NORTHERN ILLINOIS GAS CO /IL/ /NEW/ - FORM 10-Q

Attached files

file	filename
EXCEL - IDEA: XBRL DOCUMENT - NORTHERN ILLINOIS GAS CO /IL/ /NEW/	Financial_Report.xls
EX-32.01 - NICOR GAS EXHIBIT 32.01 CERTIFICATION - NORTHERN ILLINOIS GAS CO /IL/ /NEW/	nicorgas3201certification.htm
EX-31.02 - NICOR GAS EXHIBIT 31.02 CERTIFICATION - NORTHERN ILLINOIS GAS CO /IL/ /NEW/	nicorgas3102certification.htm
EX-32.02 - NICOR GAS EXHIBIT 32.02 CERTIFICATION - NORTHERN ILLINOIS GAS CO /IL/ /NEW/	nicorgas3202certification.htm
EX-31.01 - NICOR GAS EXHIBIT 31.01 CERTIFICATION - NORTHERN ILLINOIS GAS CO /IL/ /NEW/	nicorgas3101certification.htm
EX-12.1 - NICOR GAS EXHIBIT 12.01 RATIO OF EARNINGS TO FIXED CHARGES - NORTHERN ILLINOIS GAS CO /IL/ /NEW/	nicorgasratioearnfixedcharge.htm

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 June 30, 2011

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

Commission File Number 1-7296

NORTHERN ILLINOIS GAS COMPANY

(Doing business as Nicor Gas Company)

(Exact name of registrant as specified in its charter)

Illinois	36-2863847
(State of Incorporation)	(I.R.S. Employer
	Identification No.)

1844 Ferry Road
Naperville, Illinois 60563-9600	(630) 983-8888
(Address of principal executive offices) (Zip Code)	(Registrant’s telephone number, including area code)

The registrant meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form with a reduced disclosure format.

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 [ ]		Accelerated filer [ ]

	Non-accelerated filer [X]		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]

All shares of common stock are owned by Nicor Inc.

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Glossary			ii

Part I – Financial Information

	Item 1.	Financial Statements (Unaudited)

		Condensed Consolidated Statements of Income: Three and six months ended June 30, 2011 and 2010	1

		Condensed Consolidated Statements of Cash Flows: Six months ended June 30, 2011 and 2010	2

		Condensed Consolidated Balance Sheets: June 30, 2011 and 2010, and December 31, 2010	3

		Notes to the Condensed Consolidated Financial Statements	4

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29

	Item 4.	Controls and Procedures	29

Part II – Other Information

	Item 1.	Legal Proceedings	30

	Item 1A.	Risk Factors	30

	Item 6.	Exhibits	32

		Signature	33

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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.

Chicago Hub. A venture of Nicor Gas, which provides natural gas storage and transmission-related services to marketers and other gas distribution companies.

Degree day. The extent to which the daily average temperature falls below 65 degrees Fahrenheit. Normal weather for Nicor Gas’ service territory, for purposes of this report, is considered to be 5,600 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.

Horizon Pipeline. Horizon Pipeline Company, L.L.C. (“Horizon”), a 50-percent-owned joint venture of Nicor, operates an interstate regulated natural gas pipeline of approximately 70 miles stretching from Joliet, Illinois to near the Wisconsin/Illinois border.

ICC. Illinois Commerce Commission, the agency that establishes the rules and regulations governing utility rates and services in Illinois.

IDR. Illinois Department of Revenue.

IRS. Internal Revenue Service.

LIFO. Last-in, first-out.

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

Nicor. Nicor Inc., the parent company of Nicor Gas.

Nicor Advanced Energy. Prairie Point Energy, L.L.C. (doing business as Nicor Advanced Energy), a wholly owned business of Nicor 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 of Nicor that engages in wholesale marketing of natural gas supply services primarily in the Midwest, administers the Chicago Hub for Nicor Gas, serves commercial and industrial customers in the 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), or the registrant.

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Nicor Services. Nicor Energy Services Company, a wholly owned business of Nicor 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 of Nicor 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.

SEC. The United States Securities and Exchange Commission.

iii

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Part I - FINANCIAL INFORMATION

Item 1. Financial Statements

Nicor Gas Company
Condensed Consolidated Statements of Income (Unaudited)
(millions)

	Three months ended						Six months ended
	June 30						June 30
	2011			2010			2011			2010

Operating revenues (includes revenue taxes of $31.4, $23.9, $106.3 and $97.8, respectively)	$	358.9		$	299.5		$	1,274.7		$	1,368.3

Operating expenses
Cost of gas		181.8			118.9			821.8			906.8
Operating and maintenance		65.9			78.9			149.2			142.1
Depreciation		47.1			45.9			94.2			91.9
Taxes, other than income taxes		35.7			28.2			114.9			106.1
Income tax expense		7.8			6.8			30.0			38.5
Total operating expenses		338.3			278.7			1,210.1			1,285.4

Operating income		20.6			20.8			64.6			82.9

Other income (expense), net
Other income		.3			.8			.7			1.3
Other expense		(.4	)		(.2	)		(.9	)		(.9	)
Income tax benefit (expense) on other income		.1			(.3	)		.1			(.2	)
Total other income (expense), net		-			.3			(.1	)		.2

Interest expense
Interest on debt, net of amounts capitalized		8.0			9.0			16.6			18.0
Other		.1			.1			(2.0	)		.2
Total interest expense		8.1			9.1			14.6			18.2

Net income	$	12.5		$	12.0		$	49.9		$	64.9


The accompanying notes are an integral part of these statements.

