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
      1934
 For the fiscal year ended December 31, 2008


or


[   ]
                TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF
1934


Commission
File Number
1-7297





NICOR
INC.


(Exact
name of registrant as specified in its charter)





Illinois
            
            36-2855175(State
      of Incorporation)
            
            (I.R.S.
      EmployerIdentification
      No.)1844
      Ferry RoadNaperville,
      Illinois 60563-9600
            
            (630)
      305-9500(Address
      of principal executive offices) (Zip Code)
            
            (Registrant’s
      telephone number, including area
code)





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 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.  [X]





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, 2008 closing price
of $42.59) held by non-affiliates of the registrant was approximately $1.9
billion.  As of February 17, 2009, there were 45,198,311 shares of
common stock outstanding.




DOCUMENTS
INCORPORATED BY REFERENCE





Portions
of the company’s 2009 Annual Meeting Definitive Proxy Statement, to be filed on
or about March 11, 2009, 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
                                            
                                            
                                            61B.
                                            
                                            Unresolved Staff Comments
                                            
                                            
                                            112.
                                            
                                            Properties
                                            
                                            
                                            113.
                                            
                                            Legal Proceedings
                                            
                                            
                                            114.
                                            
                                            Submission of Matters to a Vote of Security Holders
                                            
                                            
                                            11Executive Officers of the Registrant
                                            
                                            
                                            12Part II5.
                                            
                                            Market for Registrant’s Common Equity, Related
      Stockholder Matters and Issuer Purchases of Equity
      Securities
                                            
                                            
                                            136.
                                            
                                            Selected Financial Data
                                            
                                            
                                            157.
                                            
                                            Management’s Discussion and Analysis of Financial
      Condition and Results of Operations
                                            
                                            
                                            167A.
                                            
                                            Quantitative and Qualitative Disclosures About
      Market Risk
                                            
                                            
                                            378.
                                            
                                            Financial Statements and Supplementary
      Data
                                            
                                            
                                            399.
                                            
                                            Changes in and Disagreements With Accountants
      on Accounting and Financial Disclosure
                                            
                                            
                                            759A.
                                            
                                            Controls and Procedures
                                            
                                            
                                            759B.
                                            
                                            Other Information
                                            
                                            
                                            76Part III10.
                                            
                                            Directors, Executive Officers and Corporate
      Governance
                                            
                                            
                                            7711.
                                            
                                            Executive Compensation
                                            
                                            
                                            7712.
                                            
                                            Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder Matters
                                            
                                            
                                            7713.
                                            
                                            Certain Relationships and Related Transactions, and
      Director Independence
                                            
                                            
                                            7814.
                                            
                                            Principal Accounting Fees and Services
                                            
                                            
                                            78Part IV15.
                                            
                                            Exhibits, Financial Statement
      Schedules
                                            
                                            
                                            79Signatures
                                            
                                            
                                            81Exhibit Index
                                            
                                            
                                            82








i
 
 Table of
Contents




Nicor
Inc.





Glossary





ALJs.Administrative Law
Judges.





ARO.Asset retirement
obligation.





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 5,830 degree days per year.





EN Engineering.EN
Engineering, L.L.C., a 50-percent-owned joint venture that provides engineering
and consulting services.





FASB.Financial
Accounting Standards Board.





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





FIN.  FASB
Interpretation.





FSP.  FASB Staff
Position.





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.Illinois
Department of Revenue.
  IRS.  Internal
Revenue Service.
  Jobs Act.American
Jobs Creation Act of 2004.





LIFO.  Last-in,
first-out.





Mcf, MMcf,
Bcf.Thousand cubic feet, million cubic feet, billion cubic
feet.





MMBtus.  Million
British thermal units.





Nicor.Nicor Inc.,
or the registrant.





Nicor Advanced Energy.Prairie Point
Energy,
L.L.C. (doing business as Nicor Advanced Energy), a wholly owned business that
provides natural gas and related services on an unregulated basis to residential
and small commercial customers.




ii
 
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Contents




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, and
manages Nicor Solutions’ and Nicor Advanced Energy’s product risks, including
the purchase of natural gas supplies.





Nicor Gas.Northern
Illinois Gas Company (doing business as Nicor Gas Company) is a regulated wholly
owned public utility business and one of the nation’s largest distributors of
natural gas.





Nicor
Services.Nicor Energy Services Company, a wholly owned
business that provides customer and prospect management services to businesses
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.Polychlorinated
Biphenyls.














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


SEC.The United
States Securities and Exchange Commission.


SFAS.Statement of
Financial Accounting Standards.







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





USEPA.United
States Environmental Protection Agency.




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 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
2008.





Summary
financial information for Nicor’s major business segments 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 and its customer base has grown over the years, 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 24 for operating revenues, deliveries and number
of customers by customer classification.  Nicor Gas had approximately
2,200 employees at year-end 2008.





Nicor Gas
maintains franchise agreements with most of the communities it serves, allowing
it to construct, operate and maintain distribution facilities in those
communities.  Franchise agreement terms range up to 50
years.  Currently, about one-quarter 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 the 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 60% 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 up to 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.





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,






2
 
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Contents




the
company has a tariff that allows negotiation with potential bypass customers,
and no such customer has bypassed the Nicor Gas system since the tariff became
effective in 1987.  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 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 impacts Nicor Gas’
distribution margin, net of income taxes, by approximately $1.6 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 will vary depending upon the time
of year, weather patterns, the number of customers for these products and the
market price for natural gas.  In 2008 and 2006, the offsetting impact
related to utility-bill management products was about one-half of the gas
distribution weather effect.  In 2007, weather was near normal,
resulting in no significant offsetting impact.





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 establishes the rules and regulations governing
utility rates and services in Illinois.  Those rules or 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 April 29, 2008, Nicor Gas filed with the ICC for
      an overall increase in rates.  The company’s filing, as updated,
      provides a revenue increase of $140.4 million for a rate of return on rate
      base of 9.27 percent, which reflects an 11.15 percent cost of common
      equity.  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 – Rate
Proceeding.




·
            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.





·
            As
      with the cost of natural gas, the company has a tariff that provides for
      the pass-through of prudently incurred environmental costs related to the
      remediation of former manufactured gas plant sites.  This
      pass-through is also subject to annual ICC
  review.





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





3
 
 Table of Contents




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.





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, 2008, Tropical Shipping’s operating fleet consisted of 11 owned
vessels and 6 chartered vessels with a container capacity totaling approximately
5,600 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.





4
 
 Table of
Contents




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 also has equity interests in joint ventures including
a FERC-regulated 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 move connection services for other
utilities.  Nicor Solutions offers its residential and small
commercial customers 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.





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 50-percent-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.





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
various equity investments, the largest of which is Triton, a cargo container
leasing business.  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.




5
 
 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 and 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 1999-2008 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.





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 also 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.





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.





A
change in the ICC’s approved rate mechanisms 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 ICC-approved mechanisms for the
recovery of prudently incurred costs.  A change in these rate
recovery mechanisms, 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.





6
 
 Table of
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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 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, conservation, 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’s gas distribution segment 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.





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.




7
 
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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.  The 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,
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 expenses such as bad debt expense,
company use gas and storage-related natural gas expenses, financing costs and
customer service expenses, and these changes 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.





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 and hedging transactions do not qualify for hedge
accounting under SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, 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.





8
 
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Transporting
and storing natural gas involve 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 Nicor’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/or Nicor Gas’ liquidity
through additional contributions to the trust to meet future funding
requirements. These impacts, either individually or in aggregate, may adversely
affect Nicor’s results of operations, cash flows and financial
condition.





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.





9
 
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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.





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, 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.






10
 
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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.





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





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.





11
 
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Executive Officers of the Registrant





Name
                  
                  Age
                  
                  Current
      Position and BackgroundRuss
      M. Strobel
                  
                  56
                  
                  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
                  
                  59
                  
                  Executive
      Vice President and Chief Financial Officer, Nicor and Nicor Gas (since
      2003).Rocco
      J. D’Alessandro
                  
                  50
                  
                  Executive
      Vice President Operations, Nicor Gas (since 2006); Senior Vice President
      Operations, Nicor Gas (2002-2006).Daniel
      R. Dodge
                  
                  55
                  
                  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
                  
                  59
                  
                  Senior
      Vice President Human Resources and Corporate Communications, Nicor and
      Nicor Gas (since 2002).Paul
      C. Gracey, Jr.
                  
                  49
                  
                  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
                  
                  57
                  
                  Senior
      Vice President Finance and Strategic Planning, Nicor and Nicor Gas (since
      2007); Senior Vice President Finance and Treasurer, Nicor and Nicor Gas
      (2006-2007); Vice President Administration and Finance, Nicor and Nicor
      Gas (2004-2006); Temporary General Manager - Internal Audit, Nicor and
      Nicor Gas (2003-2004); Partner, Tatum Partners L.L.C., professional
      services (2003-2004).Douglas
      M. Ruschau
                  
                  50
                  
                  Vice
      President and Treasurer, Nicor and Nicor Gas (since 2007); Vice President
      Finance and Treasurer, Peoples Energy Corporation
    (2002-2007).Karen
      K. Pepping
                  
                  44
                  
                  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).Rick
      Murrell
                  
                  62
                  
                  Chairman
      and President, Tropical Shipping and Construction Company Limited (since
      2006); President and CEO, Tropical Shipping and Birdsall Inc.
      (1987-2005).




12
 
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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, 2009, there were approximately 18,500
common stockholders of record and the closing stock price was
$31.76.





Stock
      price
                                          
                                          
                                          DividendsQuarter
                                          
                                          High
                                          
                                          
                                          Low
                                          
                                          
                                          Declared2008First
                                          
                                          $
                                          42.70
                                          
                                          
                                          $
                                          32.35
                                          
                                          
                                          $
                                          .465Second
                                          
                                          
                                          44.55
                                          
                                          
                                          
                                          33.33
                                          
                                          
                                          
                                          .465Third
                                          
                                          
                                          51.99
                                          
                                          
                                          
                                          38.01
                                          
                                          
                                          
                                          .465Fourth
                                          
                                          
                                          48.42
                                          
                                          
                                          
                                          32.53
                                          
                                          
                                          
                                          .4652007First
                                          
                                          $
                                          49.76
                                          
                                          
                                          $
                                          44.46
                                          
                                          
                                          $
                                          .465Second
                                          
                                          
                                          53.66
                                          
                                          
                                          
                                          42.17
                                          
                                          
                                          
                                          .465Third
                                          
                                          
                                          48.20
                                          
                                          
                                          
                                          37.80
                                          
                                          
                                          
                                          .465Fourth
                                          
                                          
                                          45.16
                                          
                                          
                                          
                                          39.18
                                          
                                          
                                          
                                          .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 2008 or 2007.  As of December 31, 2008, $21.5 million
remained authorized for the repurchase of common stock.





13
 
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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, 2004, and all dividends were
reinvested.





Comparison
of Five-Year Cumulative Total Return









2004
                              
                              
                              2005
                              
                              
                              2006
                              
                              
                              2007
                              
                              
                              2008Nicor
                              
                              $
                              114
                              
                              
                              $
                              127
                              
                              
                              $
                              158
                              
                              
                              $
                              150
                              
                              
                              $
                              129S&P
      Utilities
                              
                              
                              124
                              
                              
                              
                              145
                              
                              
                              
                              175
                              
                              
                              
                              209
                              
                              
                              
                              149S&P
      500
                              
                              
                              111
                              
                              
                              
                              116
                              
                              
                              
                              135
                              
                              
                              
                              142
                              
                              
                              
                              90





14
 
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Contents




Nicor
      Inc.Item
      6.
                    Selected Financial
      Data


(in
      millions, except per share data)Year
      ended December 312008
                                                                                    
                                                                                    
                                                                                    2007
                                                                                    
                                                                                    
                                                                                    2006
                                                                                    
                                                                                    
                                                                                    2005
                                                                                    
                                                                                    
                                                                                    2004Operating
      revenues
                                                                                    
                                                                                    $
                                                                                    3,776.6
                                                                                    
                                                                                    
                                                                                    $
                                                                                    3,176.3
                                                                                    
                                                                                    
                                                                                    $
                                                                                    2,960.0
                                                                                    
                                                                                    
                                                                                    $
                                                                                    3,357.8
                                                                                    
                                                                                    
                                                                                    $
                                                                                    2,739.7Operating
      income
                                                                                    
                                                                                    $
                                                                                    185.0
                                                                                    
                                                                                    
                                                                                    $
                                                                                    206.5
                                                                                    
                                                                                    
                                                                                    $
                                                                                    202.5
                                                                                    
                                                                                    
                                                                                    $
                                                                                    201.7
                                                                                    
                                                                                    
                                                                                    $
                                                                                    137.7Net
      income
                                                                                    
                                                                                    
                                                                                    $
                                                                                    119.5
                                                                                    
                                                                                    
                                                                                    $
                                                                                    135.2
                                                                                    
                                                                                    
                                                                                    $
                                                                                    128.3
                                                                                    
                                                                                    
                                                                                    $
                                                                                    136.3
                                                                                    
                                                                                    
                                                                                    $
                                                                                    75.1Earnings
      per average share of common stockBasic
                                                                                    
                                                                                    
                                                                                    $
                                                                                    2.64
                                                                                    
                                                                                    
                                                                                    $
                                                                                    2.99
                                                                                    
                                                                                    
                                                                                    $
                                                                                    2.88
                                                                                    
                                                                                    
                                                                                    $
                                                                                    3.08
                                                                                    
                                                                                    
                                                                                    $
                                                                                    1.71Diluted
                                                                                    
                                                                                    
                                                                                    2.63
                                                                                    
                                                                                    
                                                                                    
                                                                                    2.99
                                                                                    
                                                                                    
                                                                                    
                                                                                    2.87
                                                                                    
                                                                                    
                                                                                    
                                                                                    3.07
                                                                                    
                                                                                    
                                                                                    
                                                                                    1.70Dividends
      declared per common share
                                                                                    
                                                                                    $
                                                                                    1.86
                                                                                    
                                                                                    
                                                                                    $
                                                                                    1.86
                                                                                    
                                                                                    
                                                                                    $
                                                                                    1.86
                                                                                    
                                                                                    
                                                                                    $
                                                                                    1.86
                                                                                    
                                                                                    
                                                                                    $
                                                                                    1.86Property,
      plant and equipmentGross
                                                                                    
                                                                                    
                                                                                    $
                                                                                    4,802.4
                                                                                    
                                                                                    
                                                                                    $
                                                                                    4,611.7
                                                                                    
                                                                                    
                                                                                    $
                                                                                    4,479.7
                                                                                    
                                                                                    
                                                                                    $
                                                                                    4,351.3
                                                                                    
                                                                                    
                                                                                    $
                                                                                    4,143.6Net
                                                                                    
                                                                                    
                                                                                    
                                                                                    2,858.6
                                                                                    
                                                                                    
                                                                                    
                                                                                    2,757.3
                                                                                    
                                                                                    
                                                                                    
                                                                                    2,714.7
                                                                                    
                                                                                    
                                                                                    
                                                                                    2,659.1
                                                                                    
                                                                                    
                                                                                    
                                                                                    2,549.8Total
      assets
                                                                                    
                                                                                    $
                                                                                    4,784.0
                                                                                    
                                                                                    
                                                                                    $
                                                                                    4,271.3
                                                                                    
                                                                                    
                                                                                    $
                                                                                    4,137.2
                                                                                    
                                                                                    
                                                                                    $
                                                                                    4,453.4
                                                                                    
                                                                                    
                                                                                    $
                                                                                    3,993.9
                                                                                    *CapitalizationLong-term
      debt, net of unamortized discount
                                                                                    
                                                                                    $
                                                                                    448.0
                                                                                    
                                                                                    
                                                                                    $
                                                                                    422.8
                                                                                    
                                                                                    
                                                                                    $
                                                                                    497.5
                                                                                    
                                                                                    
                                                                                    $
                                                                                    485.8
                                                                                    
                                                                                    
                                                                                    $
                                                                                    495.3Mandatorily
      redeemable preferred stock
                                                                                    
                                                                                    
                                                                                    .6
                                                                                    
                                                                                    
                                                                                    
                                                                                    .6
                                                                                    
                                                                                    
                                                                                    
                                                                                    .6
                                                                                    
                                                                                    
                                                                                    
                                                                                    .6
                                                                                    
                                                                                    
                                                                                    
                                                                                    1.6Common
      equity
                                                                                    
                                                                                    
                                                                                    973.1
                                                                                    
                                                                                    
                                                                                    
                                                                                    945.2
                                                                                    
                                                                                    
                                                                                    
                                                                                    876.1
                                                                                    
                                                                                    
                                                                                    
                                                                                    814.8
                                                                                    
                                                                                    
                                                                                    
                                                                                    752.6$
                                                                                    1,421.7
                                                                                    
                                                                                    
                                                                                    $
                                                                                    1,368.6
                                                                                    
                                                                                    
                                                                                    $
                                                                                    1,374.2
                                                                                    
                                                                                    
                                                                                    $
                                                                                    1,301.2
                                                                                    
                                                                                    
                                                                                    $
                                                                                    1,249.5See
      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 comparisonsand
      may affect the future performance of Nicor's business.* Periods
      prior to 2008 were adjusted due to the retrospective application of FSP
      No. FIN 39-1, Amendment
      of FIN 39, Offsetting of Amounts Related to Certain Contracts.  SeeItem
      8 - Notes to the Consolidated Financial Statements - Note
      2 - New Accounting Pronouncements for further
      information.
  15
 
 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 2006 to 2008 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 energy-related
businesses.





Net
income and diluted earnings per common share are presented below (in millions,
except per share data):




2008
                      
                      
                      2007
                      
                      
                      2006Net
      income
                      
                      $
                      119.5
                      
                      
                      $
                      135.2
                      
                      
                      $
                      128.3Diluted
      earnings per common share
                      
                      $
                      2.63
                      
                      
                      $
                      2.99
                      
                      
                      $
                      2.87





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 income from equity investments,
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.





When
comparing 2007 results to 2006, net income and diluted earnings per common share
for 2007 include the mercury-related recoveries noted above.  Net
income and diluted earnings per common share for 2006 include a $10 million
charge ($.22 per share and non-deductible for tax purposes) associated with the
company’s settlement of an inquiry by the staff of the SEC Enforcement Division
and a pretax recovery of $3.8 million ($.05 per share) associated with Nicor
Gas’ mercury inspection and repair program.  Year over year
comparisons (excluding the effects of the items noted above) reflect improved
operating income in the company’s gas distribution and other energy-related
businesses, and lower interest expense, which were more than offset by lower
operating income in the company’s shipping business, lower corporate operating
results, lower income from equity investments and higher average shares
outstanding in 2007.





16
 
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Rate proceeding. On April 29, 2008, Nicor Gas
filed with the ICC for an overall increase in rates.  The company’s
filing, as updated, provides a revenue increase of $140.4 million for a rate of
return on rate base of 9.27 percent, which reflects an 11.15 percent cost of
common equity.  The requested rate increase is needed to recover
higher operating costs and increased capital investments.





In its
rate filing, Nicor Gas has proposed some new rate adjustment
mechanisms.  These include mechanisms that would adjust rates to
reflect certain changes in the company’s bad debt expense and cost of gas used
for operations.  Also included are a volume balancing rider that would
adjust rates to recover fixed costs, an energy efficiency rider that would fund
energy efficiency programs and a rider that would adjust rates to recover a
portion of capital expenditures incurred to replace certain older
infrastructure.





On
February 9, 2009, the ALJs’ proposed order was issued recommending an increase
in base revenues of approximately $68.8 million, a rate of return on rate base
of 7.57 percent and a rate of return on equity of 10.17 percent.  The
proposed order also includes approval of a volume balancing rider that would
adjust rates to recover fixed costs and an energy efficiency rider that would
fund energy efficiency programs.





Nicor Gas
and other parties to the proceeding will have the opportunity to file written
briefs to identify points where they agree or disagree with the proposed
order.  After considering these briefs, the ALJs may modify the
proposed order before submitting it as their recommendation to the ICC
commissioners.  The ICC commissioners will then make the final
decision on Nicor Gas' rate increase request and that decision may differ from
the ALJs' recommendation.  That final decision is expected to be
issued no later than March 25, 2009.  New rates would be effective
prospectively.





Capital market
environment.The volatility in the capital markets during 2008
has caused general concern over the valuations of investments, exposure to
increased credit risk and pressures on liquidity.  The company has
reviewed its investments, exposure to credit risk and sources of liquidity and,
with the exception of the impact on postretirement benefit costs discussed
below, does not currently expect any future material adverse impacts relating to
these items.





