UNITED STATES
 SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 
 [X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 For the quarterly period ended March 30, 2011
 
 or
 
 [   ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 Commission File Number 1-7297
  
 NICOR INC.
 (Exact name of registrant as specified in its charter)
 
 Illinois
36-2855175(State of Incorporation)
(I.R.S. EmployerIdentification No.)
 
 1844 Ferry RoadNaperville, Illinois 60563-9600
(630) 305-9500(Address of principal executive offices) (Zip Code)
(Registrant’s telephone number, including area code)
 
 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.  Yes [X]   No [   ]
 
 Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months.  Yes [X]   No [   ]
 
 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in rule 12b-2 of the Exchange Act.
 Large accelerated filer    [X]
Accelerated filer                     [   ]Non-accelerated filer      [   ]
Smaller reporting company   [   ]
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes [  ] No [X]
 
 Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.  Common stock, par value $2.50, outstanding at April 27, 2011, were 45,545,154 shares.


Table of Contents
 
 Glossary

iiPart I - Financial InformationItem 1.
Financial Statements (Unaudited)Condensed Consolidated Statements of Income:  Three months ended March 31, 2011 and 2010
1Condensed Consolidated Statements of Cash Flows:  Three months ended March 31, 2011 and 2010
2Condensed Consolidated Balance Sheets:  March 31, 2011 and 2010, and December 31, 2010
3Notes to the Condensed Consolidated Financial Statements
4Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
23Item 3.
Quantitative and Qualitative Disclosures About Market Risk
37Item 4.
Controls and Procedures
37Part II - Other InformationItem 1.
Legal Proceedings
38Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
38Item 6.
Exhibits
39Signature
41
  i
 Table of Contents
 
 Glossary
 
 AGL Resources.AGL Resources, Inc., the company with whom Nicor entered into an Agreement and Plan of Merger on December 6, 2010.
 
 ALJ.Administrative Law Judge.
 
 Base gas.The gas required in a storage reservoir to provide the pressure to cycle the normal working storage volume.
 
 Central Valley.  Central Valley Gas Storage, L.L.C., a wholly owned business that is developing a natural gas storage facility in the Sacramento River valley of north-central California.
 
 Chicago Hub.  A venture of Nicor Gas, which provides natural gas storage and transmission-related services to marketers and other gas distribution companies.
 
 CPUC.  California Public Utilities Commission, the agency that regulates utility services in California.
 
 Degree day.The extent to which the daily average temperature falls below 65 degrees Fahrenheit.  Normal weather for Nicor Gas’ service territory, for purposes of this report, is considered to be 5,600 degree days per year.
  FERC.Federal Energy Regulatory Commission, the agency that regulates the interstate transportation of natural gas, oil and electricity.
 
 Financial Reform Legislation.Dodd-Frank Wall Street Reform and Consumer Protection Act.
 
 Health Care Act.Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010.
 
 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.
 
 LIBOR.London Inter-bank Offered Rate.
 
 LIFO.  Last-in, first-out.
 
 Mcf, MMcf, Bcf.Thousand cubic feet, million cubic feet, billion cubic feet.
 
 Nicor.  Nicor Inc., or the registrant.
 
 Nicor Advanced Energy.  Prairie Point Energy, L.L.C. (doing business as Nicor Advanced Energy), a wholly owned business that provides natural gas and related services on an unregulated basis to residential and small commercial customers.
 
 Nicor Enerchange.Nicor Enerchange, L.L.C., a wholly owned business that engages in wholesale marketing of natural gas supply services primarily in the Midwest, administers the Chicago Hub for Nicor
 
 ii
 Table of Contents
 Gas, serves commercial and industrial customers in the northern Illinois market area, and manages Nicor Solutions’ and Nicor Advanced Energy’s product risks, including the purchase of natural gas supplies.
 
 Nicor Gas.Northern Illinois Gas Company (doing business as Nicor Gas Company) is a regulated wholly owned public utility business and one of the nation’s largest distributors of natural gas.
 
 Nicor Services.Nicor Energy Services Company,a wholly owned business that, directly or through subsidiaries, provides customer move connection services for utilities and product warranty contracts, heating, ventilation and air conditioning repair, maintenance and installation services and equipment to retail markets, including residential and small commercial customers.
 
 Nicor Solutions.Nicor Solutions, L.L.C., a wholly owned business that offers residential and small commercial customers energy-related products that provide for natural gas cost stability and management of their utility bill.
  NYMEX.  New York Mercantile Exchange.
 
 PBR.Performance-based rate, a regulatory plan which ended on January 1, 2003, that provided economic incentives based on natural gas cost performance.
 
 PGA.Purchased Gas Adjustment, a rate rider that passes natural gas costs directly through to customers without markup, subject to ICC review.
 
 Rider.  A rate adjustment mechanism that is part of a utility’s tariff which authorizes it to provide specific services or assess specific charges.
 
 Sawgrass Storage.  Sawgrass Storage, L.L.C., a 50-percent-owned natural gas storage development joint venture with Mill Creek Gas Storage, L.L.C., an affiliate of Samson Contour Energy E&P, L.L.C., involving the proposed development of a depleted natural gas reservoir located near Monroe, Louisiana.
 
 SEC.The United States Securities and Exchange Commission.
 
 TEL.Tropic Equipment Leasing, Inc., a wholly owned subsidiary of Nicor, holds the company’s interest in Triton.
 
 TEU.Twenty-foot equivalent unit, a measure of volume in containerized shipping equal to one 20-foot-long container.
 
 Triton.  Triton Container Investments L.L.C., a cargo container leasing company in which Nicor Inc. has an investment.
 
 Tropical Shipping.A wholly owned business and a carrier of containerized freight in the Bahamas and the Caribbean region.
 iii
 Table of Contents
  Part I - FINANCIAL INFORMATIONItem 1.Financial StatementsNicor Inc.Condensed Consolidated Statements of Income (Unaudited)(millions, except per share data)Three months endedMarch 312011


2010Operating revenuesGas distribution (includes revenue taxes of $74.9 and $73.9, respectively)
$
915.8


$
1,068.8Shipping

80.8



83.5Other energy ventures

63.0



65.7Corporate and eliminations

(22.6
)


(25.1
)Total operating revenues

1,037.0



1,192.9Operating expensesGas distributionCost of gas

640.0



787.9Operating and maintenance

83.6



63.8Depreciation

47.1



46.0Taxes, other than income taxes

79.2



77.9Shipping

82.0



84.0Other energy ventures

58.5



61.3Other corporate expenses and eliminations

(19.2
)


(24.0
)Total operating expenses

971.2



1,096.9Operating income

65.8



96.0Interest expense, net of amounts capitalized

6.9



9.0Equity investment income, net

4.4



1.5Other income, net

.4



.4Income before income taxes

63.7



88.9Income tax expense, net of benefits

18.5



28.4Net income
$
45.2


$
60.5Average shares of common stock outstandingBasic

45.9



45.4Diluted

45.9



45.6Earnings per average share of common stockBasic
$
.98


$
1.33Diluted

.98



1.33Dividends declared per share of common stock
$
.465


$
.465The accompanying notes are an integral part of these statements.


1
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Nicor Inc.Condensed Consolidated Statements of Cash Flows (Unaudited)(millions)Three months endedMarch 312011


2010Operating activitiesNet income

$
45.2


$
60.5Adjustments to reconcile net income to net cash flow provided from operating activities:Depreciation


51.9



50.6Deferred income tax expense (benefit)


1.6



(4.2
)Changes in assets and liabilities:Receivables, less allowances


(54.5
)


(44.1
)Gas in storage


119.3



113.5Deferred/accrued gas costs


22.2



36.6Derivative instruments


1.9



72.4Margin accounts - derivative instruments


4.9



(48.1
)Other assets


18.4



8.7Accounts payable


(69.4
)


(117.3
)Customer credit balances and deposits


(34.2
)


(57.8
)Temporary LIFO inventory liquidation


233.3



229.9Other liabilities


2.6



24.7Other items


7.6



(1.1
)Net cash flow provided from operating activities


350.8



324.3Investing activitiesAdditions to property, plant and equipment


(57.7
)


(42.4
)Net decrease in other short-term investments


10.0



6.6Other investing activities


(3.4
)


.5Net cash flow used for investing activities


(51.1
)


(35.3
)Financing activitiesProceeds from issuing long-term debt


75.0



-Disbursements to retire long-term debt


(75.0
)


-Net repayments of commercial paper


(271.3
)


(266.0
)Dividends paid


(21.4
)


(21.2
)Other financing activities


(2.5
)


.4Net cash flow used for financing activities


(295.2
)


(286.8
)Net increase in cash and cash equivalents


4.5



2.2Cash and cash equivalents, beginning of period


31.5



55.7Cash and cash equivalents, end of period

$
36.0


$
57.9The accompanying notes are an integral part of these statements.




2
 Table of Contents




Nicor Inc.Condensed Consolidated Balance Sheets (Unaudited)(millions)March 31


December 31


March 312011


2010


2010AssetsCurrent assetsCash and cash equivalents

$
36.0


$
31.5


$
57.9Short-term investments


61.1



70.6



70.9Receivables, less allowances of $40.9, $27.6 and $52.0, respectively


526.9



472.4



536.2Gas in storage


44.6



163.9



23.7Derivative instruments


35.0



49.1



54.3Margin accounts - derivative instruments


46.8



50.9



81.4Other


98.7



115.2



122.3Total current assets


849.1



953.6



946.7Property, plant and equipment, at costGas distribution


4,754.8



4,733.6



4,614.9Shipping


334.7



333.6



335.1Other


71.7



60.5



38.8Property, plant and equipment, at cost


5,161.2



5,127.7



4,988.8Less accumulated depreciation


2,130.5



2,104.9



2,046.4Total property, plant and equipment, net


3,030.7



3,022.8



2,942.4Long-term investments


135.8



134.2



130.5Other assets


373.1



385.9



399.2Total assets

$
4,388.7


$
4,496.5


$
4,418.8Liabilities and CapitalizationCurrent liabilitiesLong-term debt due within one year

$
-


$
-


$
75.0Short-term debt


153.7



425.0



228.0Accounts payable


258.4



335.5



236.6Customer credit balances and deposits


76.4



110.6



83.9Temporary LIFO inventory liquidation


233.3



-



229.9Derivative instruments


72.7



82.9



151.2Other


138.1



120.3



154.7Total current liabilities


932.6



1,074.3



1,159.3Deferred credits and other liabilitiesRegulatory asset retirement liability


855.5



843.9



815.2Deferred income taxes


430.6



423.4



415.9Health care and other postretirement benefits


230.9



229.7



200.0Asset retirement obligation


192.9



190.9



184.1Other


118.7



132.0



143.1Total deferred credits and other liabilities


1,828.6



1,819.9



1,758.3Commitments and contingenciesCapitalizationLong-term obligations


498.5



498.4



423.4Common equityCommon stock


113.9



113.9



113.2Paid-in capital


69.0



69.1



56.7Retained earnings


957.9



934.1



920.3Accumulated other comprehensive loss


(11.8
)


(13.2
)


(12.4
)Total common equity


1,129.0



1,103.9



1,077.8Total capitalization


1,627.5



1,602.3



1,501.2Total liabilities and capitalization

$
4,388.7


$
4,496.5


$
4,418.8The accompanying notes are an integral part of these statements.


3
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  Nicor Inc.
 
 Notes to the Condensed Consolidated Financial Statements (Unaudited)
 
 1.
PROPOSED MERGER WITH AGL RESOURCES
 
 In December 2010, Nicor entered into an Agreement and Plan of Merger (the “Merger Agreement”) with AGL Resources, which Nicor expects will be complete in the second half of 2011.  In accordance with the Merger Agreement, each share of Nicor common stock outstanding at the Effective Time (as defined in the Merger Agreement), other than shares to be cancelled and Dissenting Shares (as defined in the Merger Agreement), will be converted into the right to receive consideration consisting of (i) $21.20 in cash and (ii) 0.8382 shares of AGL Resources common stock, subject to adjustments in certain circumstances.
 
 Completion of the proposed merger is conditioned upon, among other things, shareholder approval by both companies and the receipt of various regulatory approvals.  AGL Resources filed a registration statement with the SEC to register the AGL Resources common stock to be issued in the merger, and the SEC permitted that registration to become effective on April 29, 2011.  AGL Resources and Nicor also filed their pre-merger notifications under the Hart-Scott-Rodino Antitrust Improvements Act and were granted early termination of the waiting period on April 18, 2011.
 
 In January 2011, Nicor, Nicor Gas and AGL Resources filed a joint application with the ICC for approval of the proposed merger.  The approval by the ICC is a condition to completion of the merger.  The application did not request a rate increase and included a commitment to maintain the number of full-time equivalent employees involved in the operation of Nicor Gas at a level comparable to current staffing for a period of three years following merger completion.  On April 28, 2011, the Staff of the ICC and several intervenors who are participating in the proceeding submitted initial testimony, which is available on the ICC’s website, recommending that the ICC deny the joint application or that it impose various requirements on the joint applicants as conditions of approval.  Rebuttal testimony from the joint applicants will be submitted to the ICC in late May.  The ICC has eleven months to act upon the application.
 