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Nicor Gas Company
Condensed Consolidated Statements of Cash Flows (Unaudited)
(millions)

	Six months ended
	June 30
	2011			2010

Operating activities
Net income	$	49.9		$	64.9
Adjustments to reconcile net income to net cash flow provided from operating activities:
Depreciation		94.2			91.9
Deferred income tax expense (benefit)		11.8			(5.5	)
Changes in assets and liabilities:
Receivables, less allowances		176.3			215.4
Gas in storage		109.0			93.2
Deferred/accrued gas costs		9.5			37.0
Derivative instruments		(22.9	)		9.6
Margin accounts - derivative instruments		19.6			(11.2	)
Other assets		4.2			23.2
Accounts payable		(18.2	)		(51.5	)
Customer credit balances and deposits		(26.9	)		(40.2	)
Temporary LIFO inventory liquidation		88.6			87.7
Other liabilities		26.1			10.0
Other items		(1.5	)		(1.8	)
Net cash flow provided from operating activities		519.7			522.7

Investing activities
Additions to property, plant & equipment		(84.1	)		(76.1	)
Other investing activities		2.1			1.6
Net cash flow used for investing activities		(82.0	)		(74.5	)

Financing activities
Proceeds from issuing long-term debt		75.0			-
Disbursements to retire long-term debt		(75.0	)		-
Net repayments of commercial paper		(359.0	)		(387.0	)
Net repayments of loan from affiliates		(31.1	)		-
Debt issuance costs		(1.5	)		(3.6	)
Dividends paid		(45.8	)		(58.0	)
Other financing activities		(.3	)		-
Net cash flow used for financing activities		(437.7	)		(448.6	)

Net decrease in cash and cash equivalents		-			(.4	)

Cash and cash equivalents, beginning of period		.1			.6

Cash and cash equivalents, end of period	$	.1		$	.2


The accompanying notes are an integral part of these statements.

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Nicor Gas Company
Condensed Consolidated Balance Sheets (Unaudited)
(millions)

	June 30			December 31			June 30
	2011			2010			2010
Assets
Gas distribution plant, at cost	$	4,795.3		$	4,733.6		$	4,646.1
Less accumulated depreciation		1,922.3			1,879.1			1,843.4
Gas distribution plant, net		2,873.0			2,854.5			2,802.7

Current assets
Cash and cash equivalents		.1			.1			.2
Receivables, less allowances of $39.3, $25.2 and $48.0, respectively		205.5			378.4			189.0
Receivables - affiliates		6.1			9.5			6.6
Gas in storage		10.2			119.2			11.5
Derivative instruments		6.0			7.4			4.0
Margin accounts - derivative instruments		33.8			49.8			52.6
Other		79.2			98.7			93.9
Total current assets		340.9			663.1			357.8

Regulatory postretirement asset		185.6			193.3			187.6
Other assets		158.9			144.0			145.4

Total assets	$	3,558.4		$	3,854.9		$	3,493.5

Capitalization and Liabilities
Capitalization
Long-term obligations
Long-term debt, net of unamortized discount	$	498.5		$	498.4		$	423.3
Mandatorily redeemable preferred stock		1.5			1.8			1.8
Total long-term obligations		500.0			500.2			425.1
Non-redeemable preferred stock		1.4			1.4			1.4
Common equity
Common stock		76.2			76.2			76.2
Paid-in capital		108.1			108.1			108.1
Retained earnings		482.6			471.6			484.7
Accumulated other comprehensive loss		(6.5	)		(7.1	)		(7.1	)
Total common equity		660.4			648.8			661.9
Total capitalization		1,161.8			1,150.4			1,088.4

Current liabilities
Long-term obligations due within one year		.3			.3			75.3
Short-term debt - affiliates		8.9			40.0			-
Short-term debt - other		66.0			425.0			107.0
Accounts payable		218.6			239.0			212.9
Customer credit balances and deposits		83.7			110.6			101.5
Temporary LIFO inventory liquidation		88.6			-			87.7
Derivative instruments		30.0			50.4			62.4
Other		108.5			112.1			108.6
Total current liabilities		604.6			977.4			755.4

Deferred credits and other liabilities
Regulatory asset retirement liability		866.9			843.9			825.7
Deferred income taxes		384.3			364.7			336.8
Health care and other postretirement benefits		231.5			229.7			201.0
Asset retirement obligation		195.0			190.6			186.2
Other		114.3			98.2			100.0
Total deferred credits and other liabilities		1,792.0			1,727.1			1,649.7

Commitments and contingencies

Total capitalization and liabilities	$	3,558.4		$	3,854.9		$	3,493.5

The accompanying notes are an integral part of these statements.

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Nicor Gas Company

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. The approvals from Nicor shareholders and AGL Resources shareholders required in connection with the merger were received on June 14, 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. The Staff of the ICC and several intervenors who are participating in the proceeding have submitted 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. 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, which then issued a letter stating that it had reviewed the notification of proposed merger filed by AGL Resources and after considering the matter, noted the transaction. 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.

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Company personnel are participating in efforts to develop integration plans for the combined entity. No 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 Gas 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. 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 June 30, 2011 is expected to be restored prior to year-end.

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.