The
company sponsored defined benefit pension plan experienced significant declines
in the market values of its investments in 2008.  These market value
declines adversely impact the company’s future postretirement benefit costs in
two ways.  First, the expected return on the pension plan’s assets
(which serves to reduce postretirement benefit costs) will decline as a result
of the lower asset market values.  Second, the pension plan’s 2008
actuarial losses (largely due to the decline in asset market values) will be
amortized over the average remaining service life of plan
participants.  As a regulated utility, Nicor Gas expects continued
rate recovery of the eligible costs of its defined benefit postretirement plans
and, accordingly, associated changes in the plan’s funded status have been
deferred as a regulatory asset or liability until recognized in net income,
instead of being recorded in accumulated other comprehensive
income.  The adverse impact of both factors on 2009 postretirement
benefit costs compared to 2008 costs is approximately $30
million.  About one-fourth of this added cost will be capitalized as a
cost of constructing gas distribution facilities and the remainder will be
included in gas distribution operating and maintenance expense, net of any
amounts charged to affiliates.  The fair value of the company’s
defined benefit
pension plan assets still exceeds the projected benefit obligation at December
31, 2008.  The company does not expect to make any contributions to
the plan in 2009.  However, if market values of the plan assets
continue to significantly decline, the company may be required to make a
contribution.





Details
of various financial and operating information by segment can be found on the
pages that follow.





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




2008
                    
                    
                    2007
                    
                    
                    2006Gas
      distribution
                    
                    $
                    124.4
                    
                    
                    $
                    128.7
                    
                    
                    $
                    123.9Shipping
                    
                    
                    39.3
                    
                    
                    
                    45.4
                    
                    
                    
                    47.5Other
      energy ventures
                    
                    
                    25.3
                    
                    
                    
                    34.0
                    
                    
                    
                    26.6Corporate
      and eliminations
                    
                    
                    (4.0
                    )
                    
                    
                    (1.6
                    )
                    
                    
                    4.5$
                    185.0
                    
                    
                    $
                    206.5
                    
                    
                    $
                    202.5





The
following summarizes operating income (loss) comparisons by major business
segment:





·
            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).




Gas
distribution operating income increased $4.8 million in 2007 compared to the
prior year due primarily to higher gas distribution margin ($8.1 million
increase) and mercury-related recoveries ($4.4 million increase), partially
offset by higher depreciation expense ($5.5 million increase), operating and
maintenance expense ($1.3 million increase) and lower gains on property sales
($1.3 million decrease).





·
            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 ($39.9 million increase), partially offset by lower
      volumes shipped ($18.6 million decrease).  Operating costs were
      higher due primarily to higher transportation-related costs ($20.7 million
      increase).




Shipping
operating income decreased $2.1 million in 2007 as compared to the prior year as
higher operating revenues ($5.6 million increase) were more than offset by
higher operating costs ($7.7 million increase).  Higher operating
revenues were attributable to higher volumes shipped ($6.8 million
increase).  Higher operating costs were due primarily to higher
transportation-related costs ($7.1 million increase) which includes
fuel.





·
            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).





Nicor’s
other energy ventures operating income increased $7.4 million in 2007 compared
to the prior year due to higher operating income at Nicor’s energy-related
products and services businesses ($3.9 million increase) and higher operating
income at Nicor Enerchange ($3.5 million increase).  Improved operating
results at Nicor’s energy-related products and services businesses were due to
higher operating revenues ($6.3 million increase), partially offset by higher
operating expenses ($2.4 million increase).  Improved operating
results at Nicor Enerchange were due primarily to the favorable






18
 
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costing
of physical sales activity and improved 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 unfavorable changes in valuations of
derivative instruments used to hedge purchases and sales of natural gas
inventory.





Nicor
Enerchange uses derivatives to mitigate commodity price risk in order to
substantially lock-in the profit margin that will ultimately be
realized.  A source of commodity price risk arises as Nicor Enerchange
purchases and holds natural gas in storage to earn a profit margin from its
ultimate sale.  However, gas stored in inventory is required to be
accounted for at the lower of weighted-average cost or market, whereas the
derivatives used to reduce the risk associated with a change in the value of the
inventory are carried at fair value, with changes in fair value recorded in
operating results in the period of change.  In addition, Nicor
Enerchange also uses derivatives to mitigate the commodity price risks of the
utility-bill management products offered by Nicor’s energy-related products and
services businesses.  The gains and losses associated with the
utility-bill management products are recognized in the months that the services
are provided.  However, the underlying derivatives used to hedge the
price exposure are carried at fair value.  For those derivatives that
don’t meet the requirements for hedge accounting, the changes in fair value are
recorded in operating results in the period of change.  As a result,
earnings are subject to volatility 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 2008, 2007 and 2006 was impacted by
      the following items:





In 2008,
corporate and eliminations’ operating income included $6.2 million of costs
associated with Nicor’s other energy ventures’ utility-bill
management products attributable to colder than normal weather (excludes
costs of approximately $0.6 million recorded within other energy
ventures).  In 2006, corporate and eliminations’ operating income
included $9.5 million of benefits associated with Nicor’s other energy ventures’
utility-bill management products attributable to warmer than normal weather
(excludes costs of approximately $0.7 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 segment’s weather risk.  The
amount of the offset attributable to the utility-bill management products
marketed by Nicor’s other energy ventures will vary depending upon a number of
factors including the time of year, weather patterns, the number of customers
for these products and the market price for natural gas.





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 segment (recorded as a reduction to operating and maintenance
expense).





In 2006,
corporate and eliminations’ operating income included a $10 million charge
(non-deductible for tax purposes) relating to a settlement with the SEC of
claims of securities law violations relating to the PBR plan.  The
company neither admitted nor denied any wrongdoing in the matter.





In 2006,
corporate and eliminations’ operating income included insurance recoveries of
$5.2 million related to previously incurred legal expenses associated with
securities class actions and shareholder derivative lawsuits settled in prior
years.





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RESULTS
OF OPERATIONS





Details
of various financial and operating information by segment can be found in the
tables throughout this review.  The following discussion summarizes
the major items impacting Nicor’s operating income.





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





2008
                    
                    
                    2007
                    
                    
                    2006Gas
      distribution
                    
                    $
                    3,206.9
                    
                    
                    $
                    2,627.5
                    
                    
                    $
                    2,452.3Shipping
                    
                    
                    425.2
                    
                    
                    
                    403.9
                    
                    
                    
                    398.3Other
      energy ventures
                    
                    
                    230.3
                    
                    
                    
                    244.5
                    
                    
                    
                    215.9Corporate
      and eliminations
                    
                    
                    (85.8
                    )
                    
                    
                    (99.6
                    )
                    
                    
                    (106.5
                    )$
                    3,776.6
                    
                    
                    $
                    3,176.3
                    
                    
                    $
                    2,960.0





Gas
distribution revenues are impacted by changes in natural gas costs, which are
passed directly through to customers without markup, subject to ICC
review.  Gas distribution revenues 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).





Gas
distribution revenues increased $175.2 million in 2007 compared to the prior
year due to colder weather in 2007 (approximately $240 million increase),
partially offset by lower natural gas prices (approximately $25 million
decrease) and demand unrelated to weather (approximately $12 million
decrease).





Shipping
segment 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.  During the second quarter of 2008, Tropical
Shipping completed an acquisition of the assets of Caribtran, Inc., which is
expected to add approximately 4 percent to expected shipping revenues on an
annual basis.





Shipping
segment operating revenues increased $5.6 million in 2007 compared to the prior
year due to higher volumes shipped.  Volumes were higher due primarily
to increased interisland shipments.  Volumes shipped in 2007 were
adversely impacted by increased competition in several of the ports served, the
strategic decision not to compete for certain low margin business, decreased
construction cargo for hurricane recovery projects and changing global trade
patterns.





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 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.





Nicor’s
other energy ventures operating revenues increased $28.6 million in 2007
compared to the prior year due to higher revenues at Nicor Enerchange ($22.3
million increase) and Nicor’s energy-related products and services businesses
($6.3 million increase).  Higher revenues at Nicor Enerchange were
due, in part, to the favorable costing of physical sales activity and improved
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
unfavorable






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changes
in valuations of derivative instruments used to hedge purchases and sales of
natural gas inventory.  Higher revenues at Nicor’s energy-related
products and services businesses were attributable to an increase in average
customer contracts ($6.6 million increase).





Corporate
and eliminations primarily reflects the elimination of gas distribution revenues
against Nicor Solutions’ expenses for customers purchasing the utility-bill
management  products.





Gas distribution
margin.Nicor utilizes a measure it refers to as “gas
distribution margin” to evaluate the operating income impact of gas distribution
revenues.  Gas distribution revenues include natural gas costs, which
are passed directly through to customers without markup, subject to ICC review,
and revenue taxes, for which Nicor Gas earns a small administrative
fee.  These items often cause significant fluctuations in gas
distribution revenues, with equal and offsetting fluctuations in cost of gas and
revenue tax expense, with no direct impact on gas distribution
margin.





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





2008
                      
                      
                      2007
                      
                      
                      2006Gas
      distribution revenues
                      
                      $
                      3,206.9
                      
                      
                      $
                      2,627.5
                      
                      
                      $
                      2,452.3Cost
      of gas
                      
                      
                      (2,427.8
                      )
                      
                      
                      (1,906.5
                      )
                      
                      
                      (1,743.7
                      )Revenue
      tax expense
                      
                      
                      (171.1
                      )
                      
                      
                      (148.7
                      )
                      
                      
                      (144.4
                      )Gas
      distribution margin
                      
                      $
                      608.0
                      
                      
                      $
                      572.3
                      
                      
                      $
                      564.2





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 margin increased $8.1 million in 2007 compared to the prior year
due to colder weather (approximately $17 million increase), partially offset by
lower average distribution rates (approximately $6 million decrease which
included the negative impact of approximately $2 million attributable to the
ICC’s rate order rehearing decision that went into effect in April 2006) and the
impact of customer interest (approximately $2 million decrease).





Gas distribution operating and
maintenance expense.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 recoveries of previously incurred costs ($3.9 million, of which $2.0
million relates to a recovery of costs associated with the prior year PCB matter
and $1.9 million relates to legal cost recoveries from a counterparty with whom
Nicor previously did business during the PBR timeframe).





Gas
distribution operating and maintenance expense increased $1.3 million in 2007
compared to the prior year.  Higher bad debt expense ($14.9 million
increase) was partially offset by lower company use gas and storage-related gas
costs ($13.1 million decrease) attributable primarily to lower prices paid for
natural gas.





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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 reserve adjustment and $0.8 million in cost recoveries
recorded during the first quarter of 2007.  In 2006, a mercury-related
recovery of $3.8 million was realized from a settlement reached with an
independent contractor of Nicor Gas.  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, 2007 and 2006, Nicor Gas realized pretax gains
of $0.8 million, $2.0 million and $3.3 million, respectively.  The
company periodically assesses its ownership of certain real estate
holdings.





Shipping operating
expenses.  Shipping segment 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.





Shipping
segment operating expenses increased $7.7 million in 2007 compared to the prior
year due primarily to higher transportation-related costs ($7.1 million
increase) which includes fuel.





Other energy ventures operating
expenses.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.





Nicor’s
other energy ventures operating expenses increased $21.2 million in 2007
compared to the prior year.  Approximately $18 million of the variance
is related to transportation and storage charges at Nicor
Enerchange.  In addition, there were higher expenses at Nicor’s
energy-related products and services businesses ($2.4 million increase)
reflecting higher costs associated with customer contracts ($2.9 million
increase) due, in part, to an increase in average customer
contracts.





Litigation charges (recoveries),
net.In 2006, Nicor recorded a $10 million charge
(non-deductible for tax purposes) relating to a settlement with the SEC of
claims of securities law violations relating to the PBR plan.  The
company neither admitted nor denied any wrongdoing in the matter.





Other corporate expenses and
eliminations.  Other corporate operating expenses (income) were
($2.0) million, $1.8 million and ($5.2) million in 2008, 2007 and 2006,
respectively.  In 2008 and 2006, Nicor recorded recoveries of
previously incurred legal costs.  Also included in the amounts for all
years presented are certain business development costs.





Intercompany
eliminations were ($79.8) million, ($99.8) million and ($115.8) million in 2008,
2007 and 2006, respectively, and related primarily to utility-bill management
products.




22
 
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Interest
expense.Interest expense increased $2.2 million in 2008
compared to the prior year.  This increase reflects the impact 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.





Interest
expense decreased $11.2 million in 2007 compared to the prior
year.  This decrease reflects the impact of lower interest on income
tax matters ($9.0 million decrease) attributable to the previously mentioned
settlement with the IRS and lower average borrowing levels.





Net equity investment
income.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).





Net
equity investment income decreased $4.8 million in 2007 compared to the prior
year due primarily to the sale in 2006 of an equity investment ($3.8 million
decrease, of which $2.4 million related to a gain on the sale and $1.4 million
related to equity income recognized in 2006).





Equity
investment results include $6.4 million, $5.1 million and $5.8 million for 2008,
2007 and 2006, respectively, for Nicor’s share of income from
Triton.





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, 2008 and
2007, income tax expense has not been provided on approximately $23 million and
$39 million, respectively, of foreign company shipping earnings that are
expected to be indefinitely reinvested offshore.





The
effective income tax rate was 27.0 percent, 26.6 percent and 26.3 percent for
2008, 2007 and 2006, respectively.  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.  The increase in
the 2007 effective income tax rate compared to 2006 reflects the recognition of
tax benefits in 2006 related to the reorganization of the company’s shipping and
related operations offset, in part, by the non-deductible $10 million charge in
2006 associated with the company’s SEC inquiry and an increase in 2007 of
untaxed foreign earnings.





23
 
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Nicor
      Inc.Gas
      Distribution Statistics2008
                                                  
                                                  
                                                  2007
                                                  
                                                  
                                                  2006Operating revenues(millions)SalesResidential
                                                  
                                                  $
                                                  2,176.2
                                                  
                                                  
                                                  $
                                                  1,791.4
                                                  
                                                  
                                                  $
                                                  1,671.1Commercial
                                                  
                                                  
                                                  551.4
                                                  
                                                  
                                                  
                                                  426.2
                                                  
                                                  
                                                  
                                                  373.9Industrial
                                                  
                                                  
                                                  61.9
                                                  
                                                  
                                                  
                                                  47.6
                                                  
                                                  
                                                  
                                                  42.82,789.5
                                                  
                                                  
                                                  
                                                  2,265.2
                                                  
                                                  
                                                  
                                                  2,087.8TransportationResidential
                                                  
                                                  
                                                  40.9
                                                  
                                                  
                                                  
                                                  31.1
                                                  
                                                  
                                                  
                                                  32.0Commercial
                                                  
                                                  
                                                  82.2
                                                  
                                                  
                                                  
                                                  76.7
                                                  
                                                  
                                                  
                                                  82.1Industrial
                                                  
                                                  
                                                  38.3
                                                  
                                                  
                                                  
                                                  37.5
                                                  
                                                  
                                                  
                                                  41.0Other
                                                  
                                                  
                                                  25.7
                                                  
                                                  
                                                  
                                                  10.6
                                                  
                                                  
                                                  
                                                  3.7187.1
                                                  
                                                  
                                                  
                                                  155.9
                                                  
                                                  
                                                  
                                                  158.8Other
      revenuesRevenue
      taxes
                                                  
                                                  
                                                  174.0
                                                  
                                                  
                                                  
                                                  149.6
                                                  
                                                  
                                                  
                                                  147.7Environmental
      cost recovery
                                                  
                                                  
                                                  9.7
                                                  
                                                  
                                                  
                                                  10.9
                                                  
                                                  
                                                  
                                                  11.6Chicago
      Hub
                                                  
                                                  
                                                  11.3
                                                  
                                                  
                                                  
                                                  19.0
                                                  
                                                  
                                                  
                                                  26.4Other
                                                  
                                                  
                                                  35.3
                                                  
                                                  
                                                  
                                                  26.9
                                                  
                                                  
                                                  
                                                  20.0230.3
                                                  
                                                  
                                                  
                                                  206.4
                                                  
                                                  
                                                  
                                                  205.7$
                                                  3,206.9
                                                  
                                                  
                                                  $
                                                  2,627.5
                                                  
                                                  
                                                  $
                                                  2,452.3Deliveries(Bcf)SalesResidential
                                                  
                                                  
                                                  214.4
                                                  
                                                  
                                                  
                                                  201.8
                                                  
                                                  
                                                  
                                                  185.9Commercial
                                                  
                                                  
                                                  54.7
                                                  
                                                  
                                                  
                                                  48.7
                                                  
                                                  
                                                  
                                                  41.8Industrial
                                                  
                                                  
                                                  6.4
                                                  
                                                  
                                                  
                                                  5.7
                                                  
                                                  
                                                  
                                                  5.0275.5
                                                  
                                                  
                                                  
                                                  256.2
                                                  
                                                  
                                                  
                                                  232.7TransportationResidential
                                                  
                                                  
                                                  25.6
                                                  
                                                  
                                                  
                                                  19.7
                                                  
                                                  
                                                  
                                                  17.0Commercial
                                                  
                                                  
                                                  93.1
                                                  
                                                  
                                                  
                                                  84.6
                                                  
                                                  
                                                  
                                                  80.4Industrial
                                                  
                                                  
                                                  103.9
                                                  
                                                  
                                                  
                                                  107.8
                                                  
                                                  
                                                  
                                                  108.6222.6
                                                  
                                                  
                                                  
                                                  212.1
                                                  
                                                  
                                                  
                                                  206.0498.1
                                                  
                                                  
                                                  
                                                  468.3
                                                  
                                                  
                                                  
                                                  438.7Year-end customers(thousands)SalesResidential
                                                  
                                                  
                                                  1,760
                                                  
                                                  
                                                  
                                                  1,789
                                                  
                                                  
                                                  
                                                  1,807Commercial
                                                  
                                                  
                                                  130
                                                  
                                                  
                                                  
                                                  128
                                                  
                                                  
                                                  
                                                  123Industrial
                                                  
                                                  
                                                  8
                                                  
                                                  
                                                  
                                                  7
                                                  
                                                  
                                                  
                                                  71,898
                                                  
                                                  
                                                  
                                                  1,924
                                                  
                                                  
                                                  
                                                  1,937TransportationResidential
                                                  
                                                  
                                                  222
                                                  
                                                  
                                                  
                                                  191
                                                  
                                                  
                                                  
                                                  166Commercial
                                                  
                                                  
                                                  53
                                                  
                                                  
                                                  
                                                  54
                                                  
                                                  
                                                  
                                                  57Industrial
                                                  
                                                  
                                                  5
                                                  
                                                  
                                                  
                                                  5
                                                  
                                                  
                                                  
                                                  6280
                                                  
                                                  
                                                  
                                                  250
                                                  
                                                  
                                                  
                                                  2292,178
                                                  
                                                  
                                                  
                                                  2,174
                                                  
                                                  
                                                  
                                                  2,166Other
      statisticsDegree
      days
                                                  
                                                  
                                                  6,348
                                                  
                                                  
                                                  
                                                  5,756
                                                  
                                                  
                                                  
                                                  5,174Colder
      (warmer) than normal (1)
                                                  
                                                  
                                                  9%
                                                  
                                                  
                                                  
                                                  (1%)
                                                  
                                                  
                                                  
                                                  (11%)Average
      gas cost per Mcf sold
                                                  
                                                  $
                                                  8.76
                                                  
                                                  
                                                  $
                                                  7.36
                                                  
                                                  
                                                  $
                                                  7.44(1)
      Normal weather for Nicor Gas' service territory, for purposes of this
      report, is considered to be 5,830 degree
      days per year.





24
 
 Table of
Contents





Shipping
      Statistics
                              
                              2008
                              
                              
                              2007
                              
                              
                              2006TEUs
      shipped (thousands)
                              
                              
                              197.1
                              
                              
                              
                              206.6
                              
                              
                              
                              203.1Average
      revenue per TEU
                              
                              $
                              2,158
                              
                              
                              $
                              1,955
                              
                              
                              $
                              1,961At
      end of periodPorts served
                              
                              
                              25
                              
                              
                              
                              26
                              
                              
                              
                              27Vessels operated
                              
                              
                              17
                              
                              
                              
                              19
                              
                              
                              
                              18





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.  Recent capital market conditions are not currently
expected to have a material adverse impact on the company’s ability to access
capital.





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





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.





In 2003,
Nicor received an income tax refund of approximately $100 million attributable
to a tax loss carryback associated with a change in tax accounting method (which
increased its deferred income tax liability), subject to IRS review and approval
as part of normal ongoing audits.  Through December 31, 2004, the
total current tax benefits previously recorded under this accounting method
approximated $135 million (amounts recorded were offset by increases to the
deferred tax liability with no net effect on reported net federal income tax
expense).  In 2005, the IRS revised the regulations pertaining to the
aforementioned tax accounting method.  The new regulations required
repayment in 2005 and 2006 of amounts previously taken as current tax
deductions.  During 2006 and 2005, the company reclassified income tax
expense from deferred to current and repaid approximately $135 million equally
over those years.





Investing
activities.Net cash flow used for investing activities was
$265.3 million, $193.9 million and $192.2 million in 2008, 2007 and 2006,
respectively.





During
the second quarter of 2008, Tropical Shipping acquired the assets of Caribtran,
Inc., a provider of less-than-container load and full container load
consolidation services from the United States to the Caribbean and Central
America.




