnings resulting from the sale of investments were not
significant.





4.      RESTRICTED
SHORT-TERM INVESTMENTS





In 2007,
restricted short-term investments totaling $10 million were released as part of
a final settlement with the SEC commissioners on claims of securities law
violations relating to the PBR plan.  The company neither admitted nor
denied any wrongdoing in the matter.  In 2006, Nicor recorded a $10
million charge (non-deductible for tax purposes) as part of a tentative
settlement and deposited the funds in an escrow account pending the review and
final approval of the tentative settlement by the SEC
commissioners.









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5.      ASSET
RETIREMENT OBLIGATIONS





Nicor
records AROs associated with services, mains and other components of the
distribution system and the buildings in its gas distribution business and with
certain equipment in its shipping business.  Nicor has not recognized
an ARO associated with gathering lines and storage wells in its gas distribution
business because there is insufficient company or industry retirement history to
reasonably estimate the fair value of the obligation.





The
following table presents a reconciliation of the beginning and ending ARO for
the years ended December 31 (in millions):





2009
            
            
            2008Beginning
      of period
            
            $
            187.2
            
            
            $
            179.4Liabilities
      incurred during the period
            
            
            2.1
            
            
            
            2.0Liabilities
      settled during the period
            
            
            (6.3
            )
            
            
            (3.6
            )Accretion
            
            
            10.8
            
            
            
            10.2Revision
      in estimated cash flows
            
            
            (1.6
            )
            
            
            (.8
            )End
      of period
            
            $
            192.2
            
            
            $
            187.2





Substantially
all of the ARO is classified as a noncurrent liability.





6.      GAS
IN STORAGE





Gas in
storage at December 31 included natural gas inventory of the following
subsidiaries (in millions):





2009
            
            
            2008Nicor
      Gas
            
            $
            104.7
            
            
            $
            173.7Nicor
      Enerchange
            
            
            32.5
            
            
            
            34.8$
            137.2
            
            
            $
            208.5





Nicor
Gas’ inventory is carried at cost on a LIFO basis.  Nicor Enerchange’s
inventory is carried at the lower of weighted-average cost or
market.





Based on
the average cost of gas purchased in December 2009 and 2008, the estimated
replacement cost of Nicor Gas’ inventory at December 31, 2009 and 2008 exceeded
the LIFO cost by $288.5 million and $297.7 million, respectively.





During
2009, Nicor Gas liquidated 8.8 Bcf of its LIFO-based inventory at an average
cost per Mcf of $7.83.  For gas purchased in 2009, the company’s
average cost per Mcf was $3.89 lower than the average LIFO liquidation
rate.  Applying LIFO cost in valuing the liquidation, as opposed to
using the average gas purchase cost, had the effect of increasing the cost of
gas in 2009 by $34.3 million.





During
2007, Nicor Gas liquidated 7 Bcf of its LIFO-based inventory at an average cost
per Mcf of $5.81.  For gas purchased in 2007, the company’s average
cost per Mcf was $0.93 higher than the average LIFO liquidation
rate.  Applying LIFO cost in valuing the liquidation, as opposed to
using the average gas purchase cost, had the effect of decreasing the cost of
gas in 2007 by $6.4 million.





There was
no liquidation of LIFO layers during 2008.









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Since the
cost of gas, including inventory costs, is charged to customers without markup,
subject to ICC review, the LIFO liquidation in 2009 and 2007 had no impact on
net income.





Nicor
Enerchange recorded charges of $2.8 million, $8.3 million and $5.0 million in
2009, 2008 and 2007, respectively, resulting from lower of cost or market
valuations.





7.      SHORT-TERM
AND LONG-TERM DEBT





In July
2009, Nicor Gas, through a private placement, issued $50 million First Mortgage
Bonds at 4.70 percent, due in 2019.  In February 2009, the $50 million
5.37 percent First Mortgage Bond series matured and was retired.





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.





Substantially
all gas distribution properties are subject to the lien of the indenture
securing Nicor Gas’ First Mortgage Bonds.





In May
2009, Nicor Gas established a $550 million, 364-day revolver, expiring May 2010,
to replace the $600 million, nine-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 $494.0
million and $739.9 million of commercial paper outstanding with a
weighted-average interest rate of 0.1 percent and 0.4 percent at December 31,
2009 and 2008, respectively.





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





The
company incurred total interest expense of $38.8 million, $40.3 million, and
$38.2 million in 2009, 2008 and 2007, respectively.  Interest expense
is reported net of amounts capitalized.  Interest expense capitalized
for the years ended December 31, 2009, 2008 and 2007 was $0.1 million, $0.2
million and $0.3 million, respectively.





Nicor Gas
may not extend cash advances to an affiliate if Nicor Gas has any outstanding
short-term borrowings.  Nicor Gas’ practice also provides that the
balance of cash deposits or advances from Nicor Gas to an affiliate at any time
shall not exceed the unused balance of funds actually available to that
affiliate under its existing bank credit agreements or its commercial paper
facilities with unaffiliated third parties.  Nicor Gas’ positive cash
deposits, if any, may be applied by Nicor to offset negative balances of other
Nicor subsidiaries and vice versa.





8.      FAIR
VALUE MEASUREMENTS





The fair
value of assets and liabilities that are measured on a recurring basis are
categorized in the table below (in millions) into three broad levels (with Level
1 considered the most reliable) based upon the valuation inputs.









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Quoted
      prices in active markets
            
            
            Significant
      observable inputs
            
            
            Significant
      unobservable inputs(Level
      1)
            
            
            (Level
      2)
            
            
            (Level
      3)
            
            
            TotalDecember
      31, 2009AssetsMoney
      market funds
            
            $
            121.1
            
            
            $
            -
            
            
            $
            -
            
            
            $
            121.1Derivatives
            
            
            14.6
            
            
            
            16.8
            
            
            
            8.8
            
            
            
            40.2$
            135.7
            
            
            $
            16.8
            
            
            $
            8.8
            
            
            $
            161.3LiabilitiesDerivatives
            
            $
            54.2
            
            
            $
            29.3
            
            
            $
            3.8
            
            
            $
            87.3December
      31, 2008AssetsMoney
      market funds
            
            $
            81.2
            
            
            $
            -
            
            
            $
            -
            
            
            $
            81.2Derivatives
            
            
            33.8
            
            
            
            21.7
            
            
            
            8.5
            
            
            
            64.0$
            115.0
            
            
            $
            21.7
            
            
            $
            8.5
            
            
            $
            145.2LiabilitiesDerivatives
            
            $
            161.4
            
            
            $
            28.0
            
            
            $
            6.9
            
            
            $
            196.3





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 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 for the periods ended December 31 (in
millions):




2009
            
            
            2008Beginning
      of period
            
            $
            1.6
            
            
            $
            8.2Net
      realized/unrealized gains (losses)Included
      in regulatory assets and liabilities
            
            
            (3.5
            )
            
            
            5.5Included
      in net income
            
            
            15.2
            
            
            
            6.4Settlements,
      net of purchases and issuances
            
            
            (2.0
            )
            
            
            (13.8
            )Transfers
      in and/or (out) of Level 3
            
            
            (6.3
            )
            
            
            (4.7
            )End
      of period
            
            $
            5.0
            
            
            $
            1.6Net
      unrealized gains (losses) included in net income
              relating
      toderivatives
      still held at December 31
            
            $
            5.0
            
            
            $
            1.8


Net
realized/unrealized gains (losses) included in net income are attributable to
Nicor Enerchange and are classified as operating revenues.









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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 at December 31 (in
millions):





2009
            
            
            2008AssetsMargin
      accounts – derivative instruments
            
            $
            46.1
            
            
            $
            134.4Other
      – noncurrent
            
            
            13.8
            
            
            
            29.3LiabilitiesOther
      – current
            
            $
            -
            
            
            $
            .1





In
addition, the recorded amount of restricted short and long-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 December 31, 2009 and 2008 was
$500 million.  Based on quoted market interest rates, the fair value
of the company’s First Mortgage Bonds was approximately $543 million and $520
million at December 31, 2009 and 2008, respectively.





9.      DERIVATIVE
INSTRUMENTS





A
description of the company’s objectives and strategies for using derivative
instruments, and related accounting policies, is included in Note 1 – Accounting
Policies – Derivative instruments and Credit risk and
concentrations.  All derivatives recognized on the Consolidated
Balance Sheets are measured at fair value, as described in Note 8 – Fair Value
Measurements.





Consolidated Balance
Sheets.  Derivative assets and liabilities as of December 31,
2009 are shown in the table below (in millions):





Derivatives
      designated
              as
      hedging instruments
            
            
            Derivatives
      not designated as hedging instrumentsAssetsDerivative
      instruments
            
            $
            .3
            
            
            $
            30.6Other
      – noncurrent
            
            
            -
            
            
            
            9.3$
            .3
            
            
            $
            39.9LiabilitiesDerivative
      instruments
            
            $
            1.0
            
            
            $
            71.3Other
      – noncurrent
            
            
            -
            
            
            
            15.0$
            1.0
            
            
            $
            86.3





Volumes.  As of
December 31, 2009, Nicor Gas held outstanding derivative contracts of
approximately 64 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 1.3 Bcf as of December 31, 2009.  The above volumes exclude
contracts, such as variable-priced contracts and basis swaps, which are
accounted for as derivatives but whose fair values are not directly impacted by
changes in commodity prices.







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Consolidated Statements of Operations– 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 Consolidated Statements of
Operations.  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 operating income as shown in the
following table for the year ended December 31, 2009 (in millions):





Pretax
      gain (loss) recognized in other comprehensive
              income
              (Effective
      portion)
            
            
            Location
            
            
            Pretax
      gain
              (loss)
      reclassified
              from
      accumulated
              other
      comprehensive income into income (Effective portion)$
            (3.1)
            
            
            Operating
      revenues
            
            
            $
            (11.3)(4.0)
            
            
            Operating
      and maintenance
            
            
            
            (8.4)$
            (7.1)
            
            
            
            
            
            $
            (19.7)





As of
December 31, 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 24 months.  For
these hedges, the total pretax loss deferred in accumulated other comprehensive
income at December 31, 2009 was $0.9 million (or $0.5 million after taxes),
substantially all of which is expected to be reclassified to earnings within the
next 12 months.





Consolidated Statements of Operations
– 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
effects of these items are summarized in the table below for the year ended
December 31, 2009 (in millions):





Location
            
            Net
      gain (loss) recognized in incomeOperating
      revenues
            
            $
            (17.1
            )Operating
      and maintenance
            
            
            (1.9
            )$
            (19.0
            )





Nicor
Gas’ derivatives used 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 $166.1 million were recognized in
regulatory assets for the year ended December 31, 2009.





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 December 31, 2009, for agreements with such
features, derivative contracts with liability fair values totaled approximately
$20 million, for which the company had posted no collateral to its
counterparties.  If it was assumed that the










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company
had to post the maximum contractually specified collateral or settle the
liability, the company would have been required to pay approximately $19
million.