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

	June 30		December 31		June 30
	2011		2010		2010
Regulatory assets - current
Regulatory postretirement asset	$	21.1	$	21.1	$	20.6
Deferred gas costs		-		6.5		-
Bad debt rider		-		-		18.7
Other		10.5		7.4		7.2
Regulatory assets - noncurrent
Regulatory postretirement asset		185.6		193.3		187.6
Deferred gas costs		-		1.4		7.8
Deferred environmental costs		45.5		25.0		23.1
Unamortized losses on reacquired debt		12.6		13.1		13.7
Other		8.5		9.6		12.4
	$	283.8	$	277.4	$	291.1

Regulatory liabilities - current
Regulatory asset retirement liability	$	17.2	$	17.2	$	14.5
Accrued gas costs		1.3		-		15.5
Bad debt rider		26.6		16.4		-
Other		2.4		7.7		12.8
Regulatory liabilities - noncurrent
Regulatory asset retirement liability		866.9		843.9		825.7
Regulatory income tax liability		13.8		18.2		20.2
Bad debt rider		10.7		11.7		3.1
Other		1.2		.9		.8
	$	940.1	$	916.0	$	892.6

All items listed above are classified in Other on the Condensed Consolidated Balance Sheets, with the exception of the noncurrent portions of the Regulatory postretirement asset and the Regulatory asset retirement liability, which are 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 $27.8 million, $141.8 million and $30.4 million at June 30, 2011, December 31, 2010 and June 30, 2010, respectively.

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 and six months ended June 30, 2011 were $31.0 million and $104.7 million, respectively, and $23.5 million and $96.4 million, respectively, for the same periods in 2010.

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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.

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.

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.

Credit risk and concentrations. Nicor Gas has a diversified customer base 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 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 and to limit its exposure to any one counterparty. Nicor Gas 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.	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

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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 $66 million, $425 million and $107 million of commercial paper borrowings outstanding at June 30, 2011, December 31, 2010 and June 30, 2010, respectively.

Nicor Gas participates in a cash management system with other subsidiaries of Nicor. Under this system, at June 30, 2011 and December 31, 2010, Nicor Gas had owed $8.9 million and $40.0 million, respectively, to Nicor which is payable on demand. Interest expense related to this loan was insignificant for the three and six months ended June 30, 2011.

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

5.	INCOME TAXES

The effective income tax rate for the three months ended June 30, 2011 increased to 37.8 percent from 37.1 percent for the prior-year period. The effective income tax rate for the six months ended June 30, 2011 increased to 37.5 percent from 37.4 percent for the prior-year period. The higher effective income tax rate for the three and six months ended June 30, 2011 is due primarily to the increase to the Illinois state income tax rate, partially offset by lower forecasted annual pretax income (which causes a lower effective income tax rate since tax credits are a larger share of pretax income). Effective January 1, 2011, the State of Illinois raised the corporate income tax rate from 7.3 percent to 9.5 percent.

The company's major tax jurisdictions include the United States and Illinois, with tax returns examined by the IRS and IDR, respectively. At June 30, 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 June 30, 2011. 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 June 30, 2011, December 31, 2010 and June 30, 2010 was $23.4 million, $24.3 million and $24.2 million, respectively.

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6.	FAIR VALUE MEASUREMENTS

The fair value of commodity derivative 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)		Total
June 30, 2011
Assets	$	.7	$	.8	$	7.2	$	8.7

Liabilities	$	19.7	$	11.8	$	.2	$	31.7

December 31, 2010
Assets	$	1.3	$	2.7	$	4.3	$	8.3

Liabilities	$	27.0	$	26.9	$	.3	$	54.2

June 30, 2010
Assets	$	.8	$	.3	$	3.7	$	4.8

Liabilities	$	33.8	$	39.0	$	1.4	$	74.2

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.

The following table presents a reconciliation of the Level 3 beginning and ending net derivative asset (liability) balances (in millions):

	Three months ended June 30				Six months ended June 30
	2011		2010		2011			2010

Beginning of period	$	4.2	$	.2	$	4.0		$	(.3	)
Net realized/unrealized gains (losses) included in regulatory assets and liabilities		2.2		.5		5.1			(.8	)
Settlements, net of purchases**		.6		1.6		(2.1	)		3.4
End of period	$	7.0	$	2.3	$	7.0		$	2.3

** There were no purchases for the three and six months ended June 30, 2011.

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Nicor Gas 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):

	June 30		December 31		June 30
	2011		2010		2010
Assets
Margin accounts - derivative instruments	$	33.8	$	49.8	$	52.6
Other - noncurrent		3.8		7.4		13.5

In addition, the recorded amount of short-term borrowings approximates fair value. Long-term debt outstanding, including current maturities, is recorded at the principal balance outstanding, net of unamortized discounts. The principal balance of Nicor Gas’ First Mortgage Bonds outstanding at June 30, 2011, December 31, 2010 and June 30, 2010 was $500 million. Based on quoted prices or market interest rates, the fair value of the company’s First Mortgage Bonds outstanding was approximately $566 million, $554 million and $561 million at June 30, 2011, December 31, 2010 and June 30, 2010, respectively.

7.	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 6 – Fair Value Measurements.

