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

SUMMARY

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

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

                                          Three months ended          Six months ended
                                                June 30                    June 30
                                          2009           2008         2009          2008

    Net income                          $    22.9       $  28.9     $    66.7      $ 70.3

    Diluted earnings per common share   $     .50       $   .64     $    1.47      $ 1.55

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

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

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

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

On April 24, 2009, the company filed a request for rehearing with the ICC concerning the capital structure and return on equity contained in the ICC's rate order contending the company's return on rate base should be higher. The Attorney General's office, Citizen's Utility Board and the Environmental Law and Policy Center also filed requests for rehearing on items including the management structure of the Energy Efficiency Plan and the rate design for residential customers. These other parties do not raise issues about the amount of the rate increase granted to Nicor Gas. On May 13, 2009, the ICC agreed to conduct a rehearing concerning the capital structure but denied the remainder of the company's request. The ICC also denied all the rehearing requests by other parties. The ICC has until October 13, 2009 to issue a ruling on rehearing. Any changes in rates as a result of rehearing would be effective prospectively. Nicor Gas has also filed an appeal of the ICC's rate order in state appellate court. That appeal has been stayed until the ICC issues its ruling on rehearing.

Capital market environment. The volatility in the capital markets during 2008 and 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 income, instead of being recorded in accumulated other comprehensive income. The adverse impact of both factors on 2009 postretirement benefit costs compared to 2008 costs is approximately $30 million. About one-fourth of this added cost will be capitalized as a cost of constructing gas distribution facilities and the remainder will be included in gas distribution operating and maintenance expense, net of any amounts charged to affiliates. The company does not expect to make any contributions to the pension plan in 2009. However, if market values of the pension plan assets continue to significantly decline, the company may be required to make future contributions.

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

                                       Three months ended          Six months ended
                                             June 30                    June 30
                                       2009           2008         2009         2008

        Gas distribution             $    25.1       $  20.7     $   78.9      $  83.0
        Shipping                           2.5           5.7          9.1          9.6
        Other energy ventures             12.7          11.0         15.3         12.0
        Corporate and eliminations         (.8 )         3.2         (3.9 )        (.8 )
                                     $    39.5       $  40.6     $   99.4      $ 103.8

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

· Gas distribution operating income increased $4.4 million for the three months ended June 30, 2009 compared to the prior year due to higher gas distribution margin ($15.6 million increase), partially offset by higher operating and maintenance expense ($9.4 million increase) and depreciation expense ($1.7 million increase).

Operating income decreased $4.1 million for the six months ended June 30, 2009 compared to the prior year due primarily to higher operating and maintenance expense ($11.4 million increase) and depreciation expense ($3.3 million increase), partially offset by higher gas distribution margin ($11.0 million increase).

· Shipping operating income decreased $3.2 million and $0.5 million for the three and six months ended June 30, 2009, respectively, compared to the prior year due to lower operating revenues ($18.8 million and $27.1 million decreases, respectively), which were partially offset by lower operating costs ($15.6 million and $26.6 million decreases, respectively). Operating revenues were lower for both periods due to lower volumes shipped ($12.8 million and $23.8 million decreases, respectively) and lower average rates ($6.0 million and $3.3 million decreases, respectively). Operating costs were lower for both periods due primarily to lower transportation-related costs ($11.9 million and $20.3 million decreases, respectively, largely attributable to lower fuel prices and lower volumes shipped) and charter costs ($2.8 million and $3.8 million decreases, respectively).

· Nicor's other energy ventures operating income increased $1.7 million for the three months ended June 30, 2009 compared to the prior year due primarily to higher operating income at Nicor's energy-related products and services businesses ($1.4 million increase) and at Nicor's wholesale natural gas marketing business, Nicor Enerchange ($0.2 million increase). Higher operating income at Nicor's energy-related products and services businesses was due to lower operating expenses ($1.6 million decrease), partially offset by lower operating revenues ($0.2 million decrease). Higher operating income at Nicor Enerchange was due primarily to favorable changes in valuations of derivative instruments used to hedge purchases and sales of natural gas inventory, partially offset by unfavorable costing of physical sales activity and lower results from the company's risk management activities associated with hedging the product risks of the utility-bill management contracts offered by Nicor's energy-related products and services businesses.

