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

Attached files

file	filename
EX-12.01 - NICOR GAS EXHIBIT 12.01 RATIO OF EARNINGS TO FIXED CHARGES - NORTHERN ILLINOIS GAS CO /IL/ /NEW/	nicorgasratioearntofixedchg.htm
EX-31.01 - NICOR GAS EXHIBIT 31.01 CERTIFICATION - NORTHERN ILLINOIS GAS CO /IL/ /NEW/	nicorgas3101certification.htm
EX-32.02 - NICOR GAS EXHIBIT 32.02 CERTIFICATION - NORTHERN ILLINOIS GAS CO /IL/ /NEW/	nicorgas3202certification.htm
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

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 September 30, 2009

[ ]	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 [ ] 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 Operations: Three and nine months ended September 30, 2009 and 2008	1

		Condensed Consolidated Statements of Cash Flows: Nine months ended September 30, 2009 and 2008	2

		Condensed Consolidated Balance Sheets: September 30, 2009 and 2008, and December 31, 2008	3

		Notes to the Condensed Consolidated Financial Statements	4

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28

	Item 4.	Controls and Procedures	28

Part II – Other Information

	Item 1.	Legal Proceedings	29

	Item 6.	Exhibits	29

		Signature	30

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Glossary

ALJs. Administrative Law Judges.

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 for 2009 and 5,830 degree days per year for 2008.

FERC. Federal Energy Regulatory Commission, the agency that regulates the interstate transportation of natural gas, oil and electricity.

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

IRS. Internal Revenue Service.

LIFO. Last-in, first-out.

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

MMBtus. Million British thermal units.

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

Nicor Gas. Northern Illinois Gas Company (doing business as Nicor Gas Company), or the registrant.

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.

PCBs. Polychlorinated Biphenyls.

PGA. Purchased Gas Adjustment, a rate rider that passes natural gas costs directly through to customers without markup, subject to ICC review.

SEC. The United States Securities and Exchange Commission.

USEPA. United States Environmental Protection Agency.

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Part I - FINANCIAL INFORMATION

Item 1.

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

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

Operating revenues (includes revenue taxes of $13.1, $14.6, $114.5 and $131.6, respectively)	$	215.0		$	306.1		$	1,525.3		$	2,330.4

Operating expenses
Cost of gas		70.2			180.0			943.2			1,762.9
Operating and maintenance		63.1			63.5			222.0			211.1
Depreciation		44.4			42.8			133.4			128.5
Taxes, other than income taxes		17.6			18.9			127.3			143.3
Income tax expense (benefit), net		4.0			(2.3	)		26.0			17.5
		199.3			302.9			1,451.9			2,263.3

Operating income		15.7			3.2			73.4			67.1

Other income (expense), net
Property sale gains		-			.2			-			.2
Interest income		.3			.9			1.1			4.7
Other income		.2			.1			.8			.4
Other expense		(.2	)		(.6	)		(1.1	)		(1.5	)
Income tax expense on other income		(.2	)		(.2	)		(.4	)		(1.5	)
		.1			.4			.4			2.3

Interest expense
Interest on debt, net of amounts capitalized		8.8			9.1			25.3			27.1
Other		.1			.5			.6			2.8
		8.9			9.6			25.9			29.9

Net income (loss)	$	6.9		$	(6.0	)	$	47.9		$	39.5


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)

	Nine months ended
	September 30
	2009			2008

Operating activities
Net income	$	47.9		$	39.5
Adjustments to reconcile net income to net cash flow provided from operating activities:
Depreciation		133.4			128.5
Deferred income tax expense (benefit)		25.0			(2.4	)
Gain on sale of property, plant and equipment		-			(.2	)
Changes in assets and liabilities:
Receivables, less allowances		413.0			289.6
Gas in storage		6.0			(108.4	)
Deferred/accrued gas costs		90.4			(84.0	)
Derivative instruments		(86.8	)		47.8
Margin accounts - derivative instruments		83.5			(52.9	)
Prepaid pension costs		(.1	)		(11.6	)
Other assets		7.5			(42.6	)
Accounts payable and customer credit balances and deposits		(145.6	)		(30.2	)
Other liabilities		(14.7	)		(25.4	)
Other items		(6.5	)		(8.2	)
Net cash flow provided from operating activities		553.0			139.5

Investing activities
Additions to property, plant & equipment		(147.2	)		(159.5	)
Other investing activities		4.7			5.2
Net cash flow used for investing activities		(142.5	)		(154.3	)

Financing activities
Proceeds from issuing long-term debt		50.0			75.0
Disbursements to retire long-term obligations		(50.5	)		(75.5	)
Net (repayments) issuances of commercial paper		(352.9	)		57.0
Dividends paid		(54.6	)		(39.8	)
Other financing activities		(2.5	)		(1.1	)
Net cash flow (used for) provided from financing activities		(410.5	)		15.6

Net increase in cash and cash equivalents		-			.8

Cash and cash equivalents, beginning of period		2.3			.6

Cash and cash equivalents, end of period	$	2.3		$	1.4


The accompanying notes are an integral part of these statements.

