UNITED STATES

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K

(Mark One)

þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2011
OR

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

For the transition period from to

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 or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

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

Securities registered pursuant to Section 12(b) or 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 under the Securities Act. Yes ¨ No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Act. Yes ¨ No þ

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 þ 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 (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer þ Smaller reporting company ¨
(Do not check if smaller reporting company) Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes ¨ No þ

All shares of common stock are owned by AGL Resources Inc.

Northern Illinois Gas Company meets the conditions set forth in General Instruction I(1)(a) and (b) of Form 10-K and is therefore filing this Form 10-K with the reduced disclosure format specified in General Instruction I(2)(b), (c) and (d) of Form 10-K.

~~SECURITIES~~TABLE ~~AND~~OF ~~EXCHANGE COMMISSION~~CONTENTS

Washington, D.C. 20549

		Page(s)
Glossary of Key Terms		3-4
Forward-Looking Statements		5
Part I
Item 1.	Business	5-9
Item 1A.	Risk Factors	9-16
Item 1B.	Unresolved Staff Comments	16
Item 2.	Properties	16
Item 3.	Legal Proceedings	16
Item 4.	Mine Safety Disclosures	16
Part II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	17
Item 6.	Selected Financial Data	*
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17-33
	Executive Summary	17-19
	Results of Operations	19-22
	Liquidity and Capital Resources	23-28
	Contingencies	28-29
	Critical Accounting Policies and Estimates	29-32
	Accounting Developments	33
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	33-34
Item 8.	Financial Statements and Supplementary Data	35-62
	Report of Independent Registered Public Accounting Firm	35-36
	Management’s Report on Internal Control Over Financial Reporting	37
	Consolidated Statements of Financial Position	38-39
	Consolidated Statements of Income	40
	Consolidated Statements of Comprehensive Income	41
	Consolidated Statements of Retained Earnings	41
	Consolidated Statements of Cash Flows	42
	Note 1 – Organization and Basis of Presentation	43
	Note 2 – Significant Accounting Policies and Methods of Application	43-49
	Note 3 – Fair Value Measurements	49-50
	Note 4 – Derivative Instruments	50-51
	Note 5 – Employee Benefit Plans	52-54
	Note 6 – Debt	55-56
	Note 7 – Commitments, Guarantees and Contingencies	56-60
	Note 8 – Income Taxes	60-61
	Note 9 – Related Party Transactions	61-62
	Note 10 – Regulatory Matters	62
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	63
Item 9A.	Controls and Procedures	63
Item 9B.	Other Information	63
Part III
Item 10.	Directors, Executive Officers and Corporate Governance	*
Item 11.	Executive Compensation	*
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	*
Item 13.	Certain Relationships and Related Transactions, and Director Independence	*
Item 14.	Principal Accounting Fees and Services	64
Part IV
Item 15.	Exhibits, Financial Statement Schedules	65-67
Signatures		68
Schedule II		69

* The Registrant meets the conditions set forth in General Instruction I(1)(a) and (b) of Form 10-K and is therefore omitting the information called for by the otherwise required item.

~~FORM~~Glossary ~~10-K~~of Key Terms

~~[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2010~~2

[ ] 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)

Securities registered pursuant to Section 12(b) or 12(g) of the Act: None

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [X] No [ ]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

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 the 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 [ ]

All shares of common stock are owned by Nicor Inc.

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~~Nicor~~GLOSSARY ~~Gas~~OF ~~Company~~KEY TERMS

~~Table~~AGL Resources. AGL Resources Inc., our parent company since the completion of ~~Contents~~the merger between AGL Resources and Nicor on December 9, 2011.

Item No.	Description	Page No.
	Glossary	ii
	Part I
1.	Business	1
1A.	Risk Factors	5
1B.	Unresolved Staff Comments	13
2.	Properties	13
3.	Legal Proceedings	13
4.	(Removed and Reserved)	13
	Part II
5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	15
6.	Selected Financial Data	*
7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
7A.	Quantitative and Qualitative Disclosures About Market Risk	30
8.	Financial Statements and Supplementary Data	31
9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	63
9A.	Controls and Procedures	63
9B.	Other Information	64
	Part III
10.	Directors, Executive Officers and Corporate Governance	*
11.	Executive Compensation	*
12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	*
13.	Certain Relationships and Related Transactions, and Director Independence	*
14.	Principal Accounting Fees and Services	65
	Part IV
15.	Exhibits, Financial Statement Schedules	66
	Signatures	68
	Supplemental Information	69
	Exhibit Index	70

Bcf. Billion cubic feet.

* The Registrant meets the conditions set forth in General Instruction I(1)(a) and (b) of Form 10-K and is therefore omitting the information called for by the otherwise required item.

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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.

ALJs. Administrative Law Judges.