10.   INCOME
TAXES





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





2009
            
            
            2008
            
            
            2007CurrentFederal
            
            $
            52.1
            
            
            $
            42.1
            
            
            $
            47.8State
            
            
            8.6
            
            
            
            6.5
            
            
            
            7.460.7
            
            
            
            48.6
            
            
            
            55.2DeferredFederal
            
            
            2.9
            
            
            
            (1.7
            )
            
            
            (5.3
            )State
            
            
            2.0
            
            
            
            (1.7
            )
            
            
            .74.9
            
            
            
            (3.4
            )
            
            
            (4.6
            )Amortization
      of investment tax credits, net
            
            
            (.8
            )
            
            
            (1.4
            )
            
            
            (2.1
            )Foreign
      taxes
            
            
            .3
            
            
            
            .5
            
            
            
            .6Income
      tax expense
            
            $
            65.1
            
            
            $
            44.3
            
            
            $
            49.1





The
temporary differences which gave rise to the net deferred tax liability at
December 31 were as follows (in millions):




2009
            
            
            2008Deferred
      tax liabilitiesProperty,
      plant and equipment
            
            $
            327.5
            
            
            $
            302.2Investment
      in partnerships
            
            
            85.0
            
            
            
            108.4Other
            
            
            38.0
            
            
            
            36.3450.5
            
            
            
            446.9Deferred
      tax assetsOther
            
            
            78.0
            
            
            
            92.6Net
      deferred tax liability
            
            $
            372.5
            
            
            $
            354.3





For
purposes of computing deferred income tax assets and liabilities, temporary
differences associated with regulatory assets and liabilities have been netted
against related offsetting temporary differences.





Differences
between the federal statutory rate and the effective combined federal and state
income tax rate are shown below:




2009
            
            
            2008
            
            
            2007Federal
      statutory rate
            
            
            35.0
            %
            
            
            35.0
            %
            
            
            35.0
            %State
      income taxes, net
            
            
            3.7
            
            
            
            2.2
            
            
            
            3.1Tax
      credits
            
            
            (1.5
            )
            
            
            (2.8
            )
            
            
            (2.8
            )Amortization
      of regulatory income tax liability
            
            
            (.6
            )
            
            
            (.9
            )
            
            
            (.9
            )Undistributed
      foreign earnings
            
            
            (3.4
            )
            
            
            (5.3
            )
            
            
            (6.9
            )Other
            
            
            (.8
            )
            
            
            (1.2
            )
            
            
            (.9
            )Effective
      combined federal and state income tax rate
            
            
            32.4
            %
            
            
            27.0
            %
            
            
            26.6
            %





The
higher effective income tax rate in 2009 compared to 2008 reflects higher pretax
income in 2009 (which causes a higher effective income tax rate since permanent
differences and tax credits are a smaller share of pretax income), as well as a
decrease in untaxed foreign earnings and the absence of the 2008 tax reserve
adjustments.  The higher effective income tax rate in 2008 compared to
2007 reflects a decrease in untaxed foreign earnings in 2008, offset, in part,
by tax reserve adjustments.









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The
company's major tax jurisdictions include the United States and Illinois, with
tax returns examined by the IRS and IDR, respectively.  At December
31, 2009, the years that remain subject to examination include years beginning
after 2005 for the IRS and years beginning after 2003 for the
IDR.  For tax positions within years that remain subject to
examination, management has recognized the largest amount of tax benefit that it
believes is greater than 50 percent likely of being realized upon settlement
with the taxing authority.





A
reconciliation of the beginning and ending amounts of the liability for
unrecognized tax benefits is as follows (in millions):




2009
            
            
            2008
            
            
            2007Balance
      at January 1
            
            $
            10.8
            
            
            $
            5.7
            
            
            $
            4.8Additions
      based on tax positions related to the current year
            
            
            1.7
            
            
            
            .9
            
            
            
            1.4Additions
      for tax positions of prior years
            
            
            .3
            
            
            
            7.8
            
            
            
            .1Reductions
      for tax positions of prior years
            
            
            (.1
            )
            
            
            (4.0
            )
            
            
            (.3
            )Settlements
            
            
            (3.1
            )
            
            
            .4
            
            
            
            (.3
            )Balance
      at December 31
            
            $
            9.6
            
            
            $
            10.8
            
            
            $
            5.7





The
decrease in the liability for unrecognized tax benefits in 2009 when compared to
the prior year is due primarily to the settlement of an item concerning the
timing of inclusion in taxable income of recoveries for environmental clean-up
expenditures, partially offset by other settlements, adjustments and
accruals.  The increase in the liability for unrecognized tax benefits
in 2008 when compared to the prior year is due primarily to an item concerning
the timing of inclusion in taxable income of recoveries for environmental
clean-up expenditures, partially offset by settlements and adjustments to
estimates.





At
December 31, 2009, 2008 and 2007, there were $4.6 million, $2.5 million and $5.7
million, respectively, of unrecognized tax benefits that if recognized, would
affect the company’s annual effective tax rate.





If
settlements vary from these estimated amounts recognized for unrecognized tax
benefits, the company does not anticipate any adjustment would result in a
material change to its financial position.  However, the company
believes that it is reasonably possible that a change to its liability for
unrecognized tax benefits could occur within 12 months, potentially increasing
by $2 million or decreasing by $10 million its unrecognized tax
benefit.





The
company recognized net interest expense (income) on tax matters of approximately
$1 million, ($3) million and ($6) million in 2009, 2008 and 2007,
respectively.  In the fourth quarter of 2007, Nicor recorded the
effects of a settlement with the IRS related to the timing of certain deductions
taken as part of a change in accounting method on its 2002 tax
return.  As a result of the settlement, Nicor reduced its reserve for
interest payable by $9.6 million.  The company had approximately $5
million of interest receivable at December 31, 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.  Amounts recognized in operating expense
related to penalties were insignificant.





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 expected to be indefinitely reinvested offshore, no
deferred income tax expense would be recorded by the company.  For the
years ended December 31, 2009, 2008 and 2007, income tax expense has not been
provided on approximately $19 million, $23 million and $39 million,
respectively, of foreign company shipping earnings.








Table of Contents


At
December 31, 2009, Nicor has approximately $12 million of deferred income tax
liabilities related to approximately $34 million of cumulative undistributed
earnings of its foreign subsidiaries.  Nicor has not recorded deferred
income taxes of approximately $58 million on approximately $165 million of
cumulative undistributed foreign earnings.





The
balance of unamortized investment tax credits at December 31, 2009 and 2008 was
$25.2 million and $26.0 million, respectively.





11.   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 the highest average salary for management employees and job
level for collectively bargained employees (referred to as pension
bands).  The benefit obligation related to collectively bargained
benefits considers the company’s past practice of regular benefit
increases.  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
following table summarizes the changes in the funded status of the plans and the
related assets (liabilities) recognized in the Consolidated Balance Sheets as of
December 31 (in millions):





Pension
      benefits
            
            
            Health
      care and
              other
      benefits2009
            
            
            
            2008*
            
            
            
            2009
            
            
            
            2008*Change
      in benefit obligationBenefit
      obligation at beginning of period
            
            $
            270.2
            
            
            $
            263.2
            
            
            $
            207.7
            
            
            $
            196.9Service
      cost
            
            
            8.6
            
            
            
            10.7
            
            
            
            2.2
            
            
            
            2.7Interest
      cost
            
            
            16.5
            
            
            
            19.9
            
            
            
            12.1
            
            
            
            15.0Actuarial
      loss (gain)
            
            
            22.3
            
            
            
            2.2
            
            
            
            (2.1
            )
            
            
            3.9Participant
      contributions
            
            
            -
            
            
            
            -
            
            
            
            1.2
            
            
            
            1.5Medicare
      Part D reimbursements
            
            
            -
            
            
            
            -
            
            
            
            1.1
            
            
            
            2.2Benefits
      paid
            
            
            (12.0
            )
            
            
            (25.8
            )
            
            
            (12.8
            )
            
            
            (14.5
            )Other
            
            
            -
            
            
            
            -
            
            
            
            1.8
            
            
            
            -Benefit
      obligation at end of period
            
            
            305.6
            
            
            
            270.2
            
            
            
            211.2
            
            
            
            207.7





Change
      in plan assetsFair
      value of plan assets at beginning of period
            
            
            306.6
            
            
            
            478.7
            
            
            
            -
            
            
            
            -Actual
      return on plan assets
            
            
            68.9
            
            
            
            (146.3
            )
            
            
            -
            
            
            
            -Employer
      contributions
            
            
            -
            
            
            
            -
            
            
            
            11.6
            
            
            
            13.0Participant
      contributions
            
            
            -
            
            
            
            -
            
            
            
            1.2
            
            
            
            1.5Benefits
      paid
            
            
            (12.0
            )
            
            
            (25.8
            )
            
            
            (12.8
            )
            
            
            (14.5
            )Fair
      value of plan assets at end of period
            
            
            363.5
            
            
            
            306.6
            
            
            
            -
            
            
            
            -Funded
      status
            
            $
            57.9
            
            
            $
            36.4
            
            
            $
            (211.2
            )
            
            $
            (207.7
            )





Amounts
      recognized in the Consolidated Balance SheetsNoncurrent
      assets
            
            $
            57.9
            
            
            $
            36.4
            
            
            $
            -
            
            
            $
            -Current
      liabilities
            
            
            -
            
            
            
            -
            
            
            
            (11.5
            )
            
            
            (11.1
            )Noncurrent
      liabilities
            
            
            -
            
            
            
            -
            
            
            
            (199.7
            )
            
            
            (196.6
            )Total
      recognized
            
            $
            57.9
            
            
            $
            36.4
            
            
            $
            (211.2
            )
            
            $
            (207.7
            )





* Amounts
for 2008 reflect 15 months of activity for the transition to a December 31
measurement date.









Table of Contents


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 net 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.





Postretirement
benefit costs (credits) recorded within net regulatory assets and accumulated
other comprehensive income, and changes thereto, were as follows (in
millions):





Net
      regulatory assets
            
            
            Accumulated
      other comprehensive income
            
            
            TotalPension
      benefits
            
            
            Health
      care and other benefits
            
            
            Pension
      benefits
            
            
            Health
      care and other benefits
            
            
            Pension
      benefits
            
            
            Health
      care and other benefitsJanuary
      1, 2008
            
            $
            (6.4
            )
            
            $
            75.1
            
            
            $
            (.3
            )
            
            $
            4.0
            
            
            $
            (6.7
            )
            
            $
            79.1Current
      year actuarial loss
            
            
            188.4
            
            
            
            3.7
            
            
            
            9.9
            
            
            
            .2
            
            
            
            198.3
            
            
            
            3.9Amortization
      of actuarial loss
            
            
            -
            
            
            
            (4.4
            )
            
            
            -
            
            
            
            (.2
            )
            
            
            -
            
            
            
            (4.6
            )Amortization
      of prior service (cost) benefit
            
            
            (.3
            )
            
            
            .1
            
            
            
            -
            
            
            
            -
            
            
            
            (.3
            )
            
            
            .1Actuarial
      loss and prior service cost for October 1, 2008 – December 31,
      2008
            
            
            (.1
            )
            
            
            (1.1
            )
            
            
            -
            
            
            
            (.1
            )
            
            
            (.1
            )
            
            
            (1.2
            )December
      31, 2008
            
            
            181.6
            
            
            
            73.4
            
            
            
            9.6
            
            
            
            3.9
            
            
            
            191.2
            
            
            
            77.3Current
      year actuarial gain
            
            
            (20.3
            )
            
            
            (.3
            )
            
            
            (1.1
            )
            
            
            -
            
            
            
            (21.4
            )
            
            
            (.3
            )Amortization
      of actuarial loss
            
            
            (14.5
            )
            
            
            (4.3
            )
            
            
            (.8
            )
            
            
            (.3
            )
            
            
            (15.3
            )
            
            
            (4.6
            )Amortization
      of prior service (cost) benefit
            
            
            (.4
            )
            
            
            .1
            
            
            
            -
            
            
            
            -
            
            
            
            (.4
            )
            
            
            .1December
      31, 2009
            
            $
            146.4
            
            
            $
            68.9
            
            
            $
            7.7
            
            
            $
            3.6
            
            
            $
            154.1
            
            
            $
            72.5





The
balances as of December 31 relate primarily to unrecognized net actuarial
losses.





