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 other 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          Nine months ended
                                             September 30                September 30
                                           2009           2008        2009           2008

    Net income                          $     13.6       $  1.3     $    80.3       $ 71.6

    Diluted earnings per common share   $      .30       $  .03     $    1.77       $ 1.58

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

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 approximately $140 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 approximately $69 million, a rate of return on rate base of 7.58 percent and a rate of return on equity of 10.17 percent. The order also approved an energy efficiency rider. Nicor Gas placed the rates approved in the March 25, 2009 order into effect on April 3, 2009.

On April 24, 2009, 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 Illinois Attorney General's Office, Citizens 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 did 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. On October 7, 2009, the ICC issued its decision on rehearing in which it increased the annual base revenues approved for Nicor Gas in the March 25, 2009 order by approximately $11 million, representing a rate of return on rate base of 8.09 percent. Nicor Gas placed the rates approved in the rehearing decision into effect on a prospective basis on October 15, 2009. This $11 million increase is incremental to the approximately $69 million increase approved in the ICC's March 2009 rate order. Therefore, the total annual base revenue increase resulting from the rate case originally filed by the company in April 2008 is approximately $80 million. Nicor Gas has appeals of the ICC's rate orders on file in state appellate court.

As a result of the rates placed into effect in 2009, it is estimated that a 100-degree day variation from normal (5,600 degree days annually) impacts Nicor Gas' distribution margin, net of income taxes, by approximately $1.3 million.

Bad debt rider. In September 2009, Nicor Gas filed for approval of a rate adjustment mechanism for bad debt expense ("bad debt rider") with the ICC under an Illinois state law which took effect in July 2009. The ICC has 180 days to approve, or modify and approve, the company's proposed bad debt rider. This rider, if approved, would provide for recovery from customers of the amount over the benchmark for bad debt expense established in the Company's rate cases. It would also provide for refunds to customers if bad debt expense was below such benchmarks. If approved as filed, the Company would recover, in 2010, approximately $32 million of 2008 bad debt expense in excess of those benchmarks. New higher benchmarks apply to 2009 and future years as a result of the rate order received in 2009. The company does not currently expect a significant recovery or refund for 2009 bad debt expense based upon current natural gas prices and normal weather for the remainder of the year. Any refund or recovery relating to 2009 bad debt expense would be effected over a 12-month period beginning mid-2010. Adjustments under this tracker will be recognized when probable. Currently, the company does not expect to recognize amounts related to the bad debt rider until receipt of an ICC order related to the filing.

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.

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

                                      Three months ended          Nine months ended
                                         September 30                September 30
                                      2009           2008          2009         2008

       Gas distribution             $    19.5       $    .4     $     98.4     $  83.4
       Shipping                           6.6           9.5           15.7        19.1
       Other energy ventures              3.7            .6           19.0        12.6
       Corporate and eliminations           -          (1.2 )         (3.9 )      (2.0 )
                                    $    29.8       $   9.3     $    129.2     $ 113.1

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

· Gas distribution operating income increased $19.1 million for the three months ended September 30, 2009 compared to the prior year due to higher gas distribution margin ($20.1 million increase) and lower operating and maintenance expense ($0.9 million decrease), partially offset by higher depreciation expense ($1.6 million increase).

Gas distribution operating income increased $15.0 million for the nine months ended September 30, 2009 compared to the prior year due to higher gas distribution margin ($31.1 million increase), partially offset by higher operating and maintenance expense ($10.5 million increase) and depreciation expense ($4.9 million increase).

· Shipping operating income decreased $2.9 million and $3.4 million for the three and nine months ended September 30, 2009, respectively, compared to the prior year due to lower operating revenues ($25.2 million and $52.3 million decreases, respectively), which were partially offset by lower operating costs ($22.3 million and $48.9 million decreases, respectively). Operating revenues were lower for both periods due primarily to lower volumes shipped ($14.2 million and $38.0 million decreases, respectively) and lower average rates ($10.9 million and $14.2 million decreases, respectively). Operating costs were lower for both periods due primarily to lower transportation-related costs ($12.2 million and $32.5 million decreases, respectively, largely attributable to lower volumes shipped and fuel prices) and charter costs ($2.9 million and $6.7 million decreases, respectively).