25
 
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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 business segment are presented in the following table (in
millions):





Estimated2009
                        
                        
                        2008
                        
                        
                        2007
                        
                        
                        2006Gas
      distribution
                        
                        $
                        210
                        
                        
                        $
                        229
                        
                        
                        $
                        159
                        
                        
                        $
                        164Shipping
                        
                        
                        50
                        
                        
                        
                        17
                        
                        
                        
                        14
                        
                        
                        
                        17Other
      energy ventures
                        
                        
                        50
                        
                        
                        
                        4
                        
                        
                        
                        4
                        
                        
                        
                        6$
                        310
                        
                        
                        $
                        250
                        
                        
                        $
                        177
                        
                        
                        $
                        187





Gas
distribution segment 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 segment capital expenditures decreased in 2007 versus 2006 due to a
reduction in costs for information technology system improvements (approximately
$7 million decrease) and the impact of lower customer additions (approximately
$6 million decrease), partially offset by higher expenditures associated with
storage system projects (approximately $5 million increase).





Capital
expenditures in the gas distribution segment are expected to decrease in 2009
versus 2008 due to lower expenditures associated with gas distribution,
transmission and storage system improvements, facility construction and
information technology improvements, partially offset by higher capitalized
overhead costs attributable to higher postretirement benefit costs.





Capital
expenditures in the shipping segment increased in 2008 due to an increase in
container replacements, partially offset by a decrease in facility expansion and
freight handling equipment expenditures.





Capital
expenditures in the shipping segment decreased in 2007 due primarily to the
purchase of a vessel in 2006, partially offset by an increase in facility
expansion and freight handling equipment.





Capital
expenditures in the shipping segment are expected to increase in 2009 versus
2008 due primarily to the expected purchase of two vessels and higher
expenditures related to containers and freight equipment.





Nicor’s
capital budget also includes approximately $40 million in 2009 for the planned
development of natural gas storage fields.  During 2008, Nicor
announced the formation of a new wholly-owned subsidiary, Central Valley Gas
Storage, LLC (“Central Valley”) which plans to develop 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 2011.




26
 
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Additional investing
activities.  Yearly fluctuations in additional investing
activities include the following items:


·
            Investing
      activities in all three years reflect increased short-term investments
      primarily at the company’s shipping
segment.


·
            Investing
      activities in 2007 as compared to 2006 reflects the release of the $10.0
      million from escrow associated with the settlement of the company’s SEC
      inquiry.





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
                                          
                                          
                                          
                                          A1
                                          
                                          
                                          AA-Senior
      Unsecured Debt
                                          
                                          AA
                                          
                                          
                                          
                                          A2
                                          
                                          
                                          
                                          A+Corporate
      Credit Rating
                                          
                                          AA
                                          
                                          
                                          
                                          n/a
                                          
                                          
                                          
                                          n/a





In April
2008, Standard & Poor’s affirmed its credit ratings and changed its outlook
from Negative to Stable on both Nicor and Nicor Gas. In November 2008,
Standard & Poor’s raised the rating on unsecured debt from AA- to AA for
both Nicor and Nicor Gas.  The rating revision is the result of a
change in methodology at Standard & Poor’s to better reflect the recovery
prospects of creditors in the investor-owned utility operating
sector.





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.





At
December 31, 2008, Nicor Gas had the capacity to issue approximately $440
million of additional First Mortgage Bonds under the terms of its
indenture.  The company’s shelf registration expired in December
2008.  The company expects to file a new shelf registration in early
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.  Substantially all gas
distribution properties are subject to the lien of the indenture securing Nicor
Gas’ First Mortgage Bonds.





In
February 2009, the $50 million 5.37 percent First Mortgage Bond series matured
and were retired.  The company expects to issue $50 million in First
Mortgage Bonds in 2009.





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





27
 
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In 2006,
Nicor Gas, through a private placement, issued $50 million of First Mortgage
Bonds at 5.85 percent, due in 2036.  Proceeds from this issuance were
applied to the $50 million 5.55 percent First Mortgage Bond series, which
matured in 2006.





In 2005,
Tropical Shipping obtained a $40 million two-year senior unsecured term loan
which was used along with cash available from foreign subsidiaries to fund the
repatriation of $132 million of its cumulative undistributed foreign earnings
under the provisions of the Jobs Act.  As of December 31, 2006, this
loan was paid in full.





Short-term debt.In August 2008,
Nicor Gas established a $600 million, 9-month seasonal revolver expiring May
2009, to replace the $400 million, 210-day seasonal revolver, which expired in
May 2008.  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 $739.9
million and $369.0 million of commercial paper outstanding at December 31, 2008
and 2007, 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 2008 of $0.465 per common
share.  The company paid dividends on its common stock of $84.4
million, $84.1 million and $82.9 million in 2008, 2007 and 2006,
respectively.  Nicor currently has no contractual or regulatory
restrictions on the payment of dividends.





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
plans to amend 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
the 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 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 2008, 2007 and 2006, and at December 31, 2008, $21.5
million remained authorized for the repurchase of common stock.





Preferred
Stock.  In 2007, Nicor redeemed 100 shares of 4.48 percent
Mandatorily Redeemable Preferred Stock, $50 par value, at a per share redemption
price of $43 plus accrued unpaid dividends.  There were 11,581 shares
of the 4.48 percent Series Mandatorily Redeemable Preferred Stock, $50 par
value, outstanding at December 31, 2008.





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.





28
 
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Contractual
obligations.  At December 31, 2008, 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
                                                                                
                                                                                $
                                                                                809.6
                                                                                
                                                                                
                                                                                $
                                                                                363.1
                                                                                
                                                                                
                                                                                $
                                                                                126.6
                                                                                
                                                                                
                                                                                $
                                                                                7.7
                                                                                
                                                                                
                                                                                $
                                                                                1,307.0Long-term
      debt
                                                                                
                                                                                
                                                                                50.0
                                                                                
                                                                                
                                                                                
                                                                                75.0
                                                                                
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                375.0
                                                                                
                                                                                
                                                                                
                                                                                500.0Fixed
      interest on long-term
      debt
                                                                                
                                                                                
                                                                                28.5
                                                                                
                                                                                
                                                                                
                                                                                52.0
                                                                                
                                                                                
                                                                                
                                                                                46.6
                                                                                
                                                                                
                                                                                
                                                                                380.9
                                                                                
                                                                                
                                                                                
                                                                                508.0Operating
      leases
                                                                                
                                                                                
                                                                                23.8
                                                                                
                                                                                
                                                                                
                                                                                18.0
                                                                                
                                                                                
                                                                                
                                                                                7.4
                                                                                
                                                                                
                                                                                
                                                                                13.0
                                                                                
                                                                                
                                                                                
                                                                                62.2Other
      long-term obligations
                                                                                
                                                                                
                                                                                .2
                                                                                
                                                                                
                                                                                
                                                                                .2
                                                                                
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                .6
                                                                                
                                                                                
                                                                                
                                                                                1.0$
                                                                                912.1
                                                                                
                                                                                
                                                                                $
                                                                                508.3
                                                                                
                                                                                
                                                                                $
                                                                                180.6
                                                                                
                                                                                
                                                                                $
                                                                                777.2
                                                                                
                                                                                
                                                                                $
                                                                                2,378.2





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
estimated unrecognized tax benefits of $10.8 million at December 31, 2008, 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 business segments.  Natural gas purchase
agreements include obligations to purchase natural gas at future market prices,
calculated using December 31, 2008 NYMEX futures prices.





Operating
leases are primarily for vessels, containers and equipment in the shipping
segment, office space and equipment in the gas distribution segment 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 $41.7 million, $41.3 million and $41.7
million in 2008, 2007 and 2006, respectively.





In 2006,
Nicor Gas signed an agreement to purchase approximately 16 Bcf of synthetic
natural gas annually for a 20-year term beginning as early as
2010.  The agreement was contingent upon various milestones to be
achieved by the counterparty to the agreement.  The counterparty
failed to achieve certain of these milestones and the agreement terminated on
July 1, 2008.





Labor
negotiations.  The current labor contract between Nicor Gas and
the International Brotherhood of Electrical Workers (IBEW) Local 19 expires on
February 28, 2009.  The current agreement covers approximately 1,400
employees of Nicor Gas.  As of the filing date of this report,
negotiations between IBEW representatives and the company
continue.  Nicor Gas believes that there are adequate contingency
plans in the event of a work stoppage, which the company currently does not
expect.





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.





29
 
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OUTLOOK





Nicor’s
outlook assumes normal weather for 2009, 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 2009 earnings, they are currently not
estimable.





Gas
distribution.  Nicor Gas expects operating results to be
adversely impacted by significantly higher operating and maintenance and
depreciation expense.  Operating and maintenance expense is expected
to be higher due, in part, to increased postretirement benefit costs
attributable to 2008’s decline in the market values of investments of the
company’s defined benefit pension plan.





The
company’s request for rate relief in the amount of $140.4 million is expected to
be decided no later than March 25, 2009.  Results for Nicor Gas for
2009 are dependent on the outcome of that request.  Any rate relief
would be prospective from the date of an ICC decision.  As a result,
the company estimates that every $10 million of rate relief would positively
impact 2009 net income by approximately $4 million to $5 million.  The
company’s request for rate relief does include a request for a volume-balancing
rider that would adjust rates to substantially compensate for variances in
weather which would mitigate the volatility at Nicor Gas.





The
company estimates that a 100-degree day variation from normal weather affects
Nicor Gas’ distribution margin, net of income taxes, by approximately $1.6
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 lower when compared to 2008 as
it is expected that a challenging economic environment will have a negative
impact on tourism and the economies in the Bahamas and the Caribbean
region.  The company also continues to expect relatively low tax costs
on operating earnings in 2009 attributable to the 2006 reorganization of certain
shipping and related operations.





Otherenergyventures.  The
company expects higher operating results from its other energy ventures due to
higher results from its wholesale natural gas marketing company, partially
offset by lower results in its energy-related products and services
businesses.





Other.  Nicor also
expects its effective income tax rate to be higher, in part, because of the
absence of certain tax reserve adjustments recognized in 2008.





30
 
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Contents




CONTINGENCIES





The
following contingencies of Nicor are in various stages of investigation or
disposition.  Although in some cases the company is unable to estimate
the amount of loss reasonably possible in addition to any amounts already
recognized, it is possible that the resolution of these contingencies, either
individually or in aggregate, will require the company to take charges against,
or will result in reductions in, future earnings.  It is the opinion
of management that the resolution of these contingencies, either individually or
in aggregate, could be material to earnings in a particular period but is not
expected to have a material adverse impact on Nicor’s liquidity or financial
condition.





PBR plan.  Nicor
Gas’ PBR plan for natural gas costs went into effect in 2000 and was terminated
by the company effective January 1, 2003.  Under the PBR plan, Nicor
Gas’ total gas supply costs were compared to a market-sensitive
benchmark.  Savings and losses relative to the benchmark were
determined annually and shared equally with sales customers.  The PBR
plan is currently under ICC review.  There are allegations that the
company acted improperly in connection with the PBR plan, and the ICC and others
are reviewing these allegations.  On June 27, 2002, the Citizens
Utility Board (“CUB”) filed a motion to reopen the record in the ICC’s
proceedings to review the PBR plan (the “ICC Proceedings”).  As a
result of the motion to reopen, Nicor Gas, the Cook County State’s Attorney
Office (“CCSAO”), the staff of the ICC and CUB entered into a stipulation
providing for additional discovery.  The Illinois Attorney General’s
Office (“IAGO”) has also intervened in this matter.  In addition, the
IAGO issued Civil Investigation Demands (“CIDs”) to CUB and the ICC
staff.  The CIDs ordered that CUB and the ICC staff produce all
documents relating to any claims that Nicor Gas may have presented, or caused to
be presented, false information related to its PBR plan.  The company
has committed to cooperate fully in the reviews of the PBR plan.





In
response to these allegations, on July 18, 2002, the Nicor Board of Directors
appointed a special committee of independent, non-management directors to
conduct an inquiry into issues surrounding natural gas purchases, sales,
transportation, storage and such other matters as may come to the attention of
the special committee in the course of its investigation.  The special
committee presented the report of its counsel (“Report”) to Nicor’s Board of
Directors on October 28, 2002.  A copy of the Report is available at
the Nicor website and has been previously produced to all parties in the ICC
Proceedings.





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





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





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On
February 5, 2003, the CCSAO and CUB filed a motion for $27 million in sanctions
against the company in the ICC Proceedings.  In that motion, CCSAO and
CUB alleged that Nicor Gas’ responses to certain
CUB data requests were false.  Also on February 5, 2003, CUB stated in
a press release that, in addition to $27 million in sanctions, it would seek
additional refunds to consumers.  On March 5, 2003, the ICC staff
filed a response brief in support of CUB’s motion for sanctions.  On
May 1, 2003, the ALJs issued a ruling denying CUB and CCSAO’s motion for
sanctions.  CUB has filed an appeal of the motion for sanctions with
the ICC, and the ICC has indicated that it will not rule on the appeal until the
final disposition of the ICC Proceedings.  It is not possible to
determine how the ICC will resolve the claims of CCSAO, CUB or other parties to
the ICC Proceedings.





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





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





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





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,
2008.





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





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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.





PCBs.  Information
about PCB contingencies is presented in Item 8 – Notes to the Consolidated
Financial Statements – Note 21 – Contingencies – PCBs.





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.In 2006, Nicor received
a payment of $5.2 million from insurance carriers as reimbursement of legal
defense costs in connection with securities class actions and shareholder
derivative suits that were settled in 2004 and 2005.  This payment has
been recorded in “Other corporate expenses and eliminations” in the Consolidated
Statements of Operations for 2006.





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.





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.






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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.





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.  Changes in these assumptions typically do not have a
significant impact on the expenses recorded from year to
year.  However, 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 13 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 estimated postretirement benefit expense included in operating income
was $2.7 million, $4.8 million and $5.5 million in 2008, 2007 and 2006,
respectively.  The company expects to record postretirement benefit
expense for 2009 of $24.6 million.  As previously discussed,
significant market declines in the values of plan assets caused the increase in
postretirement expense for 2009 when compared to prior
years.  Actuarial assumptions affecting 2009 include an expected
long-term rate of return on plan assets of 8.50 percent, consistent with the
prior year, and discount rates of 6.35 percent for the company’s defined benefit
pension plan and 6.00 percent for the health care and life insurance plan,
compared with 6.25 percent for both plans a year earlier.  The 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.  The 2007 discount rate was
determined by performing a bond matching study and referencing the Citigroup
Pension Liability Index rate.  Such study utilized high quality bonds
whose expected cash flows match the timing and amount of future benefit payments
of the plans.





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.  At December 31, 2008, 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 $51 million on
approximately $146 million of cumulative undistributed foreign earnings that are
expected in management’s judgment to be indefinitely reinvested
offshore.  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






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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. Nicor’s subsidiaries and
affiliates are 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.  Recent adverse developments in the capital markets
have 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.





Nicor’s
subsidiaries and affiliates maintain 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 worsening economic conditions.  Actual credit losses
could vary materially from Nicor’s estimates.  Nicor’s allowance for
doubtful accounts at December 31, 2008, 2007 and 2006 was $44.9 million, $35.1
million and $33.4 million, respectively, as presented on Schedule II in Item 15
– Exhibits, Financial Statement Schedules.





Unbilled revenues.Nicor Gas
estimates revenues for natural gas deliveries not yet billed to customers from
the last billing date to month-end.  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,
2008, 2007 and 2006 were $196.1 million, $189.3 million and $158.9 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 applies SFAS No. 71,
Accounting for the Effects of
Certain Types of Regulation, which requires Nicor Gas to recognize the
economic effects of rate regulation and, accordingly, has recorded regulatory
assets and liabilities.  Regulatory assets represent probable future
revenue associated with certain costs that are expected to be recovered from
customers through rate riders or base rates, upon approval by the
ICC.  Regulatory liabilities represent probable future reductions in
revenues collected from ratepayers through a rate rider or base rates, or
probable future expenditures.  If Nicor Gas’ operations become no
longer subject to the provisions of SFAS No. 71, a write-off of net regulatory
liabilities would be required.  Additional information on regulatory
assets and liabilities is presented in Item 8 – Notes to the Consolidated
Financial Statements – Note 1 – Accounting Policies.





NEW
ACCOUNTING PRONOUNCEMENTS





For
information concerning SFAS No. 157, Fair Value Measurements, FSP
No. FIN 39-1, Amendment of FIN
39, Offsetting of Amounts Related to Certain Contracts, and SFAS No. 158,
Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans, see Item 8 –
Notes to the Consolidated Financial Statements – Note 2 – New Accounting
Pronouncements.




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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.




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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
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, bad debt expense, and other operating
and financing expenses.  The company purchases about 4 Bcf of natural
gas annually for its own use and to cover storage-related gas
costs.  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.  During
2008, Nicor Gas hedged a portion of its forecasted 2009 and 2010 company use and
storage-related gas costs through the use of fixed-price purchase and swap
agreements.





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, 2008, a 10 percent adverse change in natural gas
prices would have decreased Nicor’s earnings for the periods ended December 31,
2008 and 2007 by about $1.0 million and $0.4 million, respectively.





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At
December 31, 2008,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
                                    Years
                                  
                                  
                                  3
      to 5
                                    YearsPrices
      actively quoted
                                  
                                  $
                                  (14.2
                                  )
                                  
                                  $
                                  (17.0
                                  )
                                  
                                  $
                                  2.8
                                  
                                  
                                  $
                                  -Prices
      correlated to external sources
                                  
                                  
                                  19.0
                                  
                                  
                                  
                                  14.9
                                  
                                  
                                  
                                  4.1
                                  
                                  
                                  
                                  -Prices
      based on models and other valuation methods
                                  
                                  
                                  (.2
                                  )
                                  
                                  
                                  (.1
                                  )
                                  
                                  
                                  (.1
                                  )
                                  
                                  
                                  -Total
                                  
                                  $
                                  4.6
                                  
                                  
                                  $
                                  (2.2
                                  )
                                  
                                  $
                                  6.8
                                  
                                  
                                  $
                                  -





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 segment 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.





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 risk, the company has
established procedures to determine and monitor the creditworthiness of
counterparties, to require guarantees or collateral back-up, and to limit its
exposure to any one counterparty.  The company also, in some
instances, enters into netting arrangements to mitigate counterparty credit
risk.  However, recent adverse developments in the capital markets
have made it more difficult for the company to assess the creditworthiness of
our 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 $0.2 million in 2008.  For further
information about debt securities, interest rates and fair values, see Item 8 –
Financial Statements – Consolidated Statements of Capitalization, and Item 8 –
Notes to the Consolidated Financial Statements – Note 7 – Short-Term and
Long-Term Debt and Note 9 – Fair Value of Financial Instruments.




Table of
Contents





Nicor
Inc.





Item
      8.
            Financial Statements and Supplementary
      Data




PageReport of Independent Registered Public Accounting
      Firm
              40Financial
      Statements:Consolidated Statements of Operations
              42Consolidated Statements of Cash Flows
              43Consolidated Balance Sheets
              44Consolidated Statements of
    Capitalization
              45Consolidated Statements of Common
      Equity
              46Consolidated Statements of Comprehensive
      Income
              46Notes to the Consolidated Financial
      Statements
              47








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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,
2008 and 2007, 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, 2008.  Our audits also included the
financial statement schedule listed in the Index at Item 15(a)(2).  We
also have audited the Company’s internal control over financial reporting as of
December 31, 2008,  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.




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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, 2008 and 2007, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 2008, 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, 2008, based on the criteria established in Internal Control—Integrated
Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission.





As
discussed in Note 1 to the consolidated financial statements, in 2007, the
Company changed its method of recognizing and measuring income tax positions. As
discussed in Note 2 to the consolidated financial statements, in 2008, the
Company changed its method of offsetting amounts related to certain contracts
and retrospectively adjusted the 2007 balance sheet for the change.