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

	September 30			December 31			September 30
	2009			2008			2008
Assets
Gas distribution plant, at cost	$	4,575.1		$	4,460.6		$	4,411.2
Less accumulated depreciation		1,792.7			1,737.1			1,719.4
Gas distribution plant, net		2,782.4			2,723.5			2,691.8

Current assets
Cash and cash equivalents		2.3			2.3			1.4
Receivables, less allowances of $39.8, $42.5 and $43.7, respectively		169.0			577.8			247.2
Receivables - affiliates		7.2			11.4			7.8
Gas in storage		167.7			173.7			221.3
Derivative instruments		11.0			4.1			7.7
Margin accounts - derivative instruments		50.2			115.4			79.0
Other		132.9			138.0			118.8
Total current assets		540.3			1,022.7			683.2

Pension benefits		36.5			36.4			227.1
Regulatory postretirement asset		218.0			232.3			60.7
Other assets		70.9			137.4			84.7

Total assets	$	3,648.1		$	4,152.3		$	3,747.5

Capitalization and Liabilities
Capitalization
Long-term obligations
Long-term debt, net of unamortized discount	$	498.2		$	448.0		$	448.0
Mandatorily redeemable preferred stock		2.1			2.6			2.6
Total long-term obligations		500.3			450.6			450.6

Preferred stock
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		474.7			480.4			476.5
Accumulated other comprehensive loss, net		(8.4	)		(10.7	)		(2.5	)
Total common equity		650.6			654.0			658.3
Total capitalization		1,152.3			1,106.0			1,110.3

Current liabilities
Long-term obligations due within one year		.5			50.5			50.5
Short-term debt		365.0			717.9			426.0
Accounts payable		185.9			311.9			315.0
Customer credit balances and deposits		167.7			187.3			211.0
Derivative instruments		59.3			120.1			57.1
Other		107.9			88.2			54.2
Total current liabilities		886.3			1,475.9			1,113.8

Deferred credits and other liabilities
Regulatory asset retirement cost liability		791.6			751.7			749.6
Deferred income taxes		319.8			305.3			300.7
Health care and other postretirement benefits		198.0			196.6			187.0
Asset retirement obligation		189.9			184.7			183.1
Other		110.2			132.1			103.0
Total deferred credits and other liabilities		1,609.5			1,570.4			1,523.4

Commitments and contingencies

Total capitalization and liabilities	$	3,648.1		$	4,152.3		$	3,747.5


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.	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 2008 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 October 30, 2009, the date the financial statements were issued.

2.	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.

At September 30, 2009, Nicor Gas had an inventory decrement of approximately 1 Bcf which is not expected to be restored prior to year-end. The liquidated inventory was charged to cost of gas at a LIFO cost of $8.22 per Mcf. Applying LIFO cost in valuing the decrement, as opposed to the estimated annual replacement cost of $3.93 per Mcf, had the effect of increasing the cost of gas distributed by $3.1 million for the three and nine months ended September 30, 2009. Since the cost of gas, including inventory costs, is charged to customers without markup, subject to ICC review, this difference had no impact on net income. There was no permanent inventory decrement as of September 30, 2008.

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):

	September 30		December 31		September 30
	2009		2008		2008
Regulatory assets – current
Regulatory postretirement asset	$	23.3	$	23.3	$	5.2
Deferred gas costs		-		31.5		33.9
Other		4.0		-		-
Regulatory assets – noncurrent
Regulatory postretirement asset		218.0		232.3		60.7
Deferred gas costs		3.2		22.5		4.3
Deferred environmental costs		17.1		19.5		11.0
Unamortized losses on reacquired debt		14.5		15.4		15.6
Other		10.5		6.2		5.1
	$	290.6	$	350.7	$	135.8

Regulatory liabilities – current
Regulatory asset retirement cost liability	$	13.8	$	15.0	$	8.0
Accrued gas costs		39.6		-		-
Other		1.5		-		-
Regulatory liabilities – noncurrent
Regulatory asset retirement cost liability		791.6		751.7		749.6
Regulatory income tax liability		44.2		46.3		47.7
Other		.8		.8		.8
	$	891.5	$	813.8	$	806.1

All items listed above are classified in other with the exception of the noncurrent portions of the Regulatory postretirement asset and Regulatory asset retirement cost liability which are stated separately on the Condensed Consolidated Balance Sheets.

The ICC does not presently allow Nicor Gas the opportunity to earn a return on its regulatory postretirement asset. The regulatory postretirement asset is expected to be recovered from ratepayers over a period of approximately 10 to 13 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 and certain environmental costs charged to its customers.

Revenue taxes. 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 nine months ended September 30, 2009 were $12.9 million and $112.8 million, respectively, and $14.3 million and $129.3 million, respectively, for the same periods ending September 30, 2008.

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 Operations, 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

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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 income statement, 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 earnings.

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. 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.

At times, Nicor Gas enters into futures contracts, options, swap agreements and fixed-price purchase 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, unless they qualify for the normal purchases and normal sales exception, in which case they are carried at cost. To the extent hedge accounting is not elected, changes in such fair values are immediately recorded in current period earnings as operating and maintenance expense.

3.	NEW ACCOUNTING PRONOUNCEMENT

Fair value measurements. Effective January 1, 2008, the company adopted the new requirements for fair value measurements and disclosures. These requirements define fair value, establish a consistent framework for measuring fair value, and expand disclosure requirements about fair value measurements. These new requirements do not establish any new fair value measurements, but rather provide guidance on how to perform fair value measurements as required or permitted under other accounting standards. They also provide for immediate recognition of trade-date gains and losses related to certain derivative transactions whose fair value has been determined using unobservable market inputs. Nicor elected the one-year deferral allowed by the new requirements, for certain nonfinancial assets and liabilities. As it applies to Nicor, the deferral pertained to fair value measurements for business combinations, impairment testing of goodwill and other intangible assets, as well as asset retirement obligations. The effect of adopting these new requirements, in their entirety, was not material to Nicor’s results of operations or financial condition.