Condensed Consolidated Balance Sheets. Derivative assets and liabilities are classified as shown in the table below (in millions):

	June 30		December 31		June 30
	2011		2010		2010
Derivatives designated as hedging instruments
Liabilities
Derivative instruments	$	.5	$	.9	$	1.1
Other - noncurrent		-		-		.2
	$	.5	$	.9	$	1.3

Derivatives not designated as hedging instruments
Assets
Derivative instruments	$	6.0	$	7.4	$	4.0
Other - noncurrent		2.7		.9		.8
	$	8.7	$	8.3	$	4.8

Liabilities
Derivative instruments	$	29.5	$	49.5	$	61.3
Other - noncurrent		1.7		3.8		11.6
	$	31.2	$	53.3	$	72.9

Volumes. As of June 30, 2011, December 31, 2010 and June 30, 2010, Nicor Gas held outstanding derivative contracts of approximately 43 Bcf, 49 Bcf and 53 Bcf, respectively, to hedge natural gas purchases for customer use, with hedges spanning as long as three years. Commodity price-risk exposure

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arising from Nicor Gas’ natural gas purchases for company use is mitigated with derivative instruments that total to a net long position of 1.3 Bcf, 0.8 Bcf and 1.5 Bcf as of June 30, 2011, December 31, 2010 and June 30, 2010, respectively. The above volumes exclude contracts, such as variable-priced contracts, which are accounted for as derivatives but whose fair values are not directly impacted by changes in commodity prices.

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 are used by Nicor Gas to hedge purchases of natural gas for company use. Amounts related to such hedges were immaterial for the three and six months ended June 30, 2011 and 2010.

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 Nicor Gas, to hedge purchases of natural gas for company use, are recorded within operating and maintenance expense. Gains and losses recognized in income were immaterial for the three and six months ended June 30, 2011 and 2010.

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 and six months ended June 30, 2011 were $(7.2) million and $(3.6) million, respectively, and $16.2 million and $(74.1) million, respectively, for the same periods in 2010.

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 June 30, 2011, December 31, 2010 and June 30, 2010 for agreements with such features, derivative contracts with liability fair values totaled approximately $5 million, $12 million and $22 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 $4 million, $11 million and $21 million at June 30, 2011, December 31, 2010 and June 30, 2010, respectively.

8.	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

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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.

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 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 benefits
	2011			2010			2011		2010
Three months ended June 30
Service cost	$	2.5		$	2.5		$	.6	$	.5
Interest cost		4.1			4.0			3.0		2.9
Expected return on plan assets		(7.8	)		(7.3	)		-		-
Recognized net actuarial loss		2.4			2.9			1.5		1.1
Amortization of prior service cost		.1			.1			.1		.1
Net benefit cost	$	1.3		$	2.2		$	5.2	$	4.6

Six months ended June 30
Service cost	$	5.0		$	4.9		$	1.2	$	1.1
Interest cost		8.2			8.0			6.1		5.9
Expected return on plan assets		(15.6	)		(14.5	)		-		-
Recognized net actuarial loss		4.8			5.9			3.0		2.1
Amortization of prior service cost		.2			.2			.1		.1
Net benefit cost	$	2.6		$	4.5		$	10.4	$	9.2

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.

9.	COMPREHENSIVE INCOME

Total comprehensive income is as follows (in millions):

	Three months ended				Six months ended
	June 30				June 30
	2011		2010		2011		2010

Net income	$	12.5	$	12.0	$	49.9	$	64.9
Other comprehensive income (loss), after tax		.1		.4		.6		(.1	)
Total comprehensive income	$	12.6	$	12.4	$	50.5	$	64.8

Other comprehensive income (loss) consists of net gains and losses from derivative financial instruments accounted for as cash flow hedges and gains and losses from postretirement benefits.

10.	RELATED PARTY TRANSACTIONS

In the ordinary course of business, under the terms of an agreement approved by the ICC, Nicor Gas enters into transactions with Nicor and its other wholly owned subsidiaries for the use of facilities and services. The charges for these transactions are cost-based, except where the charging party has a

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prevailing price for which the facility or service is provided to the general public. In addition, Nicor charges Nicor Gas and its other wholly owned subsidiaries for the cost of corporate overheads. Corporate overheads are allocated to Nicor’s subsidiaries based upon a formula approved by the ICC. For the three and six months ended June 30, 2011, Nicor Gas had net charges to affiliates of $2.4 million and $9.6 million, respectively, and $4.2 million and $8.2 million, respectively, for the same periods in 2010.

Key executives and managerial employees of Nicor Gas participate in Nicor’s stock-based compensation plans. Nicor Gas recognized compensation expense of $1.0 million and $2.2 million for the three and six months ended June 30, 2011, respectively, in operating and maintenance expense related to these stock-based compensation plans and $1.2 million and $2.0 million, respectively, for the same periods in 2010.

Nicor Gas participates in a cash management system with other subsidiaries of Nicor. Under this system, Nicor Gas may make deposits or advances to or receive deposits or advances from Nicor. By virtue of making deposits or advances to Nicor, Nicor Gas is exposed to credit risk to the extent it is unable to secure the return of such deposits for any reason. Such deposits are due on demand. There are ICC regulations addressing the amount and circumstances under which Nicor Gas can deposit with the cash management pool or advance to and from Nicor. In addition, Nicor Gas may not extend cash advances to Nicor if Nicor Gas has any outstanding short-term borrowings. Nicor Gas’ practice also provides that the balance of cash deposits or advances from Nicor Gas to Nicor at any time shall not exceed the unused balance of funds actually available to Nicor under its existing bank credit agreements or its commercial paper facilities with unaffiliated third parties. Similarly, the balance of cash advances from Nicor to Nicor Gas may not exceed the unused balance of funds actually available to Nicor Gas under its existing credit agreements or commercial paper facilities with unaffiliated third parties. Nicor Gas’ positive cash deposits, if any, may be applied by Nicor to offset negative balances of other Nicor subsidiaries and vice versa.