/s/
DELOITTE & TOUCHE LLP




Chicago,
Illinois


February
25, 2009






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Nicor
      Inc.Consolidated Statements of Operations(millions,
      except per share data)Year
      ended December 312008
                                
                                
                                2007
                                
                                
                                2006Operating
      revenuesGas
      distribution (includes
      revenue taxes of $174.0,$149.6 and $147.7,
      respectively)
                                
                                $
                                3,206.9
                                
                                
                                $
                                2,627.5
                                
                                
                                $
                                2,452.3Shipping
                                
                                
                                425.2
                                
                                
                                
                                403.9
                                
                                
                                
                                398.3Other
      energy ventures
                                
                                
                                230.3
                                
                                
                                
                                244.5
                                
                                
                                
                                215.9Corporate
      and eliminations
                                
                                
                                (85.8
                                )
                                
                                
                                (99.6
                                )
                                
                                
                                (106.5
                                )Total
      operating revenues
                                
                                
                                3,776.6
                                
                                
                                
                                3,176.3
                                
                                
                                
                                2,960.0Operating
      expensesGas
      distributionCost
      of gas
                                
                                
                                2,427.8
                                
                                
                                
                                1,906.5
                                
                                
                                
                                1,743.7Operating
      and maintenance
                                
                                
                                294.6
                                
                                
                                
                                269.8
                                
                                
                                
                                268.5Depreciation
                                
                                
                                170.9
                                
                                
                                
                                165.6
                                
                                
                                
                                160.1Taxes,
      other than income taxes
                                
                                
                                189.4
                                
                                
                                
                                166.9
                                
                                
                                
                                163.0Mercury-related
      costs (recoveries), net
                                
                                
                                .6
                                
                                
                                
                                (8.0
                                )
                                
                                
                                (3.6
                                )Property
      sale gains
                                
                                
                                (.8
                                )
                                
                                
                                (2.0
                                )
                                
                                
                                (3.3
                                )Shipping
                                
                                
                                385.9
                                
                                
                                
                                358.5
                                
                                
                                
                                350.8Other
      energy ventures
                                
                                
                                205.0
                                
                                
                                
                                210.5
                                
                                
                                
                                189.3Litigation
      charges
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                10.0Other
      corporate expenses and eliminations
                                
                                
                                (81.8
                                )
                                
                                
                                (98.0
                                )
                                
                                
                                (121.0
                                )Total
      operating expenses
                                
                                
                                3,591.6
                                
                                
                                
                                2,969.8
                                
                                
                                
                                2,757.5Operating
      income
                                
                                
                                185.0
                                
                                
                                
                                206.5
                                
                                
                                
                                202.5Interest
      expense, net of amounts capitalized
                                
                                
                                40.1
                                
                                
                                
                                37.9
                                
                                
                                
                                49.1Equity
      investment income, net
                                
                                
                                9.4
                                
                                
                                
                                6.3
                                
                                
                                
                                11.1Interest
      income
                                
                                
                                8.8
                                
                                
                                
                                8.8
                                
                                
                                
                                9.0Other
      income, net
                                
                                
                                .7
                                
                                
                                
                                .6
                                
                                
                                
                                .6Income
      before income taxes
                                
                                
                                163.8
                                
                                
                                
                                184.3
                                
                                
                                
                                174.1Income
      tax expense, net of benefits
                                
                                
                                44.3
                                
                                
                                
                                49.1
                                
                                
                                
                                45.8Net
      income
                                
                                $
                                119.5
                                
                                
                                $
                                135.2
                                
                                
                                $
                                128.3Average
      shares of common stock outstandingBasic
                                
                                
                                45.3
                                
                                
                                
                                45.2
                                
                                
                                
                                44.6Diluted
                                
                                
                                45.4
                                
                                
                                
                                45.3
                                
                                
                                
                                44.7Earnings
      per average share of common stockBasic
                                
                                $
                                2.64
                                
                                
                                $
                                2.99
                                
                                
                                $
                                2.88Diluted
                                
                                
                                2.63
                                
                                
                                
                                2.99
                                
                                
                                
                                2.87The
      accompanying notes are an integral part of these
    statements.





42
 
 Table of
Contents





Nicor
      Inc.Consolidated Statements of Cash Flows(millions)Year
      ended December 312008
                                                    
                                                    
                                                    2007
                                                    
                                                    
                                                    2006*
      As Adjusted
                                                    
                                                    
                                                    *
      As AdjustedOperating
      activitiesNet
      income
                                                    
                                                    $
                                                    119.5
                                                    
                                                    
                                                    $
                                                    135.2
                                                    
                                                    
                                                    $
                                                    128.3Adjustments
      to reconcile net income to net cash flow provided
      from operating activities:Depreciation
                                                    
                                                    
                                                    189.8
                                                    
                                                    
                                                    
                                                    184.2
                                                    
                                                    
                                                    
                                                    178.1Deferred
      income tax benefit
                                                    
                                                    
                                                    (3.4
                                                    )
                                                    
                                                    
                                                    (4.6
                                                    )
                                                    
                                                    
                                                    (44.5
                                                    )Net
      gain on sale of property, plant and equipment
                                                    
                                                    
                                                    (1.0
                                                    )
                                                    
                                                    
                                                    (1.8
                                                    )
                                                    
                                                    
                                                    (3.3
                                                    )Gain
      on sale of equity investment
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    (2.4
                                                    )Changes
      in assets and liabilities:Receivables,
      less allowances
                                                    
                                                    
                                                    (47.3
                                                    )
                                                    
                                                    
                                                    (94.2
                                                    )
                                                    
                                                    
                                                    304.8Gas
      in storage
                                                    
                                                    
                                                    (54.5
                                                    )
                                                    
                                                    
                                                    32.0
                                                    
                                                    
                                                    
                                                    75.3Deferred/accrued
      gas costs
                                                    
                                                    
                                                    (104.1
                                                    )
                                                    
                                                    
                                                    .1
                                                    
                                                    
                                                    
                                                    (173.2
                                                    )Derivative
      instruments
                                                    
                                                    
                                                    133.3
                                                    
                                                    
                                                    
                                                    (72.8
                                                    )
                                                    
                                                    
                                                    156.8Margin
      accounts - derivative instruments
                                                    
                                                    
                                                    (134.9
                                                    )
                                                    
                                                    
                                                    16.3
                                                    
                                                    
                                                    
                                                    (66.4
                                                    )Pension
      benefits
                                                    
                                                    
                                                    179.1
                                                    
                                                    
                                                    
                                                    (54.5
                                                    )
                                                    
                                                    
                                                    26.6Regulatory
      postretirement asset
                                                    
                                                    
                                                    (186.3
                                                    )
                                                    
                                                    
                                                    44.1
                                                    
                                                    
                                                    
                                                    (113.5
                                                    )Other
      assets
                                                    
                                                    
                                                    (64.3
                                                    )
                                                    
                                                    
                                                    (13.4
                                                    )
                                                    
                                                    
                                                    (5.1
                                                    )Accounts
      payable and customer credit balances and deposits
                                                    
                                                    
                                                    (64.1
                                                    )
                                                    
                                                    
                                                    100.6
                                                    
                                                    
                                                    
                                                    (93.7
                                                    )Health
      care and other postretirement benefits
                                                    
                                                    
                                                    12.2
                                                    
                                                    
                                                    
                                                    4.7
                                                    
                                                    
                                                    
                                                    89.1Litigation
      charge
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    (10.0
                                                    )
                                                    
                                                    
                                                    -Other
      liabilities
                                                    
                                                    
                                                    (.9
                                                    )
                                                    
                                                    
                                                    (25.4
                                                    )
                                                    
                                                    
                                                    10.4Other
      items
                                                    
                                                    
                                                    (.5
                                                    )
                                                    
                                                    
                                                    11.7
                                                    
                                                    
                                                    
                                                    (20.3
                                                    )Net
      cash flow provided from (used for) operating activities
                                                    
                                                    
                                                    (27.4
                                                    )
                                                    
                                                    
                                                    252.2
                                                    
                                                    
                                                    
                                                    447.0Investing
      activitiesAdditions
      to property, plant & equipment
                                                    
                                                    
                                                    (249.9
                                                    )
                                                    
                                                    
                                                    (173.2
                                                    )
                                                    
                                                    
                                                    (187.4
                                                    )Release
      of (additions to) restricted short-term investments
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    10.0
                                                    
                                                    
                                                    
                                                    (10.0
                                                    )Purchases
      of available-for-sale securities
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    (218.9
                                                    )
                                                    
                                                    
                                                    -Proceeds
      from sales of available-for-sale securities
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    218.9
                                                    
                                                    
                                                    
                                                    -Purchases
      of held-to-maturity securities
                                                    
                                                    
                                                    (1.1
                                                    )
                                                    
                                                    
                                                    (1.6
                                                    )
                                                    
                                                    
                                                    (2.6
                                                    )Proceeds
      from maturities of held-to-maturity securities
                                                    
                                                    
                                                    3.7
                                                    
                                                    
                                                    
                                                    2.3
                                                    
                                                    
                                                    
                                                    1.5Net
      increase in other short-term investments
                                                    
                                                    
                                                    (20.4
                                                    )
                                                    
                                                    
                                                    (32.8
                                                    )
                                                    
                                                    
                                                    (7.9
                                                    )Net
      proceeds from sale of property, plant and equipment
                                                    
                                                    
                                                    1.3
                                                    
                                                    
                                                    
                                                    1.2
                                                    
                                                    
                                                    
                                                    3.9Proceeds
      from sale of equity investment
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    7.0Business
      acquisition, net of cash acquired
                                                    
                                                    
                                                    (6.1
                                                    )
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Other
      investing activities
                                                    
                                                    
                                                    7.2
                                                    
                                                    
                                                    
                                                    .2
                                                    
                                                    
                                                    
                                                    3.3Net
      cash flow used for investing activities
                                                    
                                                    
                                                    (265.3
                                                    )
                                                    
                                                    
                                                    (193.9
                                                    )
                                                    
                                                    
                                                    (192.2
                                                    )Financing
      activitiesProceeds
      from issuing long-term debt
                                                    
                                                    
                                                    75.0
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    50.0Disbursements
      to retire long-term obligations
                                                    
                                                    
                                                    (75.0
                                                    )
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    (90.0
                                                    )Net
      issuances (repayments) of commercial paper
                                                    
                                                    
                                                    370.9
                                                    
                                                    
                                                    
                                                    19.0
                                                    
                                                    
                                                    
                                                    (236.0
                                                    )Dividends
      paid
                                                    
                                                    
                                                    (84.4
                                                    )
                                                    
                                                    
                                                    (84.1
                                                    )
                                                    
                                                    
                                                    (82.9
                                                    )Repayment
      of loan against cash surrender value of life insurance
      policies
                                                    
                                                    
                                                    (11.2
                                                    )
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Proceeds
      from exercise of stock options
                                                    
                                                    
                                                    1.7
                                                    
                                                    
                                                    
                                                    8.2
                                                    
                                                    
                                                    
                                                    22.6Other
      financing activities
                                                    
                                                    
                                                    (1.1
                                                    )
                                                    
                                                    
                                                    .3
                                                    
                                                    
                                                    
                                                    3.7Net
      cash flow provided from (used for) financing activities
                                                    
                                                    
                                                    275.9
                                                    
                                                    
                                                    
                                                    (56.6
                                                    )
                                                    
                                                    
                                                    (332.6
                                                    )Net
      increase (decrease) in cash and cash equivalents
                                                    
                                                    
                                                    (16.8
                                                    )
                                                    
                                                    
                                                    1.7
                                                    
                                                    
                                                    
                                                    (77.8
                                                    )Cash
      and cash equivalents, beginning of year
                                                    
                                                    
                                                    42.8
                                                    
                                                    
                                                    
                                                    41.1
                                                    
                                                    
                                                    
                                                    118.9Cash
      and cash equivalents, end of year
                                                    
                                                    $
                                                    26.0
                                                    
                                                    
                                                    $
                                                    42.8
                                                    
                                                    
                                                    $
                                                    41.1Supplemental
      informationIncome
      taxes paid, net
                                                    
                                                    $
                                                    71.2
                                                    
                                                    
                                                    $
                                                    77.9
                                                    
                                                    
                                                    $
                                                    86.1Interest
      paid, net of amounts capitalized
                                                    
                                                    
                                                    50.2
                                                    
                                                    
                                                    
                                                    38.3
                                                    
                                                    
                                                    
                                                    40.3*
                                                    Periods
      prior to 2008 were adjusted due to the retrospective application of FSP
      No. FIN 39-1, Amendment
      of FIN 39, Offsetting of Amounts Related to Certain Contracts.See Note2 -
      New Accounting Pronouncements for further information.The
      accompanying notes are an integral part of these
    statements.





43
 
 Table of
Contents





Nicor
      Inc.Consolidated Balance Sheets(millions)December
      312008
                                            
                                            
                                            2007Assets
                                            
                                            
                                            
                                            
                                            *
      As AdjustedCurrent
      assetsCash
      and cash equivalents
                                            
                                            $
                                            26.0
                                            
                                            
                                            $
                                            42.8Short-term
      investments
                                            
                                            
                                            69.5
                                            
                                            
                                            
                                            49.1Receivables,
      less allowances of $44.9 and $35.1, respectively
                                            
                                            
                                            690.1
                                            
                                            
                                            
                                            641.5Gas
      in storage
                                            
                                            
                                            208.5
                                            
                                            
                                            
                                            154.0Derivative
      instruments
                                            
                                            
                                            49.7
                                            
                                            
                                            
                                            28.4Margin
      accounts - derivative instruments
                                            
                                            
                                            134.4
                                            
                                            
                                            
                                            28.8Other
                                            
                                            
                                            160.7
                                            
                                            
                                            
                                            98.5Total
      current assets
                                            
                                            
                                            1,338.9
                                            
                                            
                                            
                                            1,043.1Property,
      plant and equipment, at costGas
      distribution
                                            
                                            
                                            4,460.6
                                            
                                            
                                            
                                            4,279.7Shipping
                                            
                                            
                                            315.1
                                            
                                            
                                            
                                            309.2Other
                                            
                                            
                                            26.7
                                            
                                            
                                            
                                            22.84,802.4
                                            
                                            
                                            
                                            4,611.7Less
      accumulated depreciation
                                            
                                            
                                            1,943.8
                                            
                                            
                                            
                                            1,854.4Total
      property, plant and equipment, net
                                            
                                            
                                            2,858.6
                                            
                                            
                                            
                                            2,757.3Pension
      benefits
                                            
                                            
                                            36.4
                                            
                                            
                                            
                                            215.5Long-term
      investments
                                            
                                            
                                            136.8
                                            
                                            
                                            
                                            132.9Other
      assets
                                            
                                            
                                            413.3
                                            
                                            
                                            
                                            122.5Total
      assets
                                            
                                            $
                                            4,784.0
                                            
                                            
                                            $
                                            4,271.3Liabilities and
    CapitalizationCurrent
      liabilitiesLong-term
      debt due within one year
                                            
                                            $
                                            50.0
                                            
                                            
                                            $
                                            75.0Short-term
      debt
                                            
                                            
                                            739.9
                                            
                                            
                                            
                                            369.0Accounts
      payable
                                            
                                            
                                            411.3
                                            
                                            
                                            
                                            428.2Customer
      credit balances and deposits
                                            
                                            
                                            187.3
                                            
                                            
                                            
                                            234.5Derivative
      instruments
                                            
                                            
                                            167.3
                                            
                                            
                                            
                                            28.3Other
                                            
                                            
                                            112.2
                                            
                                            
                                            
                                            160.7Total
      current liabilities
                                            
                                            
                                            1,668.0
                                            
                                            
                                            
                                            1,295.7Deferred
      credits and other liabilitiesRegulatory
      asset retirement cost liability
                                            
                                            
                                            751.7
                                            
                                            
                                            
                                            720.7Deferred
      income taxes
                                            
                                            
                                            400.0
                                            
                                            
                                            
                                            400.4Health
      care and other postretirement benefits
                                            
                                            
                                            196.6
                                            
                                            
                                            
                                            185.1Asset
      retirement obligation
                                            
                                            
                                            185.0
                                            
                                            
                                            
                                            177.5Other
                                            
                                            
                                            161.0
                                            
                                            
                                            
                                            123.3Total
      deferred credits and other liabilities
                                            
                                            
                                            1,694.3
                                            
                                            
                                            
                                            1,607.0Commitments
      and contingenciesCapitalizationLong-term
      obligationsLong-term
      debt, net of unamortized discount
                                            
                                            
                                            448.0
                                            
                                            
                                            
                                            422.8Mandatorily
      redeemable preferred stock
                                            
                                            
                                            .6
                                            
                                            
                                            
                                            .6Total
      long-term obligations
                                            
                                            
                                            448.6
                                            
                                            
                                            
                                            423.4Common
      equity
                                            
                                            
                                            973.1
                                            
                                            
                                            
                                            945.2Total
      capitalization
                                            
                                            
                                            1,421.7
                                            
                                            
                                            
                                            1,368.6Total
      liabilities and capitalization
                                            
                                            $
                                            4,784.0
                                            
                                            
                                            $
                                            4,271.3*
                                            Periods
      prior to 2008 were adjusted due to the retrospective application of FSP
      No. FIN 39-1, Amendment
      of FIN 39, Offsetting of Amounts Related to Certain Contracts.See Note2 - New Accounting
      Pronouncements for further information.The
      accompanying notes are an integral part of these
    statements.






44
 
 Table of
Contents





Nicor
      Inc.Consolidated Statements of Capitalization(millions,
      except share data)December
      312008
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    2007First
      Mortgage Bonds5.875%
      Series due 2008
                                                                                                                                                    $
                                                                                                                                                    -
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    $
                                                                                                                                                    75.05.37%
      Series due 2009
                                                                                                                                                    
                                                                                                                                                    50.0
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    50.06.625%
      Series due 2011
                                                                                                                                                    
                                                                                                                                                    75.0
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    75.07.20%
      Series due 2016
                                                                                                                                                    
                                                                                                                                                    50.0
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    50.05.80%
      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
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    -500.0
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    500.0Less:
                                                                                                                                                    Amount
      due within one year
                                                                                                                                                    
                                                                                                                                                    50.0
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    75.0Unamortized
      debt discount, net of premium
                                                                                                                                                    
                                                                                                                                                    2.0
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    2.2Total
      long-term debt
                                                                                                                                                    
                                                                                                                                                    448.0
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    31.5%
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    422.8
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    30.9%Mandatorily
      redeemable preferred and preference stockCumulative,
      $50 par value, 1,600,000 preferredshares
      authorized; and cumulative, without parvalue,
      20,000,000 preference shares authorized(11,581
      shares of redeemable preferredstock,
      4.48% series, outstanding)
                                                                                                                                                    
                                                                                                                                                    .6
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    -
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    .6
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    -Common
      equityCommon
      stock, $2.50 par value, 160,000,000 sharesauthorized
      (2,901,400 and 2,976,963 shares reservedfor
      share-based awards and other purposes, and 45,198,779and
      45,129,889 shares outstanding, respectively)
                                                                                                                                                    
                                                                                                                                                    113.0
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    112.8Paid-in
      capital
                                                                                                                                                    
                                                                                                                                                    49.5
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    44.8Retained
      earnings
                                                                                                                                                    
                                                                                                                                                    830.3
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    795.5Accumulated
      other comprehensive loss, netCash
      flow hedges
                                                                                                                                                    
                                                                                                                                                    (11.7
                                                                                                                                                    )
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    (6.0
                                                                                                                                                    )Postretirement
      benefit plans
                                                                                                                                                    
                                                                                                                                                    (7.7
                                                                                                                                                    )
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    (1.7
                                                                                                                                                    )Foreign
      currency translation adjustment
                                                                                                                                                    
                                                                                                                                                    (.3
                                                                                                                                                    )
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    (.2
                                                                                                                                                    )Total
      accumulated other comprehensive loss
                                                                                                                                                    
                                                                                                                                                    (19.7
                                                                                                                                                    )
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    (7.9
                                                                                                                                                    )Total
      common equity
                                                                                                                                                    
                                                                                                                                                    973.1
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    68.5
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    945.2
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    69.1Total
      capitalization
                                                                                                                                                    $
                                                                                                                                                    1,421.7
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    100.0%
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    $
                                                                                                                                                    1,368.6
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    100.0
      %The
      accompanying notes are an integral part of these
    statements.







