The following discussion should be read in conjunction with the Management's Discussion and Analysis section of the Nicor 2008 Annual Report on Form 10-K. Results for the interim periods presented are not necessarily indicative of the results to be expected for the full fiscal year due to seasonal and other factors.

SUMMARY

Nicor is a holding company. Gas distribution is Nicor's primary business. Nicor's subsidiaries include Nicor Gas, one of the nation's largest distributors of natural gas, and Tropical Shipping, a transporter of containerized freight in the Bahamas and the Caribbean region. Nicor also owns several energy-related ventures, including Nicor Services, Nicor Solutions and Nicor Advanced Energy, which provide energy-related products and services to retail markets, and Nicor Enerchange, a wholesale natural gas marketing company. Nicor also has equity interests in energy-related businesses.

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

                                                   Three months ended
                                                        March 31
                                                   2009           2008

             Net income                          $    43.8       $  41.4

             Diluted earnings per common share   $     .96       $   .91

Comparisons of the three months ended results reflect lower operating income in the company's gas distribution business and a higher effective income tax rate in 2009, partially offset by higher operating income in the company's shipping and other energy-related businesses, higher corporate operating results and higher equity investment income.

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

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

On March 25, 2009, the ICC issued an order approving an increase in base revenues of $69.0 million, a rate of return on rate base of 7.58 percent and a rate of return on equity of 10.17 percent. The order also approved an energy efficiency rider. Nicor Gas placed its new rates into effect on April 3, 2009. As a result of the new rates, it is estimated that a 100-degree day variation from normal (5,600 degree days annually) impacts Nicor Gas' distribution margin, net of income taxes, by approximately $1.3 million.

On April 24, 2009, the company filed a request for rehearing with the ICC to appeal the capital structure and return on equity contained in the ICC's rate order contending the company's return on rate base should be higher. The Attorney General's office, Citizen's Utility Board and the Environmental Law and Policy Center also filed requests for rehearing on items including the management structure of the Energy

Efficiency Plan and the rate design for residential customers. These other parties do not raise issues about the amount of the rate increase granted to Nicor Gas. The ICC has until May 14, 2009 to either grant or deny the requests for rehearing. Any further changes in rates as a result of rehearing would be effective prospectively.

Capital market environment. The volatility in the capital markets during 2008 and 2009 has caused general concern over the valuations of investments, exposure to increased credit risk and pressures on liquidity. The company has reviewed its investments, exposure to credit risk and sources of liquidity and does not currently expect any future material adverse impacts relating to these items.

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

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

                                                Three months ended
                                                     March 31
                                                2009           2008

                 Gas distribution             $    53.8       $  62.3
                 Shipping                           6.6           3.9
                 Other energy ventures              2.6           1.0
                 Corporate and eliminations        (3.1 )        (4.0 )
                                              $    59.9       $  63.2

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

· Gas distribution operating income decreased $8.5 million for the three months ended March 31, 2009 compared to the prior year due primarily to lower gas distribution margin ($4.6 million decrease), higher operating and maintenance expense ($2.0 million increase) and higher depreciation expense ($1.6 million increase).

· Shipping operating income increased $2.7 million for the three months ended March 31, 2009 compared to the prior year due to lower operating costs ($11.0 million decrease), which were partially offset by lower operating revenues ($8.3 million decrease). Operating costs were lower due primarily to lower transportation-related costs ($8.4 million decrease, largely attributable to lower fuel prices and lower volumes shipped), employee-related costs ($1.0 million decrease) and charter costs ($1.0 million decrease). Operating revenues were lower due to lower volumes shipped ($11.0 million decrease), partially offset by higher average rates ($2.7 million increase).

· Nicor's other energy ventures operating income increased $1.6 million for the three months ended March 31, 2009 compared to the prior year due to higher operating income at Nicor's wholesale natural gas marketing business, Nicor Enerchange ($4.5 million increase), partially offset by lower operating results at Nicor's energy-related products and services businesses ($2.5 million decrease). Higher operating income at Nicor Enerchange was due primarily to favorable changes in valuations of derivative instruments used to hedge purchases and sales of natural gas inventory and favorable costing of physical sales activity, partially offset by lower results from the company's risk management activities associated with hedging the product risks of the utility-bill management contracts offered by Nicor's energy-related products and services businesses. Lower operating results at Nicor's energy-related products and services businesses were due to higher operating expenses ($4.8 million increase), partially offset by higher operating revenues ($2.3 million increase).