Nicor Gas had no deposits in the Nicor cash management pool at June 30, 2011, December 31, 2010 and June 30, 2010. Nicor Gas records interest income from deposits in the Nicor cash management pool at a rate of interest equal to the higher of Nicor’s commercial paper rate or a market rate of return on a short-term investment. For the three and six months ended June 30, 2011 and 2010, Nicor Gas recorded no interest income.

At June 30, 2011 and December 31, 2010, Nicor Gas had owed $8.9 million and $40.0 million, respectively, to Nicor. Nicor Gas records interest expense from such loans at the lower of Nicor Gas’ commercial paper rate or Nicor’s actual interest cost for the funds obtained or used to provide the cash advance to Nicor Gas. Interest expense on advances from Nicor for the three and six months ended June 30, 2011 was insignificant.

Under their utility-bill management products, Nicor Solutions pays Nicor Gas for the utility bills issued to the utility-bill management customers. For the three and six months ended June 30, 2011, Nicor Gas recorded revenues of $6.9 million and $20.9 million, respectively, associated with the payments Nicor Solutions makes to Nicor Gas on behalf of its customers. For the three and six months ended June 30, 2010, such revenues were $5.7 million and $22.4 million, respectively.

As a natural gas supplier, Nicor Advanced Energy pays Nicor Gas for delivery charges, administrative charges and applicable taxes. For the three and six months ended June 30, 2011, Nicor Advanced Energy paid Nicor Gas $1.3 million and $3.3 million, respectively, and $1.4 million and $3.5 million, respectively, for the same periods in 2010 for such items. Additionally, Nicor Advanced Energy may pay or receive inventory imbalance adjustments. There were no such charges for the three and six months ended June 30, 2011 and 2010.

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Nicor Gas enters into routine transactions with Nicor Enerchange that are governed by terms of an ICC order. For both the three and six months ended June 30, 2011, net commodity-based charges from Nicor Enerchange were $0.2 million. For the three and six months ended June 30, 2010, net commodity-based charges to (from) Nicor Enerchange were $0.2 million and $(3.7) million, respectively. Additionally, Nicor Enerchange administers the Chicago Hub for Nicor Gas in accordance with an agreement approved by the ICC. For the three and six months ended June 30, 2011, charges from Nicor Enerchange for administration of the Chicago Hub were $0.2 million and $0.3 million, respectively, and $0.1 million and $0.3 million, respectively, for the same periods in 2010. Nicor Gas also charged Nicor Enerchange for certain storage services at the Chicago Hub. Such charges for the three and six months ended June 30, 2011 and 2010 were insignificant.

In both 2011 and 2010, Horizon Pipeline charged Nicor Gas $2.6 million and $5.2 million, respectively, for the three and six months ended June 30 for natural gas transportation under rates that have been accepted by the FERC.

In addition, certain related parties may acquire regulated utility services at rates approved by the ICC.

11.	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 is being refunded over a 12-month period beginning June 2011.

12.	GUARANTEES AND INDEMNITIES

In certain instances, Nicor Gas 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 13 – Contingencies – Manufactured Gas Plant Sites. Nicor Gas believes that the likelihood of payment under its other environmental indemnifications is remote. No liability has been recorded for such indemnifications.

Nicor Gas 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. While the company does not expect to incur significant costs under these indemnifications, it is not possible to estimate the maximum future potential payments.

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13.	CONTINGENCIES

The following contingencies of Nicor Gas 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 Gas’ 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 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

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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 Gas 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 June 30, 2011.

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 June 30, 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.

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-

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site investigations will determine the extent additional remediation is necessary and provide a basis for estimating additional future costs.

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.

As of June 30, 2011, the company had recorded a liability in connection with these matters of $52.9 million. In accordance with ICC authorization, the company has been recovering, and expects to continue to recover, these costs from its customers. Since costs and recoveries relating to the cleanup of manufactured gas plant sites are passed directly through to customers, 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 appliance warranty and service plans from Nicor Services and/or a class of customers of Nicor Gas who purchased the Gas Line Comfort Guard product 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.

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.

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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 Gas 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.

RESULTS OF OPERATIONS

Operating income and net income are presented below (in millions):

	Three months ended				Six months ended
	June 30				June 30
	2011		2010		2011		2010

Operating income	$	20.6	$	20.8	$	64.6	$	82.9

Net income	$	12.5	$	12.0	$	49.9	$	64.9

Net income increased $0.5 million for the three months ended June 30, 2011 compared to the prior year due to lower operating and maintenance expense ($13.0 million pretax decrease) and lower interest expense ($1.0 million pretax decrease), partially offset by lower margin ($11.0 million pretax decrease) and higher depreciation expense ($1.2 million pretax increase). Net income decreased $15.0 million for the six months ended June 30, 2011 compared to the prior year due to lower margin ($16.9 million pretax decrease), higher operating and maintenance expense ($7.1 million pretax increase) and higher depreciation expense ($2.3 million pretax increase), partially offset by lower interest expense ($3.6 million pretax decrease).