 The merger may also be subject to review by the governmental authorities of various other federal, state or local jurisdictions under the antitrust and utility regulation or other applicable laws of those jurisdictions.  For example, AGL Resources provided a voluntary notice of the merger to the New Jersey Board of Public Utilities (“NJBPU”), which included a description of the transaction, described the benefits of the transaction and explained why AGL Resources does not believe that the approval of the NJBPU is required to complete the merger.  AGL Resources provided a similar notice to the Maryland Public Service Commission.  It is possible that one or more state commissions will open proceedings to determine whether they have jurisdiction over the merger.  In the event that any reviewing authorities are determined to have jurisdiction over the merger transaction, there can be no assurance that the reviewing authorities will permit the applicable statutory waiting periods to expire or that the reviewing authorities will terminate the applicable statutory waiting periods at all, or otherwise approve the merger without restrictions or conditions (which are difficult to predict or quantify) that would have a material adverse effect on the combined company if the merger were completed.
 
 The Merger Agreement contains certain termination rights for both Nicor and AGL Resources, and further provides for the payment of fees and expenses upon termination under specified circumstances.  For additional information relating to the proposed merger, please see the joint proxy statement / prospectus contained in the registration statement on Form S-4 that was filed with the SEC by AGL Resources on April 29, 2011.
 
 For the quarter ended March 31, 2011, the company has incurred and expensed approximately $1.5 million of merger transaction costs.  This amount does not include the cost of company personnel
 
 4
 Table of Contents
 
 participating in efforts to develop integration plans for the combined entity.  No other adjustments have been made to the financial statements as a result of the proposed merger.
 
 2.
BASIS OF PRESENTATION
 
 The unaudited Condensed Consolidated Financial Statements of Nicor have been prepared by the company pursuant to the rules and regulations of the SEC.  Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to SEC rules and regulations.  The unaudited Condensed Consolidated Financial Statements and Notes should be read in conjunction with the financial statements and the notes thereto included in the company’s 2010 Annual Report on Form 10-K.
 
 The information furnished reflects, in the opinion of the company, all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the results for the interim periods presented.  Results for the interim periods presented are not necessarily indicative of the results to be expected for the full fiscal year due to seasonal and other factors.
 
 The company’s management evaluated subsequent events for potential recognition and disclosure through the date the financial statements were issued.
 
 3.
ACCOUNTING POLICIES
 
 Gas in storage.  Nicor Gas’ inventory is carried at cost on a LIFO basis.  Inventory decrements occurring during interim periods that are expected to be restored prior to year-end are charged to cost of gas at the estimated annual replacement cost, and the difference between this cost and the actual LIFO layer cost is recorded on the balance sheet as a temporary LIFO inventory liquidation.  Interim inventory decrements not expected to be restored prior to year-end are charged to cost of gas at the actual LIFO cost of the layers liquidated.  The inventory decrement as of March 31, 2011 is expected to be restored prior to year-end.
 
 Nicor Enerchange’s inventory is carried at the lower of weighted-average cost or market (market is represented by the cash price per the close of business on the last trading day of the period).  In the first quarter of 2010, Nicor Enerchange recorded a charge of $5.0 million resulting from lower of cost or market valuations.
 
 Regulatory assets and liabilities.  Nicor Gas is regulated by the ICC, which establishes the rules and regulations governing utility rates and services in Illinois.  As a rate-regulated company, Nicor Gas is required to recognize the economic effects of rate regulation and, accordingly, has recorded regulatory assets and liabilities.  Regulatory assets represent probable future revenue associated with certain costs that are expected to be recovered from customers through rate riders or base rates, upon approval by the ICC.  Regulatory liabilities represent probable future reductions in revenues collected from ratepayers through a rate rider or base rates, or probable future expenditures.  If Nicor Gas’ operations become no longer subject to rate regulation, a write-off of net regulatory liabilities would be required.
  5
 Table of Contents
  
 March 31


December 31


March 312011


2010


2010Regulatory assets - currentRegulatory postretirement asset

$
21.1


$
21.1


$
20.6Deferred gas costs


-



6.5



-Bad debt rider


-



-



28.3Other


10.8



7.4



6.9Regulatory assets - noncurrentRegulatory postretirement asset


189.4



193.3



191.5Deferred gas costs


-



1.4



20.6Deferred environmental costs


20.8



25.0



19.9Unamortized losses on reacquired debt


12.8



13.1



14.0Other


9.8



9.6



13.3$
264.7


$
277.4


$
315.1
 
 Regulatory liabilities - currentRegulatory asset retirement liability

$
17.2


$
17.2


$
14.5Accrued gas costs


14.3



-



27.9Bad debt rider


23.3



16.4



-Other


4.6



7.7



8.2Regulatory liabilities - noncurrentRegulatory asset retirement liability


855.5



843.9



815.2Regulatory income tax liability


14.5



18.2



21.2Bad debt rider


13.4



11.7



3.1Other


1.3



.9



.7$
944.1


$
916.0


$
890.8
 
 All items listed above are classified in Other on the Condensed Consolidated Balance Sheets, with the exception of the noncurrent portion of the Regulatory asset retirement liability, which is stated separately.
 
 The ICC does not presently allow Nicor Gas the opportunity to earn a return on its regulatory postretirement asset.  This regulatory postretirement asset is expected to be recovered from ratepayers over a period of approximately 9 to 12 years.  The regulatory assets related to debt are not included in rate base, but are recovered over the term of the debt through the rate of return authorized by the ICC.  Nicor Gas is allowed to recover and is required to pay, using short-term interest rates, the carrying costs related to temporary under or overcollections of natural gas costs, certain environmental costs and energy efficiency program costs charged to its customers.  However, there is no interest associated with the under or overcollections of bad debt expense.
 
 Revenue recognition.Nicor Gas accrues revenues for estimated deliveries to customers from the date of their last bill until the balance sheet date.  Receivables include accrued unbilled revenues of $111.0 million, $144.8 million and $102.8 million at March 31, 2011, December 31, 2010 and March 31, 2010, respectively, related primarily to gas distribution operations.
 
 Nicor Gas classifies revenue taxes billed to customers as operating revenues and related taxes incurred as operating expenses.  Revenue taxes included in operating expense for the three months ended March 31, 2011 and 2010 were $73.7 million and $72.9 million, respectively.
 
 Derivative instruments.Cash flows from derivative instruments are recognized in the Condensed Consolidated Statements of Cash Flows, and gains and losses are recognized in the Condensed Consolidated Statements of Income, in the same categories as the underlying transactions.
  6
 Table of Contents
 
 Cash flow hedge accounting may be elected only for highly effective hedges, based upon an assessment, performed at least quarterly, of the historical and probable future correlation of cash flows from the derivative instrument to changes in the expected future cash flows of the hedged item.  To the extent cash flow hedge accounting is applied, the effective portion of any changes in the fair value of the derivative instruments is reported as a component of accumulated other comprehensive income.  Ineffectiveness, if any, is immediately recognized in operating income.  The amount in accumulated other comprehensive income is reclassified to earnings when the forecasted transaction is recognized in the Condensed Consolidated Statements of Income, even if the derivative instrument is sold, extinguished or terminated prior to the transaction occurring.  If the forecasted transaction is no longer expected to occur, the amount in accumulated other comprehensive income is immediately reclassified to operating income.
 
 Nicor Gas.  Derivative instruments, such as futures contracts, options and swap agreements, are utilized primarily in the purchase of natural gas for customers.  These derivative instruments are reflected at fair value and are not designated as hedges.  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.
 
 Nicor Gas enters into swap agreements to reduce the earnings volatility of certain forecasted operating costs arising from fluctuations in natural gas prices, such as the purchase of natural gas for use in company operations.  These derivative instruments are carried at fair value.  To the extent hedge accounting is not elected, changes in such fair values are immediately recorded in the current period as operating and maintenance expense.
 
 Nicor Enerchange.  Derivative instruments, such as futures contracts, options, forward contracts, swap agreements and other energy-related contracts are held by Nicor’s wholesale natural gas marketing business, Nicor Enerchange, for trading purposes.  Certain of these derivative instruments are used to economically hedge price risk associated with inventories of natural gas, fixed-price purchase and sale agreements and other future natural gas commitments.  Nicor Enerchange records such derivative 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 the activities of affiliates.  Derivatives are held related to certain utility-bill management products sold to retail customers.  These derivative instruments are carried at fair value and cash flow hedge accounting may or may not be elected.  Other derivative instruments are held for the purpose of hedging the commodity price risk associated with the forecasted purchase of base gas that will be injected as part of the development of the natural gas storage facility by Central Valley.  Such derivative instruments are carried at fair value and cash flow hedge accounting has been elected on a consolidated basis.  The base gas is a component of the storage facility’s construction costs.  Therefore, amounts recorded in accumulated other comprehensive income related to these derivative instruments will not be reclassified to earnings until the storage facility is retired and the base gas is sold.
 
 Nicor.  Forward-starting interest rate swaps are utilized to hedge the interest payments associated with long-term debt.  These derivative instruments are carried at fair value and cash flow hedge accounting is elected.  The effective portion of any changes in the fair value of the derivatives is deferred in accumulated other comprehensive income.  Upon settlement, the deferred amount is amortized to interest expense over the life of the debt.
 
 Credit risk and concentrations.  Nicor’s major subsidiaries have diversified customer bases and the company believes that it maintains prudent credit policies which mitigate customer receivable, supplier performance and derivative counterparty credit risk.The company is exposed to credit risk in the event a customer or supplier defaults on a contract to pay for or deliver product at agreed-upon terms and conditions, or a counterparty to a derivative instrument defaults on a settlement or otherwise fails to
 
 7
 Table of Contents
 
 perform under contractual terms.  To manage this risk, the company has established procedures to determine and monitor the creditworthiness of counterparties, to seek guarantees or collateral back-up in the form of cash or letters of credit, to acquire credit insurance in certain instances, and to limit its exposure to any one counterparty.  Nicor also, in some instances, enters into netting arrangements to mitigate counterparty credit risk.  Fair value measurements consider credit risk.  For assets and liabilities not carried at fair value, credit losses are accrued when probable and reasonably estimable.
 
 On February 2, 2010, the ICC approved a bad debt rider that was filed in 2009 by Nicor Gas.  The bad debt rider provides for the recovery from (or refund to) customers of the difference between Nicor Gas’ actual bad debt experience on an annual basis and the benchmark bad debt expense included in its rates for the respective year.
 
 4.
INVESTMENTS
 
 The company’s investments in debt and equity securities are as follows (in millions):
 
 March 31


December 31


March 312011


2010


2010Money market funds

$
69.1


$
82.9


$
111.8Corporate bonds


6.6



6.8



.8Other investments


9.1



8.5



5.0$
84.8


$
98.2


$
117.6
 
 Investments in debt and equity securities are classified on the Condensed Consolidated Balance Sheets as follows (in millions):
 
 March 31


December 31


March 312011


2010


2010Cash equivalents

$
8.8


$
12.6


$
41.2Short-term investments


61.1



70.6



70.9Long-term investments


14.9



15.0



5.5$
84.8


$
98.2


$
117.6
 
 Investments categorized as trading (including money market funds) totaled $71.6 million, $85.0 million and $113.8 million at March 31, 2011, December 31, 2010 and March 31, 2010, respectively.  Corporate bonds and certain other investments are categorized as held-to-maturity.  The contractual maturities of the held-to-maturity investments at March 31, 2011 are as follows (in millions):
 
 Years to maturity
 Less

than 1 year


1-5

Years


5-10

Years


Total$
.4


$
7.3


$
.9


$
8.6
 
 Nicor’s investments also include certain restricted investments, including certificates of deposit and bank accounts, maintained to fulfill statutory or contractual requirements.  These investments totaled $2.2 million, $2.0 million and $3.0 million at March 31, 2011, December 31, 2010 and March 31, 2010, respectively.  In addition, at March 31, 2011 and December 31, 2010, the company held a $2.4 million investment in a port facility development venture carried at cost.
  8
 Table of Contents
  There were no gains or losses included in earnings resulting from the sale of investments for the periods ended March 31, 2011 and 2010.
 
 5.
SHORT-TERM AND LONG-TERM DEBT
 
 In February 2011, Nicor Gas issued $75 million First Mortgage Bonds at 2.86 percent, due in 2016 through a private placement and utilized the proceeds to retire the $75 million 6.625 percent First Mortgage Bond series which matured in February 2011.  In determining that these bonds qualified for exemption from registration under Section 4(2) of the Securities Act of 1933, Nicor Gas relied on the facts that the bonds were offered only to a limited number of large institutional investors and each institutional investor that purchased the bonds represented that it was purchasing the bonds for its own account and not with a view to distribute them.
 