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

· Corporate and eliminations operating results increased $0.9 million for the three months ended March 31, 2009 compared to the prior year due to lower costs of a natural weather hedge associated with the utility-bill management products offered by Nicor's energy-related products and services businesses ($1.2 million decrease). The company recorded $2.6 million of costs in the current year compared to $3.8 million of costs recorded in the prior year. Benefits or costs resulting from variances from normal weather related to these products are recorded primarily at the corporate level as a result of an agreement between the parent company and certain of its subsidiaries. The weather impact of these contracts generally serves to partially offset the gas distribution segment's weather risk. The amount of the offset attributable to the utility-bill management products marketed by Nicor's other energy ventures will vary depending upon a number of factors including the time of year, weather patterns, the number of customers for these products and the market price for natural gas.

RESULTS OF OPERATIONS

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

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

                                                Three months ended
                                                     March 31
                                                2009          2008

                 Gas distribution             $   984.0     $ 1,464.2
                 Shipping                          89.4          97.7
                 Other energy ventures             77.1          70.2
                 Corporate and eliminations       (39.7 )       (36.4 )
                                              $ 1,110.8     $ 1,595.7

Gas distribution revenues are impacted by changes in natural gas costs, which are passed directly through to customers without markup, subject to ICC review. Gas distribution revenues decreased $480.2 million for the three months ended March 31, 2009 compared to the prior year due primarily to lower natural gas costs (approximately $365 million decrease), warmer weather (approximately $55 million decrease) and lower demand unrelated to weather (approximately $45 million decrease).

Shipping segment operating revenues decreased $8.3 million for the three months ended March 31, 2009 compared to the prior year due to lower volumes shipped ($11.0 million decrease), partially offset by higher average rates ($2.7 million increase). Higher average rates were attributable to general rate increases, partially offset by lower cost-recovery surcharges for fuel. Volumes shipped were adversely impacted by the economic slowdown. During the second quarter of 2008, Tropical Shipping completed an acquisition of the assets of Caribtran, Inc., which is expected to add approximately 4 percent to expected shipping revenues on an annual basis.

Nicor's other energy ventures operating revenues increased $6.9 million for the three months ended March 31, 2009 compared to the prior year due primarily to higher operating revenues at Nicor Enerchange ($4.5 million increase) and at Nicor's energy-related products and services businesses ($2.3 million increase). Higher operating revenues at Nicor Enerchange were due primarily to favorable changes in valuations of derivative instruments used to hedge purchases and sales of natural gas inventory and favorable costing of physical sales activity, partially offset by lower results from the company's risk management activities associated with hedging the product risks of the utility-bill management contracts offered by Nicor's energy-related products and services businesses. Higher operating revenues at Nicor's energy-related products and services businesses were attributable to higher average contract volumes and higher average revenue per utility-bill management contract.

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

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

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

                                               Three months ended
                                                    March 31
                                               2009          2008

                 Gas distribution revenues   $  984.0     $  1,464.2
                 Cost of gas                   (716.4 )     (1,186.7 )
                 Revenue tax expense            (73.6 )        (78.9 )
                 Gas distribution margin     $  194.0     $    198.6

Gas distribution margin decreased $4.6 million for the three months ended March 31, 2009 compared to the prior year due primarily to lower demand unrelated to weather (approximately $4 million decrease) and warmer weather (approximately $2 million decrease), partially offset by the impact of customer interest (approximately $3 million increase).

Gas distribution operating and maintenance expense. Gas distribution operating and maintenance expense increased $2.0 million for the three months ended March 31, 2009 compared to the prior year due to higher payroll and benefit-related costs ($7.2 million increase, of which $5.4 million relates to higher pension expense, net of capitalization), partially offset by lower bad debt expense ($5.1 million decrease due to lower revenues attributable principally to lower natural gas prices).

Shipping operating expenses. Shipping segment operating expenses decreased $11.0 million for the three months ended March 31, 2009 compared to the prior year due primarily to lower transportation-related costs ($8.4 million decrease, largely attributable to lower fuel prices and lower volumes shipped), employee-related costs ($1.0 million decrease) and charter costs ($1.0 million decrease).

Other energy ventures operating expenses. Other energy ventures operating expenses increased $5.3 million for the three months ended March 31, 2009 compared to the prior year due primarily to an increase in operating expenses at Nicor's energy-related products and services businesses ($4.8 million increase). The increase in operating expenses at Nicor's energy-related products and services businesses was due primarily to higher average contract volumes and higher average cost per utility-bill management contract.

Interest expense. Interest expense decreased $1.3 million for the three months ended March 31, 2009 compared to the prior year due primarily to lower average interest rates, partially offset by higher average borrowing levels.