4. SHORT-TERM AND LONG-TERM DEBT

In February 2009, the $50 million 5.37 percent First Mortgage Bond series matured and was retired. In July 2009, Nicor Gas, through a private placement, issued $50 million First Mortgage Bonds at 4.70 percent, due in 2019.

In August 2008, Nicor Gas, through a private placement, issued $75 million First Mortgage Bonds at 6.25 percent, due in 2038. The company retired the $75 million 5.875 percent First Mortgage Bond series that became due in August 2008.

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In May 2009, Nicor Gas established a $550 million, 364-day revolver, expiring May 2010, to replace the $600 million, nine-month seasonal revolver, which expired in May 2009. In September 2005, Nicor and Nicor Gas established a $600 million, five-year revolver, expiring 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 $365.0 million, $717.9 million and $426.0 million of commercial paper borrowings outstanding at September 30, 2009, December 31, 2008 and September 30, 2008, respectively.

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

5.	INCOME TAXES

The effective income tax rate for the three months ended September 30, 2009 increased to 37.8 percent from 25.3 percent for the prior-year period. The quarterly effective income tax rates reflect changes to forecasted annual pretax income identified in the quarter. The year-to-date adjustment to income taxes recognized in the quarter resulting from these changes to forecasted annual pretax income has a larger impact in quarters with lower income. The effective income tax rate for the nine months ended September 30, 2009 increased to 35.5 percent from 32.5 percent in the prior-year period. The higher effective income tax rate for the three and nine months ended September 30, 2009 is due primarily to higher 2009 forecasted annual pretax income (which causes a higher effective income tax rate since permanent differences and tax credits are a smaller share of pretax income).

The balance of unamortized investment tax credits at September 30, 2009, December 31, 2008 and September 30, 2008 was $24.5 million, $26.0 million and $26.5 million, respectively.

6.	ACCRUED UNBILLED REVENUES

Receivables include accrued unbilled revenues of $27.4 million, $196.1 million and $50.8 million at September 30, 2009, December 31, 2008 and September 30, 2008, respectively. Nicor Gas accrues revenues for estimated deliveries to customers from the date of their last bill until the balance sheet date.

7.	FAIR VALUE MEASUREMENTS

The tables below categorize, into three broad levels (with Level 1 considered the most reliable) based upon the valuation inputs, the fair values of those assets and liabilities that are measured on a recurring basis (in millions):

	Fair value amount
	Quoted prices in active markets		Significant observable inputs		Significant unobservable inputs
	(Level 1)		(Level 2)		(Level 3)		Total
September 30, 2009
Assets
Money market funds	$	2.0	$	-	$	-	$	2.0
Derivatives		3.0		8.3		2.8		14.1
	$	5.0	$	8.3	$	2.8	$	16.1

Liabilities
Derivatives	$	44.7	$	19.3	$	.8	$	64.8

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	Fair value amount
	Quoted prices in active markets		Significant observable inputs		Significant unobservable inputs
	(Level 1)		(Level 2)		(Level 3)		Total
December 31, 2008
Assets
Money market funds	$	.3	$	-	$	-	$	.3
Derivatives		.4		.2		5.4		6.0
	$	.7	$	.2	$	5.4	$	6.3

Liabilities
Derivatives	$	113.8	$	26.0	$	3.7	$	143.5

September 30, 2008
Assets
Money market funds	$	1.2	$	-	$	-	$	1.2
Derivatives		.5		3.8		5.1		9.4
	$	1.7	$	3.8	$	5.1	$	10.6

Liabilities
Derivatives	$	42.8	$	13.6	$	1.7	$	58.1

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; these over-the-counter items are classified within Level 2. In certain instances, the company may be required to use one or more significant unobservable inputs for a model-derived valuation; the resulting valuation is classified as Level 3.

The majority of derivatives held by Nicor Gas are for the purpose of hedging natural gas purchases for its customers, and therefore their fair values do not affect net income, as their settlement is passed directly through to customers without markup, subject to ICC review. The change in fair value for these derivatives is accounted for through regulatory assets and liabilities.

Money market funds are included in cash equivalents, are categorized as trading and are carried at fair value.

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

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

Beginning of period	$	1.6		$	7.1		$	1.7		$	7.5
Net realized/unrealized gains (losses) included in regulatory assets and liabilities		.2			1.1			(1.5	)		7.0
Settlements, net of purchases		.7			(2.9	)		2.3			(10.4	)
Transfers in and/or (out) of Level 3		(.5	)		(1.9	)		(.5	)		(.7	)
End of period	$	2.0		$	3.4		$	2.0		$	3.4

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 balances of margin accounts related to derivative instruments (in millions):

	September 30		December 31		September 30
	2009		2008		2008
Assets
Margin accounts – derivative instruments	$	50.2	$	115.4	$	79.0
Other – noncurrent		6.1		24.4		-

In addition, the recorded amount of restricted short-term investments and short-term borrowings approximates fair value. Long-term debt outstanding, including current maturities, is recorded at the principal balance outstanding, net of unamortized discounts. The principal balance of Nicor Gas’ First Mortgage Bonds outstanding at September 30, 2009, December 31, 2008 and September 30, 2008 was $500 million. Based on quoted prices and market interest rates, the fair value of the company’s First Mortgage Bonds outstanding was approximately $546 million at September 30, 2009, $520 million at December 31, 2008 and $486 million at September 30, 2008.