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.

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Company personnel are participating in efforts to develop integration plans for the combined entity. No adjustments have been made to the financial statements as a result of the proposed merger.

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.

Operating revenues. Operating revenues are impacted by changes in natural gas costs, which are passed directly through to customers without markup, subject to ICC review. Operating revenues increased $59.4 million for the three months ended June 30, 2011 compared to the prior year due primarily to the impact of colder weather (approximately $50 million increase). Operating revenues decreased $93.6 million for the six months ended June 30, 2011 compared to the prior year due primarily to lower natural gas costs (approximately $155 million decrease), partially offset by the impact of colder weather (approximately $70 million increase).

Margin. Nicor Gas utilizes a measure it refers to as “margin” to evaluate the operating income impact of revenues. 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 revenues, with equal and offsetting fluctuations in cost

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of gas and revenue tax expense, with no direct impact on 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 margin attributable to these items are offset by changes within operating and maintenance expense, with generally no impact on operating income.

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

	Three months ended						Six months ended
	June 30						June 30
	2011			2010			2011			2010

Revenues	$	358.9		$	299.5		$	1,274.7		$	1,368.3
Cost of gas		(181.8	)		(118.9	)		(821.8	)		(906.8	)
Revenue tax expense		(31.0	)		(23.5	)		(104.7	)		(96.4	)
Margin	$	146.1		$	157.1		$	348.2		$	365.1

Margin decreased $11.0 million for the three months ended June 30, 2011 compared to the prior year. Margin includes the revenue from the riders noted above which totaled $0.5 million and $16.5 million for the three months ended June 30, 2011 and 2010, respectively. Margin excluding those riders increased $5.0 million for the three months ended June 30, 2011 compared to the prior year due to the impact of colder weather (approximately $5 million increase). Margin decreased $16.9 million for the six months ended June 30, 2011 compared to the prior year. Revenue from the riders noted above totaled $1.9 million and $25.9 million for the six months ended June 30, 2011 and 2010, respectively. Margin excluding those riders increased $7.1 million for the six months ended June 30, 2011 compared to the prior year due to the impact of colder weather (approximately $8 million increase).

Operating and maintenance expense. Operating and maintenance expense decreased $13.0 million for the three months ended June 30, 2011 compared to the prior year. Operating and maintenance expense related to riders noted above decreased $16.0 million for the three months ended June 30, 2011 compared to the prior year. Excluding the impact of such riders, operating and maintenance expense increased $3.0 million for the three months ended June 30, 2011 compared to the prior year due primarily to higher bad debt expense ($2.4 million increase). Total bad debt expense, including the impact of the bad debt rider, for the three months ended June 30, 2011 was $7.8 million compared to $17.3 million in the prior year. Bad debt expense in 2011 and 2010 includes $10.0 million and $7.6 million, respectively, based on gas distribution revenues recognized in the quarter, of the approximately $63 million annual expense assumed to be collected through base rates; and $(2.2) million and $9.7 million, respectively, of expense (income) which is equal to the revenue recognized under the bad debt rider.

Operating and maintenance expense increased $7.1 million for the six months ended June 30, 2011 compared to the prior year. Operating and maintenance expense related to riders noted above decreased $24.0 million for the six months ended June 30, 2011 compared to the prior year. Excluding the impact of such riders, operating and maintenance expense increased $31.1 million for the six months ended June 30, 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 company-use and storage-related gas costs ($0.9 million decrease). Total bad debt expense including the impact of the bad debt rider, for the six months ended June 30, 2011 was $34.7 million compared to $18.7 million in the prior year. Bad debt expense in 2011 and 2010 includes $37.1 million and $37.3 million, respectively, based on gas distribution revenues recognized in the period, of the approximately $63 million annual expense assumed to be collected through base rates; and $(2.4) million and $13.1 million, respectively, of expense (income) which is equal to the revenue recognized under the bad debt rider. Bad debt expense in 2010 also includes the recognition of the $31.7 million benefit associated with the net under recovery of bad debt expense from 2008 and 2009.

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Income tax expense. The effective income tax rate for the three months ended June 30, 2011 increased to 37.8 percent from 37.1 percent for the prior-year period. The effective income tax rate for the six months ended June 30, 2011 increased to 37.5 percent from 37.4 percent for the prior year period. The higher effective income tax rate for the three and six months ended June 30, 2011 is due primarily to the increase to the Illinois state income tax rate, partially offset by lower forecasted annual pretax income (which causes a lower effective income tax rate since tax credits are a larger share of pretax income). Effective January 1, 2011, the State of Illinois raised the corporate income tax rate from 7.3 percent to 9.5 percent.

Interest expense. Interest expense decreased $1.0 million for the three months ended June 30, 2011 compared to the prior year due to lower average interest rates. Interest expense decreased $3.6 million for the six months ended June 30, 2011 compared to the prior year due primarily to an interest refund related to income tax matters and lower average interest rates. Lower average interest rates were due to the February 2011 refinancing of $75 million First Mortgage Bonds.