Nicor's other energy ventures operating income increased $3.3 million for the six months ended June 30, 2009 compared to the prior year due to higher operating income at Nicor's wholesale natural gas marketing business, Nicor Enerchange ($4.7 million increase), partially offset by lower operating income at Nicor's energy-related products and services businesses ($1.1 million decrease). Higher operating income at Nicor Enerchange was due primarily to favorable changes in valuations of derivative instruments used to hedge purchases and sales of natural gas inventory, partially offset by unfavorable costing of physical sales activity and lower results from the company's risk management activities associated with hedging the product risks of the utility-bill management contracts offered by Nicor's energy-related products and services businesses. Lower operating income at Nicor's energy-related products and services businesses was due to higher operating expenses ($3.2 million increase), partially offset by higher operating revenues ($2.1 million increase).

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

as the fair value of derivatives change. The volatility resulting from this accounting can be significant from period to period.

· Corporate and eliminations operating results decreased $4.0 million for the three months ended June 30, 2009 compared to the prior year due to the absence of prior year recoveries of previously incurred legal costs ($3.1 million decrease) and the absence of prior year benefits realized on life insurance contracts ($1.0 million decrease). The legal cost recoveries were from a counterparty with whom Nicor previously did business during the PBR timeframe. The total recovery was $5.0 million, of which $3.1 million was allocated to corporate and $1.9 million was allocated to the gas distribution segment (recorded as a reduction to operating and maintenance expense).

Corporate and eliminations operating results decreased $3.1 million for the six months ended June 30, 2009 compared to the prior year due to the previously mentioned prior year recoveries of legal costs ($3.1 million decrease) and the absence of prior year benefits realized on life insurance contracts ($1.3 million decrease), partially offset by lower costs of a natural weather hedge associated with the utility-bill management products offered by Nicor's energy-related products and services businesses ($1.1 million decrease). The company recorded $2.9 million of costs associated with the natural weather hedge in the current year compared to $4.0 million of costs recorded in the prior year. Benefits or costs resulting from variances from normal weather related to these products are recorded primarily at the corporate level as a result of an agreement between the parent company and certain of its subsidiaries. The weather impact of these contracts generally serves to partially offset the gas distribution segment's weather risk. The amount of the offset attributable to the utility-bill management products marketed by Nicor's other energy ventures will vary depending upon a number of factors including the time of year, weather patterns, the number of customers for these products and the market price for natural gas.

RESULTS OF OPERATIONS

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

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

                                      Three months ended           Six months ended
                                            June 30                     June 30
                                       2009          2008         2009          2008

       Gas distribution             $    326.3      $ 560.1     $ 1,310.3     $ 2,024.3
       Shipping                           83.8        102.6         173.2         200.3
       Other energy ventures              51.2         52.7         128.3         122.9
       Corporate and eliminations        (13.7 )      (15.6 )       (53.4 )       (52.0 )
                                    $    447.6      $ 699.8     $ 1,558.4     $ 2,295.5

Gas distribution revenues are impacted by changes in natural gas costs, which are passed directly through to customers without markup, subject to ICC review. Gas distribution revenues decreased $233.8 million for the three months ended June 30, 2009 compared to the prior year due primarily to lower natural gas costs (approximately $215 million decrease) and lower demand unrelated to weather (approximately $15 million decrease), partially offset by the impact of the recent base rate increase (approximately $20 million increase). Gas distribution revenues decreased $714.0 million for the six months ended June 30, 2009 compared to the prior year due primarily to lower natural gas costs (approximately $585 million decrease), lower demand unrelated to weather (approximately $75 million decrease) and warmer weather (approximately $65 million decrease), partially offset by the impact of the recent base rate increase (approximately $20 million increase).