8.	DERIVATIVE INSTRUMENTS

A description of the company’s objectives and strategies for using derivative instruments, and related accounting policies, is included in Note 2 – Accounting Policies – Derivative instruments. All derivatives recognized on the Condensed Consolidated Balance Sheets are measured at fair value, as described in Note 7 – Fair Value Measurements.

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Balance sheet. Derivative assets and liabilities as of September 30, 2009, carried at fair value on the Condensed Consolidated Balance Sheets, are shown in the table below (in millions):

	Derivatives designated as hedging instruments		Derivatives not designated as hedging instruments
Assets
Derivative instruments	$	.1	$	10.9
Other – noncurrent		-		3.1
	$	.1	$	14.0

Liabilities
Derivative instruments	$	1.4	$	57.9
Other – noncurrent		-		5.5
	$	1.4	$	63.4

Volumes. As of September 30, 2009, Nicor Gas held outstanding derivative contracts of approximately 62 Bcf to hedge natural gas purchases for customer use, spanning approximately three years. Commodity price-risk exposure arising from Nicor Gas’ natural gas purchases for company use is mitigated with derivative instruments that total to a net long position of 1.1 Bcf as of September 30, 2009. 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.

Income statement – 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 income statement. Cash flow hedges used by Nicor Gas, to hedge purchases of natural gas for company use, are eventually recorded within operating and maintenance expense. Cash flow hedges affected accumulated other comprehensive income and income as shown in the following table (in millions):

Pretax gain (loss) recognized in other comprehensive income (Effective portion)		Location	Pretax gain (loss) reclassified from accumulated other comprehensive income into income (Effective portion)		Pretax gain (loss) recognized in income (Ineffective portion)

Three months ended September 30, 2009
$	.1	Operating and maintenance	$	(1.2)	$	-

Nine months ended September 30, 2009
$	(3.7)	Operating and maintenance	$	(6.9)	$	-

As of September 30, 2009, the time horizon of cash flow hedges of natural gas purchases for Nicor Gas company use extends to as long as 15 months. For these hedges, the total pretax loss deferred in accumulated other comprehensive income at September 30, 2009 was $1.9 million (or $1.1 million after taxes), of which $1.8 million (or $1.1 million after taxes) is expected to be reclassified to earnings within the next 12 months.

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Income statement – 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. Pretax earnings effects of these items are summarized in the table below for the periods ended September 30, 2009 (in millions):

	Net gain (loss) recognized in income
Location	Three months ended		Nine months ended

Operating and maintenance	$	-	$	(1.8)

Nicor Gas’ derivatives 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 losses of $8.1 million and $133.6 million were recognized in regulatory assets for the three and nine months ended September 30, 2009, respectively.

Credit-risk-related contingent features. Provisions within certain derivative agreements require the company to post collateral if the company’s net liability position exceeds a specified threshold. Also, certain derivative agreements contain credit-risk-related contingent features, whereby the company would be required to provide additional collateral or pay the amount due to the counterparty when a credit event occurs, such as if the company’s credit rating was to be lowered. As of September 30, 2009, for agreements with such features, derivative contracts with liability fair values totaled approximately $15 million, 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 $11 million.

Concentrations of credit risk. In instances in which the company holds an uncollateralized net asset per an over-the-counter derivative contract, there is potential credit risk in the event the counterparty defaults on a settlement or fails to perform under the agreed-upon terms. To manage this credit risk, the company maintains prudent credit policies to determine and monitor the creditworthiness of counterparties, seeks guarantees or collateral, in the form of cash or letters of credit, and limits its exposure to any one counterparty. The company also, in some instances, enters into netting arrangements to mitigate counterparty credit risk.

9.	POSTRETIREMENT BENEFITS

Nicor Gas maintains a noncontributory defined benefit pension plan covering substantially all employees hired prior to 1998. Pension benefits are based on years of service and highest average salary for management employees and job level for collectively bargained employees. The benefit obligation related to collectively bargained benefits considers the company’s past practice of regular benefit increases to reflect current wages. 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 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 periodic benefit cost or credit 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 periodic benefit cost (credit) included the following components (in millions):

	Pension benefits						Health care and other benefits
	2009			2008			2009			2008
Three months ended September 30
Service cost	$	2.1		$	2.1		$	.6		$	.6
Interest cost		4.2			4.0			3.1			3.0
Expected return on plan assets		(6.3	)		(9.9	)		-			-
Recognized net actuarial loss		3.8			-			1.1			1.2
Amortization of prior service cost		.1			.1			(.1	)		(.1	)
	$	3.9		$	(3.7	)	$	4.7		$	4.7

Nine months ended September 30
Service cost	$	6.4		$	6.4		$	1.7		$	1.6
Interest cost		12.4			11.9			9.1			9.0
Expected return on plan assets		(18.9	)		(29.9	)		-			-
Recognized net actuarial loss		11.5			-			3.4			3.5
Amortization of prior service cost		.3			.3			(.1	)		(.1	)
	$	11.7		$	(11.3	)	$	14.1		$	14.0

Due to the significant decline in the fair value of the pension plan’s assets during 2008, the expected return on plan assets has decreased in 2009 as compared to 2008. Also, the fair value decline in 2008 has created an actuarial loss that is being amortized over the average remaining service lives of employees covered by the plan.