The
associated amounts in net regulatory assets and accumulated other comprehensive
income at December 31, 2009 that are expected to be amortized to net benefit
cost in 2010 are as follows (in millions):





Net
      regulatory assets
            
            
            Accumulated
      other comprehensive income
            
            
            TotalPension
      benefits
            
            
            Health
      care and other benefits
            
            
            Pension
      benefits
            
            
            Health
      care and other benefits
            
            
            Pension
      benefits
            
            
            Health
      care and other benefitsNet
      actuarial loss
            
            $
            11.3
            
            
            $
            3.9
            
            
            $
            .6
            
            
            $
            .2
            
            
            $
            11.9
            
            
            $
            4.1Net
      prior service cost
            
            
            .4
            
            
            
            .1
            
            
            
            -
            
            
            
            -
            
            
            
            .4
            
            
            
            .1$
            11.7
            
            
            $
            4.0
            
            
            $
            .6
            
            
            $
            .2
            
            
            $
            12.3
            
            
            $
            4.2







The
accumulated benefit obligation for pension benefits, a measure which excludes
the effect of salary and wage increases, was $269.1 million and $231.6 million
at December 31, 2009 and 2008, respectively.








Table of Contents


About
one-fourth of the net 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 benefit cost (credit) included
the following components (in millions):





Pension
      benefits
            
            
            Health
      care and
              other
      benefits2009
            
            
            2008
            
            
            2007
            
            
            2009
            
            
            2008
            
            
            2007Service
      cost
            
            $
            8.6
            
            
            $
            8.6
            
            
            $
            9.1
            
            
            $
            2.2
            
            
            $
            2.2
            
            
            $
            2.3Interest
      cost
            
            
            16.5
            
            
            
            15.9
            
            
            
            15.1
            
            
            
            12.1
            
            
            
            12.0
            
            
            
            10.9Expected
      return on plan assets
            
            
            (25.2
            )
            
            
            (39.9
            )
            
            
            (36.0
            )
            
            
            -
            
            
            
            -
            
            
            
            -Recognized
      net actuarial loss
            
            
            15.3
            
            
            
            -
            
            
            
            -
            
            
            
            4.6
            
            
            
            4.6
            
            
            
            4.7Amortization
      of prior service cost
            
            
            .4
            
            
            
            .3
            
            
            
            .5
            
            
            
            (.1
            )
            
            
            (.1
            )
            
            
            (.1
            )Net
      benefit cost (credit)
            
            $
            15.6
            
            
            $
            (15.1
            )
            
            $
            (11.3
            )
            
            $
            18.8
            
            
            $
            18.7
            
            
            $
            17.8







Assumptions
used to determine benefit obligations included the following:





Pension
      benefits
            
            
            Health
      care and
              other
      benefits2009
            
            
            2008
            
            
            2009
            
            
            2008Discount
      rate
            
            
            5.45
            %
            
            
            6.35
            %
            
            
            5.75
            %
            
            
            6.00
            %Rate
      of compensation increase
            
            
            3.75
            
            
            
            3.75
            
            
            
            3.75
            
            
            
            3.75Pension
      band increase
            
            
            2.00
            
            
            
            3.00
            
            
            
            -
            
            
            
            -





The 2009
and 2008 discount rates for each plan were determined by performing a cash flow
matching study using the Citigroup Pension Discount Curve.  The
Citigroup Pension Discount Curve is constructed from a Treasury yield curve and
adjusted by adding a corporate bond spread.  The corporate bond spread
is developed from a large pool of high quality corporate bonds and mitigates the
risks associated with selecting individual corporate bonds whose values may not
be representative of the broader market.





Assumptions
used to determine net benefit cost for the years ended December 31 included the
following:





Pension
      benefits
            
            
            Health
      care and other benefits2009
            
            
            2008
            
            
            2007
            
            
            2009
            
            
            2008
            
            
            2007Discount
      rate
            
            
            6.35
            %
            
            
            6.25
            %
            
            
            5.75
            %
            
            
            6.00
            %
            
            
            6.25
            %
            
            
            5.75
            %Expected
      return on assets
            
            
            8.50
            
            
            
            8.50
            
            
            
            8.50
            
            
            
            -
            
            
            
            -
            
            
            
            -Rate
      of compensation increase
            
            
            3.75
            
            
            
            3.75
            
            
            
            3.75
            
            
            
            3.75
            
            
            
            3.75
            
            
            
            3.75Pension
      band increase
            
            
            3.00
            
            
            
            3.00
            
            
            
            3.00
            
            
            
            -
            
            
            
            -
            
            
            
            -





Nicor Gas
establishes its expected long-term return on asset assumption by considering
historical and projected returns for each investment asset
category.  Projected returns are calculated with the assistance of
independent firms via probability-based models.  The company has
elected to apply this assumption to the fair value of plan assets, rather than
to a rolling-average fair value, in calculating the expected return on plan
assets component of net benefit cost.





Other
assumptions used to determine the health care benefit obligation were as
follows:





2009
            
            
            2008Health
      care cost trend rate
            
            
            8.0%
            
            
            
            8.5%Rate
      to which the cost trend rate is assumed to decline (the ultimate
      rate)
            
            
            5.0%
            
            
            
            5.0%Years
      to reach ultimate rate
            
            
            6
            
            
            
            7







Table of Contents





Other
assumptions used to determine the health care benefit cost for the years ended
December 31 were as follows:





2009
            
            
            2008
            
            
            2007Health
      care cost trend rate
            
            
            8.5%
            
            
            
            9.0%
            
            
            
            9.5%Rate
      to which the cost trend rate is assumed to decline (the ultimate
      rate)
            
            
            5.0%
            
            
            
            5.0%
            
            
            
            5.0%Years
      to reach ultimate rate
            
            
            7
            
            
            
            6
            
            
            
            5





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





Increase
      (decrease)
            
            
            Effect
              on
      net
              benefit
      cost
            
            
            Effect
              on
      benefit obligationHealth
      care cost trend rate
            
            
            1.0
            
            
            $
            1.2
            
            
            $
            17.2(1.0%)
            
            
            
            (1.0)
            
            
            
            (14.8)





The
Medicare Prescription Drug, Improvement and Modernization Act of 2003 continues
to provide a prescription drug benefit as well as a potential federal subsidy to
sponsors of certain retiree health care benefit plans whose prescription drug
benefits are actuarially equivalent to the Medicare Part D
benefit.  Nicor Gas has determined that the prescription drug benefits
of its plan are actuarially equivalent and accordingly has reflected the effects
of the subsidy in its determination of the benefit obligation and annual net
benefit cost.





The
company’s investment objective relating to pension plan assets is to provide a
total investment return which will allow the pension plan to meet its remaining
benefit obligations.  The company’s investment strategy is to diversify its
investments among asset classes in order to reduce risk.  Investment
performance is measured against a targeted rate of return which reflects the
asset allocation of the plan assets and an appropriate published index return
for each asset class.  The company will rebalance the investment
portfolio periodically if the actual asset allocation is significantly out of
tolerance from the target allocation.





The
following table sets forth the company’s current asset allocation target and
actual percentage of plan assets by major asset category as of December
31:




Target
            
            
            Percentage
      of plan assetsAsset
      category
            
            allocation
            
            
            2009
            
            
            2008Equity
      securities
            
            
            60%
            
            
            
            61%
            
            
            
            70%Fixed
      income securities
            
            
            40
            
            
            
            39
            
            
            
            30100%
            
            
            
            100%
            
            
            
            100%





In 2009,
the company transitioned its target allocation from a 69% equity, 31% fixed
income allocation to the target allocation shown above.  In addition,
the company adopted a long-duration, primarily corporate bond investment
strategy for the fixed income portion of the plan assets to improve duration
matching between plan assets and benefit obligations.





Equity
investments are comprised of certain common collective trusts which invest in
U.S. and international equity securities.  U.S. equity holdings are
diversified across the small, mid and large cap asset
classes.  International investments are diversified across countries
and capitalization size in order to maintain a broad market representation of
non-U.S. markets.








Table of Contents


Fixed
income investments are diversified across a broad range of investment grade
corporate bonds and other fixed income securities.  The fixed income
portfolio is targeted to maintain an average credit quality rating of at least
single-A and a weighted duration that approximates the duration of the expected
benefit obligations.





The table
below categorizes the fair value of pension plan assets (in millions) based upon
the valuation inputs described in Note 8 – Fair Value
Measurements.  There were no Level 3 inputs at December 31, 2009 and
2008.





Quoted
              prices
      in
              active
      markets
            
            
            Significant
      observable inputs(Level
      1)
            
            
            (Level
      2)
            
            
            TotalDecember
      31, 2009Equity securitiesDomestic
            
            $
            -
            
            
            $
            149.6
            
            
            $
            149.6International
            
            
            -
            
            
            
            72.9
            
            
            
            72.9Fixed income securitiesDebt
      securities
            
            
            -
            
            
            
            110.7
            
            
            
            110.7Other
            
            
            6.1
            
            
            
            24.2
            
            
            
            30.3$
            6.1
            
            
            $
            357.4
            
            
            $
            363.5December
      31, 2008Equity
      securitiesDomestic
            
            $
            -
            
            
            $
            165.4
            
            
            $
            165.4International
            
            
            -
            
            
            
            48.2
            
            
            
            48.2Fixed income securitiesDebt
      securities
            
            
            -
            
            
            
            93.0
            
            
            
            93.0$
            -
            
            
            $
            306.6
            
            
            $
            306.6





Other
fixed income securities are primarily comprised of government issued bonds and
cash and cash equivalents.