 In April 2011, Nicor Gas established a $400 million, 364-day revolving credit facility, expiring April 2012 to replace the $400 million, 364-day revolving credit facility, which was set to expire in April 2011.  In April 2010, Nicor and Nicor Gas established a $600 million, three-year revolving credit facility, expiring April 2013 to replace the $600 million, five-year revolving credit facility, which was set to expire in 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 $153.7 million, $425.0 million and $228.0 million of commercial paper borrowings outstanding at March 31, 2011, December 31, 2010 and March 31, 2010, respectively.
 
 Nicor held forward-starting interest rate swaps with a notional totaling $90 million at March 31, 2011 and December 31, 2010 and $50 million at March 31, 2010. The swaps hedge the risk associated with the interest payments attributable to the probable issuance of long-term fixed-rate debt in 2012 intended to finance the development of a natural gas storage facility.  Under the terms of the swaps, Nicor agrees to pay a fixed swap rate and receive a floating rate based on LIBOR.
 
 The company believes it is in compliance with all debt covenants.
 
 6.
INCOME TAXES
 
 The effective income tax rate for the three months ended March 31, 2011 decreased to 29.0 percent from 32.0 percent in the prior year.  The lower effective income tax rate for the three months ended March 31, 2011 is due to an adjustment to reduce certain state income tax liabilities in the first quarter of 2011 and lower forecasted annual pretax income (which causes a lower effective income tax rate since permanent differences and tax credits are a larger share of pretax income), partially offset by lower forecasted annual untaxed foreign shipping earnings and an increase to the Illinois state income tax rate.  Effective January 1, 2011, the State of Illinois raised the corporate income tax rate from 7.3 percent to 9.5 percent.
  In 2006, the company reorganized certain shipping and related operations.  The reorganization allows the company to take advantage of certain provisions of the Jobs Act that provide the opportunity for tax savings subsequent to the date of the reorganization.  Generally, to the extent foreign shipping earnings are not repatriated to the United States, such earnings are not expected to be subject to current taxation.  In addition, to the extent such earnings are determined to be indefinitely reinvested offshore, no deferred income tax expense would be recorded by the company.  For the three months ended March 31, 2011 and 2010, an income tax benefit has not been recognized on approximately $4 million and $3 million, respectively, of foreign company shipping losses.  As of March 31, 2011, Nicor has not recorded deferred income taxes of approximately $58 million on approximately $166 million of cumulative undistributed foreign earnings.
 
 9
 Table of Contents
 
 The company's major tax jurisdictions include the United States and Illinois, with tax returns examined by the IRS and IDR, respectively.  At March 31, 2011, the years that remain subject to examination include years beginning after 2006 for the IRS and the IDR.  The company had no liability for unrecognized tax benefits at March 31, 2011.  The decrease in the liability for unrecognized tax benefits from $2.9 million at December 31, 2010 was due to a reduction in state tax reserves.  The company does not believe that it is reasonably possible that a significant change in the liability for unrecognized tax benefits could occur within 12 months.
 
 The balance of unamortized investment tax credits at March 31, 2011, December 31, 2010 and March 31, 2010 was $23.8 million, $24.3 million and $24.7 million, respectively.
 
 7.
FAIR VALUE MEASUREMENTS
 
 The fair value of assets and liabilities that are measured on a recurring basis are categorized in the table below (in millions) into three broad levels (with Level 1 considered the most reliable) based upon the valuation inputs.
  Quoted prices in active markets


Significant observable inputs


Significant unobservable inputs(Level 1)


(Level 2)


(Level 3)


TotalMarch 31, 2011AssetsMoney market funds

$
69.1


$
-


$
-


$
69.1Commodity derivatives


11.6



27.3



7.8



46.7Interest rate derivative


-



1.1



-



1.1$
80.7


$
28.4


$
7.8


$
116.9LiabilitiesCommodity derivatives

$
44.1


$
26.0


$
11.6


$
81.7Interest rate derivative


-



2.9



-



2.9$
44.1


$
28.9


$
11.6


$
84.6
 
 December 31, 2010AssetsMoney market funds

$
82.9


$
-


$
-


$
82.9Commodity derivatives


21.3



35.7



9.3



66.3Interest rate derivative


-



1.0



-



1.0$
104.2


$
36.7


$
9.3


$
150.2LiabilitiesCommodity derivatives

$
55.4


$
31.3


$
12.3


$
99.0Interest rate derivative


-



3.2



-



3.2$
55.4


$
34.5


$
12.3


$
102.2
 
 March 31, 2010AssetsMoney market funds

$
111.8


$
-


$
-


$
111.8Commodity derivatives


26.4



38.0



4.8



69.2$
138.2


$
38.0


$
4.8


$
181.0LiabilitiesCommodity derivatives

$
101.2


$
75.1


$
12.4


$
188.7
 
 10
 Table of Contents
 
 When available and appropriate, the company uses quoted market prices in active markets to determine fair value and classifies such items within Level 1.  For derivatives, Level 1 values include only those derivative instruments traded on the NYMEX.  The company enters into over-the-counter instruments with values that are similar to, and correlate with, quoted prices for exchange-traded instruments in active markets; the fair values of these over-the-counter items consider credit risk and are classified within Level 2.  In certain instances, the company may be required to determine a fair value using significant unobservable inputs such as indicative broker prices; the resulting valuation is classified as Level 3.
 
 A description of the company’s objectives and strategies for using derivative instruments, and related accounting policies, is included in Note 3 – Accounting Policies – Derivative instruments and Credit risk and concentrations.
 
 The following table presents a reconciliation of the Level 3 beginning and ending net derivative asset (liability) balances (in millions):
 
 Three months ended

March 312011


2010Beginning of period

$
(3.0
)

$
5.0Net realized/unrealized gains (losses)Included in regulatory assets and liabilities


2.9



(1.3
)Included in net income


(.4
)


(6.3
)Settlements


(1.5
)


.8Transfers into Level 3


1.5



-Transfers out of Level 3


(3.3
)


(5.8
)End of period

$
(3.8
)

$
(7.6
)Net unrealized gains (losses) included in net income above relating to derivatives still held at March 31

$
(.3
)

$
(9.6
)
 
 Net realized/unrealized gains (losses) included in net income are attributable to Nicor Enerchange and are classified as operating revenues.
 
 Transfers into and out of Level 3 reflect the liquidity at the relevant natural gas trading locations and dates which affects the significance of unobservable inputs used in the valuation.  Transfers into and out of Level 3 are determined using values at the end of the interim period in which the transfer occurred.
 
 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 balance sheet classification of margin accounts related to derivative instruments (in millions):
 
 March 31


December 31


March 312011


2010


2010AssetsMargin accounts - derivative instruments

$
46.8


$
50.9


$
81.4Other - noncurrent


7.3



8.1



26.6
 In addition, the recorded amount of restricted short and long-term investments and short-term borrowings approximates fair value.  Long-term debt outstanding, including current maturities, is recorded at the principal balance outstanding, net of unamortized discounts.  The principal balance of Nicor Gas’ First Mortgage Bonds outstanding at March 31, 2011, December 31, 2010 and March 31, 2010 was $500 million.  Based on quoted prices or market interest rates, the fair value of the company’s First Mortgage
 
 11
 Table of Contents
 
 Bonds outstanding was approximately $544 million, $554 million and $530 million at March 31, 2011, December 31, 2010 and March 31, 2010, respectively.
 
 8.
DERIVATIVE INSTRUMENTS
 
 A description of the company’s objectives and strategies for using derivative instruments, and related accounting policies, is included in Note 3 – Accounting Policies – Derivative instruments and Credit risk and concentrations.  All derivatives recognized on the Condensed Consolidated Balance Sheets are measured at fair value, as described in Note 7 – Fair Value Measurements.
 
 Condensed Consolidated Balance Sheets.  Derivative assets and liabilities are classified as shown in the table below (in millions):
 
 March 31


December 31


March 312011


2010


2010Derivatives designated as hedging instrumentsAssetsDerivative instruments

$
1.6


$
.4


$
-Other - noncurrent


-



1.0



-$
1.6


$
1.4


$
-LiabilitiesDerivative instruments

$
3.8


$
2.2


$
2.8Other - noncurrent


-



3.2



.2$
3.8


$
5.4


$
3.0Derivatives not designated as hedging instrumentsAssetsDerivative instruments

$
33.4


$
48.7


$
54.3Other - noncurrent


12.8



17.2



14.9$
46.2


$
65.9


$
69.2LiabilitiesDerivative instruments

$
68.9


$
80.7


$
148.4Other - noncurrent


11.9



16.1



37.3$
80.8


$
96.8


$
185.7
 
 Volumes.  As of March 31, 2011, December 31, 2010 and March 31, 2010, Nicor Gas held outstanding derivative contracts of approximately 54 Bcf, 49 Bcf and 67 Bcf, respectively, to hedge natural gas purchases for customer use, with hedges spanning approximately three years for each of the respective periods.  Commodity price-risk exposure arising from Nicor Enerchange’s activities and Nicor Gas’ natural gas purchases for company use is mitigated with derivative instruments that total to a net short position of 3.9 Bcf as of March 31, 2011 and December 31, 2010 and a net long position of 0.6 Bcf as of  March 31, 2010.  The above volumes exclude contracts such as variable-priced contracts and basis swaps, which are accounted for as derivatives but whose fair values are not directly impacted by changes in commodity prices.
 
 Nicor held forward-starting interest rate swaps with a notional totaling $90 million at March 31, 2011 and December 31, 2010 and $50 million at March 31, 2010. The swaps hedge the risk associated with the interest payments attributable to the probable issuance of long-term fixed-rate debt in 2012.
  12
 Table of Contents
  Condensed Consolidated Statements of Income– cash flow hedges.  Changes in the fair value of derivatives designated as a cash flow hedge are recognized in other comprehensive income until the hedged transaction is recognized in the Condensed Consolidated Statements of Income.  Cash flow hedges used by the company’s other energy ventures, to hedge utility-bill management products, are eventually recognized within operating revenues.  Cash flow hedges used by Nicor Gas, to hedge purchases of natural gas for company use, are eventually recorded within operating and maintenance expense.  Cash flow hedges used by Nicor, to hedge the interest payments attributable to long-term fixed-rate debt, will eventually be recorded within interest expense.
 
 Cash flow hedges affected accumulated other comprehensive income (effective portion) as shown in the following table (in millions):
 
 Three months ended

March 312011


2010Pretax gain (loss) recognized in other comprehensive income

$
.2


$
(3.0
)
 The pretax loss reclassified from accumulated other comprehensive income into income (effective portion) is shown in the following table (in millions):
 
 Three months ended

March 31Location

2011


2010Operating revenues

$
1.3


$
.4Operating and maintenance


.3



.3$
1.6


$
.7
 
 Any amounts recognized in operating income, related to ineffectiveness or due to a forecasted transaction that is no longer expected to occur, were immaterial for the three months ended March 31, 2011 and 2010.
 
 As of March 31, 2011, December 31, 2010 and March 31, 2010, the time horizon of cash flow hedges of natural gas purchases for Nicor Gas company use and for utility-bill management products sold by Nicor’s other energy ventures span as long as two years.  For these hedges, the total pretax loss deferred in accumulated other comprehensive income at March 31, 2011, December 31, 2010 and March 31, 2010 was $0.6 million ($0.4 million after taxes), $2.0 million ($1.2 million after taxes) and $3.1 million ($1.9 million after taxes), respectively.  At the respective reporting dates, substantially all of these amounts were expected to be reclassified to earnings within the next 12 months.
 
 The amounts deferred in accumulated other comprehensive income for the forward-starting interest rate swaps will be amortized to interest expense upon the issuance of long-term fixed rate debt.  The total pretax loss deferred in accumulated other comprehensive income relating to the interest rate swaps at March 31, 2011 and December 31, 2010 was $1.8 million ($1.1 million after taxes) and $2.2 million ($1.3 million after taxes), respectively.  The total pretax loss deferred in accumulated other comprehensive income relating to the interest rate swaps at March 31, 2010 was insignificant.
 
 Condensed Consolidated Statements of Income – derivatives not designated as hedges.  The earnings of the company are subject to volatility for those derivatives not designated as hedges.  Non-designated derivatives used by the company’s other energy ventures, to hedge energy trading activities and utility-bill management products, are recorded in operating revenues.  Non-designated derivatives used by Nicor
  13
 Table of Contents
 
 Gas, to hedge purchases of natural gas for company use, are recorded within operating and maintenance expense.  Pretax net losses recognized in income are summarized in the table below (in millions):
 
 Three months ended

March 31Location

2011


2010Operating revenues

$
.2


$
1.0Operating and maintenance


.1



.9$
.3


$
1.9
 
 Nicor Gas’ derivatives used to hedge the purchase of natural gas for its customers are also not designated as hedging instruments.  Gains or losses on these derivatives are not recognized in pretax earnings, but are deferred as regulatory assets or liabilities until the related revenue is recognized.  Net gains (losses) deferred for the three months ended March 31, 2011 and 2010 were $3.5 million and $(90.3) million, respectively.
 