Net equity investment income. Net equity investment income increased $10.2 million for the three months ended March 31, 2009 compared to the prior year. On March 31, 2009, the company sold its 50-percent interest in EN Engineering and recognized a gain on the sale of $10.1 million.

Interest income. Interest income decreased $0.7 million for the three months ended March 31, 2009 compared to the prior year due primarily to the impact of lower average interest rates, partially offset by higher average investment balances.

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, 2009 and 2008, income tax expense has not been provided on approximately $5 million and $1 million, respectively, of foreign company shipping earnings that are expected to be indefinitely reinvested offshore. As of March 31, 2009, Nicor has not recorded deferred income taxes of approximately $53 million on approximately $151 million of cumulative undistributed foreign earnings that are expected in management's judgment to be indefinitely reinvested offshore.

The effective income tax rate for the three months ended March 31, 2009 increased to 30.6 percent from 25.3 percent in the prior-year period. The higher effective income tax rate for the three months ended March 31, 2009 is due primarily to higher forecasted annual pretax income (which causes a higher effective income tax rate since permanent differences and tax credits are a smaller share of pretax income), lower forecasted undistributed foreign earnings and lower forecasted tax credits.

Nicor Inc.
Gas Distribution Statistics


                                                                       Three months ended
                                                                            March 31
                                                                 2009                    2008
Operating revenues (millions)
   Sales
Residential                                                   $     648.1           $      1,013.2
Commercial                                                          170.0                    249.7
Industrial                                                           19.4                     31.0
                                                                    837.5                  1,293.9
Transportation
Residential                                                          14.3                     13.2
Commercial                                                           25.1                     31.2
Industrial                                                           10.3                     11.8
      Other                                                           3.7                     17.2
                                                                     53.4                     73.4
Other revenues
Revenue taxes                                                        74.7                     80.3
Environmental cost recovery                                           5.7                      5.0
Chicago Hub                                                           2.0                      3.4
      Other                                                          10.7                      8.2
                                                                     93.1                     96.9
                                                              $     984.0           $      1,464.2
Deliveries (Bcf)
   Sales
Residential                                                          96.4                    104.2
Commercial                                                           25.0                     25.8
Industrial                                                            2.9                      3.3
                                                                    124.3                    133.3
Transportation
Residential                                                          12.2                     11.7
Commercial                                                           38.4                     40.5
Industrial                                                           30.4                     32.3
                                                                     81.0                     84.5
                                                                    205.3                    217.8
Customers at end of period (thousands)
   Sales
Residential                                                         1,769                    1,789
Commercial                                                            132                      130
Industrial                                                              8                        8
                                                                    1,909                    1,927
Transportation
Residential                                                           219                      197
Commercial                                                             52                       53
Industrial                                                              5                        6
                                                                      276                      256
                                                                    2,185                    2,183

Other statistics
Degree days                                                         3,185                    3,272
Colder than normal (1)                                                10%                       9%
Average gas cost per Mcf sold                                 $      5.64           $         8.86

(1) Normal weather for Nicor Gas' service territory, for purposes of this report, is considered to be 5,600 degree days per year for 2009 and 5,830 degree days per year for 2008.

Shipping Statistics
                                               Three months ended
                                                    March 31
                                                2009          2008

                  TEUs shipped (thousands)         42.6         48.0
                  Revenue per TEU            $    2,100      $ 2,037
                  At end of period
                  Ports served                       25           26
                  Vessels operated                   16           18

FINANCIAL CONDITION AND LIQUIDITY

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

Operating cash flows. The gas distribution business is highly seasonal and operating cash flow may fluctuate significantly during the year and from year-to-year due to factors such as weather, natural gas prices, the timing of collections from customers, natural gas purchasing, and storage and hedging practices. The company relies on short-term financing to meet seasonal increases in working capital needs. Cash requirements generally increase over the last half of the year due to increases in natural gas purchases, gas in storage and accounts receivable. During the first half of the year, positive cash flow generally results from the sale of gas in storage and the collection of accounts receivable. This cash is typically used to substantially reduce, or eliminate, short-term debt during the first half of the year. Net cash flow provided from operating activities decreased $26.2 million for the three months ended March 31, 2009 compared to the prior year.

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

Investing activities. Net cash flow used for investing activities decreased $7.4 million for the three months ended March 31, 2009 compared to the prior year.

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

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

Financing activities. The current credit ratings for Nicor and Nicor Gas have not changed since the filing of the 2008 Annual Report on Form 10-K.

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