The
company does not expect to contribute to its pension plan in 2010 but does
expect to contribute about $12.9 million (before Medicare subsidies) to its
other postretirement benefit plan in 2010.  The following table sets
forth the gross benefit payments from the plans expected over the next 10 years
(in millions):





Twelve
      months
              ending
      December 31
            
            Pension
      benefits
            
            
            Health
      care and other benefits
            
            
            Expected
      Medicare subsidy2010
            
            $
            24.9
            
            
            $
            12.9
            
            
            $
            (1.4
            )2011
            
            
            23.1
            
            
            
            13.8
            
            
            
            (1.6
            )2012
            
            
            24.2
            
            
            
            14.5
            
            
            
            (1.7
            )2013
            
            
            24.5
            
            
            
            15.3
            
            
            
            (1.8
            )2014
            
            
            27.7
            
            
            
            15.9
            
            
            
            (1.9
            )2015-2019
            
            
            169.2
            
            
            
            89.5
            
            
            
            (10.2
            )







Nicor
also has a separate unfunded supplemental retirement plan and provides unfunded
postretirement health care and life insurance benefits to employees of
discontinued businesses.  These plans are noncontributory with defined
benefits.  Net plan expenses were $0.3 million, $0.3 million and $0.2
million in 2009, 2008 and 2007, respectively.  The projected benefit
obligation associated with these plans was $5.2 million and $5.9 million at
December 31, 2009 and 2008, respectively.








Table of Contents


The
company also sponsors defined contribution plans covering substantially all
employees.  These plans provide for employer matching
contributions.  The total cost of these plans was $7.8 million, $7.6
million and $7.2 million in 2009, 2008 and 2007, respectively.





12.   STOCK-BASED
COMPENSATION





Nicor has
a long-term incentive compensation plan that permits the granting of restricted
stock and  performance units to key executives and managerial
employees, as well as a stock deferral plan, an employee stock purchase plan and
directors’ stock-based compensation plans.





At
December 31, 2009, there was $4.2 million of total unrecognized compensation
cost related to all nonvested share-based compensation
arrangements.  That cost is expected to be recognized over a
weighted-average period of approximately 2 years.  The company
recognized compensation cost and related tax effects for all share-based
compensation arrangements for the years ended December 31 as follows (in
millions):




2009
            
            
            2008
            
            
            2007Operating
      and maintenance expense
            
            $
            5.2
            
            
            $
            2.9
            
            
            $
            1.7Income
      tax benefits
            
            
            2.1
            
            
            
            1.2
            
            
            
            .7





Cash
flows related to stock options for the years ended December 31 were as follows
(in millions):





2009
            
            
            2008
            
            
            2007Proceeds
      from the exercise of stock options
            
            $
            .3
            
            
            $
            1.7
            
            
            $
            8.2Associated
      income tax benefits realized
            
            
            -
            
            
            
            .1
            
            
            
            .9





The
difference between the proceeds from the exercise of stock options and the par
value of the stock is recorded within Paid-in capital on the Consolidated
Statements of Capitalization.





Restricted
stock.  Restricted stock represents shares of common stock that
generally vest based on continued employment at the end of a four-year
period.  Vesting can be accelerated due to certain events such as
retirement, change in control, death or disability.  The fair value of
the restricted stock is determined using the company’s closing stock price on
the grant date.  Compensation cost, measured using the grant date fair
value adjusted for a historical forfeiture rate, is recognized over the
requisite service period.





A summary
of the status of the company’s restricted stock and changes during the year
ended December 31, 2009 is as follows:




Weighted-Number
            
            
            average
      grant-of
      shares
            
            
            date
      fair valueNonvested
      at January 1, 2009
            
            
            132,450
            
            
            $
            39.79Granted
            
            
            73,197
            
            
            
            34.36Forfeited
            
            
            (452
            )
            
            
            33.78Nonvested
      at December 31, 2009
            
            
            205,195
            
            
            
            37.86







Performance
units.  Performance units represent cash payments which are
paid out based on a measure of relative total shareholder
return.  Performance units are earned at the end of a three-year
performance period depending on Nicor’s three-year total shareholder return
relative to the performance of other







Table of Contents


companies
in a predetermined utility industry peer group.  Units vest over
approximately three years, or upon becoming retirement eligible, one year or
more after the grant date.  The liability for the performance units is
adjusted to fair value each quarter-end, and compensation cost is ultimately
measured as the settlement date fair value (or cash payment).  Interim
fair values are estimated by discounting probability-weighted expected cash
flows.  The company paid $1.0 million, $0.4 million and $0.7 million
during the years ended December 31, 2009, 2008 and 2007, respectively, to settle
performance unit obligations.





Other.Among the
company’sother
stock-based compensation plans are liability awards that are re-measured to fair
value at the end of each period.  Such re-measurements can cause
fluctuations in the amount of recognized compensation expense.  The
company’s other stock-based compensation plans had an immaterial impact on net
income for the years ended December 31, 2009, 2008 and 2007.





13.   COMMON
STOCK





Changes in common
shares.  Changes in common shares outstanding are below (in
millions):





2009
            
            
            2008
            
            
            2007Beginning
      of year
            
            
            45.2
            
            
            
            45.1
            
            
            
            44.9Issued
            
            
            -
            
            
            
            .1
            
            
            
            .2End
      of year
            
            
            45.2
            
            
            
            45.2
            
            
            
            45.1





Shares
issued during 2008 and 2007 were due primarily to stock option
exercises.  There were no repurchases of common stock in 2009, 2008
and 2007 under the common stock repurchase program announced in
2001.





Dividend
restrictions.  Nicor has no contractual or regulatory
restrictions on the payment of dividends.  Nicor Gas is restricted by
regulation in the amount it can dividend or loan to
affiliates.  Dividends are allowed only to the extent of Nicor Gas’
retained earnings balance.





14.   MANDATORILY
REDEEMABLE PREFERRED STOCK





Voting.  Each share
of preferred stock, regardless of class, entitles the holder to one vote as to
matters considered at the company’s annual meeting of shareholders.





Mandatorily redeemable preferred
stock.In 2009 and 2007, Nicor redeemed 10,150 and 100 shares,
respectively, of 4.48 percent Mandatorily Redeemable Preferred Stock, $50 par
value, at an average redemption price of $46.43 and $43.00 per share,
respectively, plus accrued unpaid dividends.  There were 1,431 shares
of the 4.48 percent Series Mandatorily Redeemable Preferred Stock, $50 par
value, outstanding at December 31, 2009.





15.   BUSINESS
SEGMENT AND GEOGRAPHIC INFORMATION





Nicor is
a holding company that operates in three separately managed reportable business
segments: gas distribution, shipping and wholesale marketing.  The gas
distribution segment, Nicor’s principal business, serves 2.2 million customers
in a service territory that encompasses most of the northern third of Illinois,
excluding the city of Chicago.  The shipping segment transports
containerized freight between Florida, the eastern coast of Canada, the Bahamas
and the Caribbean region.  The shipping segment also includes amounts
related to cargo insurance coverage sold to its customers and other third
parties.  The wholesale marketing segment 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 purchases of natural gas supplies.







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Nicor’s
other businesses operate primarily in northern Illinois and include businesses
that market retail energy-related products and services to residential and small
business customers through Nicor Services, Nicor Solutions and Nicor Advanced
Energy.  They also include a 50-percent-owned natural gas pipeline
(Horizon Pipeline) with Natural Gas Pipeline Company of America and a previously
owned engineering and consulting firm (EN Engineering) with A. Epstein and Sons,
International, which was sold on March 31, 2009.  Financial
information about these other business segments is combined under the heading
“Other” on the table that follows.  Intersegment revenues on the table
are presented prior to elimination.





Gas
distribution revenues are comprised principally of natural gas sales bundled
with delivery, delivery-only (transportation) services and revenue taxes, as
follows (in millions):





2009
            
            
            2008
            
            
            2007Bundled
      sales
            
            $
            1,766.5
            
            
            $
            2,789.5
            
            
            $
            2,265.2Transportation
            
            
            169.7
            
            
            
            187.1
            
            
            
            155.9Revenue
      taxes
            
            
            150.3
            
            
            
            174.0
            
            
            
            149.6Other
            
            
            54.3
            
            
            
            56.3
            
            
            
            56.8$
            2,140.8
            
            
            $
            3,206.9
            
            
            $
            2,627.5





The
shipping segment’s vessels are under foreign registry, and its containers are
considered instruments of international trade.  Although the majority
of its long-lived assets are foreign owned and its revenues are derived from
foreign operations, the functional currency is generally the U.S.
dollar.





Nicor
management evaluates segment performance based on operating
income.  Intercompany billing for goods and services exchanged between
segments is based generally upon direct and indirect costs incurred, but in some
instances is based upon the prevailing tariff or market-based price of the
provider.





Intersegment
revenues include gas distribution revenues related to customers entering into
utility-bill management contracts with Nicor Solutions and wholesale marketing
revenues from the sale of natural gas to Nicor Advanced Energy.  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.  Nicor
Advanced Energy provides natural gas and related services on an unregulated
basis to residential and small commercial customers and purchases most of its
natural gas supplies from Nicor Enerchange.  Intersegment revenues are
eliminated in the consolidated financial statements.





Operating
income in the Corporate and eliminations column includes the following
items:


·
            Costs
      associated with Nicor’s other energy ventures’ utility-bill management
      contracts attributable to colder than normal weather in 2009 and 2008
      included in corporate and eliminations were $3.7 million and $6.2 million,
      respectively.  In 2007, there was no material weather impact
      related to other energy ventures’ utility-bill management
      contracts.  The weather impact of these contracts generally
      serves to partially offset the gas distribution segment’s weather
      risk.  This cost is recorded primarily at the corporate level as
      a result of an agreement between the parent company and certain of its
      subsidiaries.


·
            Legal
      cost recoveries of $3.1 million were recorded in corporate and
      eliminations in 2008.  The total recovery (from a counterparty
      with whom Nicor previously did business during the PBR timeframe) 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).