10.	COMPREHENSIVE INCOME

Total comprehensive income (loss) is as follows (in millions):

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

Net income (loss)	$	6.9	$	(6.0	)	$	47.9	$	39.5
Other comprehensive income (loss), after tax		.9		(4.6	)		2.3		(.3	)
	$	7.8	$	(10.6	)	$	50.2	$	39.2

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

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11. 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 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 nine months ended September 30, 2009, Nicor Gas had net charges to (from) affiliates of $(1.2) million and $4.4 million, respectively. For the three and nine months ended September 30, 2008, Nicor Gas had net charges to affiliates of $1.4 million and $5.6 million, respectively.

Nicor Gas participates in a cash management system with other subsidiaries of 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 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. 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 September 30, 2009, December 31, 2008 and September 30, 2008. 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 nine months ended September 30, 2009, Nicor Gas recorded no interest income. For the three and nine months ended September 30, 2008, interest income was insignificant.

Nicor Solutions, L.L.C. (“Nicor Solutions”), a wholly owned business of Nicor, offers residential and small commercial customers energy-related products that provide for natural gas cost stability and management of their utility bill. Under these products, Nicor Solutions pays Nicor Gas for the utility bills issued to the utility-bill management customers. For the three and nine months ended September 30, 2009, Nicor Gas recorded revenues of $3.0 million and $25.8 million, respectively, associated with the payments Nicor Solutions makes to Nicor Gas on behalf of its customers. For the three and nine months ended September 30, 2008, such revenues were $5.4 million and $45.8 million, respectively.

Prairie Point Energy, L.L.C. (doing business as Nicor Advanced Energy) is a wholly owned business of Nicor that provides natural gas and related services on an unregulated basis to residential and small commercial customers. As a natural gas supplier, Nicor Advanced Energy pays Nicor Gas for delivery charges, administrative charges and applicable taxes, and may pay or receive inventory imbalance adjustments. Nicor Gas recorded negative margin of $1.9 million and $1.5 million, respectively, from Nicor Advanced Energy for the three and nine months ended September 30, 2009. Nicor Gas recorded positive (negative) margin of $(0.5) million and $3.7 million, respectively, from Nicor Advanced Energy for the three and nine months ended September 30, 2008.

Nicor Gas enters into routine transactions with Nicor Enerchange, L.L.C. (“Nicor Enerchange”), a wholly owned business of Nicor that engages in wholesale marketing of natural gas supply services primarily in the Midwest. Such transactions are governed by terms of an ICC order. For the three and nine months ended September 30, 2009, net charges from Nicor Enerchange were $1.5 million and $4.0 million, respectively. For the three and nine months ended September 30, 2008, net charges from Nicor

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Enerchange were $13.4 million and $25.3 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 nine months ended September 30, 2009, charges from Nicor Enerchange were $0.2 million and $0.5 million, respectively. For the three and nine months ended September 30, 2008, charges from Nicor Enerchange were $0.1 million and $0.5 million, respectively.

Horizon Pipeline Company, L.L.C., a 50-percent-owned joint venture of Nicor, that operates an interstate regulated natural gas pipeline of approximately 70 miles, stretching from Joliet, Illinois to near the Wisconsin/Illinois border, charged Nicor Gas $2.6 million and $7.8 million for the three and nine months ended September 30, 2009, respectively, for natural gas transportation under rates that have been accepted by the FERC. For the three and nine months ended September 30, 2008, Horizon Pipeline charged Nicor Gas $2.6 million and $7.7 million, respectively.

EN Engineering L.L.C., formerly a 50-percent-owned joint venture of Nicor that provides engineering and consulting services, charged Nicor Gas $1.7 million for engineering and corrosion services through March 31, 2009. Nicor sold its ownership in EN Engineering on March 31, 2009. For the three and nine months ended September 30, 2008, Nicor Gas was charged $1.8 million and $5.3 million, respectively, for these services. A majority of the work performed by EN Engineering was capital in nature and is classified as property, plant and equipment on the Condensed Consolidated Balance Sheets.

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

12. REGULATORY PROCEEDINGS

Rate proceeding. On April 29, 2008, Nicor Gas filed with the ICC for an overall increase in rates. The company sought a revenue increase of approximately $140 million for a rate of return on rate base of 9.27 percent, which reflects an 11.15 percent cost of common equity. The increase is needed to recover higher operating costs and increased capital investments.

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

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

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placed the rates approved in the rehearing decision into effect on a prospective basis on October 15, 2009. This $11 million increase is incremental to the approximately $69 million increase approved in the ICC’s March 2009 rate order. Therefore, the total annual base revenue increase resulting from the rate case originally filed by the company in April 2008 is approximately $80 million. Nicor Gas has appeals of the ICC’s rate orders on file in state appellate court.

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

13. 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 14 – 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.

14.	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

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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 Administrative Law Judges (“ALJs”) assigned to the proceeding issued a ruling denying CUB’s motion for sanctions. CUB has filed an appeal of the motion for sanctions with the ICC, and the ICC has indicated that it will not rule on the appeal until the final disposition of the ICC Proceedings. It is not possible to determine how the ICC will resolve the claims of CUB or other parties to the ICC Proceedings.

In 2004, the company became aware of additional information relating to the activities of individuals affecting the PBR plan for the period from 1999 through 2002, including information consisting of third party documents and recordings of telephone conversations from Entergy-Koch Trading, LP (“EKT”), a natural gas, storage and transportation trader and consultant with whom Nicor did business under the PBR plan. Review of additional information completed in 2004 resulted in the $1.8 million adjustment to the previously recorded liability referenced above.