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Nicor Gas Company
Operating Statistics

	Three months ended						Six months ended
	June 30						June 30
	2011			2010			2011			2010
Operating revenues (millions)
Sales
Residential	$	219.8		$	179.5		$	823.1		$	895.4
Commercial		54.3			40.7			208.2			226.0
Industrial		6.3			4.2			25.2			26.1
		280.4			224.4			1,056.5			1,147.5
Transportation
Residential		9.7			10.0			23.3			24.3
Commercial		16.1			15.2			41.0			39.8
Industrial		9.6			9.1			20.5			19.6
Other		1.3			-			2.0			1.4
		36.7			34.3			86.8			85.1
Other revenues
Revenue taxes		31.4			23.9			106.3			97.8
Environmental cost recovery		2.0			1.2			7.6			8.1
Chicago Hub		.2			.6			1.3			2.1
Other		8.2			15.1			16.2			27.7
		41.8			40.8			131.4			135.7
	$	358.9		$	299.5		$	1,274.7		$	1,368.3
Deliveries (Bcf)
Sales
Residential		27.7			20.2			123.8			110.9
Commercial		7.4			5.4			32.3			29.4
Industrial		1.0			.6			4.3			3.6
		36.1			26.2			160.4			143.9
Transportation
Residential		3.1			2.4			14.3			13.6
Commercial		13.6			11.1			51.4			47.5
Industrial		23.8			22.0			54.8			51.8
		40.5			35.5			120.5			112.9
		76.6			61.7			280.9			256.8
Customers at end of period (thousands)
Sales
Residential		1,794			1,777
Commercial		134			131
Industrial		8			8
		1,936			1,916
Transportation
Residential		200			208
Commercial		46			48
Industrial		4			5
		250			261
		2,186			2,177

Other statistics
Degree days		755			463			3,954			3,489
Colder (warmer) than normal (1)		22	%		(25	)%		12	%		(1	)%
Average gas cost per Mcf sold	$	4.87		$	4.39		$	5.01		$	6.17


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

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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 company’s 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 Gas 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 decreased $3.0 million for the six months ended June 30, 2011 compared to the prior year. The significant factors contributing to the decrease in cash flow are primarily a result of changes in natural gas prices and include:

·	a decrease of $59 million from variations associated with the timing of collections of gas costs under Nicor Gas’ PGA rider;

·	a decrease of $39 million from changes in receivables due to higher receivables at the end of 2009 versus 2010 and higher receivables in June 2011 versus June 2010;

·	an increase of $33 million from higher cash used to pay accounts payable balances in the prior year;

·	an increase of $31 million from changes in margin accounts as a result of a decrease in unrealized losses on derivative instruments.

In addition, the company had lower volumes of gas in storage at the end of June 2011 compared to 2010.

Investing activities. Net cash flow used for investing activities increased $7.5 million for the six months ended June 30, 2011 compared to the prior year.

Financing activities. The current credit ratings for Nicor Gas have not changed since the filing of the 2010 Annual Report on Form 10-K. In the second quarter of 2011, Standard & Poor’s affirmed their credit ratings for Nicor Gas. Nicor Gas’ access to financing at competitive rates is, in part, dependent on its credit ratings.

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.

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Nicor Gas believes it is in compliance with all debt covenants. Nicor Gas’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 $66 million, $425 million and $107 million of commercial paper borrowings outstanding at June 30, 2011, December 31, 2010 and June 30, 2010, respectively.

Borrowing levels are presented below (in millions):

	Three months ended				Six months ended
	June 30				June 30
	2011		2010		2011		2010

Commercial Paper
Maximum borrowing	$	142.2	$	218.0	$	425.0	$	494.0
Minimum borrowing		-		-		-		-
Average borrowing		32.0		81.4		163.6		222.8

Loan from Nicor
Maximum borrowing	$	26.4	$	10.0	$	54.3	$	10.0
Minimum borrowing		-		-		-		-
Average borrowing		11.6		.1		27.0		.1

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.

OTHER MATTERS

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. In May 2011, the ICC approved an energy efficiency plan for Nicor Gas. Under its approved plan, the company estimates that it would bill approximately $155 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 intervened in the proceeding (the “operating agreement proceeding”) and sought modifications on a prospective basis to the operating

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agreement. Among the proposals were 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. Nicor Gas opposes certain of the proposed modifications. This proceeding is not expected to have a material impact on Nicor Gas’ results of operations, cash flows and financial condition. 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 transactions to 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 July 2011, the governor of Illinois signed legislation regarding a proposed synthetic natural gas plant. The new law requires Nicor Gas and other major Illinois natural gas utilities to either: (a) submit to rate cases in 2012, 2014 and 2016, or (b) purchase synthetic natural gas from the plant under a 30-year firm contract approved by the Illinois Power Authority and the ICC at a cost that may exceed the market price of natural gas. The new law provides that prices paid by the utilities for synthetic natural gas purchased from the plant under approved contracts are to be considered prudent and are not subject to review or disallowance by the ICC. There is similar legislation regarding a second proposed synthetic natural gas plant that is pending the governor’s signature.

CONTINGENCIES

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

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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.

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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.

Mercury. Information about mercury contingencies is presented in Item 1 – Notes to the Condensed Consolidated Financial Statements – Note 13 – 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 13 – 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 13 – 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 13 – Contingencies – Nicor Services Warranty Product Actions.

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 13 – Contingencies – Other.

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.

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CAUTION CONCERNING FORWARD-LOOKING STATEMENTS

This document includes certain forward-looking statements about the expectations of Nicor Gas. Although Nicor Gas 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, the company’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; and

·	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.