45
 
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Contents





Nicor
      Inc.Consolidated Statements of Common
    Equity(millions,
      except per share data)Year
      ended December 312008
                                                                                
                                                                                
                                                                                2007
                                                                                
                                                                                
                                                                                2006Common
      stockBalance
      at beginning of year
                                                                                
                                                                                $
                                                                                112.8
                                                                                
                                                                                
                                                                                $
                                                                                112.3
                                                                                
                                                                                
                                                                                $
                                                                                110.5Issued
      and converted stock, net of cancellations
                                                                                
                                                                                
                                                                                .2
                                                                                
                                                                                
                                                                                
                                                                                .5
                                                                                
                                                                                
                                                                                
                                                                                1.8Balance
      at end of year
                                                                                
                                                                                
                                                                                113.0
                                                                                
                                                                                
                                                                                
                                                                                112.8
                                                                                
                                                                                
                                                                                
                                                                                112.3Paid-in
      capitalBalance
      at beginning of year
                                                                                
                                                                                
                                                                                44.8
                                                                                
                                                                                
                                                                                
                                                                                34.1
                                                                                
                                                                                
                                                                                
                                                                                8.0Issued
      and converted stock
                                                                                
                                                                                
                                                                                5.0
                                                                                
                                                                                
                                                                                
                                                                                11.4
                                                                                
                                                                                
                                                                                
                                                                                26.6Reacquired
      and cancelled stock
                                                                                
                                                                                
                                                                                (.3
                                                                                )
                                                                                
                                                                                
                                                                                (.7
                                                                                )
                                                                                
                                                                                
                                                                                (.5
                                                                                )Balance
      at end of year
                                                                                
                                                                                
                                                                                49.5
                                                                                
                                                                                
                                                                                
                                                                                44.8
                                                                                
                                                                                
                                                                                
                                                                                34.1Retained
      earningsBalance
      at beginning of year
                                                                                
                                                                                
                                                                                795.5
                                                                                
                                                                                
                                                                                
                                                                                743.0
                                                                                
                                                                                
                                                                                
                                                                                698.0Net
      income
                                                                                
                                                                                
                                                                                119.5
                                                                                
                                                                                
                                                                                
                                                                                135.2
                                                                                
                                                                                
                                                                                
                                                                                128.3Cumulative
      effect of change in accounting principle:FIN
      No. 48
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                1.4
                                                                                
                                                                                
                                                                                
                                                                                -SFAS
      No. 158
                                                                                
                                                                                
                                                                                (.2
                                                                                )
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                -Dividends
      on common
      stock ($1.86 per share for 2008to
      2006)
                                                                                
                                                                                
                                                                                (84.5
                                                                                )
                                                                                
                                                                                
                                                                                (84.1
                                                                                )
                                                                                
                                                                                
                                                                                (83.3
                                                                                )Balance
      at end of year
                                                                                
                                                                                
                                                                                830.3
                                                                                
                                                                                
                                                                                
                                                                                795.5
                                                                                
                                                                                
                                                                                
                                                                                743.0Accumulated
      other comprehensive lossBalance
      at beginning of year
                                                                                
                                                                                
                                                                                (7.9
                                                                                )
                                                                                
                                                                                
                                                                                (13.3
                                                                                )
                                                                                
                                                                                
                                                                                (1.6
                                                                                )Other
      comprehensive income (loss)
                                                                                
                                                                                
                                                                                (11.8
                                                                                )
                                                                                
                                                                                
                                                                                5.4
                                                                                
                                                                                
                                                                                
                                                                                (8.8
                                                                                )SFAS
      No. 158 transition amount
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                (2.9
                                                                                )Balance
      at end of year
                                                                                
                                                                                
                                                                                (19.7
                                                                                )
                                                                                
                                                                                
                                                                                (7.9
                                                                                )
                                                                                
                                                                                
                                                                                (13.3
                                                                                )Total
      common equity
                                                                                
                                                                                $
                                                                                973.1
                                                                                
                                                                                
                                                                                $
                                                                                945.2
                                                                                
                                                                                
                                                                                $
                                                                                876.1Consolidated Statements of Comprehensive
      Income(millions)Year
      ended December 312008
                                                                                
                                                                                
                                                                                2007
                                                                                
                                                                                
                                                                                2006Net
      income
                                                                                
                                                                                $
                                                                                119.5
                                                                                
                                                                                
                                                                                $
                                                                                135.2
                                                                                
                                                                                
                                                                                $
                                                                                128.3Other
      comprehensive income (loss)Loss
      on cash flow hedges (net of income tax of $(2.4),$(1.0) and $(7.4),
      respectively)
                                                                                
                                                                                
                                                                                (3.6
                                                                                )
                                                                                
                                                                                
                                                                                (2.0
                                                                                )
                                                                                
                                                                                
                                                                                (11.6
                                                                                )Reclassifications
      of hedge (gains) losses to net income (netof income tax of $(1.4),
      $3.8 and $1.6, respectively)
                                                                                
                                                                                
                                                                                (2.1
                                                                                )
                                                                                
                                                                                
                                                                                6.3
                                                                                
                                                                                
                                                                                
                                                                                3.0Postretirement
      gains (losses) (net of income tax of $(3.9) and $0.9 in2008 and
      2007, respectively)
                                                                                
                                                                                
                                                                                (6.0
                                                                                )
                                                                                
                                                                                
                                                                                1.4
                                                                                
                                                                                
                                                                                
                                                                                -Foreign
      currency translation adjustment
                                                                                
                                                                                
                                                                                (.1
                                                                                )
                                                                                
                                                                                
                                                                                (.3
                                                                                )
                                                                                
                                                                                
                                                                                (.2
                                                                                )Other
      comprehensive income (loss), net of tax
                                                                                
                                                                                
                                                                                (11.8
                                                                                )
                                                                                
                                                                                
                                                                                5.4
                                                                                
                                                                                
                                                                                
                                                                                (8.8
                                                                                )Comprehensive
      income
                                                                                
                                                                                $
                                                                                107.7
                                                                                
                                                                                
                                                                                $
                                                                                140.6
                                                                                
                                                                                
                                                                                $
                                                                                119.5The
      accompanying notes are an integral part of these
    statements.







46
 
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Notes to the
Consolidated Financial Statements





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 accruals for legal, regulatory and
environmental contingencies, unbilled revenues, credit risk, postretirement
benefit assets and liabilities, asset retirement obligations, income taxes and
related assets and liabilities, the identification and valuation of derivative
instruments, and potential asset impairments.





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 applies SFAS No. 71,
Accounting for the Effects of
Certain Types of Regulation, which requires Nicor Gas to recognize the
economic effects of rate regulation and, accordingly, has recorded regulatory
assets and liabilities.  Regulatory assets represent probable future
revenue associated with certain costs that are expected to be recovered from
customers through rate riders or base rates, upon approval by the
ICC.  Regulatory liabilities represent probable future reductions in
revenues collected from ratepayers through a rate rider or base rates, or
probable future expenditures.  If Nicor Gas’ operations become no
longer subject to the provisions of SFAS No. 71, a write-off of net regulatory
liabilities would be required.





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





2008
                    
                    
                    2007Regulatory
      assetsRegulatory
      postretirement asset – current
                    
                    $
                    23.3
                    
                    
                    $
                    5.2Regulatory
      postretirement asset – noncurrent
                    
                    
                    232.3
                    
                    
                    
                    64.2Deferred
      gas costs – current
                    
                    
                    31.5
                    
                    
                    
                    -Deferred
      gas costs – noncurrent
                    
                    
                    22.5
                    
                    
                    
                    -Deferred
      environmental costs
                    
                    
                    19.5
                    
                    
                    
                    9.5Unamortized
      losses on reacquired debt
                    
                    
                    15.4
                    
                    
                    
                    16.5Deferred
      rate case costs
                    
                    
                    6.1
                    
                    
                    
                    2.6Other
                    
                    
                    .1
                    
                    
                    
                    .1$
                    350.7
                    
                    
                    $
                    98.1Regulatory
      liabilitiesRegulatory
      asset retirement cost liability – current
                    
                    $
                    15.0
                    
                    
                    $
                    8.0Regulatory
      asset retirement cost liability – noncurrent
                    
                    
                    751.7
                    
                    
                    
                    720.7Accrued
      gas costs
                    
                    
                    -
                    
                    
                    
                    50.1Regulatory
      income tax liability
                    
                    
                    46.3
                    
                    
                    
                    49.5Other
                    
                    
                    .8
                    
                    
                    
                    1.1$
                    813.8
                    
                    
                    $
                    829.4





47
 
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The
current portions of the regulatory postretirement asset and the deferred gas
costs are classified in current assets – other.  All other regulatory
assets are classified in noncurrent other assets.  The current portion
of the regulatory asset retirement cost liability and accrued gas costs are
classified in current liabilities – other.  All other regulatory
liabilities are classified in noncurrent other liabilities.





The ICC
does not presently allow Nicor Gas the opportunity to earn a return on its
regulatory postretirement asset.  This regulatory postretirement asset
is expected to be recovered from ratepayers over a period of approximately 10 to
13 years.  The regulatory assets related to debt are not included in
rate base, but are recovered over the term of the debt through the rate of
return authorized by the ICC.  Nicor Gas is allowed to recover and is
required to pay, using short-term interest rates, the carrying costs related to
temporary under or overcollections of natural gas costs and certain
environmental costs charged to its customers.





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 other are classified as
cash equivalents.  Securities are categorized as held-to-maturity when
the company has the 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.  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, 2008 and 2007 were $107.5 million and $113.2
million, respectively, and include $88.0 million and $91.9 million at December
31, 2008 and 2007, respectively, related to Triton.





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 $19.0 million and $15.6 million at December 31, 2008
and 2007, respectively.  The increase in goodwill from December 31,
2007 to December 31, 2008 is due to the acquisition of the assets of Caribtran,
Inc., a provider of less-than-container load and full container load
consolidation services from the United States to the Caribbean and Central
America.  Nicor Services had goodwill of $4.0 million at December 31,
2008 and 2007.  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.  The obligation is recorded as both a cost of
the long-lived asset and a corresponding liability.  Subsequently, the
asset retirement cost is depreciated over the life of the asset on a
straight-line basis and the asset retirement obligation is accreted to the
expected settlement amount.





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 cost liability.





48
 
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Contents





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 changes in the fair value of 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 occurs, even if the derivative instrument is sold, extinguished or
terminated prior to the transaction occurring.  If the forecasted
transaction is no longer expected to occur, the amount in accumulated other
comprehensive income is immediately reclassified to earnings.





Nicor
Gas.  Derivative instruments, such as futures contracts,
options and swap agreements, are utilized primarily in the purchase of natural
gas for customers.  These derivative instruments are reflected at fair
value.  Realized gains or losses on such instruments are included in
the cost of gas delivered and are passed directly through to customers, subject
to ICC review, and therefore have no direct impact on
earnings.  Unrealized changes in the fair value of these derivative
instruments are deferred as regulatory assets or liabilities and classified on
the balance sheet as deferred or accrued gas costs, respectively.





At times,
Nicor Gas enters into futures contracts, options, swap agreements and
fixed-price purchase agreements to reduce the earnings volatility of certain
forecasted operating costs arising from fluctuations in natural gas
prices.  These derivative instruments are carried at fair value,
unless they qualify for the normal purchases and normal sales exception, in
which case they are carried at cost.  To the extent hedge accounting
is not elected, changes in such fair values are immediately recorded in current
period earnings as operating and maintenance expense.  During 2008,
Nicor Gas hedged a portion of its forecasted 2009 and 2010 natural gas purchases
related to operating costs through the execution of swap agreements and
fixed-price purchase agreements and has generally elected cash flow hedge
accounting for such transactions.  For the years ended December 31,
2008 and 2007, there was no ineffectiveness.  At December 31, 2008 the
net deferred loss recorded in accumulated other comprehensive income associated
with these instruments was $3.0 million, reported net of $2.0 million of related
income tax benefits, the majority of which is expected to be reclassified to
earnings within the next 12 months.





Nicor
Enerchange.  Derivative instruments, such as futures contracts,
options, forward contracts, swap agreements and other energy-related contracts
are held by Nicor’s wholesale natural gas marketing business, Nicor Enerchange,
for trading purposes.  Certain of these derivative instruments are
used to economically hedge price risk associated with inventories of natural
gas, fixed-price purchase and sale agreements and other future natural gas
commitments.  Nicor Enerchange records such derivative instruments at
fair value and generally does not elect hedge accounting.  As a
result, changes in derivative fair values may have a material impact on Nicor’s
financial statements.  Other derivative instruments are used by Nicor
Enerchange to hedge price risks related to certain utility-bill management
products.  These derivative instruments are carried at fair value and
cash flow hedge accounting is regularly elected.





For the
years ended December 31, 2008, 2007 and 2006, hedge accounting ineffectiveness
was $0.2 million, $1.1 million and $2.9 million, respectively.  At
December 31, 2008, the cash flow hedges component of accumulated other
comprehensive income was a loss of $5.1 million, reported net of $3.3 million of
related income tax benefits, and is expected to be reclassified to earnings
within the next 12 months.




49
 
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Nicor Inc.  At
December 31, 2008, accumulated other comprehensive income included a loss of
$3.8 million, reported net of $2.5 million of income tax benefits, related to
derivative instruments that were designated as hedges of interest payments on
30-year bonds issued by Nicor Gas in December 2003.  The amount
deferred in accumulated other comprehensive income is being amortized to
interest expense on a straight-line basis over the remaining life of the
bonds.





Credit
risk.  Nicor’s major subsidiaries have diversified customer
bases and the company believes that it maintains prudent credit policies which
mitigate customer receivable and derivative counterparty credit risk.The company is
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 risk, the company has established
procedures to determine and monitor the creditworthiness of counterparties, to
require guarantees or collateral back-up, 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 as liabilities when probable and reasonably estimable.





Operating revenues and gas
costs.  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.





In the
shipping segment, 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 financial
results.





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.  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.





Repair and maintenance
expense.  Nicor records expense for repair and maintenance
costs as incurred.  Tropical Shipping 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 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.  The estimated useful lives of shipping-segment vessels
range from 20 to 25 years.





Revenue
taxes.  Nicor Gas classifies revenue taxes billed to customers
as operating revenues and related taxes incurred as operating
expenses.  Revenue taxes included in operating expense for 2008, 2007
and 2006 were $171.1 million, $148.7 million and $144.4 million,
respectively.






50
 
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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 segment, 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.





At
December 31, 2008, 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 $51 million on approximately $146 million of
cumulative undistributed foreign earnings that are expected in management’s
judgment to be indefinitely reinvested offshore.





On
January 1, 2007, the company adopted the provisions of FIN No. 48, Accounting for Uncertainty in Income
Taxes,whichsets forth 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
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 PRONOUNCEMENTS





Fair value measurements. 
Effective January 1, 2008, the company adopted SFAS No. 157, Fair Value Measurements,
which defines fair value, establishes a consistent framework for measuring fair
value, and expands disclosure requirements about fair value
measurements.  This Statement does not require any new fair value
measurements, rather it provides guidance on how to perform fair value
measurements as required or permitted under other accounting
pronouncements. It also provides for immediate recognition of trade-date
gains and losses related to certain derivative transactions whose fair value has
been determined using unobservable market inputs.  Nicor elected the
one-year deferral allowed by FSP SFAS 157-2, Effective Date of FASB Statement No.
157,for
certain nonfinancial assets and liabilities.  As it applies to Nicor,
the deferral pertains to fair value measurements for business combinations,
impairment testing of goodwill and other intangible assets, as well as asset
retirement obligations.  The effect of adopting SFAS No. 157 was not
material to Nicor’s results of operations or financial condition.





Offsetting of amounts related to
certain contracts.  Effective January 1, 2008, Nicor adopted
FSP No. FIN 39-1,Amendment of
FIN 39, Offsetting of Amounts Related to Certain
Contracts.  This FSP amends FIN 39 to replace the terms
“conditional contracts” and “exchange contracts” with the term “derivative
instruments” as defined in SFAS No. 133,Accounting for Derivative
Instruments and Hedging Activities.  Also, this FSP provides
guidance on whether the receivable or liability recognized upon payment or
receipt of cash collateral in a master netting agreement must be offset against
fair value amounts recognized for contracts that have been offset in the same
master netting agreement.  Upon adoption of this FSP, the company
elected not to offset fair value assets and liabilities recognized for
derivative instruments.  As a result, any related cash collateral is
not offset against the derivatives.




51
 
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This FSP
was required to be applied retrospectively to all prior periods.  As a
result of the application of this FSP, the company’s Consolidated Balance Sheets
line items increased (decreased) by the following amounts at December 31(in
millions):





2008
                    
                    
                    2007AssetsReceivables
                    
                    $
                    (36.5
                    )
                    
                    $
                    (22.5
                    )Derivative
      instruments
                    
                    
                    26.1
                    
                    
                    
                    13.0Margin
      accounts – derivative instruments
                    
                    
                    134.4
                    
                    
                    
                    28.8Noncurrent
      other assets
                    
                    
                    37.4
                    
                    
                    
                    -LiabilitiesDerivative
      instruments
                    
                    $
                    138.6
                    
                    
                    $
                    19.3Current
      other liabilities
                    
                    
                    22.8
                    
                    
                    
                    -





Defined benefit pension and other
postretirement plans.  On December 31, 2006, Nicor adopted the
recognition provisions of SFAS No. 158, Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans.  In addition,
SFAS No. 158required Nicor to
change its plan measurement date in 2008 to match its fiscal
year-end.  In accordance with SFAS No. 158, Nicor elected to use a
15-month approach for transitioning from an October 1 measurement date to a
December 31 measurement date.  Nicor adopted the measurement date
provision on December 31, 2008, recording a cumulative effect adjustment that
decreased retained earnings by $0.2 million.





3.     
INVESTMENTS





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





2008
                      
                      
                      2007Money
      market funds
                      
                      $
                      81.2
                      
                      
                      $
                      82.1Corporate
      bonds
                      
                      
                      4.8
                      
                      
                      
                      6.5Certificates
      of deposit
                      
                      
                      .6
                      
                      
                      
                      1.7Other
      investments
                      
                      
                      2.0
                      
                      
                      
                      2.2Total
      investments
                      
                      $
                      88.6
                      
                      
                      $
                      92.5





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





2008
                      
                      
                      2007Cash
      equivalents
                      
                      $
                      15.3
                      
                      
                      $
                      36.6Short-term
      investments
                      
                      
                      69.5
                      
                      
                      
                      49.1Long-term
      investments
                      
                      
                      3.8
                      
                      
                      
                      6.8Total
      investments in securities
                      
                      $
                      88.6
                      
                      
                      $
                      92.5





Money
market funds held by domestic subsidiaries are included in cash equivalents,
whereas such funds held by non-U.S subsidiaries are included in short-term
investments.




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Investments
categorized as trading (including money market funds) are carried at fair value,
and totaled $82.2 million and $83.1 million at December 31, 2008 and 2007,
respectively. Corporate bonds are categorized as held-to-maturity, and their
carrying value approximates fair value.  The contractual maturities of
the held-to-maturity corporate bonds at December 31, 2008 are as follows (in
millions):





Years to
maturity


Less
                              than
      1
                              year
                            
                            
                            1-5
                              years
                            
                            
                            5-10
                              years
                            
                            
                            More
                              than
      10
                              years
                            
                            
                            Total$
                            3.5
                            
                            
                            $
                            1.3
                            
                            
                            $
                            -
                            
                            
                            $
                            -
                            
                            
                            $
                            4.8





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 $1.6 million and $2.9 million
at December 31, 2008 and 2007, respectively.





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





4.      RESTRICTED
SHORT-TERM INVESTMENTS





In 2006,
Nicor recorded a $10 million charge (non-deductible for tax purposes) as part of
a tentative settlement with the SEC on claims of securities law violations
relating to the PBR plan.  At that time, the company deposited $10
million in an escrow account pending review and final approval of the tentative
settlement by the SEC commissioners.  In 2007, the SEC commissioners
approved the tentative settlement and a final judgment was entered by a federal
court approving the settlement and the funds held in escrow were
released.  The company neither admitted nor denied any wrongdoing in
the matter.





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 segment and with
certain equipment in its shipping segment.  Nicor has not recognized
an ARO associated with gathering lines and storage wells in its gas distribution
segment 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):





2008
                              
                              
                              2007Beginning
      of period
                              
                              $
                              179.4
                              
                              
                              $
                              170.6Liabilities
      incurred during the period
                              
                              
                              2.0
                              
                              
                              
                              2.3Liabilities
      settled during the period
                              
                              
                              (3.6
                              )
                              
                              
                              (3.2
                              )Accretion
                              
                              
                              10.2
                              
                              
                              
                              9.7Revision
      in estimated cash flows
                              
                              
                              (.8
                              )
                              
                              
                              -End
      of period
                              
                              $
                              187.2
                              
                              
                              $
                              179.4





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





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6.      GAS
IN STORAGE





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





2008
                    
                    
                    2007Nicor
      Gas
                    
                    $
                    173.7
                    
                    
                    $
                    112.9Nicor
      Enerchange
                    
                    
                    34.8
                    
                    
                    
                    41.1$
                    208.5
                    
                    
                    $
                    154.0





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





Based on
the average cost of gas purchased in December 2008 and 2007, the estimated
replacement cost of Nicor Gas’ inventory at December 31, 2008 and 2007 exceeded
the LIFO cost by $297.7 million and $415.7 million, respectively.





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.





During
2006, Nicor Gas liquidated 10 Bcf of its LIFO-based inventory at an average cost
per Mcf of $6.81.  For gas purchased in 2006, the company’s average
cost per Mcf was $0.28 lower than the 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 2006 by $2.8
million.





There was
no liquidation of LIFO layers during 2008.





Since the
cost of gas, including inventory costs, is charged to customers without markup,
subject to ICC review, the LIFO liquidations in 2007 and 2006 had no impact on
net income.





Nicor
Enerchange recorded charges of $8.3 million, $5.0 million and $21.6 million in
2008, 2007 and 2006, respectively, resulting from lower of cost or market
valuations.





7.      SHORT-TERM
AND LONG-TERM DEBT





In
February 2009, the $50 million 5.37 percent First Mortgage Bond series matured
and were 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.





In 2006,
Nicor Gas, through a private placement, issued $50 million of First Mortgage
Bonds at 5.85 percent, due in 2036.  Proceeds from this issuance were
applied to the $50 million 5.55 percent First Mortgage Bond series, which
matured in 2006.  Substantially all gas distribution properties are
subject to the lien of the indenture securing Nicor Gas’ First Mortgage
Bonds.





In August
2008, Nicor Gas established a $600 million, 9-month seasonal revolver, expiring
May 2009, to replace the $400 million, 210-day seasonal revolver, which expired
in May 2008.  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 $739.9
million and $369.0 million of commercial paper outstanding






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with a
weighted-average interest rate of 0.4 percent and 4.2 percent at December 31,
2008 and 2007, respectively.





In 2005,
Tropical Shipping obtained a $40 million two-year senior unsecured term loan
used to fund a portion of the repatriation of its cumulative undistributed
foreign earnings in connection with the Jobs Act.  As of December 31,
2006, this loan was paid in full.





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





The
company incurred total interest expense of $40.3 million, $38.2 million, and
$49.8 million in 2008, 2007 and 2006, respectively.  Interest expense
is reported net of amounts capitalized.  Interest expense capitalized
for the years ended December 31, 2008, 2007 and 2006 was $0.2 million, $0.3
million and $0.7 million, respectively.





8.      ACCRUED
UNBILLED REVENUES





Receivables
include accrued unbilled revenues of $199.1 million and $191.2 million at
December 31, 2008 and 2007, respectively, related primarily to gas distribution
operations.  Nicor Gas accrues revenues for estimated deliveries to
customers from the date of their last bill until the balance sheet
date.