 Credit-risk-related contingent features.  Provisions within certain derivative agreements require the company to post collateral if the company’s net liability position exceeds a specified threshold.  Also, certain derivative agreements contain credit-risk-related contingent features, whereby the company would be required to provide additional collateral or pay the amount due to the counterparty when a credit event occurs, such as if the company’s credit rating was to be lowered.  As of March 31, 2011, December 31, 2010 and March 31, 2010 for agreements with such features, derivative contracts with liability fair values totaled approximately $9 million, $12 million and $43 million, respectively, for which the company had posted no collateral to its counterparties.  If it was assumed that the company had to post the maximum contractually specified collateral or settle the liability, the company would have been required to pay approximately $9 million, $11 million and $42 million at March 31, 2011, December 31, 2010 and March 31, 2010, respectively.
 
 9.
POSTRETIREMENT BENEFITS
 
 Nicor Gas maintains a noncontributory defined benefit pension plan covering substantially all employees hired prior to 1998.  Pension benefits are based on years of service and the highest average salary for management employees and job level for collectively bargained employees (referred to as pension bands).  The benefit obligation related to collectively bargained benefits considers the company’s past practice of regular benefit increases.  Nicor Gas also provides health care and life insurance benefits to eligible retired employees under a plan that includes a limit on the company’s share of cost for employees hired after 1982.
 
 The 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.
  14
 Table of Contents
  About one-fourth of the net benefit cost related to these plans has been capitalized as a cost of constructing gas distribution facilities and the remainder is included in gas distribution operating and maintenance expense, net of amounts charged to affiliates.  Net benefit cost included the following components (in millions):
 
 Pension benefits


Health care and

other benefits2011


2010


2011


2010Three months ended March 31Service cost

$
2.5


$
2.4


$
.6


$
.6Interest cost


4.1



4.0



3.1



3.0Expected return on plan assets


(7.8
)


(7.2
)


-



-Recognized net actuarial loss


2.4



3.0



1.5



1.0Amortization of prior service cost


.1



.1



-



-Net benefit cost

$
1.3


$
2.3


$
5.2


$
4.6
 
 The Health Care Act contains provisions that may impact Nicor Gas’ obligation for retiree health care benefits.  The company does not currently believe these provisions will materially increase its postretirement benefit obligation, but will continue to evaluate the impact of future regulations and interpretations.
 
 10.
EQUITY INVESTMENT INCOME, NET
 
 Equity investment income includes investment income from Triton of $4.2 million and $1.4 million for the three months ended March 31, 2011 and 2010, respectively.  Nicor received cash distributions from equity investees for the three months ended March 31, 2011 and 2010 of $4.1 million and $2.5 million, respectively.
 
 11.
COMPREHENSIVE INCOME
 
 Total comprehensive income is as follows (in millions):
 Three months ended

March 312011


2010Net income

$
45.2


$
60.5Other comprehensive income (loss), after tax


1.4



(1.4
)Total comprehensive income

$
46.6


$
59.1
 
 Other comprehensive income (loss) consists primarily of net gains and losses from derivative financial instruments accounted for as cash flow hedges.
 
 12.
BUSINESS SEGMENT INFORMATION
 
 Financial data by reportable segment is as follows (in millions):
 15
 Table of Contents




Nicor Inc.Business Segments - Financial DataThree months endedMarch 312011


2010Gas distributionOperating revenuesExternal customers

$
899.8


$
1,050.0Intersegment


16.0



18.8$
915.8


$
1,068.8Operating income

$
65.9


$
93.2ShippingOperating revenuesExternal customers

$
80.8


$
83.5Intersegment


-



-$
80.8


$
83.5Operating loss

$
(1.2
)

$
(.5
)Other Energy VenturesWholesale marketingOperating revenuesExternal customers

$
4.1


$
5.6Intersegment


6.2



5.7$
10.3


$
11.3Operating income

$
3.1


$
4.7OtherOperating revenuesExternal customers

$
52.3


$
53.8Intersegment


.4



.6$
52.7


$
54.4Operating income (loss)

$
1.4


$
(.3
)Corporate and eliminationsOperating revenuesExternal customers

$
-


$
-Intersegment


(22.6
)


(25.1
)$
(22.6
)

$
(25.1
)Operating loss

$
(3.4
)

$
(1.1
)ConsolidatedOperating revenuesExternal customers

$
1,037.0


$
1,192.9Intersegment


-



-$
1,037.0


$
1,192.9Operating income

$
65.8


$
96.0




16
 Table of Contents




Intersegment revenues include gas distribution revenues related to customers entering into utility-bill management contracts with Nicor Solutions and wholesale marketing revenues from the sale of natural gas to Nicor Advanced Energy.  Under the utility-bill management contracts, Nicor Solutions bills a fixed amount to a customer, regardless of changes in natural gas prices or weather, and in exchange pays the customer’s utility bills from Nicor Gas.  Nicor Advanced Energy provides natural gas and related services on an unregulated basis to residential and small commercial customers and purchases most of its natural gas supplies from Nicor Enerchange.  Intersegment revenues are eliminated in the Condensed Consolidated Financial Statements.
 
 Costs associated with Nicor’s other energy ventures’ utility-bill management contracts attributable to variances from normal weather for the three months ended March 31, 2011 and 2010 were $1.7 million and $1.3 million, respectively.  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.  Additionally, operating income of corporate and eliminations includes merger transaction costs of approximately $1.5 million for the three months ended March 31, 2011.
 
 13.
REGULATORY PROCEEDINGS
 
 Bad debt rider.  In September 2009, Nicor Gas filed for approval of a bad debt rider with the ICC under an Illinois state law which took effect in July 2009.  On February 2, 2010, the ICC issued an order approving the company’s proposed bad debt rider.  This rider provides for recovery from customers of the amount over the benchmark for bad debt expense established in the company’s rate cases.  It also provides for refunds to customers if bad debt expense is below such benchmarks.
 
 As a result of the February 2010 order, Nicor Gas recorded in income a net recovery related to 2008 and 2009 of $31.7 million in the first quarter of 2010, all of which has been collected.  The benchmark, against which 2011 and 2010 actual bad debt experience is compared, is approximately $63 million.  The company’s actual 2010 bad debt experience was $35.7 million, resulting in a refund to customers of $27.3 million which will be refunded over a 12-month period beginning June 2011.
 
 14.
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 $4 million at March 31, 2011.  Nicor believes the likelihood of any such payment by TEL is remote.  No liability has been recorded for this obligation.
 
 Performance guarantees.Directly or through a subsidiary, Nicor Services markets product warranty contracts that provide for the repair of heating, ventilation and air conditioning equipment, natural gas lines and other appliances within homes.  Revenues from these product warranty contracts are recognized ratably over the coverage period, and related repair costs are charged to expense as incurred.  Repair expenses of $2.8 million and $2.4 million were incurred in the three months ended March 31, 2011 and 2010, respectively.
 
 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 15 – Contingencies – Manufactured Gas Plant Sites.  Nicor believes that the likelihood of payment under
 
 17
 Table of Contents
 
 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.  In July 2010, one of these former officers settled the SEC’s action against him and was indemnified by Nicor.  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.
 
 15.
CONTINGENCIES
 
 The following contingencies of Nicor are in various stages of investigation or disposition.  Although in some cases the company is unable to estimate the amount of loss reasonably possible in addition to any amounts already recognized, it is possible that the resolution of these contingencies, either individually or in aggregate, will require the company to take charges against, or will result in reductions in, future earnings.  It is the opinion of management that the resolution of these contingencies, either individually or in aggregate, could be material to earnings in a particular period but is not expected to have a material adverse impact on Nicor’s liquidity or financial condition.
 
 PBR Plan.Nicor Gas’ PBR plan for natural gas costs went into effect in 2000 and was terminated by the company effective January 1, 2003.  Under the PBR plan, Nicor Gas’ total gas supply costs were compared to a market-sensitive benchmark.  Savings and losses relative to the benchmark were determined annually and shared equally with sales customers.  The PBR plan is currently under ICC review.  There are allegations that the company acted improperly in connection with the PBR plan, and the ICC and others are reviewing these allegations.  On June 27, 2002, the Citizens Utility Board (“CUB”) filed a motion to reopen the record in the ICC’s proceedings to review the PBR plan (the “ICC Proceedings”).  As a result of the motion to reopen, Nicor Gas, the staff of the ICC and CUB entered into a stipulation providing for additional discovery.  The Illinois Attorney General’s Office (“IAGO”) has also intervened in this matter.  In addition, the IAGO issued Civil Investigation Demands (“CIDs”) to CUB and the ICC staff.  The CIDs ordered that CUB and the ICC staff produce all documents relating to any claims that Nicor Gas may have presented, or caused to be presented, false information related to its PBR plan.  The company has committed to cooperate fully in the reviews of the PBR plan.
 
 In response to these allegations, on July 18, 2002, the Nicor Board of Directors appointed a special committee of independent, non-management directors to conduct an inquiry into issues surrounding natural gas purchases, sales, transportation, storage and such other matters as may come to the attention of the special committee in the course of its investigation.  The special committee presented the report of its counsel (“Report”) to Nicor’s Board of Directors on October 28, 2002.
 
 In response, the Nicor Board of Directors directed the company’s management to, among other things, make appropriate adjustments to account for, and fully address, the adverse consequences to ratepayers of the items noted in the Report, and conduct a detailed study of the adequacy of internal accounting and regulatory controls.  The adjustments were made in prior years’ financial statements resulting in a $24.8 million liability.  Included in such $24.8 million liability is a $4.1 million loss contingency.  A $1.8 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
 
 18
 Table of Contents
 
 uncertainties.  By the end of 2003, the company completed steps to correct the weaknesses and deficiencies identified in the detailed study of the adequacy of internal controls.
 
 Pursuant to the agreement of all parties, including the company, the ICC re-opened the 1999 and 2000 purchased gas adjustment filings for review of certain transactions related to the PBR plan and consolidated the reviews of the 1999-2002 purchased gas adjustment filings with the PBR plan review.
 
 On February 5, 2003, CUB filed a motion for $27 million in sanctions against the company in the ICC Proceedings.  In that motion, CUB alleged that Nicor Gas’ responses to certain CUB data requests were false.  Also on February 5, 2003, CUB stated in a press release that, in addition to $27 million in sanctions, it would seek additional refunds to consumers.  On March 5, 2003, the ICC staff filed a response brief in support of CUB’s motion for sanctions.  On May 1, 2003, the ALJs assigned to the proceeding issued a ruling denying CUB’s motion for sanctions.  CUB has filed an appeal of the motion for sanctions with the ICC, and the ICC has indicated that it will not rule on the appeal until the final disposition of the ICC Proceedings.  It is not possible to determine how the ICC will resolve the claims of CUB or other parties to the ICC Proceedings.
 
 In 2004, the company became aware of additional information relating to the activities of individuals affecting the PBR plan for the period from 1999 through 2002, including information consisting of third party documents and recordings of telephone conversations from Entergy-Koch Trading, LP (“EKT”), a natural gas, storage and transportation trader and consultant with whom Nicor did business under the PBR plan.  Review of additional information completed in 2004 resulted in the $1.8 million adjustment to the previously recorded liability referenced above.
 
 The evidentiary hearings on this matter were stayed in 2004 in order to permit the parties to undertake additional third party discovery from EKT.  In December 2006, the additional third party discovery from EKT was obtained and the ALJs issued a scheduling order that provided for Nicor Gas to submit direct testimony by April 13, 2007.  In its direct testimony, Nicor Gas sought a reimbursement of approximately $6 million, which included interest due to the company, as noted above, of $1.6 million, as of March 31, 2007.  In September 2009, the staff of the ICC, IAGO and CUB submitted direct testimony to the ICC requesting refunds of $109 million, $255 million and $286 million, respectively.  In April 2011, Nicor Gas filed its rebuttal testimony in which it disputed the refund claims asserted in the direct testimony of the staff of the ICC, IAGO and CUB and reasserted the company’s claim for a reimbursement set forth in its direct testimony. No date has been set for evidentiary hearings on this matter.
 
 Nicor is unable to predict the outcome of the ICC’s review or the company’s potential exposure thereunder.  Because the PBR plan and historical gas costs are still under ICC review, the final outcome could be materially different than the amounts reflected in the company’s financial statements as of March 31, 2011.
 
 Litigation relating to proposed merger.  Nicor, its board of directors, AGL Resources and one or both of AGL Resources’ acquisition subsidiaries and, in one instance, Nicor’s Executive Vice President and Chief Financial Officer have been named as defendants in six putative class action lawsuits brought by purported Nicor shareholders challenging Nicor’s proposed merger with AGL Resources, two of which, including the lawsuit that named Nicor’s Executive Vice President and Chief Financial Officer as a defendant, have subsequently been voluntarily dismissed.  The first action, Joseph Pirolli v. Nicor Inc., et al. (the “Pirolli Action”) was filed on December 7, 2010 in the Eighteenth Circuit Court of DuPage County, Illinois, County Department, Chancery Division (“DuPage County Court”).  Four other actions were filed between December 10, 2010 and December 17, 2010 in the Circuit Court of Cook County, Illinois, County Department, Chancery Division (“Cook County Court”): Maxine Phillips v. Nicor Inc., et al., filed December 10, 2010; Plumbers Local #65 Pension Fund v. Nicor Inc., et al., filed December 13, 2010; Gus Monahu v. Nicor Inc., et al., filed December 17, 2010; and Roberto R. Vela v. Russ M. Strobel, et al., filed December 17, 2010.  The sixth action, which is both an individual action and a putative class
 
 19
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 action, was filed on March 1, 2011 in the United States District Court for the Northern District of Illinois, Eastern Division and captioned Maxine Phillips v. Nicor Inc.,et al. (the “Federal Action”).
 