· Nicor's other energy ventures operating income increased $3.1 million for the three months ended September 30, 2009 compared to the prior year due to higher operating income at Nicor's energy-related products and services businesses ($2.2 million increase) and at Nicor's wholesale natural gas marketing business, Nicor Enerchange ($1.3 million increase). Higher operating income at Nicor's energy-related products and services businesses was due to lower operating expenses ($2.3 million decrease). Higher operating income at Nicor Enerchange was due primarily to favorable results from the company's risk management activities associated with hedging the product risks of the utility-bill management contracts offered by Nicor's energy-related products and services businesses and favorable costing of physical sales activity, partially offset by unfavorable changes in valuations of derivative instruments used to hedge purchases and sales of natural gas inventory.

Nicor's other energy ventures operating income increased $6.4 million for the nine months ended September 30, 2009 compared to the prior year due to higher operating income at Nicor's wholesale natural gas marketing business, Nicor Enerchange ($6.0 million increase) and at Nicor's energy-related products and services businesses ($1.1 million increase). Higher operating income at Nicor Enerchange was due primarily to favorable results from the company's risk management activities associated with hedging the product risks of the utility-bill management

contracts offered by Nicor's energy-related products and services businesses, partially offset by unfavorable changes in valuations of derivative instruments used to hedge purchases and sales of natural gas inventory and unfavorable costing of physical sales activity. Higher operating income at Nicor's energy-related products and services businesses was due to higher operating revenues ($2.0 million increase), partially offset by higher operating expenses ($0.9 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 increased $1.2 million for the three months ended September 30, 2009 compared to the prior year due to lower legal and business development costs ($1.4 million decrease).

Corporate and eliminations operating results decreased $1.9 million for the nine months ended September 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 ($1.3 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). Partially offsetting the impact of these prior year items were lower legal and business development costs ($1.7 million decrease) and lower costs of a natural weather hedge associated with the utility-bill management products offered by Nicor's energy-related products and services businesses ($0.8 million decrease). The company recorded $2.8 million of costs associated with the natural weather hedge in the current year compared to $3.6 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           Nine months ended
                                         September 30                September 30
                                       2009          2008         2009          2008

       Gas distribution             $    215.0      $ 306.1     $ 1,525.3     $ 2,330.4
       Shipping                           83.3        108.5         256.5         308.8
       Other energy ventures              34.7         34.9         163.0         157.8
       Corporate and eliminations         (7.4 )       (9.2 )       (60.8 )       (61.2 )
                                    $    325.6      $ 440.3     $ 1,884.0     $ 2,735.8

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 $91.1 million for the three months ended September 30, 2009 compared to the prior year due to lower natural gas costs (approximately $120 million decrease), partially offset by the impact of the increase in base rates (approximately $25 million increase). Gas distribution revenues decreased $805.1 million for the nine months ended September 30, 2009 compared to the prior year due primarily to lower natural gas costs (approximately $700 million decrease), lower demand unrelated to weather (approximately $70 million decrease) and warmer weather (approximately $65 million decrease), partially offset by the impact of the increase in base rates (approximately $45 million increase).

Shipping segment operating revenues decreased $25.2 million and $52.3 million for the three and nine months ended September 30, 2009, respectively, compared to the prior year due primarily to lower volumes shipped ($14.2 million and $38.0 million decreases, respectively) and lower average rates ($10.9 million and $14.2 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 were essentially unchanged for the three months ended September 30, 2009 compared to the prior year at both Nicor Enerchange and at Nicor's energy-related products and services businesses.

Nicor's other energy ventures operating revenues increased $5.2 million for the nine months ended September 30, 2009 compared to the prior year due primarily to higher operating revenues at Nicor Enerchange ($3.1 million increase) and at Nicor's energy-related products and services businesses ($2.0 million increase). Higher operating revenues at Nicor Enerchange were due primarily to favorable results from the company's risk management activities associated with hedging the product risks of the utility-bill management contracts offered by Nicor's energy-related products and services businesses, partially offset by unfavorable changes in valuations of derivative instruments used to hedge purchases and sales of natural gas inventory and unfavorable costing of physical sales activity. 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           Nine months ended
                                        September 30                 September 30
                                     2009           2008         2009           2008

       Gas distribution revenues   $   215.0      $  306.1     $ 1,525.3     $  2,330.4
       Cost of gas                     (70.2 )      (180.0 )      (943.2 )     (1,762.9 )
       Revenue tax expense             (12.9 )       (14.3 )      (112.8 )       (129.3 )
       Gas distribution margin     $   131.9      $  111.8     $   469.3     $    438.2