9.      FAIR
VALUE MEASUREMENTS





Effective
January 1, 2008, SFAS No. 157, Fair Value Measurements,
defines a three-level hierarchy which prioritizes the inputs to valuation
techniques used to measure fair value into three broad levels, with Level 1
considered the most reliable.  For assets and liabilities measured at
fair value on a recurring basis on the Consolidated Balance Sheets, the table
below categorizes those fair values across the three levels as of December 31,
2008 (in millions):





Fair
      value amountQuoted
      prices in active markets
                                              
                                              
                                              Significant
      observable inputs
                                              
                                              
                                              Significant
      unobservable inputs(Level
      1)
                                              
                                              
                                              (Level
      2)
                                              
                                              
                                              (Level
      3)
                                              
                                              
                                              TotalAssetsMoney
      market funds
                                              
                                              $
                                              81.2
                                              
                                              
                                              $
                                              -
                                              
                                              
                                              $
                                              -
                                              
                                              
                                              $
                                              81.2Commodity
      derivatives:Current
                                              
                                              
                                              26.1
                                              
                                              
                                              
                                              17.1
                                              
                                              
                                              
                                              6.5
                                              
                                              
                                              
                                              49.7Noncurrent
                                              
                                              
                                              7.7
                                              
                                              
                                              
                                              4.6
                                              
                                              
                                              
                                              2.0
                                              
                                              
                                              
                                              14.3Total
                                              
                                              
                                              33.8
                                              
                                              
                                              
                                              21.7
                                              
                                              
                                              
                                              8.5
                                              
                                              
                                              
                                              64.0Total
                                              
                                              $
                                              115.0
                                              
                                              
                                              $
                                              21.7
                                              
                                              
                                              $
                                              8.5
                                              
                                              
                                              $
                                              145.2LiabilitiesCommodity
      derivatives:Current
                                              
                                              $
                                              139.1
                                              
                                              
                                              $
                                              21.6
                                              
                                              
                                              $
                                              6.6
                                              
                                              
                                              $
                                              167.3Noncurrent
                                              
                                              
                                              22.3
                                              
                                              
                                              
                                              6.4
                                              
                                              
                                              
                                              .3
                                              
                                              
                                              
                                              29.0Total
                                              
                                              $
                                              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 commodity 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.






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The net
fair value of commodity 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 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.





Money
market funds held by domestic subsidiaries are included in cash equivalents,
whereas such funds held by non-U.S. subsidiaries are included in short-term
investments.  The current portions of the derivatives noted in the
above table are stated separately within current assets and current liabilities
on the Consolidated Balance Sheets.  The noncurrent portions of the
derivatives are classified in noncurrent other.





The
following table presents a reconciliation of the Level 3 beginning and ending
net derivative asset balance for the period ended December 31 (in
millions):




2008Balance
      at January 1
                              
                              $
                              8.2Net
      realized/unrealized gains (losses)Included
      in regulatory assets and liabilities
                              
                              
                              5.5Included
      in net income
                              
                              
                              6.4Settlements,
      net of purchases
                              
                              
                              (13.8
                              )Transfers
      in and/or out of Level 3
                              
                              
                              (4.7
                              )Balance
      at December 31
                              
                              $
                              1.6Net
      unrealized gains (losses) included in net income relating to derivatives
      still held at December 31, 2008
                              
                              $
                              1.8


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





Nicor
maintains margin accounts related to financial derivative
transactions.  The company’s policy is not to offset the fair value of
assets and liabilities recognized for derivative instruments or any related
margin account.





The
following table represents the balances of margin accounts related to derivative
instruments at December 31 (in millions):




2008
                      
                      
                      2007Assets:Margin
      accounts – derivative instruments
                      
                      $
                      134.4
                      
                      
                      $
                      28.8Other
      - noncurrent
                      
                      
                      29.3
                      
                      
                      
                      -Liabilities:Other
      - current
                      
                      
                      .1
                      
                      
                      
                      -





The
recorded amount of 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, 2008 and 2007 was $500 million.  Based on
quoted market interest rates, the fair value of the company’s First Mortgage
Bonds was approximately $520 million and $513 million at December 31,
2008 and 2007, respectively.




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10.   INCOME
TAXES





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





2008
                                
                                
                                2007
                                
                                
                                2006CurrentFederal
                                
                                $
                                42.1
                                
                                
                                $
                                47.8
                                
                                
                                $
                                73.6State
                                
                                
                                6.5
                                
                                
                                
                                7.4
                                
                                
                                
                                18.248.6
                                
                                
                                
                                55.2
                                
                                
                                
                                91.8DeferredFederal
                                
                                
                                (1.7
                                )
                                
                                
                                (5.3
                                )
                                
                                
                                (22.4
                                )State
                                
                                
                                (1.7
                                )
                                
                                
                                .7
                                
                                
                                
                                (22.1
                                )(3.4
                                )
                                
                                
                                (4.6
                                )
                                
                                
                                (44.5
                                )Amortization
      of investment tax credits, net
                                
                                
                                (1.4
                                )
                                
                                
                                (2.1
                                )
                                
                                
                                (2.1
                                )Foreign
      taxes
                                
                                
                                .5
                                
                                
                                
                                .6
                                
                                
                                
                                .6Income
      tax expense, net
                                
                                $
                                44.3
                                
                                
                                $
                                49.1
                                
                                
                                $
                                45.8





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




2008
                              
                              
                              2007Deferred
      tax liabilitiesProperty,
      plant and equipment
                              
                              $
                              302.2
                              
                              
                              $
                              288.9Investment
      in partnerships
                              
                              
                              108.4
                              
                              
                              
                              117.8Other
                              
                              
                              36.3
                              
                              
                              
                              32.0446.9
                              
                              
                              
                              438.7Deferred
      tax assetsOther
                              
                              
                              92.6
                              
                              
                              
                              75.8Net
      deferred tax liability
                              
                              $
                              354.3
                              
                              
                              $
                              362.9





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:


2008
                            
                            
                            2007
                            
                            
                            2006Federal
      statutory rate
                            
                            
                            35.0
                            %
                            
                            
                            35.0
                            %
                            
                            
                            35.0
                            %State
      income taxes, net
                            
                            
                            2.2
                            
                            
                            
                            3.1
                            
                            
                            
                            2.8Tax
      credits
                            
                            
                            (2.8
                            )
                            
                            
                            (2.8
                            )
                            
                            
                            (3.1
                            )Amortization
      of regulatory income tax liability
                            
                            
                            (.9
                            )
                            
                            
                            (.9
                            )
                            
                            
                            (.9
                            )Undistributed
      foreign earnings
                            
                            
                            (5.3
                            )
                            
                            
                            (6.9
                            )
                            
                            
                            (6.0
                            )Reorganization
      of certain shipping operations
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (2.7
                            )SEC
      inquiry settlement
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            2.0Other,
      net
                            
                            
                            (1.2
                            )
                            
                            
                            (.9
                            )
                            
                            
                            (.8
                            )Effective
      combined federal and state income tax rate
                            
                            
                            27.0
                            %
                            
                            
                            26.6
                            %
                            
                            
                            26.3
                            %





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.  The increase in the 2007 effective income tax rate
compared to 2006 reflects the recognition of tax benefits in 2006 related to the
reorganization of the company’s shipping and related operations offset, in part,
by the non-deductible $10 million charge in 2006 associated with the company’s
SEC inquiry and an increase in 2007 of untaxed foreign earnings.





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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, 2008, the years that remain subject to examination by the IRS and IDR
include years beginning after 2003.  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.  The company’s
liability for unrecognized tax benefits at December 31, 2008 is $10.8 million of
which $2.5 million, if recognized, would impact the company’s effective tax
rate.  The increase in the unrecognized tax benefits from $5.7 million
at December 31, 2007 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.





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


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





If
settlements vary from these estimated amounts recognized, 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 unrecognized tax benefits could occur within 12
months, potentially increasing by $4 million or decreasing by $13 million its
unrecognized tax benefit.





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.  During the years ended December 31, 2008 and 2007, the
company recognized benefits of approximately $3 million and $6 million in
interest, respectively.  The company has approximately $9 million of
interest receivable accrued at December 31, 2008 compared with $8 million of
interest payable as of December 31, 2007.  The change is due primarily
to an interest payment made in the second quarter of 2008.  The
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, 2008 and 2007, income tax expense has not been provided
on approximately $23 million and $39 million, respectively, of foreign company
shipping earnings that are expected to be indefinitely reinvested
offshore.





As of
December 31, 2008, Nicor has not recorded deferred income taxes of approximately
$51 million on approximately $146 million of cumulative undistributed foreign
earnings that are expected in management’s judgment to be indefinitely
reinvested offshore.





The
balance of unamortized investment tax credits at December 31, 2008 and 2007 was
$26.0 million and $27.5 million, respectively.




58
 
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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 highest average salary for management employees and job
level for unionized employees.  The benefit obligation related to
collectively bargained benefits considers the company’s past practice of regular
benefit increases to reflect current wages.  Nicor Gas also provides
health care and life insurance benefits to eligible retired employees under a
plan that includes a limit on the company’s share of cost for employees hired
after 1982.





The
following table sets forth the changes in the plans’ benefit obligations and
assets, and reconciles the funded status of the plans to the corresponding asset
(liability) recorded on the balance sheet at December 31 (in
millions):


Pension
      benefits
                      
                      
                      Health
      care and
                        other
      benefits2008*
                      
                      
                      2007
                      
                      
                      
                      2008*
                      
                      
                      2007Change
      in benefit obligationBenefit
      obligation at beginning of period
                      
                      $
                      263.2
                      
                      
                      $
                      271.3
                      
                      
                      $
                      196.9
                      
                      
                      $
                      193.7Service
      cost
                      
                      
                      10.7
                      
                      
                      
                      9.1
                      
                      
                      
                      2.7
                      
                      
                      
                      2.3Interest
      cost
                      
                      
                      19.9
                      
                      
                      
                      15.1
                      
                      
                      
                      15.0
                      
                      
                      
                      10.9Actuarial
      loss (gain)
                      
                      
                      2.2
                      
                      
                      
                      (15.2
                      )
                      
                      
                      3.9
                      
                      
                      
                      1.3Participant
      contributions
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      1.5
                      
                      
                      
                      1.1Medicare
      Part D reimbursements
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      2.2
                      
                      
                      
                      1.2Benefits
      paid
                      
                      
                      (25.8
                      )
                      
                      
                      (17.1
                      )
                      
                      
                      (14.5
                      )
                      
                      
                      (13.6
                      )Benefit
      obligation at end of period
                      
                      
                      270.2
                      
                      
                      
                      263.2
                      
                      
                      
                      207.7
                      
                      
                      
                      196.9





Change
      in plan assetsFair
      value of plan assets at beginning of period
                                                    
                                                    
                                                    478.7
                                                    
                                                    
                                                    
                                                    432.3
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    1.2Actual
      (loss) return on plan assets
                                                    
                                                    
                                                    (146.3
                                                    )
                                                    
                                                    
                                                    63.5
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Employer
      contributions
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    13.0
                                                    
                                                    
                                                    
                                                    11.3Participant
      contributions
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    1.5
                                                    
                                                    
                                                    
                                                    1.1Benefits
      paid
                                                    
                                                    
                                                    (25.8
                                                    )
                                                    
                                                    
                                                    (17.1
                                                    )
                                                    
                                                    
                                                    (14.5
                                                    )
                                                    
                                                    
                                                    (13.6
                                                    )Fair
      value of plan assets at end of period
                                                    
                                                    
                                                    306.6
                                                    
                                                    
                                                    
                                                    478.7
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Funded
      status
                                                    
                                                    
                                                    36.4
                                                    
                                                    
                                                    
                                                    215.5
                                                    
                                                    
                                                    
                                                    (207.7
                                                    )
                                                    
                                                    
                                                    (196.9
                                                    )Contributions
      made after the measurement date
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    2.3Other
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    (.9
                                                    )Postretirement
      benefit asset (liability)
                                                    
                                                    $
                                                    36.4
                                                    
                                                    
                                                    $
                                                    215.5
                                                    
                                                    
                                                    $
                                                    (207.7
                                                    )
                                                    
                                                    $
                                                    (195.5
                                                    )* Amounts
      for 2008 reflect 15 months of activity for the transition to a December 31
      measurement date in accordance with SFAS No. 158.




Amounts
classified on the balance sheet as of December 31 consist of (in
millions):





Pension
      benefits
                              
                              
                              Health
      care and other benefits2008
                              
                              
                              2007
                              
                              
                              2008
                              
                              
                              2007Noncurrent
      assets
                              
                              $
                              36.4
                              
                              
                              $
                              215.5
                              
                              
                              $
                              -
                              
                              
                              $
                              -Current
      liabilities
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (11.1
                              )
                              
                              
                              (10.4
                              )Noncurrent
      liabilities
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (196.6
                              )
                              
                              
                              (185.1
                              )$
                              36.4
                              
                              
                              $
                              215.5
                              
                              
                              $
                              (207.7
                              )
                              
                              $
                              (195.5
                              )





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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, 2007
                    $
                    34.6
                    
                    
                    $
                    78.2
                    
                    
                    $
                    1.8
                    
                    
                    $
                    4.2
                    
                    
                    $
                    36.4
                    
                    
                    $
                    82.4Arising
      during period:Net actuarial (gain)
      loss
                    
                    (40.5
                    )
                    
                    
                    1.3
                    
                    
                    
                    (2.1
                    )
                    
                    
                    -
                    
                    
                    
                    (42.6
                    )
                    
                    
                    1.3Amortized
      to net periodic benefit cost (credit):Net actuarial
    loss
                    
                    -
                    
                    
                    
                    (4.5
                    )
                    
                    
                    -
                    
                    
                    
                    (.2
                    )
                    
                    
                    -
                    
                    
                    
                    (4.7
                    )Net prior service (cost)
      benefit
                    
                    (.5
                    )
                    
                    
                    .1
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (.5
                    )
                    
                    
                    .1December
      31, 2007
                    
                    (6.4
                    )
                    
                    
                    75.1
                    
                    
                    
                    (.3
                    )
                    
                    
                    4.0
                    
                    
                    
                    (6.7
                    )
                    
                    
                    79.1Arising
      during period:Net actuarial
    loss
                    
                    188.4
                    
                    
                    
                    3.7
                    
                    
                    
                    9.9
                    
                    
                    
                    .2
                    
                    
                    
                    198.3
                    
                    
                    
                    3.9Amortized
      to net periodic benefit cost (credit):Net actuarial
    loss
                    
                    -
                    
                    
                    
                    (4.4
                    )
                    
                    
                    -
                    
                    
                    
                    (.2
                    )
                    
                    
                    -
                    
                    
                    
                    (4.6
                    )Net prior service (cost)
      benefit
                    
                    (.3
                    )
                    
                    
                    .1
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (.3
                    )
                    
                    
                    .1Net
      actuarial loss and net prior servicecost
      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
                    
                    
                    $
                    77.3





The
balances as of December 31 relate primarily to unrecognized actuarial (gains)
losses.





The
associated amounts in net regulatory assets and accumulated other comprehensive
income at December 31, 2008 that are expected to be amortized to net periodic
benefit cost in 2009 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
                                                        
                                                        $
                                                        14.5
                                                        
                                                        
                                                        $
                                                        4.3
                                                        
                                                        
                                                        $
                                                        .8
                                                        
                                                        
                                                        $
                                                        .2
                                                        
                                                        
                                                        $
                                                        15.3
                                                        
                                                        
                                                        $
                                                        4.5Net
      prior service cost (benefit)
                                                        
                                                        
                                                        .4
                                                        
                                                        
                                                        
                                                        (.1
                                                        )
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        .4
                                                        
                                                        
                                                        
                                                        (.1
                                                        )$
                                                        14.9
                                                        
                                                        
                                                        $
                                                        4.2
                                                        
                                                        
                                                        $
                                                        .8
                                                        
                                                        
                                                        $
                                                        .2
                                                        
                                                        
                                                        $
                                                        15.7
                                                        
                                                        
                                                        $
                                                        4.4








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The
accumulated benefit obligation for pension benefits, a measure which excludes
the effect of salary and wage increases, was $231.6 million and $227.1 million
at the 2008 and 2007 measurement dates, respectively.





About
one-fourth of the net periodic benefit cost or credit related to these plans has
been capitalized as a cost of constructing gas distribution facilities and the
remainder is included in gas distribution operating and maintenance expense, net
of amounts charged to affiliates.  Net periodic benefit cost (credit)
included the following components (in millions):





Pension
      benefits
                                    
                                    
                                    Health
      care and other benefits2008
                                    
                                    
                                    2007
                                    
                                    
                                    2006
                                    
                                    
                                    2008
                                    
                                    
                                    2007
                                    
                                    
                                    2006Service
      cost
                                    
                                    $
                                    8.6
                                    
                                    
                                    $
                                    9.1
                                    
                                    
                                    $
                                    9.4
                                    
                                    
                                    $
                                    2.2
                                    
                                    
                                    $
                                    2.3
                                    
                                    
                                    $
                                    2.4Interest
      cost
                                    
                                    
                                    15.9
                                    
                                    
                                    
                                    15.1
                                    
                                    
                                    
                                    14.9
                                    
                                    
                                    
                                    12.0
                                    
                                    
                                    
                                    10.9
                                    
                                    
                                    
                                    10.3Expected
      return on plan assets
                                    
                                    
                                    (39.9
                                    )
                                    
                                    
                                    (36.0
                                    )
                                    
                                    
                                    (34.8
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (.2
                                    )Recognized
      net actuarial loss
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    .2
                                    
                                    
                                    
                                    4.6
                                    
                                    
                                    
                                    4.7
                                    
                                    
                                    
                                    5.0Amortization
      of prior service cost
                                    
                                    
                                    .3
                                    
                                    
                                    
                                    .5
                                    
                                    
                                    
                                    .5
                                    
                                    
                                    
                                    (.1
                                    )
                                    
                                    
                                    (.1
                                    )
                                    
                                    
                                    (.1
                                    )Net
      periodic benefit cost (credit)
                                    
                                    $
                                    (15.1
                                    )
                                    
                                    $
                                    (11.3
                                    )
                                    
                                    $
                                    (9.8
                                    )
                                    
                                    $
                                    18.7
                                    
                                    
                                    $
                                    17.8
                                    
                                    
                                    $
                                    17.4








Assumptions
used to determine benefit obligations included the following:





Pension
      benefits
                      
                      
                      Health
      care and other benefits2008
                      
                      
                      2007
                      
                      
                      2008
                      
                      
                      2007Discount
      rate
                      
                      
                      6.35
                      %
                      
                      
                      6.25
                      %
                      
                      
                      6.00
                      %
                      
                      
                      6.25
                      %Rate
      of compensation increase
                      
                      
                      3.75
                      
                      
                      
                      3.75
                      
                      
                      
                      3.75
                      
                      
                      
                      3.75





The 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.  The 2007 discount rate was
determined by performing a bond matching study and referencing the Citigroup
Pension Liability Index rate.  Such study utilized high quality bonds
whose expected cash flows match the timing and amount of future benefit payments
of the plans.





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




Pension
      benefits
                        
                        
                        Health
      care and other benefits2008
                        
                        
                        2007
                        
                        
                        2006
                        
                        
                        2008
                        
                        
                        2007
                        
                        
                        2006Discount
      rate
                        
                        
                        6.25
                        %
                        
                        
                        5.75
                        %
                        
                        
                        5.50
                        %
                        
                        
                        6.25
                        %
                        
                        
                        5.75
                        %
                        
                        
                        5.50
                        %Expected
      return on assets
                        
                        
                        8.50
                        
                        
                        
                        8.50
                        
                        
                        
                        8.50
                        
                        
                        
                        8.50
                        
                        
                        
                        8.50
                        
                        
                        
                        8.50Rate
      of compensation increase
                        
                        
                        3.75
                        
                        
                        
                        3.75
                        
                        
                        
                        3.75
                        
                        
                        
                        3.75
                        
                        
                        
                        3.75
                        
                        
                        
                        3.75





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 periodic benefit cost.  The assumed rate of
return on assets can have a significant effect on the amounts reported for
pension benefits.  A one-percentage-point change in the assumed rate
of return on assets would impact the net periodic pension cost by approximately
$3 million.






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





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





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




2008
                          
                          
                          2007
                          
                          
                          2006Health
      care cost trend rate
                          
                          9.0
                          %
                          
                          
                          9.5
                          %
                          
                          
                          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
                          
                          6
                          
                          
                          
                          5
                          
                          
                          
                          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):




One-percentIncrease
                      
                      
                      DecreaseEffect
      on total of service and interest cost components
                      
                      $
                      1.1
                      
                      
                      $
                      (1.0
                      )Effect
      on benefit obligation
                      
                      
                      18.7
                      
                      
                      
                      (16.0
                      )








The
Medicare Prescription Drug, Improvement and Modernization Act of 2003 provides 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 have reflected the effects of the subsidy in its
determination of the benefit obligation and annual net periodic benefit
cost.