 On January 10, 2011, the four actions filed in the Cook County Court were consolidated (the “Consolidated Action”).  On February 18, 2011, plaintiffs in the Consolidated Action filed an amended complaint (the “Consolidated Amended Complaint”).  On February 28, 2011, the Phillips Action in the Cook County Court was voluntarily dismissed and, on March 7, 2011, the Pirolli Action in DuPage County Court was voluntarily dismissed.  Accordingly, the remaining cases pending are the Consolidated Action and the Federal Action.
 
 The Consolidated Amended Complaint alleges, among other things, that: (a) the Nicor Board breached its fiduciary duties to Nicor and its shareholders by (i) approving the sale of Nicor to AGL Resources at an inadequate purchase price (and thus failing to maximize value to Nicor shareholders), (ii) conducting an inadequate sale process by agreeing to preclusive deal protection provisions in the Merger Agreement and failing to solicit other potential bids or alternative transactions and (iii) failing to disclose material information regarding the proposed merger to Nicor shareholders; and (b) AGL Resources, Nicor and the acquisition subsidiaries aided and abetted these alleged breaches of fiduciary duty.  The Consolidated Amended Complaint seeks, among other things, declaratory and injunctive relief, including an order enjoining the defendants from consummating the proposed merger.
 
 The Federal Action asserts both individual and purported class claims for breach of fiduciary duty and violations of the federal securities laws.  Among other things, plaintiffs allege that: (i) Nicor and the Nicor board of directors violated Section 14(a) of the Securities and Exchange Act of 1934 (sometimes referred to as the Exchange Act) and Rule 14a-9 promulgated thereunder by issuing a materially incomplete registration statement in connection with the proposed merger; and (ii) the Nicor board of directors violated Section 20(a) of the Exchange Act by virtue of its control over the content and dissemination of that registration statement.  The Federal Action also claims that: (a) the Nicor board of directors breached its fiduciary duties to Nicor and its shareholders by (i) approving the sale of Nicor to AGL Resources at an inadequate price (and thus failing to maximize value to Nicor shareholders), (ii) conducting an inadequate sale process by agreeing to preclusive deal protection provisions in the Merger Agreement and failing to solicit other potential bids or alternative transactions and (iii) failing to disclose material information regarding the proposed merger; and (b) Nicor and AGL Resources aided and abetted the alleged breaches of fiduciary duty.  The Federal Action seeks, among other things, damages and declaratory and injunctive relief, including an order enjoining the defendants from consummating the proposed merger.
 
 Nicor believes the claims asserted in each lawsuit to be without merit and intends to vigorously defend against them.  The final disposition of these shareholder litigation-related matters is not expected to have a material adverse impact on the company’s liquidity or financial condition.
 
 Mercury.  Nicor Gas has incurred, and expects to continue to incur, costs related to its historical use of mercury in various kinds of company equipment.
 
 As of March 31, 2011, Nicor Gas had remaining an estimated liability of $0.5 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 that were filed on August 29, 2000, all in the Circuit Court of Cook County, Illinois, seeking a variety of unquantified damages (including bodily injury and property damages) allegedly caused by mercury spillage resulting from the removal of mercury-containing regulators.  Potential liabilities relating to these claims have been assumed by a contractor’s insurer subject to certain limitations.
 
 The final disposition of these mercury-related matters is not expected to have a material adverse impact on the company’s liquidity or financial condition.
  20
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  Manufactured Gas Plant Sites.  Manufactured gas plants were used in the 1800s and early to mid 1900s to produce manufactured gas from coal, creating a coal tar byproduct.  Current environmental laws may require the cleanup of coal tar at certain former manufactured gas plant sites.
 
 Nicor Gas has identified properties for which it may have some responsibility.  Most of these properties are not presently owned by the company.  Nicor Gas and Commonwealth Edison Company (“ComEd”) are parties to an agreement to cooperate in cleaning up residue at many of these properties.  The agreement allocates to Nicor Gas 51.73 percent of cleanup costs for 24 sites, no portion of the cleanup costs for 14 other sites and 50 percent of general remediation program costs that do not relate exclusively to particular sites.  Information regarding preliminary site reviews has been presented to the Illinois Environmental Protection Agency for certain properties.  More detailed investigations and remedial activities are complete, in progress or planned at many of these sites.  The results of the detailed site-by-site investigations will determine the extent additional remediation is necessary and provide a basis for estimating additional future costs.  As of March 31, 2011, the company had recorded a liability in connection with these matters of $28.1 million.  In accordance with ICC authorization, the company has been recovering, and expects to continue to recover, these costs from its customers, subject to annual prudence reviews.
 
 In April 2002, Nicor Gas was named as a defendant, together with ComEd, in a lawsuit brought by the Metropolitan Water Reclamation District of Greater Chicago (the “MWRDGC”) under the Federal Comprehensive Environmental Response, Compensation and Liability Act seeking recovery of past and future remediation costs and a declaration of the level of appropriate cleanup for a former manufactured gas plant site in Skokie, Illinois now owned by the MWRDGC.  In January 2003, the suit was amended to include a claim under the Federal Resource Conservation and Recovery Act.  The suit was filed in the United States District Court for the Northern District of Illinois.  Management cannot predict the outcome of this litigation or the company’s potential exposure thereto, if any, and has not recorded a liability associated with this contingency.
 
 Since costs and recoveries relating to the cleanup of manufactured gas plant sites are passed directly through to customers in accordance with ICC regulations, subject to an annual ICC prudence review, the final disposition of manufactured gas plant matters is not expected to have a material impact on the company’s financial condition or results of operations.
 
 Municipal Tax Matters.  Many municipalities in Nicor Gas’ service territory have enacted ordinances that impose taxes on gas sales to customers within municipal boundaries.  Most of these municipal taxes are imposed on Nicor Gas based on revenues generated by Nicor Gas within the municipality.  Other municipal taxes are imposed on natural gas consumers within the municipality but are collected from consumers and remitted to the municipality by Nicor Gas.  A number of municipalities have instituted audits of Nicor Gas’ tax remittances.  In May 2007, five of those municipalities filed an action against Nicor Gas in state court in DuPage County, Illinois relating to these tax audits.  Following a dismissal of this action without prejudice by the trial court, the municipalities filed an amended complaint.  The amended complaint seeks, among other things, compensation for alleged unpaid taxes.  Nicor Gas is contesting the claims in the amended complaint.  In December 2007, 25 additional municipalities, all represented by the same audit firm involved in the lawsuit, issued assessments to Nicor Gas claiming that it failed to provide information requested by the audit firm and owed the municipalities back taxes.  Nicor Gas believes the assessments are improper and has challenged them.  While the company is unable to predict the outcome of these matters or to reasonably estimate its potential exposure related thereto, if 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.
 
 Nicor Services Warranty Product Actions.In the first quarter of 2011, three putative class actions were filed in state court in Cook County, Illinois against Nicor Services and Nicor Gas, and in one case against Nicor.  The plaintiffs purport to represent a class of customers of Nicor Gas who purchased
 
 21
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 appliance warranty and service plans from Nicor Services and/or a class of customers of Nicor Gas who purchased Gas Line Comfort Guard from Nicor Services.  In these actions, the plaintiffs variously allege that the marketing, sale and billing of the Nicor Services appliance warranty and service plans and Gas Line Comfort Guard violate the Illinois Consumer Fraud and Deceptive Business Practices Act, constitute common law fraud and result in unjust enrichment of Nicor Gas and Nicor Services.  The plaintiffs seek, on behalf of the classes they purport to represent, actual and punitive damages, interest, costs, attorneys fees and injunctive relief.  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.
 
 Nicor Advanced Energy Lock 12 Action.In March 2011, a putative class action lawsuit was filed against Nicor and Nicor Advanced Energy.  The plaintiff alleges that the marketing and sale of the Lock 12 plan offered by Nicor Advanced Energy violated the Illinois Consumer Fraud and Deceptive Business Practices Act and resulted in unjust enrichment of Nicor and Nicor Advanced Energy.  The plaintiff seeks compensatory damages, interest, costs and attorneys fees on behalf of the class of former Nicor Gas customers who switched to the Lock 12 plan.  While the company is unable to predict the outcome of these matters or to reasonably estimate its potential exposure related thereto, if any, and has not recorded a liability associated with this contingency, the final disposition of these matters is not expected to have a material adverse impact on the company’s liquidity or financial condition.
 
 Other.In addition to the matters set forth above, the company is involved in legal or administrative proceedings before various courts and agencies with respect to general claims, taxes, environmental, gas cost prudence reviews and other matters.  Although unable to determine the ultimate outcome of these other contingencies, management believes that these amounts are appropriately reflected in the financial statements, including the recording of appropriate liabilities when reasonably estimable.
  22
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  Item 2.                 Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 The following discussion should be read in conjunction with the Management’s Discussion and Analysis section of the Nicor 2010 Annual Report on Form 10-K.  Results for the interim periods presented are not necessarily indicative of the results to be expected for the full fiscal year due to seasonal and other factors.
 
 SUMMARY
 
 Nicor is a holding company.  Gas distribution is Nicor’s primary business.  Nicor’s subsidiaries include Nicor Gas, one of the nation’s largest distributors of natural gas, and Tropical Shipping, a transporter of containerized freight in the Bahamas and the Caribbean region.  Nicor also owns several energy-related ventures, including Nicor Services, Nicor Solutions and Nicor Advanced Energy, which provide energy-related products and services to retail markets, Nicor Enerchange, a wholesale natural gas marketing company, and Central Valley, which is developing a natural gas storage facility.  Nicor also has equity interests in a cargo container leasing business, a FERC-regulated natural gas pipeline, a natural gas storage development project and certain affordable housing investments.
 
 Net income and diluted earnings per common share are presented below (in millions, except per share data):
 
 Three months ended

March 312011


2010Net income

$
45.2


$
60.5Diluted earnings per common share

$
.98


$
1.33
 
 Comparisons of the three months ended results reflect lower operating income in the company’s gas distribution business, lower operating results in the company’s shipping business and lower corporate operating results, partially offset by higher operating income in the company’s other energy-related businesses, higher equity investment income, lower interest expense and a lower effective income tax rate in 2011.
 
 Proposed merger with AGL Resources.  In December 2010, Nicor entered into an Agreement and Plan of Merger (the “Merger Agreement”) with AGL Resources, which Nicor expects will be complete in the second half of 2011.  In accordance with the Merger Agreement, each share of Nicor common stock outstanding at the Effective Time (as defined in the Merger Agreement), other than shares to be cancelled and Dissenting Shares (as defined in the Merger Agreement), will be converted into the right to receive consideration consisting of (i) $21.20 in cash and (ii) 0.8382 shares of AGL Resources common stock, subject to adjustments in certain circumstances.
 
 Completion of the proposed merger is conditioned upon, among other things, shareholder approval by both companies and the receipt of various regulatory approvals.  AGL Resources filed a registration statement with the SEC to register the AGL Resources common stock to be issued in the merger, and the SEC permitted that registration to become effective on April 29, 2011.  AGL Resources and Nicor also filed their pre-merger notifications under the Hart-Scott-Rodino Antitrust Improvements Act and were granted early termination of the waiting period on April 18, 2011.
 
 In January 2011, Nicor, Nicor Gas and AGL Resources filed a joint application with the ICC for approval of the proposed merger.  The approval by the ICC is a condition to completion of the merger.  The application did not request a rate increase and included a commitment to maintain the number of full-time equivalent employees involved in the operation of Nicor Gas at a level comparable to current staffing for
 
 23
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 a period of three years following merger completion.  On April 28, 2011, the Staff of the ICC and several intervenors who are participating in the proceeding submitted initial testimony, which is available on the ICC’s website, recommending that the ICC deny the joint application or that it impose various requirements on the joint applicants as conditions of approval.  Rebuttal testimony from the joint applicants will be submitted to the ICC in late May.  The ICC has eleven months to act upon the application.
 
 The merger may also be subject to review by the governmental authorities of various other federal, state or local jurisdictions under the antitrust and utility regulation or other applicable laws of those jurisdictions.  For example, AGL Resources provided a voluntary notice of the merger to the New Jersey Board of Public Utilities (“NJBPU”), which included a description of the transaction, described the benefits of the transaction and explained why AGL Resources does not believe that the approval of the NJBPU is required to complete the merger.  AGL Resources provided a similar notice to the Maryland Public Service Commission.  It is possible that one or more state commissions will open proceedings to determine whether they have jurisdiction over the merger.  In the event that any reviewing authorities are determined to have jurisdiction over the merger transaction, there can be no assurance that the reviewing authorities will permit the applicable statutory waiting periods to expire or that the reviewing authorities will terminate the applicable statutory waiting periods at all, or otherwise approve the merger without restrictions or conditions (which are difficult to predict or quantify) that would have a material adverse effect on the combined company if the merger were completed.
 