Financial
data by reportable segment is as follows (in millions):









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Nicor
      Inc.Other
      Energy Ventures
            
            
            CorporateGas
            
            
            
            
            
            Wholesale
            
            
            
            
            
            anddistribution
            
            
            Shipping
            
            
            marketing
            
            
            Other
            
            
            eliminations
            
            
            ConsolidatedOperating
      revenues2009External
      customers
            
            $
            2,097.7
            
            
            $
            352.6
            
            
            $
            15.2
            
            
            $
            186.6
            
            
            $
            -
            
            
            $
            2,652.1Intersegment
            
            
            43.1
            
            
            
            -
            
            
            
            35.3
            
            
            
            1.9
            
            
            
            (80.3
            )
            
            
            -2,140.8
            
            
            
            352.6
            
            
            
            50.5
            
            
            
            188.5
            
            
            
            (80.3
            )
            
            
            2,652.12008External
      customers
            
            
            3,135.8
            
            
            
            425.2
            
            
            
            24.1
            
            
            
            191.5
            
            
            
            -
            
            
            
            3,776.6Intersegment
            
            
            71.1
            
            
            
            -
            
            
            
            12.5
            
            
            
            2.2
            
            
            
            (85.8
            )
            
            
            -3,206.9
            
            
            
            425.2
            
            
            
            36.6
            
            
            
            193.7
            
            
            
            (85.8
            )
            
            
            3,776.62007External
      customers
            
            
            2,557.4
            
            
            
            403.9
            
            
            
            15.8
            
            
            
            199.2
            
            
            
            -
            
            
            
            3,176.3Intersegment
            
            
            70.1
            
            
            
            -
            
            
            
            27.5
            
            
            
            2.0
            
            
            
            (99.6
            )
            
            
            -2,627.5
            
            
            
            403.9
            
            
            
            43.3
            
            
            
            201.2
            
            
            
            (99.6
            )
            
            
            3,176.3Operating
      income (loss)2009
            
            $
            149.7
            
            
            $
            29.2
            
            
            $
            24.1
            
            
            $
            21.4
            
            
            $
            (4.1
            )
            
            $
            220.32008
            
            
            124.4
            
            
            
            39.3
            
            
            
            5.8
            
            
            
            19.5
            
            
            
            (4.0
            )
            
            
            185.02007
            
            
            128.7
            
            
            
            45.4
            
            
            
            17.7
            
            
            
            16.3
            
            
            
            (1.6
            )
            
            
            206.5Equity
      investment income (loss), net2009
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            12.0
            
            
            $
            3.8
            
            
            $
            15.82008
            
            
            (.1
            )
            
            
            -
            
            
            
            -
            
            
            
            4.7
            
            
            
            4.8
            
            
            
            9.42007
            
            
            (.1
            )
            
            
            -
            
            
            
            -
            
            
            
            3.5
            
            
            
            2.9
            
            
            
            6.3Interest
      income2009
            
            $
            1.5
            
            
            $
            .5
            
            
            $
            -
            
            
            $
            .3
            
            
            $
            -
            
            
            $
            2.32008
            
            
            5.5
            
            
            
            1.8
            
            
            
            .2
            
            
            
            .9
            
            
            
            .4
            
            
            
            8.82007
            
            
            5.3
            
            
            
            2.1
            
            
            
            .3
            
            
            
            1.0
            
            
            
            .1
            
            
            
            8.8Interest
      expense, net of amounts capitalized2009
            
            $
            36.9
            
            
            $
            -
            
            
            $
            .2
            
            
            $
            .2
            
            
            $
            1.4
            
            
            $
            38.72008
            
            
            39.8
            
            
            
            -
            
            
            
            1.2
            
            
            
            .1
            
            
            
            (1.0
            )
            
            
            40.12007
            
            
            34.0
            
            
            
            .6
            
            
            
            1.4
            
            
            
            .4
            
            
            
            1.5
            
            
            
            37.9Income
      tax expense (benefit), net2009
            
            $
            40.3
            
            
            $
            3.9
            
            
            $
            9.4
            
            
            $
            13.3
            
            
            $
            (1.8
            )
            
            $
            65.12008
            
            
            31.0
            
            
            
            6.2
            
            
            
            1.9
            
            
            
            9.7
            
            
            
            (4.5
            )
            
            
            44.32007
            
            
            34.2
            
            
            
            3.5
            
            
            
            6.2
            
            
            
            7.9
            
            
            
            (2.7
            )
            
            
            49.1Property,
      plant and equipment, net2009
            
            $
            2,794.8
            
            
            $
            128.0
            
            
            $
            1.1
            
            
            $
            15.5
            
            
            $
            (.3
            )
            
            $
            2,939.12008
            
            
            2,723.5
            
            
            
            121.2
            
            
            
            .5
            
            
            
            13.7
            
            
            
            (.3
            )
            
            
            2,858.62007
            
            
            2,624.1
            
            
            
            120.0
            
            
            
            .5
            
            
            
            13.2
            
            
            
            (.5
            )
            
            
            2,757.3Capital
      expenditures2009
            
            $
            203.2
            
            
            $
            21.9
            
            
            $
            .3
            
            
            $
            5.3
            
            
            $
            -
            
            
            $
            230.72008
            
            
            229.4
            
            
            
            16.3
            
            
            
            .2
            
            
            
            3.8
            
            
            
            .2
            
            
            
            249.92007
            
            
            159.0
            
            
            
            14.5
            
            
            
            .4
            
            
            
            3.5
            
            
            
            (.1
            )
            
            
            177.3Depreciation2009
            
            $
            177.4
            
            
            $
            14.5
            
            
            $
            .3
            
            
            $
            3.7
            
            
            $
            (.1
            )
            
            $
            195.82008
            
            
            170.9
            
            
            
            15.4
            
            
            
            .2
            
            
            
            3.4
            
            
            
            (.1
            )
            
            
            189.82007
            
            
            165.6
            
            
            
            15.4
            
            
            
            .3
            
            
            
            3.1
            
            
            
            (.2
            )
            
            
            184.2








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16.   EQUITY
INVESTMENT INCOME, NET





Equity
investment income, net included the following (in millions):





2009
            
            
            2008
            
            
            2007Triton
            
            $
            5.3
            
            
            $
            6.4
            
            
            $
            5.1Horizon
      Pipeline
            
            
            1.5
            
            
            
            1.5
            
            
            
            1.6EN
      Engineering
            
            
            10.5
            
            
            
            3.2
            
            
            
            1.9Affordable
      housing investments
            
            
            (1.5
            )
            
            
            (1.7
            )
            
            
            (2.3
            )$
            15.8
            
            
            $
            9.4
            
            
            $
            6.3





On March
31, 2009, the company sold its 50-percent interest in EN
Engineering.  The company’s share of the sale price was $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.





In 2009,
2008 and 2007, Nicor received dividends from equity investees of $10.0 million,
$16.0 million and $12.3 million, respectively.





17.   RELATED
PARTY TRANSACTIONS





Horizon
Pipeline charged Nicor Gas $10.3 million for each of the years ended December
31, 2009, 2008 and 2007 for natural gas transportation under rates that have
been accepted by the FERC.





Nicor
sold its ownership in EN Engineering on March 31, 2009.  Prior to the
sale, EN Engineering charged Nicor Gas $1.7 million, $7.2 million and $4.8
million for engineering and corrosion services rendered for 2009, 2008 and 2007,
respectively.  A majority of the work performed by EN Engineering was
capital in nature, and is classified as property, plant and equipment on the
Consolidated Balance Sheets.





In
addition, certain related parties may acquire regulated utility services at
rates approved by the ICC.





18.   COMMITMENTS





At
December 31, 2009, Nicor had purchase commitments with payments due as follows
(in millions):





Purchase
      obligations
            
            
            Operating
      leases2010
            
            $
            27.4
            
            
            $
            15.22011
            
            
            16.9
            
            
            
            9.42012
            
            
            5.6
            
            
            
            6.82013
            
            
            1.8
            
            
            
            3.62014
            
            
            1.4
            
            
            
            2.3After
      2014
            
            
            3.0
            
            
            
            22.2$
            56.1
            
            
            $
            59.5





Purchase
obligations consist of a natural gas transportation agreement and property,
plant and equipment purchases.  Operating leases are primarily for
vessels, containers and equipment in the shipping business, office space and
equipment in the gas distribution business and office space for the company’s
other energy ventures.







Table of Contents





Tropical
Shipping has certain equipment operating leases which include purchase and/or
renewal options, at fair market amounts at the time of purchase or
renewal.  Rental expense under operating leases was $31.4 million,
$41.7 million and $41.3 million in 2009, 2008 and 2007,
respectively.





19.   REGULATORY
PROCEEDINGS





Rate proceeding.On
March 25, 2009, the ICC issued an order approving an increase in base revenues
of approximately $69 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 the rates approved in
the March 25, 2009 order into effect on April 3, 2009.





On April
24, 2009, Nicor Gas 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.  On May
13, 2009, the ICC agreed to conduct a rehearing concerning the capital structure
but denied the remainder of the company’s request.  On October 7,
2009, the ICC issued its decision on rehearing in which it increased the annual
base revenues approved for Nicor Gas in the March 25, 2009 order by
approximately $11 million, increasing the rate of return on rate base to 8.09
percent.  Nicor Gas placed the rates approved in the rehearing
decision into effect on a prospective basis on October 15,
2009.  Therefore, the total annual base revenue increase resulting
from the rate case originally filed by the company in April 2008 is
approximately $80 million.  In December 2009, Nicor Gas withdrew
appeals of the ICC rate orders that it previously had filed in state appellate
court.  The ICC’s decision on rehearing, therefore, is final and no
longer subject to appeal.





Bad debt rider.  In
September 2009, Nicor Gas filed for approval of a bad debt rider with the ICC
under an Illinois state law which took effect in July 2009.  On
February 2, 2010, the ICC issued an order approving the company’s proposed bad
debt rider.  This rider will provide for recovery from customers of
the amount over the benchmark for bad debt expense established in the company’s
rate cases.  It will also provide for refunds to customers if bad debt
expense is below such benchmarks.





As a
result of the February order, Nicor Gas will record in the first quarter of 2010
a net recovery related to 2008 and 2009 of approximately $32 million;
substantially all of this amount is expected to be collected in
2010.  The benchmark, against which 2010 actual bad debt expense will
be compared, is approximately $63 million.





20.   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 $5 million at December
31, 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 product warranty contracts that provide 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 $7.9
million, $7.1 million and $6.6 million were incurred in 2009, 2008 and 2007,
respectively.








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 21 – 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. 
During 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.





21.
            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 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, CUB filed a motion for $27 million in sanctions against the
company in the ICC Proceedings.  In that motion, 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 assigned to the proceeding issued
a ruling denying CUB’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 CUB or other parties to the ICC Proceedings.





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 Entergy-Koch Trading, LP (“EKT”), a natural gas,
storage and transportation trader and consultant with whom Nicor did business
under the PBR plan.  Review of additional information completed in
2004 resulted in the $1.8 million adjustment to the previously recorded
liability referenced above.





The
evidentiary hearings on this matter were stayed in 2004 in order to permit the
parties to undertake additional third party discovery from EKT.  In
December 2006, the additional third party discovery from EKT was obtained and
the ALJs issued a scheduling order that provided for Nicor Gas to submit direct
testimony by April 13, 2007.  In its direct testimony, 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.  In
September 2009, the staff of the ICC, IAGO and CUB submitted direct testimony to
the ICC requesting refunds of $109 million, $255 million and $286 million,
respectively.  No date has been set for evidentiary hearings on this
matter.





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 December 31,
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
December 31, 2009, Nicor Gas had remaining an estimated liability of $2.1
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)










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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”) are
parties to an agreement to cooperate in cleaning up residue at many of these
properties.  The 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.  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 December 31, 2009, the
company had recorded a liability in connection with these matters of $23.8
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 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.





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.  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.  While the company is unable to predict the outcome
of these matters or to reasonably estimate its potential exposure related
thereto, if









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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.





22.   QUARTERLY
RESULTS (UNAUDITED)





Quarterly
results may be impacted by the variability in the results of the gas
distribution business due to seasonal and other factors.  Summarized
quarterly financial data is presented below (in millions, except per share
data).