The
company’s investment objective relating to pension plan assets is to have a high
probability of meeting its obligations without additional cash
contributions.  The company’s investment strategy is to maintain an
asset mix near its target asset allocation and to rebalance the portfolio
monthly if the actual allocation deviates from the target by two or more
percentage points.  The following table sets forth the target
allocation and actual percentage of plan assets by asset category:




Target
                          
                          
                          Percentage
      of plan assetsAsset
      category
                          
                          allocation
                          
                          
                          2008
                          
                          
                          2007Equity
      securities
                          
                          
                          69
                          %
                          
                          
                          70
                          %
                          
                          
                          69
                          %Debt
      securities
                          
                          
                          31
                          
                          
                          
                          30
                          
                          
                          
                          31100
                          %
                          
                          
                          100
                          %
                          
                          
                          100
                          %





Investments
in equity securities are diversified among various mutual funds that are
comprised of domestic and international equity securities.  Debt
securities are comprised of a mutual fund that is invested in bonds representing
a diversity of sectors and maturities.





The
company does not expect to contribute to its pension plan in 2009 but does
expect to contribute about $12.5 million (before Medicare subsidies) to its
other postretirement benefit plan in 2009.  The following table sets
forth the benefit payments from the plans expected over the next 10 years (in
millions):





62
 
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Twelve
      months ending December 31
                      
                      Pension
      benefits
                      
                      
                      Health
      care and other benefits
                      
                      
                      Expected
      Medicare subsidy2009
                      
                      $
                      19.9
                      
                      
                      $
                      12.5
                      
                      
                      $
                      (1.4
                      )2010
                      
                      
                      19.2
                      
                      
                      
                      13.4
                      
                      
                      
                      (1.5
                      )2011
                      
                      
                      20.0
                      
                      
                      
                      14.3
                      
                      
                      
                      (1.6
                      )2012
                      
                      
                      21.9
                      
                      
                      
                      14.9
                      
                      
                      
                      (1.7
                      )2013
                      
                      
                      22.9
                      
                      
                      
                      15.7
                      
                      
                      
                      (1.8
                      )2014-2018
                      
                      
                      153.7
                      
                      
                      
                      87.9
                      
                      
                      
                      (9.6
                      )





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, $0.2 million and zero
in 2008, 2007 and 2006, respectively.  The projected benefit
obligation associated with these plans was $5.9 million and $6.2 million at
December 31, 2008 and 2007, respectively.





The
company also sponsors defined contribution plans covering substantially all
domestic employees.  These plans provide for employer matching
contributions.  The total cost of these plans was $7.6 million, $7.2
million and $6.6 million in 2008, 2007 and 2006, 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, 2008, there was $3.7 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):


2008
                    
                    
                    2007
                    
                    
                    2006Operating
      and maintenance expense
                    
                    $
                    2.9
                    
                    
                    $
                    1.7
                    
                    
                    $
                    3.4Income
      tax benefits
                    
                    
                    1.2
                    
                    
                    
                    .7
                    
                    
                    
                    1.4





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





2008
                    
                    
                    2007
                    
                    
                    2006Proceeds
      from the exercise of stock options
                    
                    $
                    1.7
                    
                    
                    $
                    8.2
                    
                    
                    $
                    22.6Associated
      income tax benefits realized
                    
                    
                    .1
                    
                    
                    
                    .9
                    
                    
                    
                    2.8





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.






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A summary
of the status of the company’s restricted stock and changes during the year
ended December 31, 2008 is as follows:




Weighted-Number
                          
                          
                          average
      grant-of
      shares
                          
                          
                          date
      fair valueNonvested
      at January 1, 2008
                          
                          
                          73,820
                          
                          
                          $
                          45.48Granted
                          
                          
                          61,230
                          
                          
                          
                          32.92Forfeited
                          
                          
                          (2,600
                          )
                          
                          
                          39.83Nonvested
      at December 31, 2008
                          
                          
                          132,450
                          
                          
                          
                          39.79








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 companies in a predetermined utility
industry peer group.  Units vest over approximately three years, or
upon retirement 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 $0.4
million, $0.7 million and $0.8 million during the years ended December 31, 2008,
2007 and 2006, respectively, to settle performance unit
obligations.





Other.The company
has other stock-based compensation plans, but the impact on net income and
earnings per share for the years ended December 31, 2008, 2007 and 2006 is
immaterial.





13.   COMMON
STOCK





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





2008
                              
                              
                              2007
                              
                              
                              2006Beginning
      of year
                              
                              
                              45.1
                              
                              
                              
                              44.9
                              
                              
                              
                              44.2Issued
                              
                              
                              .1
                              
                              
                              
                              .2
                              
                              
                              
                              .7End
      of year
                              
                              
                              45.2
                              
                              
                              
                              45.1
                              
                              
                              
                              44.9





Shares
issued during 2008, 2007 and 2006 were due primarily to stock option
exercises.  There were no repurchases of common stock in 2008, 2007
and 2006 under the common stock repurchase program announced in
2001.





Dividend and other
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.  In addition, 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.




64
 
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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 2007, Nicor redeemed 100 shares of 4.48 percent
Mandatorily Redeemable Preferred Stock, $50 par value, at a per share redemption
price of $43 plus accrued unpaid dividends.  There were 11,581 shares
of the 4.48 percent Series Mandatorily Redeemable Preferred Stock, $50 par
value, outstanding at December 31, 2008.





15.   BUSINESS
SEGMENT AND GEOGRAPHIC INFORMATION





Nicor is
a holding company that operates in two separately managed reportable business
segments:  gas distribution and shipping.  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.





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





2008
                          
                          
                          2007
                          
                          
                          2006Bundled
      sales
                          
                          $
                          2,789.5
                          
                          
                          $
                          2,265.2
                          
                          
                          $
                          2,087.8Transportation
                          
                          
                          187.1
                          
                          
                          
                          155.9
                          
                          
                          
                          158.8Revenue
      taxes
                          
                          
                          174.0
                          
                          
                          
                          149.6
                          
                          
                          
                          147.7Other
                          
                          
                          56.3
                          
                          
                          
                          56.8
                          
                          
                          
                          58.0$
                          3,206.9
                          
                          
                          $
                          2,627.5
                          
                          
                          $
                          2,452.3





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.  In connection with the company’s reorganization of certain
shipping and related operations in 2006, the shipping segment recorded $4.2
million in current income tax expense and recognized a $1.8 million net income
tax charge associated with the elimination of certain deferred income
taxes.





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





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.





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The
majority of intersegment revenues represent gas distribution revenues related to
customers entering into utility-bill management contracts with Nicor
Solutions.  Under the utility-bill management contracts, Nicor
Solutions bills a fixed amount to a customer, regardless of changes in natural
gas prices or weather, and in exchange pays the customer’s utility bills from
Nicor Gas.  Intersegment revenues are eliminated in the 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 2008 and recorded
      in corporate and eliminations was $6.2 million.  In 2006,
      benefits associated with Nicor’s other energy ventures’ utility-bill
      management contracts attributable to warmer than normal weather and
      recorded in corporate and eliminations was $9.5 million.  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).


·
            Insurance
      recoveries of $5.2 million in 2006.  The insurance recoveries
      related to previously incurred legal expenses associated with securities
      class actions and shareholder derivative lawsuits settled in prior
      years.


·
            A
      $10 million charge (non-deductible for tax purposes) in 2006 relating to a
      settlement with the SEC of claims of securities law violations relating to
      the PBR plan.


·
            Income
      tax benefits in 2006 which include a net income tax benefit of $7.0
      million from the elimination of certain deferred income taxes associated
      with the reorganization of certain shipping and related operations in 2006
      and $0.5 million in current income tax expense related to the repatriation
      of foreign earnings in 2005.





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





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Nicor
      Inc.Other
                                              
                                              
                                              CorporateGas
                                              
                                              
                                              
                                              
                                              
                                              energy
                                              
                                              
                                              anddistribution
                                              
                                              
                                              Shipping
                                              
                                              
                                              ventures
                                              
                                              
                                              eliminations
                                              
                                              
                                              ConsolidatedOperating
      revenues2008External
      customers
                                              
                                              $
                                              3,135.8
                                              
                                              
                                              $
                                              425.2
                                              
                                              
                                              $
                                              215.6
                                              
                                              
                                              $
                                              -
                                              
                                              
                                              $
                                              3,776.6Intersegment
                                              
                                              
                                              71.1
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              14.7
                                              
                                              
                                              
                                              (85.8
                                              )
                                              
                                              
                                              -3,206.9
                                              
                                              
                                              
                                              425.2
                                              
                                              
                                              
                                              230.3
                                              
                                              
                                              
                                              (85.8
                                              )
                                              
                                              
                                              3,776.62007External
      customers
                                              
                                              
                                              2,557.4
                                              
                                              
                                              
                                              403.9
                                              
                                              
                                              
                                              215.0
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              3,176.3Intersegment
                                              
                                              
                                              70.1
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              29.5
                                              
                                              
                                              
                                              (99.6
                                              )
                                              
                                              
                                              -2,627.5
                                              
                                              
                                              
                                              403.9
                                              
                                              
                                              
                                              244.5
                                              
                                              
                                              
                                              (99.6
                                              )
                                              
                                              
                                              3,176.32006External
      customers
                                              
                                              
                                              2,370.9
                                              
                                              
                                              
                                              398.3
                                              
                                              
                                              
                                              190.8
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              2,960.0Intersegment
                                              
                                              
                                              81.4
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              25.1
                                              
                                              
                                              
                                              (106.5
                                              )
                                              
                                              
                                              -2,452.3
                                              
                                              
                                              
                                              398.3
                                              
                                              
                                              
                                              215.9
                                              
                                              
                                              
                                              (106.5
                                              )
                                              
                                              
                                              2,960.0Operating
      income (loss)2008
                                              
                                              $
                                              124.4
                                              
                                              
                                              $
                                              39.3
                                              
                                              
                                              $
                                              25.3
                                              
                                              
                                              $
                                              (4.0
                                              )
                                              
                                              $
                                              185.02007
                                              
                                              
                                              128.7
                                              
                                              
                                              
                                              45.4
                                              
                                              
                                              
                                              34.0
                                              
                                              
                                              
                                              (1.6
                                              )
                                              
                                              
                                              206.52006
                                              
                                              
                                              123.9
                                              
                                              
                                              
                                              47.5
                                              
                                              
                                              
                                              26.6
                                              
                                              
                                              
                                              4.5
                                              
                                              
                                              
                                              202.5Equity
      investment income (loss), net2008
                                              
                                              $
                                              (.1
                                              )
                                              
                                              $
                                              -
                                              
                                              
                                              $
                                              4.7
                                              
                                              
                                              $
                                              4.8
                                              
                                              
                                              $
                                              9.42007
                                              
                                              
                                              (.1
                                              )
                                              
                                              
                                              -
                                              
                                              
                                              
                                              3.5
                                              
                                              
                                              
                                              2.9
                                              
                                              
                                              
                                              6.32006
                                              
                                              
                                              (.1
                                              )
                                              
                                              
                                              -
                                              
                                              
                                              
                                              7.1
                                              
                                              
                                              
                                              4.1
                                              
                                              
                                              
                                              11.1Interest
      income2008
                                              
                                              $
                                              5.5
                                              
                                              
                                              $
                                              1.8
                                              
                                              
                                              $
                                              1.1
                                              
                                              
                                              $
                                              .4
                                              
                                              
                                              $
                                              8.82007
                                              
                                              
                                              5.3
                                              
                                              
                                              
                                              2.1
                                              
                                              
                                              
                                              1.3
                                              
                                              
                                              
                                              .1
                                              
                                              
                                              
                                              8.82006
                                              
                                              
                                              6.3
                                              
                                              
                                              
                                              1.1
                                              
                                              
                                              
                                              1.3
                                              
                                              
                                              
                                              .3
                                              
                                              
                                              
                                              9.0Other
      income (expense), net2008
                                              
                                              $
                                              .6
                                              
                                              
                                              $
                                              .1
                                              
                                              
                                              $
                                              .1
                                              
                                              
                                              $
                                              (.1
                                              )
                                              
                                              $
                                              .72007
                                              
                                              
                                              .5
                                              
                                              
                                              
                                              .2
                                              
                                              
                                              
                                              .1
                                              
                                              
                                              
                                              (.2
                                              )
                                              
                                              
                                              .62006
                                              
                                              
                                              .6
                                              
                                              
                                              
                                              .2
                                              
                                              
                                              
                                              .1
                                              
                                              
                                              
                                              (.3
                                              )
                                              
                                              
                                              .6Interest
      expense, net of amounts capitalized2008
                                              
                                              $
                                              39.8
                                              
                                              
                                              $
                                              -
                                              
                                              
                                              $
                                              1.3
                                              
                                              
                                              $
                                              (1.0
                                              )
                                              
                                              $
                                              40.12007
                                              
                                              
                                              34.0
                                              
                                              
                                              
                                              .6
                                              
                                              
                                              
                                              1.8
                                              
                                              
                                              
                                              1.5
                                              
                                              
                                              
                                              37.92006
                                              
                                              
                                              44.3
                                              
                                              
                                              
                                              2.3
                                              
                                              
                                              
                                              2.5
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              49.1Income
      tax expense (benefit), net2008
                                              
                                              $
                                              31.0
                                              
                                              
                                              $
                                              6.2
                                              
                                              
                                              $
                                              11.6
                                              
                                              
                                              $
                                              (4.5
                                              )
                                              
                                              $
                                              44.32007
                                              
                                              
                                              34.2
                                              
                                              
                                              
                                              3.5
                                              
                                              
                                              
                                              14.1
                                              
                                              
                                              
                                              (2.7
                                              )
                                              
                                              
                                              49.12006
                                              
                                              
                                              27.8
                                              
                                              
                                              
                                              9.0
                                              
                                              
                                              
                                              12.9
                                              
                                              
                                              
                                              (3.9
                                              )
                                              
                                              
                                              45.8Property,
      plant and equipment, net2008
                                              
                                              $
                                              2,723.5
                                              
                                              
                                              $
                                              121.2
                                              
                                              
                                              $
                                              14.2
                                              
                                              
                                              $
                                              (.3
                                              )
                                              
                                              $
                                              2,858.62007
                                              
                                              
                                              2,624.1
                                              
                                              
                                              
                                              120.0
                                              
                                              
                                              
                                              13.7
                                              
                                              
                                              
                                              (.5
                                              )
                                              
                                              
                                              2,757.32006
                                              
                                              
                                              2,580.7
                                              
                                              
                                              
                                              121.3
                                              
                                              
                                              
                                              13.2
                                              
                                              
                                              
                                              (.5
                                              )
                                              
                                              
                                              2,714.7Capital
      expenditures2008
                                              
                                              $
                                              229.4
                                              
                                              
                                              $
                                              16.3
                                              
                                              
                                              $
                                              4.0
                                              
                                              
                                              $
                                              .2
                                              
                                              
                                              $
                                              249.92007
                                              
                                              
                                              159.0
                                              
                                              
                                              
                                              14.5
                                              
                                              
                                              
                                              3.9
                                              
                                              
                                              
                                              (.1
                                              )
                                              
                                              
                                              177.32006
                                              
                                              
                                              164.5
                                              
                                              
                                              
                                              16.9
                                              
                                              
                                              
                                              5.9
                                              
                                              
                                              
                                              (.2
                                              )
                                              
                                              
                                              187.1Depreciation2008
                                              
                                              $
                                              170.9
                                              
                                              
                                              $
                                              15.4
                                              
                                              
                                              $
                                              3.6
                                              
                                              
                                              $
                                              (.1
                                              )
                                              
                                              $
                                              189.82007
                                              
                                              
                                              165.6
                                              
                                              
                                              
                                              15.4
                                              
                                              
                                              
                                              3.4
                                              
                                              
                                              
                                              (.2
                                              )
                                              
                                              
                                              184.22006
                                              
                                              
                                              160.1
                                              
                                              
                                              
                                              15.7
                                              
                                              
                                              
                                              2.3
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              178.1





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16.  
EQUITY INVESTMENT INCOME, NET





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





2008
                        
                        
                        2007
                        
                        
                        2006Triton
                        
                        $
                        6.4
                        
                        
                        $
                        5.1
                        
                        
                        $
                        5.8Adkins
      Energy
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        3.8Horizon
      Pipeline
                        
                        
                        1.5
                        
                        
                        
                        1.6
                        
                        
                        
                        1.8EN
      Engineering
                        
                        
                        3.2
                        
                        
                        
                        1.9
                        
                        
                        
                        1.5Affordable
      housing investments
                        
                        
                        (1.7
                        )
                        
                        
                        (2.3
                        )
                        
                        
                        (1.8
                        )$
                        9.4
                        
                        
                        $
                        6.3
                        
                        
                        $
                        11.1





Included
in equity investment income from Adkins Energy for 2006 is the sale of the
investment, which resulted in a $2.4 million gain.





In 2008,
2007 and 2006, Nicor received dividends from equity investees of $16.0 million,
$12.3 million and $7.4 million, respectively.





17.  
RELATED PARTY TRANSACTIONS





Horizon
Pipeline charged Nicor Gas $10.3 million for each of the years ended December
31, 2008, 2007 and 2006 for natural gas transportation under rates that have
been accepted by the FERC.





EN
Engineering charged Nicor Gas $7.2 million, $4.8 million and $4.2 million for
engineering and corrosion services rendered for 2008, 2007 and 2006,
respectively.  A majority of the work performed by EN Engineering is
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, 2008, Nicor had purchase commitments with payments due as follows
(in millions):





Purchase
      obligations
                      
                      
                      Operating
                        leases
                      
                      
                      Other
      long-term obligations2009
                      
                      $
                      25.2
                      
                      
                      $
                      23.8
                      
                      
                      $
                      .22010
                      
                      
                      12.1
                      
                      
                      
                      10.5
                      
                      
                      
                      .12011
                      
                      
                      12.1
                      
                      
                      
                      7.5
                      
                      
                      
                      .12012
                      
                      
                      5.6
                      
                      
                      
                      5.3
                      
                      
                      
                      -2013
                      
                      
                      3.1
                      
                      
                      
                      2.1
                      
                      
                      
                      -After
      2013
                      
                      
                      -
                      
                      
                      
                      13.0
                      
                      
                      
                      .6$
                      58.1
                      
                      
                      $
                      62.2
                      
                      
                      $
                      1.0





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 segment, office space and
equipment in the gas distribution segment and office space for the other energy
ventures.




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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 $41.7 million,
$41.3 million and $41.7 million in 2008, 2007 and 2006,
respectively.





Other
long-term obligations consist primarily of redeemable preferred
stock.





19.   RATE
PROCEEDING





On April
29, 2008, Nicor Gas filed with the ICC for an overall increase in
rates.  The company’s filing, as updated, provides a revenue increase
of $140.4 million for a rate of return on rate base of 9.27 percent, which
reflects an 11.15 percent cost of common equity.  The requested rate
increase is needed to recover higher operating costs and increased capital
investments.





In its
rate filing, Nicor Gas has proposed some new rate adjustment
mechanisms.  These include mechanisms that would adjust rates to
reflect certain changes in the company’s bad debt expense and cost of gas used
for operations.  Also included are a volume balancing rider that would
adjust rates to recover fixed costs, an energy efficiency rider that would fund
energy efficiency programs and a rider that would adjust rates to recover a
portion of capital expenditures incurred to replace certain older
infrastructure.





On
February 9, 2009, the ALJs’ proposed order was issued recommending an increase
in base revenues of approximately $68.8 million, a rate of return on rate base
of 7.57 percent and a rate of return on equity of 10.17 percent.  The
proposed order also includes approval of a volume balancing rider that would
adjust rates to recover fixed costs and an energy efficiency rider that would
fund energy efficiency programs.





Nicor Gas
and other parties to the proceeding will have the opportunity to file written
briefs to identify points where they agree or disagree with the proposed
order.  After considering these briefs, the ALJs may modify the
proposed order before submitting it as their recommendation to the ICC
commissioners.  The ICC commissioners will then make the final
decision on Nicor Gas' rate increase request and that decision may differ from
the ALJs' recommendation.  That final decision is expected to be
issued no later than March 25, 2009.  New rates would be effective
prospectively.





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 $10 million at December
31, 2008.  Nicor believes the likelihood of any such payment by TEL is
remote.  No liability has been recorded for this
obligation.





Performance guarantees.Nicor Services markets separately priced product warranty contracts that
provide, over a period of one to fifteen years, for the repair of heating,
ventilation and air conditioning equipment, natural gas lines and other
appliances within homes.  Revenues from these product warranty
contracts are recognized ratably over the coverage period, and related repair
costs are charged to expense as incurred.  Repair expenses of $7.1
million, $6.6 million and $6.2 million were incurred in 2008, 2007 and 2006,
respectively.




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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 Cook County State’s Attorney
Office (“CCSAO”), the staff of the ICC and CUB entered into a stipulation
providing for additional discovery.  The Illinois Attorney General’s
Office (“IAGO”) has also intervened in this matter.  In addition, the
IAGO issued Civil Investigation Demands (“CIDs”) to CUB and the ICC
staff.  The CIDs ordered that CUB and the ICC staff produce all
documents relating to any claims that Nicor Gas may have presented, or caused to
be presented, false information related to its PBR plan.  The company
has committed to cooperate fully in the reviews of the PBR plan.