Other factors that could cause materially different results include, but are not limited to, weather conditions; natural disasters; natural gas 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; 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 Gas 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 Gas 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 commodity prices and interest rates. Nicor Gas’ 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 13 – 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 1A. Risk Factors

The following factors are updated risk factors related to the proposed merger with AGL Resources since the filing of the 2010 Annual Report on Form 10-K to reflect certain subsequent regulatory approvals, shareholder approval by both companies and the execution of a Memorandum of Understanding relating to the shareholder litigation. The risks described below should be carefully considered in addition to the other risks described in the 2010 Annual Report on Form 10-K, other cautionary statements and risks described elsewhere, and the other information contained in this report and in Nicor Gas' other filings with the SEC, including its subsequent reports on Forms 10-Q and 8-K. Additionally, see the joint proxy/prospectus contained in the registration statement on Form S-4 filed by AGL Resources on April 29, 2011.

Risks Related to the Proposed Merger with AGL Resources

The merger may not be completed, which could adversely affect Nicor’s business operations and stock price.

AGL Resources and Nicor have not yet obtained the approval of the ICC required to complete the merger. The ICC could still seek to block or challenge the merger or could impose restrictions they deem necessary or desirable in the public interest as a condition to approving the merger. If this approval is not received, or it is not received on terms that satisfy the conditions set forth in the Merger Agreement, then neither AGL Resources nor Nicor will be obligated to complete the merger.

In addition, the Merger Agreement contains other customary closing conditions, which may not be satisfied or waived. If AGL Resources and Nicor are unable to complete the merger, Nicor would be subject to a number of risks, including, but not limited to, the following:

·	the company would not realize the anticipated benefits of the merger, including, among other things, increased operating efficiencies;

·	the attention of Nicor Gas’ management may have been diverted to the merger rather than to its own operations and the pursuit of other opportunities that could have been beneficial to the company;

·	the potential loss of key personnel during the pendency of the merger as employees may experience uncertainty about their future roles with the combined company; and

·	Nicor Gas will have been subject to certain restrictions on the conduct of its business, which may prevent it from making certain acquisitions or dispositions or pursuing certain business opportunities while the merger is pending.

Nicor is required to pay AGL Resources a termination fee and the reimbursement of merger-related out-of-pocket expenses if Nicor terminates the Merger Agreement under certain circumstances specified in the Merger Agreement.

The occurrence of any of these events individually or in combination could have a material adverse effect on the company’s results of operations.

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The merger is subject to receipt of consent or approval from governmental entities that could delay or prevent the completion of the merger or impose conditions that could have a material adverse effect on the combined company or that could cause abandonment of the merger.

To complete the merger, AGL Resources and Nicor need to obtain approval from the ICC.

While the company believes that AGL Resources and Nicor will receive the required statutory approval, there can be no assurance as to the receipt or timing of the receipt of the approval. If approval is received, the ICC may impose terms (i) that do not satisfy the conditions set forth in the Merger Agreement, which could permit AGL Resources or Nicor to terminate the Merger Agreement or (ii) that could reasonably be expected to have a detrimental impact on the combined company following completion of the merger. A substantial delay in obtaining the required approval or the imposition of unfavorable terms, conditions or restrictions contained in such approval could prevent the completion of the merger or have an adverse effect on the anticipated benefits of the merger, thereby impacting the business, financial condition or results of operations of the combined company.

The Department of Justice and the Federal Trade Commission have granted AGL Resources and Nicor early termination of the waiting period under the Hart-Scott-Rodino Act, the SEC has declared effective AGL Resources' registration statement on Form S-4, approval has been received from the California Public Utilities Commission to transfer ownership of Central Valley Gas Storage from Nicor to AGL Resources, and AGL Resources and Nicor held special shareholder meetings where the shareholders of both companies approved the merger. Additionally, the parties involved in the shareholder litigation have entered into an agreement to resolve all of the pending lawsuits, subject to court approval.

Even though the statutory antitrust law waiting period has expired, governmental authorities could seek to block or challenge the merger as they deem necessary or desirable in the public interest.

The merger may 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.

AGL Resources provided a voluntary notice of the merger to the New Jersey Board of Public Utilities (“NJBPU”) and the Maryland Public Service Commission (“Maryland Commission”), 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 or Maryland Commission is required to complete the merger. In May 2011, the Maryland Commission issued a letter stating that it had reviewed the notification of proposed merger filed by AGL Resources and after considering the matter, noted the transaction. It is possible that the NJBPU will open proceedings to determine whether they have jurisdiction over the merger. In the event that they are determined to have jurisdiction over the merger transaction, there can be no assurance that the reviewing authorities will 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.

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Item 6. Exhibits

Exhibit
Number		Description of Document

3.01	*	Restated Articles of Incorporation of the company as filed with the Illinois Secretary of State on July 21, 2006. (File No. 1-7296, Form 10-Q for June 30, 2006, Nicor Gas Company, Exhibit 3.01.)

3.02	*	Nicor Gas Company Amended and Restated By-laws effective as of December 1, 2007. (File No. 1-7296, Form 8-K for November 29, 2007, Nicor Gas Company, Exhibit 3.1.)

12.01		Computation of Consolidated Ratio of Earnings to Fixed Charges.

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.

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 Gas Company

August 3, 2011		/s/ KAREN K. PEPPING
(Date)		Karen K. Pepping
		Vice President and Controller
		(Principal Accounting Officer and
		Duly Authorized Officer)

Attached files

NORTHERN ILLINOIS GAS CO /IL/ /NEW/ Reports

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