Gas distribution margin increased $20.1 million for the three months ended September 30, 2009 compared to the prior year due to the impact of the increase in base rates (approximately $25 million increase). Gas distribution margin increased $31.1 million for the nine months ended September 30, 2009 compared to the prior year due to the impact of the increase in base rates (approximately $45 million increase), partially offset by lower demand unrelated to weather (approximately $6 million decrease), lower franchise gas cost recoveries (approximately $3 million decrease) and warmer weather (approximately $2 million decrease). As a result of the rate order which became effective on March 25, 2009, Nicor Gas will recover through a cost recovery rider current year franchise gas costs over a 12 month period beginning the following May. Prior to the March 25, 2009 rate order, such costs were recovered based upon a fixed amount determined periodically through a rate case proceeding. As a result of this change, franchise gas cost recoveries in 2009 will be lower than prior periods with minimal impact on operating income.

Gas distribution operating and maintenance expense. Gas distribution operating and maintenance expense decreased $0.9 million for the three months ended September 30, 2009 compared to the prior year due to lower company use and storage-related gas costs ($5.0 million decrease) and bad debt expense ($1.3 million decrease due to lower revenues attributable principally to lower natural gas costs), partially offset by higher pension expense, net of capitalization ($5.4 million increase). Operating and maintenance expense increased $10.5 million for the nine months ended September 30, 2009 compared to the prior year due primarily to higher payroll and benefit-related costs ($20.2 million increase, of which $16.3 million relates to higher pension expense, net of capitalization) and the absence of prior year cost 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). Partially offsetting these amounts were lower bad debt expense ($7.3 million decrease due to lower revenues attributable principally to lower natural gas costs) and lower franchise gas costs ($7.1 million decrease). As a result of the 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 $22.3 million and $48.9 million for the three and nine months ended September 30, 2009, respectively, compared to the prior year due primarily to lower transportation-related costs ($12.2 million and $32.5 million decreases, respectively, largely attributable to lower volumes shipped and fuel prices) and charter costs ($2.9 million and $6.7 million decreases, respectively). Also affecting the three months ended results were lower payroll and benefit-related costs ($2.9 million decrease).

Other energy ventures operating expenses. Other energy ventures operating expenses decreased $3.3 million for the three months ended September 30, 2009 compared to the prior year due to a decrease in operating expenses at Nicor's energy-related products and services businesses ($2.3 million decrease) and at Nicor Enerchange ($1.5 million decrease). The decrease in operating expenses at Nicor's energy-related products and services businesses was due 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 primarily to lower transportation and storage charges. Operating expenses decreased $1.2 million for the nine months ended September 30, 2009 compared to the prior year due to lower operating expense at Nicor Enerchange ($2.9 million decrease), partially offset by a an increase in operating expenses at Nicor's energy-related products and services businesses ($0.9 million increase). The decrease in operating expenses at Nicor Enerchange was due primarily to lower transportation and storage charges. The increase in operating expenses at Nicor's energy-related products and services businesses was due primarily to higher average contract volumes and higher selling, general and administrative costs attributable to business growth, partially offset by lower average cost per utility-bill management contract, attributable, in part, to product mix.

Interest expense. Interest expense decreased $0.6 million and $2.2 million for the three and nine months ended September 30, 2009, respectively, compared to the prior year due primarily to lower average interest rates, partially offset by higher average borrowing levels and bank commitment fees.

Net equity investment income. Net equity investment income decreased $1.9 million for the three months ended September 30, 2009 compared to the prior year due primarily to the absence of income from the company's 50-percent interest in EN Engineering which was sold in the first quarter of 2009 ($1.0 million decrease) and a decrease in income from the company's investment in Triton ($0.6 million decrease). Net equity investment income increased $7.1 million for the nine months ended September 30, 2009, compared to the prior year due primarily to a $10.1 million gain recognized on the sale of EN Engineering, partially offset by the absence of income from the company's investment in EN Engineering ($1.8 million decrease) and a decrease in income from the company's investment in Triton ($1.4 million decrease).

Interest income. Interest income decreased $0.7 million for the three months ended September 30, 2009 compared to the prior year due primarily to the impact of lower average interest rates. Interest income decreased $5.1 million for the nine months ended September 30, 2009 compared to the prior year due primarily to . . .