 The Merger Agreement contains certain termination rights for both Nicor and AGL Resources, and further provides for the payment of fees and expenses upon termination under specified circumstances.  For additional information relating to the proposed merger, please see the joint proxy statement / prospectus contained in the registration statement on Form S-4 that was filed with the SEC by AGL Resources on April 29, 2011.
 
 For the quarter ended March 31, 2011, the company has incurred and expensed approximately $1.5 million of merger transaction costs.  This amount does not include the cost of company personnel participating in efforts to develop integration plans for the combined entity.  No other adjustments have been made to the financial statements as a result of the proposed merger.
 
 Bad debt rider.  In September 2009, Nicor Gas filed for approval of a bad debt rider with the ICC under an Illinois state law which took effect in July 2009.  On February 2, 2010, the ICC issued an order approving the company’s proposed bad debt rider.  This rider provides for recovery from customers of the amount over the benchmark for bad debt expense established in the company’s rate cases.  It also provides for refunds to customers if bad debt expense is below such benchmarks.
 
 As a result of the February 2010 order, Nicor Gas recorded in income a net recovery related to 2008 and 2009 of $31.7 million in the first quarter of 2010, all of which has been collected.  The benchmark, against which 2011 and 2010 actual bad debt experience is compared, is approximately $63 million.  The company’s actual 2010 bad debt experience was $35.7 million, resulting in a refund to customers of $27.3 million which will be refunded over a 12-month period beginning June 2011.
 
 Capital market environment.The volatility in the capital markets over the past three years has caused general concern over the valuations of investments, exposure to increased credit risk and pressures on liquidity.  The company continues to review its investments, exposure to credit risk and sources of liquidity and does not currently expect any future material adverse impacts relating to this past volatility.
  24
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  Operating income.  Operating income (loss) by the company’s major businesses is presented below (in millions):
  Three months ended

March 312011


2010Gas distribution

$
65.9


$
93.2Shipping


(1.2
)


(.5
)Other energy ventures


4.5



4.4Corporate and eliminations


(3.4
)


(1.1
)$
65.8


$
96.0
 
 The following summarizes operating income (loss) comparisons by the company’s major businesses:
  
 ·
Gas distribution operating income decreased $27.3 million for the three months ended March 31, 2011 compared to the prior year due primarily to higher operating and maintenance expense ($19.8 million increase of which $31.7 million relates to the absence of 2010’s recovery of 2008 and 2009 bad debt expense under the bad debt rider), lower gas distribution margin ($5.9 million decrease) and higher depreciation expense ($1.1 million increase).
 
 ·
Shipping operating results decreased $0.7 million for the three months ended March 31, 2011 compared to the prior year due to lower operating revenues ($2.7 million decrease), which were partially offset by lower operating expenses ($2.0 million decrease).  Lower operating revenues were due to lower volumes shipped, partially offset by higher average rates.  Operating expenses were lower due primarily to lower payroll and benefit-related costs and lower transportation-related costs.
  ·
Nicor’s other energy ventures operating income increased $0.1 million for the three months ended March 31, 2011 compared to the prior year due to higher operating income at Nicor’s energy-related products and services businesses ($1.9 million increase), partially offset by lower operating income at Nicor’s wholesale natural gas marketing business, Nicor Enerchange ($1.6 million decrease).  Higher operating income at Nicor’s energy-related products and services businesses was due to lower operating expenses ($3.6 million decrease), partially offset by lower operating revenues ($1.7 million decrease).  Lower operating income at Nicor Enerchange was due to unfavorable changes in valuations of derivative instruments used to hedge purchases and sales of natural gas inventory and unfavorable costing of physical sales activity, partially offset by favorable results from the company’s risk management services associated with hedging the product risks of the utility-bill management contracts offered by Nicor’s energy-related products and services businesses.
 
 Nicor Enerchange uses derivatives to mitigate commodity price risk in order to substantially lock-in the profit margin that will ultimately be realized.  A source of commodity price risk arises as Nicor Enerchange purchases and holds natural gas in storage to earn a profit margin from its ultimate sale.  However, gas stored in inventory is required to be accounted for at the lower of weighted-average cost or market, whereas the derivatives used to reduce the risk associated with a change in the value of the inventory are carried at fair value, with changes in fair value recorded in operating results in the period of change.  In addition, Nicor Enerchange also uses derivatives to mitigate the commodity price risks of the utility-bill management products offered by Nicor’s energy-related products and services businesses.  The gains and losses associated with the utility-bill management products are recognized in the months that the services are provided.  However, the underlying derivatives used to hedge the price exposure are carried at fair value.  For derivatives that either do not meet the requirements for hedge accounting or for which hedge accounting is not elected, the changes in fair value are recorded in operating results in the period
 
 25
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 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 results decreased $2.3 million for the three months ended March 31, 2011 compared to the prior year due primarily to current year merger transaction costs ($1.5 million) and higher costs of a natural weather hedge associated with the utility-bill management products offered by Nicor’s energy-related product and services businesses ($0.4 million increase).  The company recorded $1.7 million of costs associated with the natural weather hedge in the current year compared to $1.3 million of costs recorded in the prior year.  Benefits or costs resulting from variances from normal weather related to these products are recorded primarily at the corporate level as a result of an agreement between the parent company and certain of its subsidiaries.  The weather impact of these contracts generally serves to partially offset the gas distribution business’ weather risk.  The amount of the offset attributable to the utility-bill management products marketed by Nicor’s other energy ventures will vary depending upon a number of factors including the time of year, weather patterns, the number of customers for these products and the market price for natural gas.
 
 RESULTS OF OPERATIONS
 
 Details of various financial and operating information by major business can be found in the tables throughout this review.  The following discussion summarizes the major items impacting Nicor’s operating income.
 
 Operating revenues.  Operating revenues by the company’s major businesses are presented below (in millions):
 
 Three months ended

March 312011


2010Gas distribution

$
915.8


$
1,068.8Shipping


80.8



83.5Other energy ventures


63.0



65.7Corporate and eliminations


(22.6
)


(25.1
)$
1,037.0


$
1,192.9
 
 Gas distribution operating revenues are impacted by changes in natural gas costs, which are passed directly through to customers without markup, subject to ICC review.  Gas distribution operating revenues decreased $153.0 million for the three months ended March 31, 2011 compared to the prior year due primarily to lower natural gas costs (approximately $170 million decrease), partially offset by the impact of colder weather (approximately $20 million increase).
 
 Shipping operating revenues decreased $2.7 million for the three months ended March 31, 2011 compared to the prior year due to lower volumes shipped ($8.1 million decrease), partially offset by higher average rates ($5.4 million increase).  Volumes shipped were adversely impacted by the continued economic slowdown and increased competition.  Higher average rates were due primarily to an increase in both base rates and cost-recovery surcharges for fuel.
 
 Nicor’s other energy ventures operating revenues decreased $2.7 million for the three months ended March 31, 2011 compared to the prior year due to lower operating revenues at Nicor’s energy-related products and services businesses ($1.7 million decrease) and at Nicor Enerchange ($1.0 million decrease).  Lower operating revenues at Nicor’s energy-related products and services businesses were due to lower average revenue per utility-bill management contract attributable to lower average natural gas prices, partially offset by higher average contract volumes.  Lower operating revenues at Nicor Enerchange were
 
 26
 Table of Contents
 
 due to unfavorable changes in valuations of derivative instruments used to hedge purchases and sales of natural gas inventory and unfavorable costing of physical sales activity, partially offset by favorable results from the company’s risk management services associated with hedging the product risks of the utility-bill management contracts offered by Nicor’s energy-related products and services businesses.
 
 Corporate and eliminations reflects primarily the elimination of gas distribution revenues against Nicor Solutions’ expenses for customers purchasing the utility-bill management products and Nicor Enerchange net revenues from the sale of natural gas to Nicor Advanced Energy.
 
 Gas distribution margin.Nicor utilizes a measure it refers to as “gas distribution margin” to evaluate the operating income impact of gas distribution revenues.  Gas distribution revenues include natural gas costs, which are passed directly through to customers without markup, subject to ICC review, and revenue taxes, for which Nicor Gas earns a small administrative fee.  These items often cause significant fluctuations in gas distribution revenues, with equal and offsetting fluctuations in cost of gas and revenue tax expense, with no direct impact on gas distribution margin.  The company has a franchise gas cost recovery rider, a rider to recover the costs associated with energy efficiency programs and a bad debt rider.  Changes in revenue included in gas distribution margin attributable to these items are offset by changes within operating and maintenance expense, with generally no impact on operating income.
 
 A reconciliation of gas distribution revenues and margin follows (in millions):
 
 Three months ended

March 312011


2010Gas distribution revenues

$
915.8


$
1,068.8Cost of gas


(640.0
)


(787.9
)Revenue tax expense


(73.7
)


(72.9
)Gas distribution margin

$
202.1


$
208.0
 
 Gas distribution margin decreased $5.9 million for the three months ended March 31, 2011 compared to the prior year.  Gas distribution margin includes the revenue from the riders noted above which totaled $1.4 million and $9.4 million for the three months ended March 31, 2011 and 2010, respectively.  Gas distribution margin excluding those riders increased $2.1 million compared to the prior year due to the impact of colder weather (approximately $3 million increase).
 
 Gas distribution operating and maintenance expense.  Gas distribution operating and maintenance expense increased$19.8 million for the three months ended March 31, 2011 compared to the prior year.  Operating and maintenance expense related to riders noted above decreased $8.0 million.  Operating and maintenance expense excluding such riders increased $27.8 million for the three months ended March 31, 2011 compared to the prior year due to the absence of 2010’s recovery of 2008 and 2009 bad debt expense under the bad debt rider ($31.7 million), partially offset by lower bad debt expense ($2.6 million decrease) and lower company-use and storage-related gas costs ($1.1 million decrease).  Total bad debt expense for the three months ended March 31, 2011 was $26.9 million compared to $1.4 million in the prior year.  Bad debt expense in 2011 includes $27.1 million, based on gas distribution revenues recognized in the quarter, of the approximately $63 million annual expense assumed to be collected through base rates; and $(0.2) million of expense which is equal to the revenue recognized under the bad debt rider.  Bad debt expense in 2010 includes the recognition of the $31.7 million benefit associated with the net under recovery of bad debt expense from 2008 and 2009; $29.7 million, based on gas distribution revenues recognized in the quarter, of the approximately $63 million annual expense assumed to be collected through base rates; and $3.4 million of expense which is equal to the revenue recognized under the bad debt rider.
  27
 Table of Contents
  Shipping operating expenses.  Shipping operating expenses decreased $2.0 million for the three months ended March 31, 2011 compared to the prior year due primarily to lower payroll and benefit-related costs ($1.1 million decrease) and lower transportation-related costs ($0.5 million decrease, attributable in part to lower volumes shipped, partially offset by higher fuel prices).
 
 Other energy ventures operating expenses.Other energy ventures operating expenses decreased $2.8 million for the three months ended March 31, 2011 compared to the prior year due to a decrease in operating expenses at Nicor’s energy-related products and services businesses ($3.6 million decrease) attributable to lower average cost per utility-bill management contract resulting from lower average natural gas prices, partially offset by an increase in operating expenses at Nicor Enerchange ($0.6 million increase) attributable to higher natural gas related transportation and storage charges.
 
 Interest expense.  Interest expense decreased$2.1 million for the three months ended March 31, 2011 compared to the prior year due primarily to an interest refund related to income tax matters ($1.9 million decrease).
 
 Net equity investment income.  Net equity investment income increased $2.9 million for the three months ended March 31, 2011 compared to the prior year due primarily to an increase in income from the company’s investment in Triton ($2.8 million increase).
 
 Income tax expense.  In 2006, the company reorganized certain shipping and related operations.  The reorganization allows the company to take advantage of certain provisions of the Jobs Act that provide the opportunity for tax savings subsequent to the date of the reorganization.  Generally, to the extent foreign shipping earnings are not repatriated to the United States, such earnings are not expected to be subject to current taxation.  In addition, to the extent such earnings are determined to be indefinitely reinvested offshore, no deferred income tax expense would be recorded by the company.  For the three months ended March 31, 2011 and 2010, an income tax benefit has not been recognized on approximately $4 million and $3 million, respectively, of foreign company shipping losses.  As of March 31, 2011, Nicor has not recorded deferred income taxes of approximately $58 million on approximately $166 million of cumulative undistributed foreign earnings.
 
 The effective income tax rate for the three months ended March 31, 2011 decreased to 29.0 percent from 32.0 percent in the prior year.  The lower effective income tax rate for the three months ended March 31, 2011 is due to an adjustment to reduce certain state income tax liabilities in the first quarter of 2011 and lower forecasted annual pretax income (which causes a lower effective income tax rate since permanent differences and tax credits are a larger share of pretax income), partially offset by lower forecasted annual untaxed foreign shipping earnings and an increase to the Illinois state income tax rate.  Effective January 1, 2011, the State of Illinois raised the corporate income tax rate from 7.3 percent to 9.5 percent.