ARO. Asset retirement obligation.

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~~ERC. ~~The~~Environmental ~~extent~~remediation ~~to which the daily average temperature falls below 65 degrees Fahrenheit~~costs. ~~Normal weather for Nicor Gas’ service territory, for purposes of this report, is considered to be 5,600 degree days per year for 2010 and 2009 and 5,830 degree days per year for 2008.~~

~~FERC~~FASB. ~~Federal~~Financial ~~Energy~~Accounting ~~Regulatory~~Standards ~~Commission, the agency that regulates the interstate transportation of natural gas, oil and electricity~~Board.

~~Financial Reform Legislation~~FERC. ~~Dodd-Frank~~Federal ~~Wall~~Energy ~~Street~~Regulatory ~~Reform and Consumer Protection Act~~Commission.

Fitch. Fitch Ratings.

GAAP. Accounting principles generally accepted in the United States of America.

Health Care Act. Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010.

~~Horizon~~Heating ~~Pipeline~~Degree Days. ~~Horizon~~A ~~Pipeline~~measure ~~Company,~~of ~~L.L.C.~~the ~~(“Horizon”)~~effects of weather on our business, acalculated ~~50-percent-owned~~when ~~joint~~the ~~venture~~average ofdaily ~~Nicor,~~temperatures ~~operates~~are anless ~~interstate~~than ~~regulated~~65 ~~natural~~degrees ~~gas~~Fahrenheit. Normal ~~pipeline~~weather offor ~~approximately~~our 70service ~~miles~~territory, ~~stretching~~for ~~from~~purposes ~~Joliet~~of this report, ~~Illinois~~is considered to ~~near~~be ~~the~~5,600 ~~Wisconsin/Illinois~~Heating ~~border~~Degree Days per year.

~~ICC~~Heating Season. ~~Illinois~~The ~~Commerce~~period ~~Commission,~~from ~~the~~November ~~agency~~through ~~that~~March ~~establishes~~when ~~the~~natural ~~rules~~gas usage and ~~regulations~~operating ~~governing~~revenues ~~utility~~are ~~rates~~generally ~~and~~higher ~~services~~because inweather ~~Illinois~~is colder.

~~IDR~~Horizon Pipeline. ~~Illinois~~Horizon ~~Department~~Pipeline Company, L.L.C., a 50% owned joint venture of ~~Revenue~~AGL Resources, operates an interstate regulated natural gas pipeline of approximately 70 miles stretching from Joliet, Illinois to near the Wisconsin/Illinois border.

~~IRS~~Illinois Commission. ~~Internal~~Illinois ~~Revenue~~Commerce ~~Service~~Commission, our state regulatory agency.

LIBOR. London Inter-Bank Offered Rate.

LIFO. Last-in, first-out.

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

~~Nicor~~Moody’s. ~~Nicor~~Moody’s ~~Inc.,~~Investors ~~the parent company of Nicor Gas~~Service.

Nicor ~~Advanced Energy~~. ~~Prairie~~Nicor ~~Point Energy~~Inc., ~~L.L.C.~~our ~~(doing~~parent ~~business~~company asprior ~~Nicor~~to ~~Advanced~~the ~~Energy),~~completion ~~a wholly owned business~~ of ~~Nicor~~the ~~that~~merger ~~provides~~between ~~natural~~AGL ~~gas~~Resources and ~~related~~Nicor ~~services~~ on anDecember ~~unregulated~~9, ~~basis to residential and small commercial customers~~2011.

Nicor ~~Enerchange~~Advanced Energy. ~~Nicor~~Prairie ~~Enerchange~~Point Energy, L.L.C. (doing business as Nicor Advanced Energy), a wholly owned business of ~~Nicor~~AGL Resources that ~~engages~~provides ~~in wholesale marketing of~~ natural gas ~~supply services primarily in the Midwest, administers the Chicago Hub for Nicor Gas, serves commercial~~ and ~~industrial~~related ~~customers~~services inon ~~the~~an ~~northern~~unregulated ~~Illinois~~basis ~~market~~to ~~area,~~residential and ~~manages~~small ~~Nicor~~commercial ~~Solutions’ and Nicor Advanced Energy’s product risks, including the purchase of natural gas supplies~~customers.

Nicor Enerchange. Nicor Enerchange, L.L.C., a wholly owned business of AGL Resources that engages in wholesale marketing of natural gas supply services primarily in the Midwest, administers the Chicago Hub for us, 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.

ii Glossary of Key Terms

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Nicor Services. Nicor Energy Services Company, a wholly owned business of ~~Nicor~~AGL Resources 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~~AGL Resources that offers residential and small commercial customers energy-related products that provide for natural gas cost stability and management of their utility bill.

~~NYMEX~~OCI. ~~New~~Other ~~York~~comprehensive ~~Mercantile Exchange~~income.