Quarter
      endedMar.
      31
            
            
            June
      30
            
            
            Sept.
      30
            
            
            Dec.
      312009Operating
      revenues
            
            $
            1,110.8
            
            
            $
            447.6
            
            
            $
            325.6
            
            
            $
            768.1Operating
      income
            
            
            59.9
            
            
            
            39.5
            
            
            
            29.8
            
            
            
            91.1Net
      income
            
            
            43.8
            
            
            
            22.9
            
            
            
            13.6
            
            
            
            55.2Earnings
      per average share of common stockBasic
            
            
            .97
            
            
            
            .50
            
            
            
            .30
            
            
            
            1.22Diluted
            
            
            .96
            
            
            
            .50
            
            
            
            .30
            
            
            
            1.212008Operating
      revenues
            
            $
            1,595.7
            
            
            $
            699.8
            
            
            $
            440.3
            
            
            $
            1,040.8Operating
      income
            
            
            63.2
            
            
            
            40.6
            
            
            
            9.3
            
            
            
            71.9Net
      income
            
            
            41.4
            
            
            
            28.9
            
            
            
            1.3
            
            
            
            47.9Earnings
      per average share of common stockBasic
            
            
            .92
            
            
            
            .64
            
            
            
            .03
            
            
            
            1.06Diluted
            
            
            .91
            
            
            
            .64
            
            
            
            .03
            
            
            
            1.05








Table of Contents




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





None.





Item
      9A.
            Controls and
      Procedures





Evaluation
of Disclosure 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 most
recent fiscal quarter of the period covered by this Annual Report on Form 10-K
(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 most recent fiscal quarter covered
by this Annual Report on Form 10-K, 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.





Management’s
Report on Internal Control Over Financial Reporting





Internal
control over financial reporting refers to the process designed by, or under the
supervision of, the company’s Chief Executive Officer and Chief Financial
Officer, and effected by the company’s board of directors, management and other
personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles, and
includes those policies and procedures that:





1.
            Pertain
      to the maintenance of records that in reasonable detail accurately and
      fairly reflect the transactions and dispositions of the assets of the
      company;





2.
            Provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with generally accepted
      accounting principles, and that receipts and expenditures of the company
      are being made only in accordance with authorizations of management and
      directors of the company; and





3.
            Provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use or disposition of the company’s assets that
      could have a material effect on the financial
  statements.








Table of Contents




Internal
control over financial reporting cannot provide absolute assurance of achieving
financial reporting objectives because of its inherent
limitations.  Internal control over financial reporting is a process
that involves human diligence and compliance and is subject to lapses in
judgment and breakdowns resulting from human failures.  Internal
control over financial reporting also can be circumvented by collusion or
improper management override.  Because of such limitations, there is a
risk that material misstatements may not be prevented or detected on a timely
basis by internal control over financial reporting.  However, these
inherent limitations are known features of the financial reporting
process.  Therefore, it is possible to design into the process
safeguards to reduce, though not eliminate, this risk.  Management is
responsible for establishing and maintaining adequate internal control over
financial reporting for the company.





Management
has used the framework set forth in the report entitled “Internal
Control—Integrated Framework” published by the Committee of Sponsoring
Organizations of the Treadway Commission to evaluate the effectiveness of the
company’s internal control over financial reporting.  Management has
concluded that the company’s internal control over financial reporting was
effective as of December 31, 2009.  Deloitte & Touche LLP, an
independent registered public accounting firm, has issued an attestation report
on the company’s internal control over financial reporting.





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.





Item
9B.         Other
Information





None.







Table of Contents


PART
III





Item
      10.
            Directors, Executive
      Officers of the Registrant and Corporate
  Governance





Information
on directors is contained under the Election of Directors and Section 16(a)
Beneficial Ownership Reporting Compliance sections in Nicor’s Definitive Proxy
Statement to be filed on or about March 10, 2010, and is incorporated herein by
reference.





Information
about the audit committee and the audit committee financial expert is contained
under the Committees of the Board of Directors and Audit Committee Report
sections in Nicor’s Definitive Proxy Statement to be filed on or about March 10,
2010, and is incorporated herein by reference.





Information
about executive officers is included in Part I of this Form 10-K, Executive
Officers of the Registrant, and is incorporated herein by
reference.  Executive officers of the company are elected annually by
the Board of Directors.





In
addition, security ownership information about executive officers is contained
under the Section 16(a) Beneficial Ownership Reporting Compliance section in
Nicor’s Definitive Proxy Statement to be filed on or about March 10, 2010, and
is incorporated herein by reference.





The
company has adopted a Code of Ethics that applies to the company’s directors,
officers and employees, including its principal executive officer, principal
financial officer, principal accounting officer or controller or persons
performing similar functions.  We intend to satisfy the disclosure
requirements under Item 5.05 of Form 8-K regarding an amendment to or waiver
from a provision of such Code of Ethics as it applies to our principal executive
officer, principal financial officer, principal accounting officer or controller
or persons performing similar functions and that relates to certain topics, by
posting such information on the company’s investor section of its internet site
at www.nicor.com.





The
company has disclosed its Code of Ethics, Audit Committee Charter, Corporate
Governance Committee Charter, Compensation Committee Charter and Corporate
Governance Guidelines on the company’s investor section of its Internet site at
www.nicor.com.  Any
shareholder may also request this information in print form from the company’s
Investor Relations department.





Item 11.
            Executive
      Compensation





Information
on the compensation committee is contained under the Committees of the Board of
Directors and Compensation Committee Report sections in Nicor’s Definitive Proxy
Statement to be filed on or about March 10, 2010, and is incorporated herein by
reference.





Information
on executive compensation is contained under the Compensation Discussion and
Analysis, Summary Compensation Table, Grants of Plan-Based Awards, Outstanding
Equity Awards at Fiscal Year-End, Option Exercises and Stock Vested, Pension
Benefits, Nonqualified Deferred Compensation, Other Potential Post-Employment
Payments and Director Compensation sections in Nicor’s Definitive Proxy
Statement to be filed on or about March 10, 2010, and is incorporated herein by
reference.





Item
      12.
            Security Ownership of
      Certain Beneficial Owners and Management and Related Stockholder
      Matters





Information
on security ownership of certain beneficial owners and management is contained
under the Security Ownership of Management and Beneficial Ownership of Common
Stock sections in Nicor’s Definitive Proxy Statement to be filed on or about
March 10, 2010, and is incorporated herein by reference.







Table of Contents




EQUITY
COMPENSATION PLAN INFORMATION


Plan
      category
            (a)
              
              
              
              Number
      of  securities to be issued upon exercise of outstanding
      options, warrants, and rights
            (b)
              
              
              
              Weighted-average
      exercise price of outstanding options, warrants, and
rights
            (c)
              
              Number
      of securities remaining available for future issuance under equity
      compensation plans (excluding securities reflected in column
      (a))Equity
      compensation plans approved by security holders
            662,149
            $36.36
            2,009,779(1)Equity
      compensation plans not approved by security holders
            -
            -
            -Total
            662,149
            $36.36
            2,009,779





(1)
            This
      number includes 326,559 shares issuable under the 1997 Long-Term Incentive
      Plan, as amended.  These shares can be used for awards under the
      Stock Deferral Plan, which allows eligible key executives and managerial
      employees to convert up to 50 percent of their cash awards from annual and
      long-term incentive plans into Nicor common stock, the receipt of which is
      deferred.  Also included are 354,215 shares issuable under the
      Nicor Employee Stock Purchase Plan.  The remaining 1,329,005
      shares are issuable under the 2006 Long-Term Incentive
      Program.  These shares can be used for restricted stock, stock
      options and performance award units, including awards under the Stock
      Deferral Plan.





Item
      13.
            Certain Relationships
      and Related Transactions, and Director
  Independence





Information
about certain relationships and related transactions, and director independence
is contained under the Transactions with Related Persons and Director
Independence sections in Nicor’s Definitive Proxy Statement to be filed on or
about March 10, 2010, and is incorporated herein by reference.





Item
      14.
            Principal Accounting
      Fees and Services





Information
on principal accounting fees and services is contained under the Principal
Accountant Fees and Services section in Nicor’s Definitive Proxy Statement to be
filed on or about March 10, 2010, and is incorporated herein by
reference.








Table of Contents


PART
IV





Item
      15.
            Exhibits, Financial
      Statement Schedules





a)





1)
            Financial
      Statements:





See Item
8, Financial Statements and Supplementary Data, filed herewith, for a list of
financial statements.





2)
            Financial
      Statement Schedules:





ScheduleNumber
            
            PageReport of Independent Registered Public Accounting
      Firm
            41II
            Valuation and Qualifying Accounts
            81





Schedules
      other than those listed are omitted because they are not
      applicable.





3)
            Exhibits
      Filed:





See
Exhibit Index filed herewith.








Table of Contents




Nicor
      Inc.Schedule IIVALUATION AND QUALIFYING ACCOUNTS(millions)AdditionsBalance
      at
              
              
              Charged
      to
              
              
              Charged
      to
              
              
              
              
              
              
              
              Balancebeginning
              
              
              costs
      and
              
              
              other
              
              
              
              
              
              
              
              at
      endDescription
              
              of
      period
              
              
              expenses
              
              
              accounts
              
              
              
              Deductions
              
              
              
              of
      period2009Allowance
      for doubtful accounts receivable
              
              $
              44.9
              
              
              $
              56.6
              
              
              $
              -
              
              
              
              $
              68.5
              
              (a)
              
              $
              33.0Accrued
      mercury-related costs
              
              
              2.5
              
              
              
              -
              
              
              
              -
              
              
              
              
              .4
              
              (b)
              
              
              2.1Accrued
      manufactured gas plant environmental costs
              
              
              21.4
              
              
              
              -
              
              
              
              11.2
              
              (c)
              
              
              8.8
              
              (b)
              
              
              23.82008Allowance
      for doubtfulaccounts receivable
              
              $
              35.1
              
              
              $
              74.1
              
              
              $
              -
              
              
              
              $
              64.3
              
              (a)
              
              $
              44.9Accrued
      mercury-related costs
              
              
              2.8
              
              
              
              .6
              
              
              
              -
              
              
              
              
              .9
              
              (b)
              
              
              2.5Accrued
      manufactured gas plantenvironmental costs
              
              
              15.2
              
              
              
              -
              
              
              
              19.8
              
              (c)
              
              
              13.6
              
              (b)
              
              
              21.42007Allowance
      for doubtfulaccounts receivable
              
              $
              33.4
              
              
              $
              57.6
              
              
              $
              -
              
              
              
              $
              55.9
              
              (a)
              
              $
              35.1Accrued
      mercury-related costs
              
              
              13.2
              
              
              
              -
              
              
              
              -
              
              
              
              
              10.4
              
              (b)
              
              
              2.8Accrued
      manufactured gas plantenvironmental costs
              
              
              19.9
              
              
              
              -
              
              
              
              4.5
              
              (c)
              
              
              9.2
              
              (b)
              
              
              15.2(a)
      Accounts receivable written off, net of recoveries.(b)
      Expenditures, other adjustments.(c)
      Accrual of estimated future remediation costs that are deferred as
      regulatory assets.