28
 Table of Contents




Nicor Inc.Gas Distribution StatisticsThree months endedMarch 312011


2010Operating revenues(millions)SalesResidential

$
603.3


$
715.9Commercial


153.9



185.3Industrial


18.9



21.9776.1



923.1TransportationResidential


13.6



14.3Commercial


24.9



24.6Industrial


10.9



10.5Other


.7



1.450.1



50.8Other revenuesRevenue taxes


74.9



73.9Environmental cost recovery


5.6



6.9Chicago Hub


1.1



1.5Other


8.0



12.689.6



94.9$
915.8


$
1,068.8Deliveries(Bcf)SalesResidential


96.1



90.7Commercial


24.9



24.0Industrial


3.3



3.0124.3



117.7TransportationResidential


11.2



11.2Commercial


37.8



36.4Industrial


31.0



29.880.0



77.4204.3



195.1Customers at end of period(thousands)SalesResidential


1,794



1,775Commercial


135



132Industrial


8



81,937



1,915TransportationResidential


204



213Commercial


47



49Industrial


4



5255



2672,192



2,182Other statisticsDegree days


3,199



3,026Colder than normal (1)


10%



4%Average gas cost per Mcf sold

$
5.05


$
6.57(1) Normal weather for Nicor Gas' service territory, for purposes of this report, is considered to be 5,600 degree days per year.




29
 Table of Contents




Shipping Statistics
 Three months ended

March 312011


2010TEUs shipped (thousands)


38.4



42.5Revenue per TEU

$
2,103


$
1,963At end of periodPorts served


25



25Vessels operated


14



15
 FINANCIAL CONDITION AND LIQUIDITY
 
 The company believes it has access to adequate resources to meet its needs for capital expenditures, debt redemptions, dividend payments and working capital.  These resources include net cash flow from operating activities, access to capital markets, lines of credit and short-term investments.  Capital market conditions are not currently expected to have a material adverse impact on the company’s ability to access capital.
 
 Operating cash flows.  The gas distribution business is highly seasonal and operating cash flow may fluctuate significantly during the year and from year-to-year due to factors such as weather, natural gas prices, the timing of collections from customers, natural gas purchasing, and storage and hedging practices.  The company relies on short-term borrowings, backed by bank lines of credit, 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.
 
 Net cash flow provided from operating activities increased $26.5 million for the three months ended March 31, 2011 compared to the prior year.  The significant factors contributing to the increase in cash flow are primarily a result of changes in natural gas prices and include:
 ·
an increase of $53 million from changes in margin accounts as a result of a decrease in unrealized losses on derivative instruments;
 ·
an increase of $48 million from lower cash used to pay accounts payable balances;
 ·
a decrease of $92 million from variations associated with the timing of collections of gas costs under Nicor Gas’ PGA rider.
 
 Investing activities.Net cash flow used for investing activities increased $15.8 million for the three months ended March 31, 2011 compared to the prior year due primarily to an increase in capital expenditures related to the development of a natural gas storage facility by Central Valley.
 
 Financing activities.  The current credit ratings for Nicor and Nicor Gas have not changed since the filing of the 2010 Annual Report on Form 10-K.Nicor and Nicor Gas’ access to financing at competitive rates is, in part, dependent on its credit ratings.
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  Long-term debt.In February 2011, Nicor Gas issued $75 million First Mortgage Bonds at 2.86 percent, due in 2016 through a private placement and utilized the proceeds to retire the $75 million 6.625 percent First Mortgage Bond series which matured in February 2011.  In determining that these bonds qualified for exemption from registration under Section 4(2) of the Securities Act of 1933, Nicor Gas relied on the facts that the bonds were offered only to a limited number of large institutional investors and each institutional investor that purchased the bonds represented that it was purchasing the bonds for its own account and not with a view to distribute them.
 
 Nicor held forward-starting interest rate swaps with a notional totaling $90 million at March 31, 2011 and December 31, 2010 and $50 million at March 31, 2010.  The swaps hedge the risk associated with the interest payments attributable to the probable issuance of long-term fixed-rate debt in 2012 intended to finance the development of a natural gas storage facility.  Under the terms of the swaps, Nicor agrees to pay a fixed swap rate and receive a floating rate based on LIBOR.
  The company believes it is in compliance with all debt covenants.  Nicor’s long-term debt agreements do not include rating triggers or material adverse change provisions.
 
 Short-term debt.  In April 2011, Nicor Gas established a $400 million, 364-day revolving credit facility, expiring April 2012 to replace the $400 million, 364-day revolving credit facility, which was set to expire in April 2011.  In April 2010, Nicor and Nicor Gas established a $600 million, three-year revolving credit facility, expiring April 2013 to replace the $600 million, five-year revolving credit facility, which was set to expire in 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 $153.7 million, $425.0 million and $228.0 million of commercial paper borrowings outstanding at March 31, 2011, December 31, 2010 and March 31, 2010, respectively.  During the first quarter of 2011, the commercial paper borrowing levels ranged from $425 million to $107 million and averaged $297 million.  During the first quarter of 2010, the commercial paper borrowing levels ranged from $494 million to $183 million and averaged $366 million.  The average borrowing levels are calculated using average daily balances for each day during the period.  The company expects that funding from commercial paper and related backup line-of-credit agreements will continue to be available in the foreseeable future.
 
 Dividends.  Nicor maintained its quarterly common stock dividend rate of $0.465 per common share during the three months ended March 31, 2011.  This quarterly dividend rate was also applicable in 2010.  The company paid dividends on its common stock of approximately $21.4 million and $21.2 million for the three months ended March 31, 2011 and 2010, respectively.  Pursuant to the Merger Agreement, Nicor is restricted from paying a dividend in excess of $0.465 per share in any quarter.  Other than the Merger Agreement, Nicor currently has no contractual or regulatory restrictions on the payment of dividends.
 
 OTHER MATTERS
 
 Storage Projects.  Central Valley is developing an underground natural gas storage facility in the Sacramento River valley of north-central California and plans to provide approximately 11 Bcf of working natural gas capacity, offering flexible, high deliverability multi-cycle services and interconnection to a regional pipeline.  In October 2010, the CPUC approved Central Valley’s Certificate of Public Convenience and Necessity to construct and operate the storage facility.  Central Valley initiated the on-site phases of construction activity in April of 2011 and expects completion by year-end, with firm storage services commencing in early 2012.  The company estimates the net capital cost for the Central Valley project to be approximately $120 million.
 
 Nicor is also participating in a natural gas storage development joint venture known as Sawgrass Storage. In 2010, Sawgrass Storageinitiated the pre-filing process with the FERC.
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 Application for Approval of Energy Efficiency Plan.  On September 29, 2010, Nicor Gas filed an application with the ICC seeking approval of an energy efficiency plan.  The filing was made pursuant to an Illinois law enacted in 2009 that requires local gas distribution utilities to establish plans to achieve specified energy savings goals beginning in June 2011 and provides utilities with a rider to collect the costs of the plan from customers.  Under its proposed plan, the company estimates that it would bill nearly $100 million to customers under the rider, over a three year period commencing June 1, 2011, to fund the costs of various energy savings programs identified in the company’s filing.
 
 Petition for Re-approval of Operating Agreement.On July 1, 2009, Nicor Gas filed a petition seeking re-approval from the ICC of the operating agreement that governs many inter-company transactions between Nicor Gas and its affiliates.  The petition was filed pursuant to a requirement contained in the ICC order approving the company’s most recent general rate increase and requested that the operating agreement be re-approved without change.  A number of parties have intervened in the proceeding (the “operating agreement proceeding”) and are seeking modifications on a prospective basis to the operating agreement.  Among the proposals are several by the ICC Staff and intervenors that would preclude Nicor Gas from continuing to provide certain services to support warranty products that are sold by Nicor Services.  Specifically, Nicor Services currently uses Nicor Gas personnel to assist in some sales solicitation for these warranty products and to provide repair services for some of these products.  Nicor Gas does not believe these proposed modifications are appropriate and is opposing them.  If these proposed modifications to the operating agreement are approved by the ICC, it would require changes in the way Nicor Services provides its warranty products and could adversely impact the future profitability of these products.  As the ICC will be required to evaluate future transactions between Nicor Gas and its affiliates in connection with the joint application of AGL Resources, Nicor and Nicor Gas for approval of the merger of AGL Resources and Nicor (the “merger proceeding”), the ICC ALJ assigned to the merger proceeding has determined to address the matters raised in the operating agreement proceeding in the merger proceeding.
 
 Financial Reform Legislation.Financial Reform Legislation was enacted into law on July 21, 2010, and includes a provision that requires certain over the counter derivative transactionsto be executed through an exchange or centrally cleared and also includes provisions under which the Commodity Futures Trading Commission may impose collateral requirements.  Final rules on major provisions in the legislation will be established through rulemakings.  While the company does not currently believe the legislation will have a material impact on its results of operations, cash flows and financial condition, the company will continue to evaluate the legislation and future rulemakings.
  Health Care Reform Legislation.In March 2010, the Health Care Act was signed into law resulting in comprehensive health care reform.  The Health Care Act contains provisions that may impact Nicor Gas’ obligation for retiree health care benefits.  The company does not currently believe these provisions will materially increase its postretirement benefit obligation, but will continue to evaluate the impact of future regulations and interpretations.
 
 Synthetic Natural Gas Plant Legislation.  In January 2011, the Illinois House and Senate passed legislation regarding two proposed synthetic natural gas plants.  The legislation was vetoed by the governor in March 2011.  The legislation would have required Nicor Gas and other major Illinois natural gas utilities to either:  (a) submit to rate cases in 2011, 2013 and 2015, or (b) purchase under long-term contracts (30 years for one plant and 10 years for the other) natural gas from the plants at a cost that may exceed the market price of natural gas.
 
 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
 
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 earnings.  It is the opinion of management that the resolution of these contingencies, either individually or in aggregate, could be material to earnings in a particular period but is not expected to have a material adverse impact on Nicor’s liquidity or financial condition.
 
 PBR plan.  Nicor Gas’ PBR plan for natural gas costs went into effect in 2000 and was terminated by the company effective January 1, 2003.  Under the PBR plan, Nicor Gas’ total gas supply costs were compared to a market-sensitive benchmark.  Savings and losses relative to the benchmark were determined annually and shared equally with sales customers.  The PBR plan is currently under ICC review.  There are allegations that the company acted improperly in connection with the PBR plan, and the ICC and others are reviewing these allegations.  On June 27, 2002, the Citizens Utility Board (“CUB”) filed a motion to reopen the record in the ICC’s proceedings to review the PBR plan (the “ICC Proceedings”).  As a result of the motion to reopen, Nicor Gas, the staff of the ICC and CUB entered into a stipulation providing for additional discovery.  The Illinois Attorney General’s Office (“IAGO”) has also intervened in this matter.  In addition, the IAGO issued Civil Investigation Demands (“CIDs”) to CUB and the ICC staff.  The CIDs ordered that CUB and the ICC staff produce all documents relating to any claims that Nicor Gas may have presented, or caused to be presented, false information related to its PBR plan.  The company has committed to cooperate fully in the reviews of the PBR plan.
 
 In response to these allegations, on July 18, 2002, the Nicor Board of Directors appointed a special committee of independent, non-management directors to conduct an inquiry into issues surrounding natural gas purchases, sales, transportation, storage and such other matters as may come to the attention of the special committee in the course of its investigation.  The special committee presented the report of its counsel (“Report”) to Nicor’s Board of Directors on October 28, 2002.  A copy of the Report is available at the Nicor website and has been previously produced to all parties in the ICC Proceedings.
 
 In response, the Nicor Board of Directors directed the company’s management to, among other things, make appropriate adjustments to account for, and fully address, the adverse consequences to ratepayers of the items noted in the Report, and conduct a detailed study of the adequacy of internal accounting and regulatory controls.  The adjustments were made in prior years’ financial statements resulting in a $24.8 million liability.  Included in such $24.8 million liability is a $4.1 million loss contingency.  A $1.8 million adjustment to the previously recorded liability, which is discussed below, was made in 2004 increasing the recorded liability to $26.6 million.  Nicor Gas estimates that there is $26.9 million due to the company from the 2002 PBR plan year, which has not been recognized in the financial statements due to uncertainties surrounding the PBR plan.  In addition, interest due to the company on certain components of these amounts has not been recognized in the financial statements due to the same uncertainties.  By the end of 2003, the company completed steps to correct the weaknesses and deficiencies identified in the detailed study of the adequacy of internal controls.
 
 Pursuant to the agreement of all parties, including the company, the ICC re-opened the 1999 and 2000 purchased gas adjustment filings for review of certain transactions related to the PBR plan and consolidated the reviews of the 1999-2002 purchased gas adjustment filings with the PBR plan review.
 