Shipping segment operating revenues decreased $18.8 million and $27.1 million for the three and six months ended June 30, 2009, respectively, compared to the prior year due to lower volumes shipped ($12.8 million and $23.8 million decreases, respectively) and lower average rates ($6.0 million and $3.3 million decreases, respectively). Volumes shipped were adversely impacted by the economic slowdown. Lower average rates were attributable to lower cost-recovery surcharges for fuel. During the second quarter of 2008, Tropical Shipping completed an acquisition of the assets of Caribtran, Inc., which added approximately 4 percent to shipping revenues on an annualized basis.

Nicor's other energy ventures operating revenues decreased $1.5 million for the three months ended June 30, 2009 compared to the prior year due primarily to lower operating revenues at Nicor Enerchange ($1.2 million decrease) and at Nicor's energy-related products and services businesses ($0.2 million decrease). Lower operating revenues at Nicor Enerchange were due primarily to unfavorable costing of physical sales activity and lower results from the company's risk management activities associated with hedging the product risks of the utility-bill management contracts offered by Nicor's energy-related products and services businesses, partially offset by favorable changes in valuations of derivative instruments used to hedge purchases and sales of natural gas inventory. Lower operating revenues at Nicor's energy-related products and services businesses were due to lower average revenue per utility-bill management contract attributable, in part, to product mix, partially offset by higher average contract volumes.

Operating revenues increased $5.4 million for the six months ended June 30, 2009 compared to the prior year due to higher operating revenues at Nicor Enerchange ($3.3 million increase) and at Nicor's energy-related products and services businesses ($2.1 million increase). Higher operating revenues at Nicor Enerchange were due primarily to favorable changes in valuations of derivative instruments used to hedge purchases and sales of natural gas inventory, partially offset by unfavorable costing of physical sales activity and lower results from the company's risk management activities associated with hedging the product risks of the utility-bill management contracts offered by Nicor's energy-related products and services businesses. Higher operating revenues at Nicor's energy-related products and services businesses were attributable to higher average contract volumes, partially offset by lower average revenue per utility-bill management contract, attributable primarily to product mix.

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

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

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

                                     Three months ended            Six months ended
                                           June 30                     June 30
                                      2009          2008         2009           2008

       Gas distribution revenues   $    326.3     $  560.1     $ 1,310.3     $  2,024.3
       Cost of gas                     (156.6 )     (396.2 )      (873.0 )     (1,582.9 )
       Revenue tax expense              (26.3 )      (36.1 )       (99.9 )       (115.0 )
       Gas distribution margin     $    143.4     $  127.8     $   337.4     $    326.4

Gas distribution margin increased $15.6 million for the three months ended June 30, 2009 compared to the prior year due to the impact of the recent base rate increase (approximately $20 million increase), partially offset by lower demand unrelated to weather (approximately $2 million decrease). Gas distribution margin increased $11.0 million for the six months ended June 30, 2009 compared to the prior year due to the impact of the recent base rate increase (approximately $20 million increase), partially offset by lower demand unrelated to weather (approximately $6 million decrease) and warmer weather (approximately $2 million decrease).

Gas distribution operating and maintenance expense. Gas distribution operating and maintenance expense increased $9.4 million for the three months ended June 30, 2009 compared to the prior year due to higher payroll and benefit-related costs ($7.1 million increase, of which $5.5 million relates to higher pension expense, net of capitalization) and the absence of prior year recoveries of previously incurred costs ($3.9 million, of which $2.0 million relates to a recovery of costs associated with the PCB matter and $1.9 million relates to legal cost recoveries from a counterparty with whom Nicor previously did business during the PBR timeframe). Operating and maintenance expense increased $11.4 million for the six months ended June 30, 2009 compared to the prior year due primarily to higher payroll and benefit-related costs ($14.3 million increase, of which $10.9 million relates to higher pension expense, net of capitalization), the absence of the previously mentioned cost recoveries ($3.9 million) and higher company use and storage-related gas costs ($2.4 million increase), partially offset by lower franchise gas costs ($6.7 million decrease) and lower bad debt expense ($6.0 million decrease due to lower revenues attributable principally to lower natural gas costs). As a result of the recent rate order, which became effective on March 25, 2009, the expense for franchise gas costs will be deferred until the related revenue, recovered through a cost recovery rider, is recognized.