Table of Contents
 
 Signatures





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





Nicor
      Inc.Date  February 24,
      2010
            
            /s/ KAREN K. PEPPINGKaren
      K. PeppingVice
      President and Controller(Principal
      Accounting Officer andDuly
      Authorized Officer)Pursuant
      to the requirements of the Securities Exchange Act of 1934, this report
      has been signed below by
      the following persons on behalf of the registrant and in the capacities
      indicated on February 24, 2010.Signature
            
            Title/s/ RUSS M. STROBELRuss
      M. Strobel
            
            Chairman,
      President and(Principal
      Executive Officer)
            
            Chief
      Executive Officer/s/ RICHARD L. HAWLEYRichard
      L. Hawley
            
            Executive
      Vice President and(Principal
      Financial Officer)
            
            Chief
      Financial Officer/s/ KAREN K. PEPPINGKaren
      K. Pepping
            
            Vice
      President and Controller(Principal
      Accounting Officer)ROBERT
      M. BEAVERS, JR.*
            
            DirectorBRUCE
      P. BICKNER*
            
            DirectorJOHN
      H. BIRDSALL, III*
            
            DirectorNORMAN
      R BOBINS*
            
            DirectorBRENDA
      J. GAINES*
            
            DirectorRAYMOND
      A. JEAN*
            
            DirectorDENNIS
      J. KELLER*
            
            DirectorR.
      EDEN MARTIN*
            
            DirectorGEORGIA
      R. NELSON*
            
            DirectorARMANDO
      J. OLIVERA*
            
            DirectorJOHN
      RAU*
            
            DirectorJOHN
      C. STALEY*
            
            Director*
            By    /s/ RICHARD L.
      HAWLEYRichard
      L. Hawley(Attorney-in-fact)







Table of Contents


Exhibit
Index





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
      3.1.)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
            *
            Indenture
      of Commonwealth Edison Company to Continental Illinois National Bank and
      Trust Company of Chicago, Trustee, dated as of January 1,
      1954.  (File No. 1-7296, Form 10-K for 1995, Nicor Gas, Exhibit
      4.01.)4.02
            *
            Indenture
      of Adoption of Nicor Gas to Continental Illinois National Bank and Trust
      Company of Chicago, Trustee, dated February 9, 1954.  (File No.
      1-7296, Form 10-K for 1995, Nicor Gas, Exhibit 4.02.)4.03
            *
            Supplemental
      Indenture, dated February 15, 1998, of Nicor Gas to Harris Trust and
      Savings Bank, Trustee, under Indenture dated as of January 1,
      1954.  (File No. 1-7296, Form 10-K for 1997, Nicor Gas, Exhibit
      4.19.)





4.04
            *
            Supplemental
      Indenture, dated February 1, 2001, of Nicor Gas to BNY Midwest Trust
      Company, Trustee, under Indenture dated as of January 1,
      1954.  (File No. 1-7296, Form 10-K for 2000, Nicor Gas, Exhibit
      4.17.)4.05
            *
            Supplemental
      Indenture, dated May 15, 2001, of Nicor Gas to BNY Midwest Trust Company,
      Trustee, under Indenture dated as of January 1, 1954.  (File No.
      1-7296, Form 10-Q for June 2001, Nicor Gas, Exhibit
  4.01.)4.06
            *
            Supplemental
      Indenture, dated December 1, 2003, of Nicor Gas to BNY Midwest Trust
      Company, Trustee, under Indenture dated as of January 1,
      1954.  (File No. 1-7297, Form 10-K for 2003, Nicor Inc., Exhibit
      4.10.)4.07
            *
            Supplemental
      Indenture, dated December 1, 2003, of Nicor Gas to BNY Midwest Trust
      Company, Trustee, under Indenture dated as of January 1,
      1954.  (File No. 1-7297, Form 10-K for 2003, Nicor Inc., Exhibit
      4.11.)4.08
            *
            Supplemental
      Indenture, dated December 1, 2003, of Nicor Gas to BNY Midwest Trust
      Company, Trustee, under Indenture dated as of January 1,
      1954.  (File No. 1-7297, Form 10-K for 2003, Nicor Inc., Exhibit
      4.12.)





4.09
            *
            Supplemental
      Indenture, dated December 1, 2006, of Nicor Gas to BNY Midwest Trust
      Company, Trustee, under Indenture dated as of January 1,
      1954.  (File No. 1-7297, Form 10-K for 2006, Nicor Inc., Exhibit
      4.11.)4.10
            *
            Supplemental
      Indenture, dated August 1, 2008, of Nicor Gas to BNY Mellon Trust Company,
      Trustee, under Indenture dated January 1, 1954.  (File No.
      1-7297, Form 10-Q for September 30, 2008, Nicor Inc., Exhibit
      4.01.)    Table of Contents
  ExhibitNumber
            
            Description of Document4.11
            *
            Supplemental
      Indenture, dated July 23, 2009, of Nicor Gas to BNY Mellon Trust Company,
      Trustee, under Indenture dated as of January 1, 1954.  (File No.
      1-7297, Form 10-Q for June 30, 2009, Nicor Inc., Exhibit
      4.01.)10.01
            *
            1984
      Nicor Officers’ Capital Accumulation Plan Participation
      Agreement.  (File No. 1-7297, Form 10-K for 1988, Nicor Inc.,
      Exhibit 10-10.)10.01(a)
            *
            1985
      Nicor Officers’ Capital Accumulation Plan Participation
      Agreement.  (File No. 1-7297, Form 10-K for 1988, Nicor Inc.,
      Exhibit 10-10(a).)10.02
            *
            First
      Amendment to Agreements Restating 1984 and 1985 Nicor Capital Accumulation
      Plan Participation Agreements for Officers and Directors.  (File
      No. 1-7297, Form 10-Q for March 2000, Nicor Inc., Exhibit
      10.04.)10.03
            *
            Nicor
      Capital Accumulation Plan (as amended and restated effective as of January
      1, 2008).  (File No. 1-7297, Form 8-K for November 20, 2008,
      Nicor Inc., Exhibit 10.2.)10.04
            *
            Amendment
      Restating 1984 and 1985 Nicor Capital Accumulation Plan Participation
      Agreements among Nicor Inc., Birdsall Inc. and John H. Birdsall
      III.  (File No. 1-7297, Form 8-K for November 20, 2008, Nicor
      Inc., Exhibit 10.1.)10.05
            *
            Nicor
      Gas Supplementary Savings Plan (as Amended and Restated for Post-2004
      Benefits, Effective January 1, 2008).  (File No. 1-7297, Form
      10-K for 2008, Nicor Inc., Exhibit 10.05.)10.06
            *
            Directors’
      Pension Plan.  (File No. 1-7297, Form 10-K for 1985, Nicor Inc.,
      Exhibit 10-18.)10.07
            *
            Flexible
      Spending Account for Executives.  (File No. 1-7297, Form 10-K
      for 1986, Nicor Inc., Exhibit 10-20.)


10.08
            *
            Nicor
      Inc. Stock Deferral Plan.  (File No. 1-7297, Form 10-Q for
      September 1996, Nicor Inc., Exhibit 10.01.)10.09
            *
            Amendment
      to Nicor Inc. Stock Deferral Plan.  (File No. 1-7297, Form 10-K
      for 1997, Nicor Inc., Exhibit 10.22.)10.10
            *
            Second
      Amendment to Nicor Stock Deferral Plan.  (File No. 1-7297, Form
      10-Q for March 2000, Nicor Inc., Exhibit 10.07.)10.11
            *
            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 28, 2008, Nicor
      Inc., Exhibit 10.4.)10.12
            *
            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.)   Table of Contents
  ExhibitNumber
            
            Description of Document10.13
            *
            Nicor
      Inc. Stock Deferral Plan (as Amended and Restated for Post-2004 Benefits,
      Effective January 1, 2008).  (File No. 1-7297, Form 8-K for July
      28, 2008, Nicor Inc., Exhibit 10.3.)10.14
            *
            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.)10.15
            *
            Nicor
      Inc. 1997 Long-Term Incentive Plan.  (Filed as appendix to the
      Nicor Inc. Proxy Statement, dated March 6, 1997.)10.16
            *
            First
      Amendment to Nicor 1997 Long-Term Incentive Plan.  (File No.
      1-7297, Form 10-Q for March 2000, Nicor Inc., Exhibit
    10.06.)10.17
            *
            Third
      Amendment to Nicor Inc. 1997 Long-Term Incentive Plan.  (File
      No. 1-7297, Form 8-K for March 17, 2006, Nicor Inc., Exhibit
      10.5.)10.18
            *
            Fourth
      Amendment to Nicor Inc. 1997 Long-Term Incentive Plan.  (File
      No. 1-7297, Form 8-K for July 28, 2008, Nicor Inc., Exhibit
      10.7.)10.19
            *
            Non-Qualified
      Stock Option Agreement Form.  (File No. 1-7297, Form 8-K for
      March 17, 2005, Nicor Inc., Exhibit 10.01.)10.20
            *
            Deferred
      Restricted Stock Agreement under the Nicor Inc. 1997 Long-Term Incentive
      Plan.  (File No. 1-7297, Form 8-K for March 17, 2006, Nicor
      Inc., Exhibit 10.1.)10.21
            *
            Restricted
      Stock Agreement Form under the Nicor Inc. 1997 Long-Term Incentive
      Plan.  (File No. 1-7297, Form 8-K for March 17, 2006, Nicor
      Inc., Exhibit 10.2.)


10.22
            *
            Non-Qualified
      Stock Option Agreement Form under the Nicor Inc. 1997 Long-Term Incentive
      Plan.  (File No. 1-7297, Form 10-Q for March 31, 2006, Nicor
      Inc., Exhibit 10.10.)10.23
            *
            2006
      Long Term Incentive Plan.  (File No. 1-7297, Form 8-K for April
      20, 2006, Nicor Inc., Exhibit 10.01.)10.24
            *
            First
      Amendment to Nicor Inc. 2006 Long Term Incentive Plan.  (File
      No. 1-7297, Form 8-K for July 28, 2008, Nicor Inc., Exhibit
      10.8.)10.25
            *
            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.)10.26
            *
            Performance
      Cash Unit Agreement Form.  (File No. 1-7297, Form 8-K for March
      17, 2006, Nicor Inc., Exhibit 10.3.)10.27
            *
            Performance
      Cash Unit Agreement Form.  (File No. 1-7297, Form 8-K for March
      26, 2007, Nicor Inc., Exhibit 10.3.)10.28
            *
            Performance
      Cash Unit Agreement Form.  (File No. 1-7297, Form 8-K for March
      28, 2008, Nicor Inc., Exhibit 10.2.)    Table of Contents
  ExhibitNumber
            
            Description of Document10.29
            *
            Performance
      Cash Unit Agreement Form.  (File No. 1-7297, Form 8-K for March
      27, 2009, Nicor Inc. Exhibit 10.02.)10.30
            *
            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.)10.31
            *
            First
      Amendment 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.)10.32
            *
            Restricted
      Stock Unit Agreement Form.  (File No. 1-7297, Form 8-K for March
      26, 2007, Nicor Inc., Exhibit 10.2.)10.33
            *
            Restricted
      Stock Unit Agreement between Nicor Inc. and Russ M.
      Strobel.  (File No. 1-7297, Form 8-K for March 26, 2007, Nicor
      Inc., Exhibit 10.1.)10.34
            *
            Restricted
      Stock Unit Agreement between Nicor Inc. and Russ M.
      Strobel.  (File No. 1-7297, Form 8-K for March 28, 2008, Nicor
      Inc., Exhibit 10.1.)10.35
            *
            First
      Amendment to Restricted Stock Unit Agreement between Russ M. Strobel and
      Nicor Inc.  (File No. 1-7297, Form 10-Q for September 30, 2008,
      Nicor Inc., Exhibit 10.03.)10.36
            *
            Restricted
      Stock Unit Agreement between Nicor Inc. and Russ M.
      Strobel.  (File No. 1-7297, Form 8-K for March 27, 2009, Nicor
      Inc., Exhibit 10.01.)10.37
            *
            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.)10.38
            *
            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.)10.39
            *
            Security
      Payment Plan.  (File No. 1-7297, Form 10-K for 1999, Nicor Inc.,
      Exhibit 10.24.)10.40
            *
            Amendment
      and Restatement of Nicor Gas Supplementary Retirement
      Plan.  (File No. 1-7297, Form 10-Q for March 2000, Nicor Inc.,
      Exhibit 10.01.)10.41
            *
            Amendment
      to Nicor Gas Supplementary Retirement Plan (as in Effect on October 3,
      2004, for Pre-2005 Benefits). (File No. 1-7297, Form 8-K for July 28,
      2008, Nicor Inc., Exhibit 10.12.)