In
response to these allegations, on July 18, 2002, the Nicor Board of Directors
appointed a special committee of independent, non-management directors to
conduct an inquiry into issues surrounding natural gas purchases, sales,
transportation, storage and such other matters as may come to the attention of
the special committee in the course of its investigation.  The special
committee presented the report of its counsel (“Report”) to Nicor’s Board of
Directors on October 28, 2002.




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





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





On
February 5, 2003, the CCSAO and CUB filed a motion for $27 million in sanctions
against the company in the ICC Proceedings.  In that motion, CCSAO and
CUB alleged that Nicor Gas’ responses to certain CUB data requests were
false.  Also on February 5, 2003, CUB stated in a press release that,
in addition to $27 million in sanctions, it would seek additional refunds to
consumers.  On March 5, 2003, the ICC staff filed a response brief in
support of CUB’s motion for sanctions.  On May 1, 2003, the ALJs
issued a ruling denying CUB and CCSAO’s motion for sanctions.  CUB has
filed an appeal of the motion for sanctions with the ICC, and the ICC has
indicated that it will not rule on the appeal until the final disposition of the
ICC Proceedings.  It is not possible to determine how the ICC will
resolve the claims of CCSAO, CUB or other parties to the ICC
Proceedings.





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





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







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





Nicor is
unable to predict the outcome of the ICC’s review or the company’s potential
exposure thereunder.  Because the PBR plan and historical gas costs
are still under ICC review, the final outcome could be materially different than
the amounts reflected in the company’s financial statements as of December 31,
2008.





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.





In the
first quarter of 2007, Nicor Gas recorded a $7.2 million reduction to its
previously established reserve for mercury-related matters.  The
reduction was attributable primarily to the favorable settlement during that
quarter of certain lawsuits that had been pending against Nicor
Gas.  As of December 31, 2008, Nicor Gas had remaining an estimated
liability of $2.5 million related to inspection, cleanup and legal defense
costs.  This represents management’s best estimate of future costs
based on an evaluation of currently available information. Actual costs may vary
from this estimate.





Nicor Gas
remains a defendant in several private lawsuits, all in the Circuit Court of
Cook County, Illinois, seeking a variety of unquantified damages (including
bodily injury and property damages) allegedly caused by mercury spillage
resulting from the removal of mercury-containing
regulators.  Potential liabilities relating to these claims have been
assumed by a contractor’s insurer subject to certain limitations.





Nicor Gas
continues to pursue recovery from insurers and independent contractors that had
performed work for the company.  In the first quarter of 2007, the
company recorded a net recovery of approximately $0.8 million.





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.





To date,
Nicor Gas has identified about 40 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 interim agreement to cooperate in cleaning up residue at many of
these properties.  Under the interim agreement, mutually agreed costs
are to be evenly split between Nicor Gas and ComEd until such time as they are
finally allocated either through negotiation or arbitration.  On April
17, 2006, Nicor Gas initiated arbitration to determine the final allocations of
these costs between Nicor Gas and ComEd.  On January 3, 2008, Nicor
Gas and ComEd entered into a definitive agreement concerning final cost
allocations.  The definitive agreement allocates to Nicor Gas 51.73
percent of cleanup costs for 24 sites, no portion of the cleanup costs for 14
other sites and 50 percent of general






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remediation
program costs that do not relate exclusively to particular sites.  The
definitive agreement is subject, among other things, to approval by the
ICC.  The arbitration that was initiated by Nicor Gas in 2006
currently is stayed pursuant to the arbitration panel’s order and is expected to
be stayed pending the ICC review of the definitive allocation agreement.
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, 2008, the company had recorded a liability
in connection with these matters of $21.4 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
December 2001, a purported class action lawsuit was filed against Exelon
Corporation, ComEd and Nicor Gas in the Circuit Court of Cook County alleging,
among other things, that the cleanup of a former manufactured gas plant site in
Oak Park, Illinois was inadequate.  Additional lawsuits were later
filed related to this same former manufactured gas plant site. These lawsuits
sought, in part, unspecified damages for property damage, nuisance, and various
personal injuries that allegedly resulted from exposure to contaminants
allegedly emanating from the site, injunctive relief to compel the defendants to
engage in various cleanup activities and punitive damages.  An
agreement in principle to settle the purported class action was reached in the
first quarter of 2006 at which time a $2.3 million reserve for this matter was
recorded by the company.  The settlement was approved by the trial
court and the lawsuit was dismissed during the second quarter of
2007.  Under the settlement, the company made a payment of $2.2
million which was charged against a previously established
reserve.  The remaining lawsuits relating to the Oak Park site were
settled and the claims dismissed during the first quarter of 2008.  In
accordance with ICC authorization, the company expects to recover costs of such
settlements from its customers, subject to an annual prudence
review.





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.





PCBs.In June 2007,
Nicor Gas notified the USEPA of the discovery by Nicor Gas of PCBs at four homes
in Park Ridge, Illinois.  Nicor Gas has cleaned up the PCBs at these
four homes.  In July 2007, the USEPA issued a subpoena to Nicor Gas
pursuant to Section 11 of the Toxic Substances Control Act.  In the
subpoena, the USEPA indicated that it was investigating Nicor Gas’
identification of PCB-contaminated liquids in its distribution
system.  The subpoena sought documents related to Nicor Gas’ pipeline
liquids and the extent and location of PCBs contained therein.  The
Illinois Attorney General made a similar request for information from Nicor
Gas.  Nicor Gas has provided documentation to the USEPA and the
Illinois Attorney General, including information about the presence of PCBs in
its system, and has conducted sample testing at additional customer
locations.  While Nicor is unable to






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predict
the outcome of these inquiries or to reasonably estimate its potential exposure
related thereto, if any, and has not recorded a liability associated with this
contingency, the final disposition of this matter is not expected to have a
material adverse impact on the company’s liquidity or financial
condition.





Municipal Tax
Matters.  Many municipalities in Nicor Gas’ service territory
have enacted ordinances that impose taxes on gas sales to customers within
municipal boundaries.  Most of these municipal taxes are imposed on
Nicor Gas based on revenues generated by Nicor Gas within the
municipality.  Other municipal taxes are imposed on natural gas
consumers within the municipality but are collected from consumers and remitted
to the municipality by Nicor Gas.  A number of municipalities have
instituted audits of Nicor Gas’ tax remittances.  In May 2007, five of
those municipalities filed an action against Nicor Gas in state court in DuPage
County, Illinois relating to these tax audits.  Following a dismissal
of this action without prejudice by the trial court, the municipalities filed an
amended complaint in August 2008.  The amended complaint seeks, among
other things, compensation for alleged unpaid taxes. Nicor Gas is contesting the
claims in the amended complaint.  In December 2007, 25 additional
municipalities, all represented by the same audit firm involved in the lawsuit,
issued assessments to Nicor Gas claiming that it failed to provide information
requested by the audit firm and owed the municipalities back
taxes.  Nicor Gas believes the assessments are improper and has
challenged them.  While the company is unable to predict the outcome
of these matters or to reasonably estimate its potential exposure related
thereto, if any, and has not recorded a liability associated with this
contingency, the final disposition of these matters is not expected to have a
material adverse impact on the company’s liquidity or financial
condition.





Other.In 2006, Nicor
received a payment of $5.2 million from insurance carriers as reimbursement of
legal defense costs in connection with securities class actions and shareholder
derivative suits that were settled in 2004 and 2005.  This payment has
been recorded in “Other corporate expenses and eliminations” in the Consolidated
Statements of Operations for 2006.





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.




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22.   QUARTERLY
RESULTS (UNAUDITED)





Summarized
quarterly financial data is presented below (in millions, except per share
data).





Quarter
      endedMar.
      31
                              
                              
                              June
      30
                              
                              
                              Sept.
      30
                              
                              
                              Dec.
      312008Operating
      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
                              
                              
                              
                              1.052007Operating
      revenues
                              
                              $
                              1,334.7
                              
                              
                              $
                              556.9
                              
                              
                              $
                              365.2
                              
                              
                              $
                              919.5Operating
      income
                              
                              
                              76.6
                              
                              
                              
                              29.9
                              
                              
                              
                              22.8
                              
                              
                              
                              77.2Net
      income
                              
                              
                              47.2
                              
                              
                              
                              18.0
                              
                              
                              
                              14.5
                              
                              
                              
                              55.5Earnings
      per average share of common stockBasic
                              
                              
                              1.05
                              
                              
                              
                              .40
                              
                              
                              
                              .32
                              
                              
                              
                              1.23Diluted
                              
                              
                              1.04
                              
                              
                              
                              .40
                              
                              
                              
                              .32
                              
                              
                              
                              1.22





The first
quarter of 2007 included a pretax mercury-related recovery of $8.0 million
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.  The fourth quarter of 2007 included
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 this settlement, Nicor reduced its reserve for
interest payable by $9.6 million.





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






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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.





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, 2008.  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.




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PART
III





Item
      10.
            Directors, Executive Officers 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 11, 2009, and is incorporated herein by
reference.





Information
about the audit committee financial expert is contained under the Audit
Committee Report section in Nicor’s Definitive Proxy Statement to be filed on or
about March 11, 2009, 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 11, 2009, 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 executive compensation is contained under the Executive Compensation and
Director Compensation sections in Nicor’s Definitive Proxy Statement to be filed
on or about March 11, 2009, 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 11, 2009, and is incorporated herein by reference.




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EQUITY
COMPENSATION PLAN INFORMATION


(a)
                    
                    
                    (b)
                    
                    
                    (c)Plan
      category
                    
                    Number
      of securities to be issued upon exercise of outstanding options,
      warrants, and rights
                    
                    
                    Weighted-average
      exercise price of outstanding options, warrants, and
rights
                    
                    
                    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
                    
                    
                    640,823
                    
                    
                    
                    $36.30
                    
                    
                    
                    2,154,818
      (1)Equity
      compensation plans not approved by security holders
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Total
                    
                    
                    640,823
                    
                    
                    
                    $36.30
                    
                    
                    
                    2,154,818





(1)
            This
      number includes 365,543 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 387,525 shares issuable under the Nicor Employee Stock
      Purchase Plan.  The remaining 1,401,750 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 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 11, 2009, 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
Accounting Fees and Services section in Nicor’s Definitive Proxy Statement to be
filed on or about March 11, 2009, and is incorporated herein by
reference.





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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
                    40II
                    Valuation and Qualifying Accounts
                    80





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





3)
            Exhibits
      Filed:





See
Exhibit Index filed herewith.




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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
      period2008Allowance
      for doubtfulaccounts receivable
                                              
                                              $
                                              35.1
                                              
                                              
                                              $
                                              74.1
                                              
                                              
                                              $
                                              -
                                              
                                              
                                              
                                              $
                                              64.3
                                              
                                              (a)
                                              
                                              $
                                              44.9Accrued
      mercury-related costs
                                              
                                              
                                              2.8
                                              
                                              
                                              
                                              .6
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              
                                              .9
                                              
                                              (b)
                                              
                                              
                                              2.5Accrued
      manufactured gas plant environmental
    costs
                                              
                                              
                                              15.2
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              19.8
                                              
                                              (c)
                                              
                                              
                                              13.6
                                              
                                              (b)
                                              
                                              
                                              21.42007Allowance
      for doubtful accounts receivable
                                              
                                              $
                                              33.4
                                              
                                              
                                              $
                                              57.6
                                              
                                              
                                              $
                                              -
                                              
                                              
                                              
                                              $
                                              55.9
                                              
                                              (a)
                                              
                                              $
                                              35.1Accrued
      mercury-related costs
                                              
                                              
                                              13.2
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              
                                              10.4
                                              
                                              (b)
                                              
                                              
                                              2.8Accrued
      manufactured gas plant environmental
    costs
                                              
                                              
                                              19.9
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              4.5
                                              
                                              (c)
                                              
                                              
                                              9.2
                                              
                                              (b)
                                              
                                              
                                              15.22006Allowance
      for doubtfulaccounts receivable
                                              
                                              $
                                              31.5
                                              
                                              
                                              $
                                              41.7
                                              
                                              
                                              $
                                              -
                                              
                                              
                                              
                                              $
                                              39.8
                                              
                                              (a)
                                              
                                              $
                                              33.4Accrued
      mercury-related costs
                                              
                                              
                                              17.5
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              
                                              4.3
                                              
                                              (b)
                                              
                                              
                                              13.2Accrued
      manufactured gas plant environmental
    costs
                                              
                                              
                                              19.5
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              12.7
                                              
                                              (c)
                                              
                                              
                                              12.3
                                              
                                              (b)
                                              
                                              
                                              19.9(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.





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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 25,
2009
                        
                        /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 registrantand
      in the capacities indicated on February 25, 2009.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)







81
 
 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.)
   82
 
 Table of
Contents
  ExhibitNumber
                      
                      Description of Document10.01
                      *
                      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).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
                *
                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.)10.13
                *
                Nicor
      Inc. 1997 Long-Term Incentive Plan.  (Filed as appendix to the
      Nicor Inc. Proxy Statement, dated March 6, 1997.)10.14
                *
                First
      Amendment to Nicor 1997 Long-Term Incentive Plan.  (File No.
      1-7297, Form 10-Q for March 2000, Nicor Inc., Exhibit
    10.06.)   83
 
 Table of
Contents
  ExhibitNumber
                        
                        Description of Document10.15
                        *
                        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.)10.16
                        *
                        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.)10.17
                        *
                        Non-Qualified
      Stock Option Agreement Form.  (File No. 1-7297, Form 8-K for
      March 17, 2005, Nicor Inc., Exhibit 10.01.)10.18
                        *
                        Performance
      Cash Unit Agreement Form.  (File No. 1-7297, Form 8-K for March
      17, 2005, Nicor Inc., Exhibit 10.02.)10.19
                        *
                        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.)10.20
                        *
                        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.)


10.21
                *
                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.)10.22
                *
                2006
      Long Term Incentive Plan (File No. 1-7297, Form 8-K for April 20, 2006,
      Nicor Inc., Exhibit 10.01.)10.23
                *
                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.)10.24
                *
                Performance
      Cash Unit Agreement Form.  (File No. 1-7297, Form 8-K for March
      17, 2006, Nicor Inc., Exhibit 10.3.)10.25
                *
                Performance
      Cash Unit Agreement Form.  (File No. 1-7297, Form 8-K for March
      26, 2007, Nicor Inc., Exhibit 10.3.)10.26
                *
                Performance
      Cash Unit Agreement Form.  (File No. 1-7297, Form 8-K for March
      28, 2008, Nicor Inc., Exhibit 10.2.)10.27
                *
                Restricted
      Stock Unit Agreement Form.  (File No. 1-7297, Form 8-K for March
      26, 2007, Nicor Inc., Exhibit 10.2.)10.28
                *
                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.)10.29
                *
                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.)10.30
                *
                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.)   84
 
 Table of
Contents
  ExhibitNumber
                            
                            Description of Document10.31
                            *
                            Security
      Payment Plan.  (File No. 1-7297, Form 10-K for 1999, Nicor Inc.,
      Exhibit 10.24.)10.32
                            *
                            Amendment
      and Restatement of Nicor Gas Supplementary Retirement
      Plan.  (File No. 1-7297, Form 10-Q for March 2000, Nicor Inc.,
      Exhibit 10.01.)10.33
                            *
                            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.)10.34
                            *
                            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.)10.35
                            *
                            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.)10.36
                            *
                            First
      Amendment to the Nicor Inc. Salary Deferral Plan.  (File No.
      1-7297, Form 10-K for 2005, Nicor Inc., Exhibit 10.46.)10.37
                            *
                            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.)10.38
                            *
                            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.)





10.39
                *
                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.)10.40
                *
                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.)10.41
                *
                Nicor
      Inc. Supplemental Senior Officer Retirement Plan.  (File No.
      1-7297, Form 10-K for 2002, Nicor Inc., Exhibit 10.28.)10.42
                *
                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.)10.43
                *
                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.)10.44
                *
                2005
      Long-Term Incentive Program.  (File No. 1-7297, Form 8-K for
      March 17, 2005, Nicor Inc., Exhibit 10.03.)10.45
                *
                2006
      Long-Term Incentive Program.  (File No. 1-7297, Form 8-K for
      March 17, 2006, Nicor Inc., Exhibit
10.4.)   85
 
 Table of
Contents
  ExhibitNumber
                                
                                Description of Document10.46
                                *
                                2007
      Long-Term Incentive Program.  (File No. 1-7297, Form 8-K for
      March 26, 2007, Nicor Inc., Exhibit 10.4.)10.47
                                *
                                2008
      Long Term Incentive Program. (File No. 1-7297, Form 8-K for March 28,
      2008, Nicor Inc., Exhibit 10.3.)10.48
                                *
                                2007
      Nicor Annual Incentive Compensation Plan for Officers.  (File
      No. 1-7297, Form 8-K for February 28, 2007, Nicor Inc., Exhibit
      10.1.)10.49
                                *
                                2007
      Nicor Gas Annual Incentive Compensation Plan for Officers. (File No.
      1-7297, Form 8-K for February 28, 2007, Nicor Inc., Exhibit
      10.2.)








10.50
                
                2008 Nicor Annual Incentive
      Compensation Plan for Officers.10.51
                
                2008 Nicor Gas Annual Incentive
      Compensation Plan for Officers.10.52
                *
                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.)10.53
                *
                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.)10.54
                
                First Amendment to the Nicor Inc.
      Directors’ Deferred Compensation Plan.10.55
                
                Second Amendment to the Nicor Inc.
      Directors’ Deferred Compensation Plan.10.56
                *
                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.)10.57
                
                First Amendment to the Northern
      Illinois Gas Company Directors’ Deferred Compensation
      Plan.10.58
                
                Second Amendment to the Northern
      Illinois Gas Company Directors’ Deferred Compensation
      Plan.10.59
                *
                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.)10.60
                *
                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.)10.61
                *
                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.)10.62
                *
                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.)   86
 
 Table of
Contents




ExhibitNumber
                    
                    Description
      of Document10.63
                    *
                    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.)10.64
                    *
                    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.)10.65
                    *
                    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.)10.66
                    *
                    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.)10.67
                    *
                    Tropical
      Shipping Company Long-Term Incentive Plan. (File No. 1-7297, Form 8-K for
      March 28, 2008, Nicor Inc., Exhibit 10.4.)10.68
                    *
                    The
      Tropical Companies U.S./Satellites/Vessels Incentive Compensation Plan
      dated as of May 1, 2007. (File No. 1-7297, Form 10-K for 2007, Nicor Inc.,
      Exhibit 10.67.)10.69
                    *
                    Tropical
      Annual Incentive Compensation Plan. (File No. 1-7297, Form 8-K for March
      28, 2008, Nicor Inc., Exhibit 10.5.)10.70
                    *
                    Birdsall,
      Inc. Supplementary Savings Plan. (File No. 1-7297, Form 8-K for October
      16, 2008, Nicor Inc., Exhibit 10.1.)10.71
                    *
                    Nicor
      Claims and Procedures for Nonqualified Plans. (File No. 1-7297, Form 8-K
      for July 28, 2008, Nicor Inc., Exhibit 10.10.)10.72
                    *
                    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.)10.73
                    *
                    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.)10.74
                    *
                    9-Month
      Credit Agreement Dated as of August 11, 2008.  (File No. 1-7297,
      Form 10-Q for September 30, 2008, Nicor Inc., Exhibit
    10.01.)10.75
                    *
                    1993
      Interim Cooperative Agreement between Commonwealth Edison Company and
      Northern Illinois Gas Company.  (File No. 1-7297, Form 10-Q for
      March 31, 2006, Nicor Inc., Exhibit 10.11.)10.76
                    *
                    Amendment
      No. 1 to the 1993 Interim Cooperative Agreement.  (File No.
      1-7297, Form 10-Q for March 31, 2006, Nicor Inc., Exhibit
      10.12.)10.77
                    *
                    Amendment
      No. 2 to the 1993 Interim Cooperative Agreement.  (File No.
      1-7297, Form 10-Q for March 31, 2006, Nicor Inc., Exhibit
      10.13.)   87
 
 Table of
Contents
  ExhibitNumber
                      
                      Description of
  Document





10.78
                *
                Amendment
      No. 3 to the 1993 Interim Cooperative Agreement.  (File No.
      1-7297, Form 10-Q for March 31, 2006, Nicor Inc., Exhibit
      10.14.)10.79
                *
                Memorandum
      of Understanding between Nicor Gas and Commonwealth Edison
      Company.  (File No. 1-7297, Form 10-Q for June 30, 2007, Nicor
      Inc., Exhibit 99.01.)10.80
                *
                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.)21.01
                
                Subsidiaries.23.01
                
                Consent of Independent Registered
      Public Accounting Firm.24.01
                
                Powers of Attorney.31.01
                
                Rule 13a-14(a)/15d-14(a)
      Certification.31.02
                
                Rule 13a-14(a)/15d-14(a)
      Certification.32.01
                
                Section 1350
      Certification.32.02
                
                Section 1350
      Certification.





*
            These
      exhibits have been previously filed with the SEC as exhibits to
      registration statements or to other filings with the SEC and are
      incorporated herein as exhibits by reference.  The file number
      and exhibit number of each such exhibit, where applicable, are stated, in
      parentheses, in the description of such
exhibit.




88