Shipping operating expenses. Shipping segment operating expenses decreased $15.6 million and $26.6 million for the three and six months ended June 30, 2009, respectively, compared to the prior year due primarily to lower transportation-related costs ($11.9 million and $20.3 million decreases, respectively, largely attributable to lower fuel prices and lower volumes shipped) and charter costs ($2.8 million and $3.8 million decreases, respectively).

Other energy ventures operating expenses. Other energy ventures operating expenses decreased $3.2 million for the three months ended June 30, 2009 compared to the prior year due primarily to a decrease in operating expenses at Nicor's energy-related products and services businesses ($1.6 million decrease) and at Nicor Enerchange ($1.4 million decrease). The decrease in operating expenses at Nicor's energy-related products and services businesses was due primarily to lower average cost per utility-bill management contract, partially offset by higher average contract volumes. The decrease in operating expenses at Nicor Enerchange was due to lower transportation and storage charges. Operating expenses increased $2.1 million for the six months ended June 30, 2009 compared to the prior year due primarily to an increase in operating expenses at Nicor's energy-related products and services businesses ($3.2 million increase), partially offset by a decrease in operating expense at Nicor Enerchange ($1.4 million decrease). The increase in operating expenses at Nicor's energy-related products and services businesses was due primarily to higher average contract volumes. The decrease in operating expenses at Nicor Enerchange was due to lower transportation and storage charges.

Interest expense. Interest expense decreased $0.3 million and $1.6 million for the three and six months ended June 30, 2009, respectively, compared to the prior year due primarily to lower average interest rates, partially offset by higher average borrowing levels.

Net equity investment income. Net equity investment income decreased $1.2 million for the three months ended June 30, 2009, compared to the prior year due primarily to a decrease in income from the company's investment in Triton ($0.9 million decrease). Net equity investment income increased $9.0 million for the six months ended June 30, 2009, compared to the prior year. On March 31, 2009, the company sold its 50-percent interest in EN Engineering and recognized a gain on the sale of $10.1 million.

Interest income. Interest income decreased $3.7 million and $4.4 million for the three and six months ended June 30, 2009, respectively, compared to the prior year due primarily to the impact of lower average investment balances, lower interest on tax matters and lower average interest rates.

Income tax expense. In 2006, the company reorganized certain shipping and related operations. The reorganization allows the company to take advantage of certain provisions of the Jobs Act that provide the opportunity for tax savings subsequent to the date of the reorganization. Generally, to the extent foreign shipping earnings are not repatriated to the United States, such earnings are not expected to be subject to current taxation. In addition, to the extent such earnings are determined to be indefinitely reinvested offshore, no deferred income tax expense would be recorded by the company. For the six months ended June 30, 2009, income tax expense has not been provided on approximately $5 million of foreign company shipping earnings that are expected to be indefinitely reinvested offshore compared to approximately $3 million for the three and six months ended June 30, 2008. As of June 30, 2009, Nicor has not recorded deferred income taxes of approximately $53 million on approximately $151 million of cumulative undistributed foreign earnings that are expected in management's judgment to be indefinitely reinvested offshore.

The effective income tax rate for the three months ended June 30, 2009 increased to 30.9 percent from 25.3 percent in the prior-year period. The effective income tax rate for the six months ended June 30, 2009 increased to 30.7 percent from 25.3 percent in the prior-year period. The higher effective income tax rate for the three and six months ended June 30, 2009 is due primarily to higher forecasted annual pretax income (which causes a higher effective income tax rate since permanent differences and tax credits are a smaller share of pretax income).

. . .