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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 seeks a reimbursement of approximately $6 million, which includes 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. 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 September 30, 2009.

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 September 30, 2009, Nicor Gas had remaining an estimated liability of $2.2 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, 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 1800’s and early to mid 1900’s 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”) were parties to an interim agreement to cooperate in cleaning up residue at many of these properties. Under the interim agreement, mutually agreed costs were to be evenly split between Nicor Gas and ComEd until such time as they are finally allocated either through negotiation or arbitration. On January 3, 2008, Nicor Gas and ComEd entered into a definitive agreement concerning final cost allocations. The definitive 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. The definitive agreement required approval of the ICC, which was obtained in the second quarter of 2009. Information regarding preliminary site reviews has been presented to the Illinois Environmental Protection Agency for certain properties. More detailed investigations and remedial activities are complete, in progress or planned at many of these sites. The results of the detailed site-by-site investigations will determine the extent additional remediation is necessary and provide a basis for estimating additional future costs. As of September 30, 2009, the company had recorded a liability in connection with these matters of $22.0 million. In accordance with ICC authorization, the company has been recovering, and expects to continue to recover, these costs from its customers, subject to annual prudence reviews.

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In April 2002, Nicor Gas was named as a defendant, together with ComEd, in a lawsuit brought by the Metropolitan Water Reclamation District of Greater Chicago (the “MWRDGC”) under the Federal Comprehensive Environmental Response, Compensation and Liability Act seeking recovery of past and future remediation costs and a declaration of the level of appropriate cleanup for a former manufactured gas plant site in Skokie, Illinois now owned by the MWRDGC. In January 2003, the suit was amended to include a claim under the Federal Resource Conservation and Recovery Act. The suit was filed in the United States District Court for the Northern District of Illinois. Management cannot predict the outcome of this litigation or the company’s potential exposure thereto, if any, and has not recorded a liability associated with this contingency.

Since costs and recoveries relating to the cleanup of manufactured gas plant sites are passed directly through to customers in accordance with ICC regulations, subject to an annual ICC prudence review, the final disposition of manufactured gas plant matters is not expected to have a material impact on the company’s financial condition or results of operations.

PCBs. In June 2007, Nicor Gas notified the USEPA of the discovery by Nicor Gas of PCBs at four homes in Park Ridge, Illinois. Nicor Gas has cleaned up the PCBs at these four homes. In July 2007, the USEPA issued a subpoena to Nicor Gas pursuant to Section 11 of the Toxic Substances Control Act. In the subpoena, the USEPA indicated that it was investigating Nicor Gas’ identification of PCB-contaminated liquids in its distribution system. The subpoena sought documents related to Nicor Gas’ pipeline liquids and the extent and location of PCBs contained therein. The Illinois Attorney General made a similar request for information from Nicor Gas. Nicor Gas has provided documentation to the USEPA and the Illinois Attorney General, including information about the presence of PCBs in its system, and has conducted sample testing at additional customer locations. The USEPA is undertaking a nationwide inquiry into the presence of PCBs in gas transmission and distribution pipelines. The company does not expect, however, either the USEPA or the Illinois Attorney General to assess fines to, or pursue any enforcement actions, against Nicor Gas with respect to this matter.

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 in August 2008. 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.

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 2008 Annual Report on Form 10-K. Results for the interim periods presented are not necessarily indicative of the results to be expected for the full fiscal year due to seasonal and other factors.

RESULTS OF OPERATIONS

Operating income and net income (loss) are presented below for the periods covered by this report (in millions):

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

Operating income	$	15.7	$	3.2		$	73.4	$	67.1

Net income (loss)	$	6.9	$	(6.0	)	$	47.9	$	39.5

Net income (loss) increased $12.9 million for the three months ended September 30, 2009 compared to the prior year due primarily to higher margin ($20.1 million pretax increase) and lower operating and maintenance expense ($0.4 million pretax decrease), partially offset by higher depreciation expense ($1.6 million pretax increase) and a higher effective income tax rate. Net income increased $8.4 million for the nine months ended September 30, 2009 compared to the prior year due primarily to higher margin ($31.1 million pretax increase) and lower interest expense ($4.0 million pretax decrease), partially offset by higher operating and maintenance expense ($10.9 million pretax increase) and depreciation expense ($4.9 million pretax increase), lower interest income ($3.6 million pretax decrease) and a higher effective income tax rate.

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On April 24, 2009, the company filed a request for rehearing with the ICC concerning the capital structure and return on equity contained in the ICC’s rate order contending the company’s return on rate base should be higher. The Illinois Attorney General’s Office, Citizens Utility Board and the Environmental Law and Policy Center also filed requests for rehearing on items including the management structure of the Energy Efficiency Plan and the rate design for residential customers. These other parties did not raise issues about the amount of the rate increase granted to Nicor Gas. On May 13, 2009, the ICC agreed to conduct a rehearing concerning the capital structure but denied the remainder of the company’s request. The ICC also denied all the rehearing requests by other parties. On October 7, 2009, the ICC issued its decision on rehearing in which it increased the annual base revenues approved for Nicor Gas in the March 25, 2009 order by approximately $11 million, representing a rate of return on rate base of 8.09 percent. Nicor Gas placed the rates approved in the rehearing decision into effect on a prospective basis on October 15, 2009. This $11 million increase is incremental to the approximately $69 million increase approved in the ICC’s March 2009 rate order. Therefore, the total annual base revenue increase resulting from the rate case originally filed by the company in April 2008 is approximately $80 million. Nicor Gas has appeals of the ICC’s rate orders on file in state appellate court.