 On February 5, 2003, CUB filed a motion for $27 million in sanctions against the company in the ICC Proceedings.  In that motion, CUB alleged that Nicor Gas’ responses to certain CUB data requests were false.  Also on February 5, 2003, CUB stated in a press release that, in addition to $27 million in sanctions, it would seek additional refunds to consumers.  On March 5, 2003, the ICC staff filed a response brief in support of CUB’s motion for sanctions.  On May 1, 2003, the ALJs assigned to the proceeding issued a ruling denying CUB’s motion for sanctions.  CUB has filed an appeal of the motion for sanctions with the ICC, and the ICC has indicated that it will not rule on the appeal until the final disposition of the ICC Proceedings.  It is not possible to determine how the ICC will resolve the claims of CUB or other parties to the ICC Proceedings.
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  In 2004, the company became aware of additional information relating to the activities of individuals affecting the PBR plan for the period from 1999 through 2002, including information consisting of third party documents and recordings of telephone conversations from Entergy-Koch Trading, LP (“EKT”), a natural gas, storage and transportation trader and consultant with whom Nicor did business under the PBR plan.  Review of additional information completed in 2004 resulted in the $1.8 million adjustment to the previously recorded liability referenced above.
 
 The evidentiary hearings on this matter were stayed in 2004 in order to permit the parties to undertake additional third party discovery from EKT.  In December 2006, the additional third party discovery from EKT was obtained and the ALJs issued a scheduling order that provided for Nicor Gas to submit direct testimony by April 13, 2007.  In its direct testimony, Nicor Gas sought a reimbursement of approximately $6 million, which included interest due to the company, as noted above, of $1.6 million, as of March 31, 2007.  In September 2009, the staff of the ICC, IAGO and CUB submitted direct testimony to the ICC requesting refunds of $109 million, $255 million and $286 million, respectively.  In April 2011, Nicor Gas filed its rebuttal testimony in which it disputed the refund claims asserted in the direct testimony of the staff of the ICC, IAGO and CUB and reasserted the company’s claim for a reimbursement set forth in its direct testimony.  No date has been set for evidentiary hearings on this matter.
 
 Nicor is unable to predict the outcome of the ICC’s review or the company’s potential exposure thereunder.  Because the PBR plan and historical gas costs are still under ICC review, the final outcome could be materially different than the amounts reflected in the company’s financial statements as of March 31, 2011.
 
 Litigation relating to proposed merger.  Nicor, its board of directors, AGL Resources and one or both of AGL Resources’ acquisition subsidiaries and, in one instance, Nicor’s Executive Vice President and Chief Financial Officer have been named as defendants in six putative class action lawsuits brought by purported Nicor shareholders challenging Nicor’s proposed merger with AGL Resources, two of which, including the lawsuit that named Nicor’s Executive Vice President and Chief Financial Officer as a defendant, have subsequently been voluntarily dismissed.  The first action, Joseph Pirolli v. Nicor Inc., et al. (the “Pirolli Action”) was filed on December 7, 2010 in the Eighteenth Circuit Court of DuPage County, Illinois, County Department, Chancery Division (“DuPage County Court”).  Four other actions were filed between December 10, 2010 and December 17, 2010 in the Circuit Court of Cook County, Illinois, County Department, Chancery Division (“Cook County Court”): Maxine Phillips v. Nicor Inc., et al., filed December 10, 2010; Plumbers Local #65 Pension Fund v. Nicor Inc., et al., filed December 13, 2010; Gus Monahu v. Nicor Inc., et al., filed December 17, 2010; and Roberto R. Vela v. Russ M. Strobel, et al., filed December 17, 2010.  The sixth action, which is both an individual action and a putative class action, was filed on March 1, 2011 in the United States District Court for the Northern District of Illinois, Eastern Division and captioned Maxine Phillips v. Nicor Inc.,et al. (the “Federal Action”).
 
 On January 10, 2011, the four actions filed in the Cook County Court were consolidated (the “Consolidated Action”).  On February 18, 2011, plaintiffs in the Consolidated Action filed an amended complaint (the “Consolidated Amended Complaint”).  On February 28, 2011, the Phillips Action in the Cook County Court was voluntarily dismissed and, on March 7, 2011, the Pirolli Action in DuPage County Court was voluntarily dismissed. Accordingly, the remaining cases pending are the Consolidated Action and the Federal Action.
 
 The Consolidated Amended Complaint alleges, among other things, that: (a) the Nicor Board breached its fiduciary duties to Nicor and its shareholders by (i) approving the sale of Nicor to AGL Resources at an inadequate purchase price (and thus failing to maximize value to Nicor shareholders), (ii) conducting an inadequate sale process by agreeing to preclusive deal protection provisions in the Merger Agreement and failing to solicit other potential bids or alternative transactions and (iii) failing to disclose material
 
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 information regarding the proposed merger to Nicor shareholders; and (b) AGL Resources, Nicor and the acquisition subsidiaries aided and abetted these alleged breaches of fiduciary duty.  The Consolidated Amended Complaint seeks, among other things, declaratory and injunctive relief, including an order enjoining the defendants from consummating the proposed merger. 
 The Federal Action asserts both individual and purported class claims for breach of fiduciary duty and violations of the federal securities laws.  Among other things, plaintiffs allege that: (i) Nicor and the Nicor board of directors violated Section 14(a) of the Securities and Exchange Act of 1934 (sometimes referred to as the Exchange Act) and Rule 14a-9 promulgated thereunder by issuing a materially incomplete registration statement in connection with the proposed merger; and (ii) the Nicor board of directors violated Section 20(a) of the Exchange Act by virtue of its control over the content and dissemination of that registration statement.  The Federal Action also claims that: (a) the Nicor board of directors breached its fiduciary duties to Nicor and its shareholders by (i) approving the sale of Nicor to AGL Resources at an inadequate price (and thus failing to maximize value to Nicor shareholders), (ii) conducting an inadequate sale process by agreeing to preclusive deal protection provisions in the Merger Agreement and failing to solicit other potential bids or alternative transactions and (iii) failing to disclose materialinformation regarding the proposed merger; and (b) Nicor and AGL Resources aided and abetted the alleged breaches of fiduciary duty.  The Federal Action seeks, among other things, damages and declaratory and injunctive relief, including an order enjoining the defendants from consummating the proposed merger.
 
 Nicor believes the claims asserted in each lawsuit to be without merit and intends to vigorously defend against them.  The final disposition of these shareholder litigation-related matters is not expected to have a material adverse impact on the company’s liquidity or financial condition.
 
 Mercury.  Information about mercury contingencies is presented in Item 1 – Notes to the Condensed Consolidated Financial Statements – Note 15 – Contingencies – Mercury.
 
 Manufactured gas plant sites.  The company is conducting environmental investigations and remedial activities at former manufactured gas plant sites.  Additional information about these sites is presented in Item 1 – Notes to the Condensed Consolidated Financial Statements – Note 15 – Contingencies – Manufactured Gas Plant Sites.
 
 Municipal tax matters.  Information about municipal tax contingencies is presented in Item 1 – Notes to the Condensed Consolidated Financial Statements – Note 15 – Contingencies – Municipal Tax Matters.
 
 Nicor Services Warranty Product Actions.Information about warranty product contingencies is presented in Item 1 – Notes to the Condensed Consolidated Financial Statements – Note 15 – Contingencies – Nicor Services Warranty Product Actions.
 
 Nicor Advanced Energy Lock 12 Action.Information about contingencies related to the Lock 12 product offered by Nicor Advanced Energy is presented in Item 1 – Notes to the Condensed Consolidated Financial Statements – Note 15 – Contingencies – Nicor Advanced Energy Lock 12 Action.
 
 Other.The company is involved in legal or administrative proceedings before various courts and agencies with respect to general claims, taxes, environmental, gas cost prudence reviews and other matters.  See Item 1 – Notes to the Condensed Consolidated Financial Statements – Note 15 – Contingencies – Other.
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 CRITICAL ACCOUNTING ESTIMATES
 
 See Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Estimates in the 2010 Annual Report on Form 10-K for a discussion of the company’s critical accounting estimates.
 
 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, among other things, to the outcome of the proposed merger between Nicor and AGL Resources, 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.
 
 Specifically with respect to the proposed merger between Nicor and AGL Resources, Nicor’s expectations are subject to future events, risks and uncertainties, and there are several factors – many beyond the company’s control – that could cause results to differ significantly from its expectations.  Such events, risks and uncertainties include, but are not limited to:
  ·
the possibility that the company’s business may suffer as a result of the uncertainty surrounding the merger;
  ·
the possibility that AGL Resources and Nicor will not receive the regulatory approvals required to complete the merger or that the merger will not be consummated for other reasons;
  ·
the possibility of adverse decisions in pending and potential state and federal class action lawsuits, including shareholder suits, relating to the merger;
  ·
the possibility that the company may not be able to maintain relationships with its employees, suppliers, or customers as a result of the uncertainty surrounding the merger; and
  ·
the possibility that the Merger Agreement will be terminated under circumstances in which the company would incur termination payment obligations.
 
 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 3.                 Quantitative and Qualitative Disclosures About Market Risk
 
 Nicor is exposed to market risk in the normal course of its business operations, including the risk of loss arising from adverse changes in natural gas and fuel commodity prices and interest rates.  Nicor’s practice is to manage these risks utilizing derivative instruments and other methods, as deemed appropriate.
 
 There has been no material change in the company’s exposure to market risk since the filing of the 2010 Annual Report on Form 10-K.
 
 Item 4.Controls and Procedures
 
 The company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by the company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and that such information is accumulated and communicated to the registrant’s management, including the Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), as appropriate to allow timely decisions regarding required disclosures.  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.
 
 The company carried out an evaluation under the supervision and with the participation of the company’s management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the company’s disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q (the “Evaluation”).  Based on the Evaluation, the company’s Chief Executive Officer and Chief Financial Officer concluded, at the reasonable assurance level, as of the end of the period covered by this Quarterly Report on Form 10-Q, that the company’s disclosure controls and procedures, were effective.
 
 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.
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 PART II - OTHER INFORMATION
 
 Item 1.                 Legal Proceedings
 
 See Part I, Item 1 – Notes to the Condensed Consolidated Financial Statements – Note 1 – Proposed Merger with AGL Resources and Note 15 – Contingencies and Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Other Matters, which are incorporated herein by reference.
 
 Item 2.                 Unregistered Sales of Equity Securities and Use of Proceeds
 
 In 2001, Nicor announced a $50 million common stock repurchase program, under which Nicor may purchase its common stock as market conditions permit through open market transactions and to the extent cash flow is available after other cash needs and investment opportunities.  There have been no repurchases under this program since 2002.  As of March 31, 2011, $21.5 million remained authorized for the repurchase of common stock.
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  Item 6.                 Exhibits
 
 ExhibitNumber

Description of Document2.01
*
Agreement and Plan of Merger, dated as of December 6, 2010, by and among AGL Resources Inc., Apollo Acquisition Corp., Ottawa Acquisition LLC and Nicor Inc.  (File No. 1-7297, Form 8-K for December 7, 2010, Nicor Inc., Exhibit 2.1.)3.01
*
Amended and Restated Articles of Incorporation of Nicor Inc., as further amended by the amendment filed with the Illinois Secretary of State on June 2, 2008. (File No. 1-7297, Form 10-Q for June 30, 2008, Nicor Inc., Exhibit 3.01.)3.02
*
Nicor Inc. Amended and Restated By-laws effective as of July 24, 2008.  (File No. 1-7297, Form 8-K for July 28, 2008, Nicor Inc., Exhibit 3.1.)3.03
*
Nicor Inc. Amendment to Amended and Restated By-laws.  (File No. 1-7297, Form 8-K for November 20, 2008, Nicor Inc., Exhibit 3.1.)10.01
*
Restricted Stock Unit Agreement between Nicor Inc. and Russ M. Strobel.  (File No. 1-7297, Form 8-K for March 25, 2011, Nicor Inc., Exhibit 10.01.)10.02
*
Form of Restricted Stock Unit Agreement.  (File No. 1-7297, Form 8-K for March 25, 2011, Nicor Inc., Exhibit 10.02.)10.03
*
2011 Long-Term Incentive Program.  (File No. 1-7297, Form 8-K for March 25, 2011, Nicor Inc., Exhibit 10.05.)10.04

First Amendment to 3-Year Credit Agreement dated as of April 19, 2011.10.05

364-Day Credit Agreement dated as of April 19, 2011.31.01

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.101.INS
**
XBRL Instance Document.101.SCH
**
XBRL Taxonomy Extension Schema.101.CAL
**
XBRL Taxonomy Extension Calculation Linkbase.101.DEF
**
XBRL Taxonomy Extension Definition Linkbase.101.LAB
**
XBRL Taxonomy Extension Label Linkbase.101.PRE
**
XBRL Taxonomy Extension Presentation Linkbase.
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  *
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.  **  Pursuant to Rule 406T of Regulation S-T, these exhibits are deemed furnished, not filed.
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 Signature
 
 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
 Nicor Inc.May 4, 2011

/s/ KAREN K. PEPPING(Date)

Karen K. PeppingVice President and Controller(Principal Accounting Officer and
 Duly Authorized Officer)
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