10.42
            *
            Nicor
      Gas Supplementary Retirement Plan (as Amended and Restated for Post-2004
      Benefits, Effective January 1, 2008). (File No. 1-7297, Form 8-K for July
      28, 2008, Nicor Inc., Exhibit 10.11.)10.43
            *
            Second
      Amendment and Restatement to Nicor Salary Deferral Plan.  (File
      No. 1-7297, Form 10-Q for September 30, 2002, Nicor Inc., Exhibit
      10.01.)    Table of Contents
  ExhibitNumber
            
            Description of Document10.44
            *
            First
      Amendment to the Nicor Inc. Salary Deferral Plan.  (File No.
      1-7297, Form 10-K for 2005, Nicor Inc., Exhibit 10.46.)10.45
            *
            Amendment
      to Nicor Inc. Salary Deferral Plan (as in Effect on October 3, 2004, for
      Pre-2005 Benefits).  (File No. 1-7297, Form 8-K for July 28,
      2008, Nicor Inc., Exhibit 10.2.)10.46
            *
            Nicor
      Inc. Salary Deferral Plan (as Amended and Restated for Post-2004 Benefits,
      Effective January 1, 2008).  (File No. 1-7297, Form 8-K for July
      28, 2008, Nicor Inc., Exhibit
10.1.)





10.47
            *
            Supplemental
      Retirement Benefit Agreement between Russ M. Strobel and Nicor
      Inc.  (File No. 1-7297, Form 10-K for 2001, Nicor Inc., Exhibit
      10.32.)10.48
            *
            Amended
      and Restated Supplemental Retirement Benefit Plan Agreement between Russ
      M. Strobel and Nicor Inc.  (File No. 1-7297, Form 8-K for July
      28, 2008, Nicor Inc., Exhibit 10.9.)10.49
            *
            Nicor
      Inc. Supplemental Senior Officer Retirement Plan.  (File No.
      1-7297, Form 10-K for 2002, Nicor Inc., Exhibit 10.28.)10.50
            *
            Amendment
      to Nicor Inc. Supplemental Senior Officer Retirement Plan (as in Effect on
      October 3, 2004, for Pre-2005 Benefits).  (File No. 1-7297, Form
      8-K for July 28, 2008, Nicor Inc., Exhibit 10.6.)10.51
            *
            Nicor
      Inc. Supplemental Senior Officer Retirement Plan (as Amended and Restated
      for Post-2004 Benefits, Effective January 1, 2008).  (File No.
      1-7297, Form 8-K for July 28, 2008, Nicor Inc., Exhibit
    10.5.)10.52
            *
            2006
      Long-Term Incentive Program.  (File No. 1-7297, Form 8-K for
      March 17, 2006, Nicor Inc., Exhibit 10.4.)10.53
            *
            2007
      Long-Term Incentive Program.  (File No. 1-7297, Form 8-K for
      March 26, 2007, Nicor Inc., Exhibit 10.4.)10.54
            *
            2008
      Long-Term Incentive Program. (File No. 1-7297, Form 8-K for March 28,
      2008, Nicor Inc., Exhibit 10.3.)10.55
            *
            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.)10.56
            *
            2009
      Long-Term Incentive Program.  (File No. 1-7297, Form 8-K for
      March 27, 2009, Nicor Inc., Exhibit 10.03.)10.57
            *
            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.)





10.58
            *
            Nicor
      Annual Incentive Compensation Plan for Officers.  (File No.
      1-7297, Form 10-K for 2008, Nicor Inc., Exhibit
  10.50.)


Table of Contents
  ExhibitNumber
            
            Description of Document10.59
            *
            Nicor
      Gas Annual Incentive Compensation Plan for Officers.  (File No.
      1-7297, Form 10-K for 2008, Nicor Inc., Exhibit 10.51.)10.60
            *
            Letter
      Agreement between Nicor Inc. and Richard L. Hawley.  (File No.
      1-7297, Form 8-K for March 26, 2007, Nicor Inc., Exhibit
      10.5.)10.61
            *
            Nicor
      Directors’ Deferred Compensation Plan, as amended and restated effective
      January 1, 2008.  (File No. 1-7297, Form 10-Q for June 30, 2007,
      Nicor Inc., Exhibit 10.02.)10.62
            *
            First
      Amendment to the Nicor Inc. Directors’ Deferred Compensation
      Plan.  (File No. 1-7297, Form 10-K for 2008, Nicor Inc., Exhibit
      10.54.)10.63
            *
            Second
      Amendment to the Nicor Inc. Directors’ Deferred Compensation
      Plan.  (File No. 1-7297, Form 10-K for 2008, Nicor Inc., Exhibit
      10.55.)10.64
            *
            Nicor
      Gas Directors’ Deferred Compensation Plan, as amended and restated
      effective January 1, 2008.  (File No. 1-7297, Form 10-Q for June
      30, 2007, Nicor Inc., Exhibit 10.01.)10.65
            *
            First
      Amendment to the Northern Illinois Gas Company Directors’ Deferred
      Compensation Plan.  (File No. 1-7297, Form 10-K for 2008, Nicor
      Inc., Exhibit 10.57.)10.66
            *
            Second
      Amendment to the Northern Illinois Gas Company Directors’ Deferred
      Compensation Plan.  (File No. 1-7297, Form 10-K for 2008, Nicor
      Inc., Exhibit 10.58.)10.67
            *
            Nicor
      Directors’ Stock Value Plan, as amended and restated effective January 1,
      2008.  (File No. 1-7297, Form 10-Q for June 30, 2007, Nicor
      Inc., Exhibit 10.03.)10.68
            *
            Amended
      and Restated Change-in-Control Agreement dated as of December 18, 2007
      between Nicor Inc. and Russ M. Strobel.  (File No. 1-7297, Form
      8-K for December 19, 2007, Nicor Inc., Exhibit 10.1.)10.69
            *
            Amended
      and Restated Change-in-Control Agreement dated as of December 18, 2007
      between Nicor Inc. and Richard L. Hawley.  (File No. 1-7297,
      Form 8-K for December 19, 2007, Nicor Inc., Exhibit
  10.2.)10.70
            *
            Amended
      and Restated Change-in-Control Agreement dated as of December 18, 2007
      between Nicor Inc. and Daniel R. Dodge.  (File No. 1-7297, Form
      8-K for December 19, 2007, Nicor Inc., Exhibit 10.3.)10.71
            
            Amended and Restated
      Change-in-Control Agreement dated as of December 17, 2007 between Nicor
      Inc. and Rocco J. D’Alessandro.10.72
            *
            Amended
      and Restated Change-in-Control Agreement dated as of December 18, 2007
      between Nicor Inc. and Paul C. Gracey, Jr.  (File No. 1-7297,
      Form 8-K for December 19, 2007, Nicor Inc., Exhibit
  10.4.)








Table of Contents




ExhibitNumber
            
            Description of Document10.73
            *
            Amended
      and Restated Change-in-Control Agreement dated as of February 7, 2008
      between Tropical Shipping and Construction Company Limited and Rick
      Murrell. (File No. 1-7297, Form 10-K for 2007, Nicor Inc., Exhibit
      10.65.)10.74
            *
            Amended
      and Restated Change-in-Control Agreement dated as of December 18, 2007
      between Nicor Inc. and Claudia J. Colalillo.  (File No. 1-7297,
      Form 8-K for December 19, 2007, Nicor Inc., Exhibit
  10.5.)10.75
            *
            Tropical
      Shipping Company Long-Term Performance Incentive Plan dated as of January
      1, 1995.  (File No. 1-7297, Form 10-K for 2007, Nicor Inc.,
      Exhibit 10.66.)10.76
            *
            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.)10.77
            *
            Tropical
      Shipping Company Long-Term Incentive Plan.  (File No. 1-7297,
      Form 8-K for March 28, 2008, Nicor Inc., Exhibit 10.4.)10.78
            *
            Tropical
      Annual Incentive Compensation Plan.  (File No. 1-7297, Form 8-K
      for March 28, 2008, Nicor Inc., Exhibit 10.5.)10.79
            *
            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.)10.80
            *
            Nicor
      Claims and Procedures for Nonqualified Plans.  (File No. 1-7297,
      Form 8-K for July 28, 2008, Nicor Inc., Exhibit 10.10.)10.81
            *
            5-Year
      Credit Agreement dated as of September 13, 2005.  (File No.
      1-7297, Form 10-Q for September 30, 2005, Nicor Inc., Exhibit
      10.03.)10.82
            *
            Second
      Amendment to the 5-Year Credit Agreement dated as of October 26,
      2006.  (File No. 1-7297, Form 10-Q for September 20, 2006, Nicor
      Inc., Exhibit 10.02.)10.83
            *
            364-Day
      Credit Agreement Dated as of May 11, 2009.  (File No. 1-7297,
      Form 10-Q for June 30, 2009, Nicor Inc., Exhibit
  10.12.)





10.84
            *
            Final
      Allocation Agreement between Nicor Gas and Commonwealth Edison Company
      dated as of January 3, 2008. (File No. 1-7297, Form 10-K for 2007, Nicor
      Inc., Exhibit 10.64.)10.85
            
            Agreement between Nicor Gas and
      Local 19 of the International Brotherhood of Electrical Workers 2009-2014.21.01
            
            Subsidiaries.23.01
            
            Consent of Independent Registered
      Public Accounting Firm.24.01
            
            Powers of
  Attorney.     Table of Contents
  ExhibitNumber
            
            Description of Document31.01
            
            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.