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

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

The company sponsored defined benefit pension plan experienced significant declines in the market values of its investments in 2008. These market value declines adversely impact the company’s future postretirement benefit costs in two ways. First, the expected return on the pension plan’s assets (which serves to reduce postretirement benefit costs) declined as a result of the lower asset market values. Second, the pension plan’s 2008 actuarial losses (largely due to the decline in asset market values) are being amortized over the average remaining service life of plan participants. As a regulated utility, Nicor Gas expects continued rate recovery of the eligible costs of its defined benefit postretirement plans and, accordingly, associated changes in the plan’s funded status have been deferred as a regulatory asset or liability until recognized in income, instead of being recorded in accumulated other comprehensive income. The adverse impact of both factors on 2009 postretirement benefit costs compared to 2008 costs is approximately $30 million. About one-fourth of this added cost will be capitalized as a cost of constructing gas distribution facilities and the remainder will be included in operating and maintenance expense, net of any amounts charged to affiliates.

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

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 of gas and revenue tax expense, with no direct impact on margin.

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

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

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

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

Operating and maintenance expense. Operating and maintenance expense decreased $0.4 million for the three months ended September 30, 2009 compared to the prior year due to lower company use and storage-related gas costs ($5.0 million decrease) and bad debt expense ($1.3 million decrease due to lower revenues attributable principally to lower natural gas costs), partially offset by higher pension expense, net of capitalization ($5.4 million increase). Operating and maintenance expense increased $10.9 million for the nine months ended September 30, 2009 compared to the prior year due primarily to higher payroll and benefit-related costs ($20.2 million increase, of which $16.3 million relates to higher pension expense, net of capitalization) and the absence of prior year recoveries of previously incurred costs ($3.9 million, of which $2.0 million relates to a recovery of costs associated with the PCB matter and $1.9 million relates to legal cost recoveries from a counterparty with whom Nicor previously did business during the PBR timeframe). Partially offsetting these amounts were lower bad debt expense ($7.3 million decrease due to lower revenues attributable principally to lower natural gas costs) and lower franchise gas costs ($7.1 million decrease). As a result of the recent rate order, which became effective on March 25,

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2009, the expense for franchise gas costs will be deferred until the related revenue, recovered through a cost recovery rider, is recognized.

Income tax expense. The effective income tax rate for the three months ended September 30, 2009 increased to 37.8 percent from 25.3 percent for the prior-year period. The quarterly effective income tax rates reflect changes to forecasted annual pretax income identified in the quarter. The year-to-date adjustment to income taxes recognized in the quarter resulting from these changes to forecasted annual pretax income has a larger impact in quarters with lower income. The effective income tax rate for the nine months ended September 30, 2009 increased to 35.5 percent from 32.5 percent in the prior-year period. The higher effective income tax rate for the three and nine months ended September 30, 2009 is due primarily to higher 2009 forecasted annual pretax income (which causes a higher effective income tax rate since permanent differences and tax credits are a smaller share of pretax income).

Interest income. Interest income decreased $0.6 million and $3.6 million for the three and nine months ended September 30, 2009, respectively, compared to the prior year due primarily to the impact of lower average investment balances and lower interest on tax matters.

Interest expense. Interest expense decreased $0.7 million for the three months ended September 30, 2009 compared to the prior year due primarily to lower average interest rates, partially offset by higher average borrowing levels and bank commitment fees. Interest expense decreased $4.0 million for the nine months ended September 30, 2009 compared to the prior year due primarily to lower average interest rates and lower interest on income tax matters, partially offset by higher average borrowing levels and bank commitment fees.

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Nicor Gas Company
Operating Statistics

	Three months ended				Nine months ended
	September 30				September 30
	2009		2008		2009		2008
Operating revenues (millions)
Sales
Residential	$	126.1	$	196.1	$	969.8	$	1,572.4
Commercial		28.9		50.5		245.9		402.1
Industrial		2.8		3.8		27.8		45.9
		157.8		250.4		1,243.5		2,020.4
Transportation
Residential		9.7		7.3		34.1		28.5
Commercial		14.0		11.9		56.9		54.9
Industrial		10.7		9.3		30.0		28.7
Other		.1		1.3		4.0		24.0
		34.5		29.8		125.0		136.1
Other revenues
Revenue taxes		13.1		14.6		114.5		131.6
Environmental cost recovery		1.3		.7		9.2		6.8
Chicago Hub		1.8		2.6		5.6		8.5
Other		6.5		8.0		27.5		27.0
		22.7		25.9		156.8		173.9
	$	215.0	$	306.1	$	1,525.3	$	2,330.4
Deliveries (Bcf)
Sales
Residential		12.7		12.3		134.9		142.6
Commercial		3.5		3.5		35.5		37.2
Industrial		.5		.3		4.4		4.5
		16.7		16.1		174.8		184.3
Transportation
Residential		1.6		1.5		17.1		16.3
Commercial		9.4		9.5		60.6		61.7
Industrial		23.0		21.3		76.6		76.7
		34.0		32.3		154.3		154.7
		50.7		48.4		329.1		339.0
Customers at end of period (thousands)
Sales
Residential		1,743		1,751
Commercial		128		127
Industrial		7		7
		1,878		1,885
Transportation
Residential		221		215
Commercial		51		53
Industrial		5		5
		277		273
		2,155		2,158

Other statistics
Degree days		66		37		3,937		3,999
Colder (warmer) than normal (1)		8%		(47)%		10%		6%
Average gas cost per Mcf sold	$	3.91	$	11.12	$	5.24	$	9.52


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

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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 financing to meet seasonal increases in working capital needs. Cash requirements generally increase over the last half of the year due to increases in natural gas purchases, gas in storage and accounts receivable. During the first half of the year, positive cash flow generally results from the sale of gas in storage and the collection of accounts receivable. This cash is typically used to substantially reduce, or eliminate, short-term debt during the first half of the year. Net cash flow provided from operating activities increased $413.5 million for the nine months ended September 30, 2009 compared to the prior 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.

Investing activities. Net cash flow used for investing activities decreased $11.8 million for the nine months ended September 30, 2009 compared to the prior year.

Financing activities. In August 2009, Moody’s upgraded Nicor Gas’ senior secured debt rating to “Aa3” from “A1.” The rating revision by Moody’s reflects an upgrade to the majority of senior secured debt ratings of investment-grade regulated utilities by one notch. All other credit ratings for Nicor Gas have not changed since the filing of the 2008 Annual Report on Form 10-K. In the second quarter of 2009, Moody’s and Standard & Poor’s affirmed their credit ratings on Nicor Gas. In the third quarter of 2009, Fitch affirmed their credit ratings on Nicor Gas.

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

Long-term debt. In February 2009, the $50 million 5.37 percent First Mortgage Bond series matured and was retired. In July 2009, Nicor Gas, through a private placement, issued $50 million First Mortgage Bonds at 4.70 percent, due in 2019.

On February 25, 2009, Nicor Gas filed a shelf registration for the purpose of issuing additional First Mortgage Bonds. The shelf registration became effective on March 20, 2009.

Short-term debt. In May 2009, Nicor Gas established a $550 million, 364-day revolver, expiring May 2010, to replace the $600 million, nine-month seasonal revolver, which expired in May 2009. In September 2005, Nicor and Nicor Gas established a $600 million, five-year revolver, expiring September 2010. These facilities were established with major domestic and foreign banks and serve as backup for

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the issuance of commercial paper. The company had $365.0 million, $717.9 million and $426.0 million of commercial paper borrowings outstanding at September 30, 2009, December 31, 2008 and September 30, 2008, respectively. The company expects that funding from commercial paper and related backup line-of-credit agreements will continue to be available in the foreseeable future and sufficient to meet estimated cash requirements.

OTHER MATTERS

Recent Illinois Legislation. In July 2009, a new Illinois state law took effect that will require utility companies to participate in bill payment assistance programs for low-income customers. Funding for the programs is expected to be provided largely through federal and state government contributions, as well as through an increase in monthly utility-customer charges. The legislation also requires utilities to develop and implement energy efficiency measures to obtain prescribed reductions in customer deliveries. Funding for the program, excluding the adverse impact on Nicor Gas of lower deliveries and resulting reduced margin, will be through a rate adjustment mechanism. In addition, the legislation allows utility companies to implement, subject to ICC approval, a rate adjustment mechanism for bad debt expense starting with the 2008 year. Certain provisions of the legislation will be implemented on a pilot basis beginning in 2009. The company is currently evaluating the impact of this legislation on the company’s results of operations, cash flows and financial condition.

Labor negotiations. On April 17, 2009, Nicor Gas announced that the International Brotherhood of Electrical Workers Local 19 ratified a new labor contract which expires on February 28, 2014. The agreement covers approximately 1,400 employees of Nicor Gas. The new contract will provide for, among other things, general wage increases and changes to various employee benefits, and is not expected to have a material impact on the company’s results of operations, cash flows and financial condition.

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 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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Mercury. Information about mercury contingencies is presented in Item 1 – Notes to the Condensed Consolidated Financial Statements – Note 14 – 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 14 – Contingencies – Manufactured Gas Plant Sites.

PCBs. Information about PCB contingencies is presented in Item 1 – Notes to the Condensed Consolidated Financial Statements – Note 14 – Contingencies – PCBs.

Municipal tax matters. Information about municipal tax contingencies is presented in Item 1 – Notes to the Condensed Consolidated Financial Statements – Note 14 – Contingencies – Municipal Tax Matters.

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 14 – 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 2008 Annual Report on Form 10-K for a discussion of the company’s critical accounting estimates.

NEW ACCOUNTING PRONOUNCEMENT

For information concerning the new requirements for fair value measurements and disclosures, see Item 1 – Notes to the Condensed Consolidated Financial Statements – Note 3 – New Accounting Pronouncement.

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 to 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.

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-

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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.

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 2008 Annual Report on Form 10-K.

Item 4. 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”).

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. These disclosure controls and procedures are designed so that required information is accumulated and communicated to the registrant’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosures. Based on the Evaluation, the company’s Chief Executive Officer and Chief Financial Officer concluded that the company’s disclosure controls and procedures, as of the end of the period covered by this Quarterly Report on Form 10-Q, were effective at the reasonable assurance level 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 United States Securities and Exchange Commission rules and forms.

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 12 – Regulatory Proceedings and Note 14 – Contingencies, which are incorporated herein by reference.

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.

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.

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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

October 30, 2009		/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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