Pad gas. Volumes of non-working natural gas used to maintain the operational integrity of a natural gas storage facility.

PBR. Performance-based rate, a regulatory plan which ended on January 1, 2003, that provided economic incentives based on natural gas cost performance.

~~PCBs~~PGA. ~~Polychlorinated~~Purchased ~~Biphenyls~~Gas Adjustment, a rate rider that passes natural gas costs directly through to customers without markup, subject to Illinois Commission review.

~~PGA~~PP&E. ~~Purchased Gas Adjustment~~Property, aplant ~~rate~~and ~~rider that passes natural gas costs directly through to customers without markup, subject to ICC review~~equipment.

Revenue taxes. Revenue and use taxes.

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~~ SNG. Substitute natural gas, a synthetic form of gas manufactured from coal.

~~Table~~S&P. Standard of& ~~Contents~~Poor’s Ratings Services.

~~PART~~Glossary Iof Key Terms

Item 1. Business

Nicor Gas, an Illinois corporation formed in 1954, is a wholly owned subsidiary of Nicor, a holding company. Certain terms used herein are defined in the glossary on pages ii and iii.

PROPOSED MERGER WITH AGL RESOURCES

In December 2010, Nicor entered into an Agreement and Plan of Merger (the “Merger Agreement”) with AGL Resources. 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 adjustment in certain circumstances.

The completion of the proposed merger is subject to various customary conditions, including, among others (i) shareholder approval by both companies, (ii) expiration or termination of any applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, (iii) the SEC’s clearance of a registration statement registering AGL Resources common stock and (iv) receipt of all required regulatory approvals from, among others, the ICC.

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. The proposed merger is expected to be completed in the second half of 2011. Except for specific references to the proposed merger, the disclosures contained in this report on Form 10-K relate solely to Nicor Gas.

In January 2011, Nicor, Nicor Gas and AGL Resources filed a joint application with the ICC for approval of the proposed 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 ICC has eleven months to act upon the application.

For additional information relating to the proposed merger please see Nicor’s Form 8-K filed on December 7, 2010 and the joint proxy statement / prospectus contained in the registration statement on Form S-4 filed by AGL Resources on February 4, 2011.

GENERAL

Nicor Gas, a regulated natural gas distribution utility, serves 2.2 million customers in a service territory that encompasses most of the northern third of Illinois, excluding the city of Chicago. The company’s service territory is diverse, providing the company with a well-balanced mix of residential, commercial and industrial customers. Residential customers typically account for approximately 50 percent of natural gas deliveries, while commercial and industrial customers each typically account for approximately 25 percent. See Operating Statistics on page 19 for operating revenues, deliveries and number of customers by customer classification. Nicor Gas had approximately 2,200 employees at year-end 2010.

Nicor Gas maintains franchise agreements with most of the incorporated municipalities it serves, allowing it to construct, operate and maintain distribution facilities in those incorporated municipalities. Franchise agreement terms range up to 50 years. Currently, about one-third of the agreements will expire within five years.

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Customers have the option of purchasing their own natural gas supplies, with delivery of the gas by Nicor Gas. The larger of these transportation customers also have options that include the use of Nicor Gas’ storage system and the ability to choose varying supply backup levels. The choice of transportation service as compared to natural gas sales service results in less revenue for Nicor Gas but has no direct impact on net operating results. Nicor Gas continues to deliver natural gas, maintain its distribution system and respond to emergencies.

Nicor Gas also operates the Chicago Hub, which provides natural gas storage and transmission-related services to marketers and other gas distribution companies. The Chicago area is a major market hub for natural gas, and demand exists for storage and transmission-related services by marketers, other gas distribution companies and electric power-generation facilities. Nicor Gas’ Chicago Hub addresses that demand. Chicago Hub revenues are passed directly through to customers as a credit to Nicor Gas’ PGA rider.

SOURCES OF NATURAL GAS SUPPLY

Nicor Gas purchases natural gas supplies in the open market by contracting with producers and marketers. It also purchases transportation and storage services from interstate pipelines that are regulated by the FERC. When firm pipeline services are temporarily not needed, Nicor Gas may release the services in the secondary market under FERC-mandated capacity release provisions, with proceeds reducing the cost of natural gas charged to customers.

Peak-use requirements are met through utilization of company-owned storage facilities, pipeline transportation capacity, purchased storage services and other supply sources, arranged by either Nicor Gas or its transportation customers. Nicor Gas has been able to obtain sufficient supplies of natural gas to meet customer requirements. The company believes natural gas supply and pipeline capacity will be sufficiently available to meet market demands in the foreseeable future.

Natural gas supply. Nicor Gas maintains a diversified portfolio of natural gas supply contracts. Supply purchases are diversified by supplier, producing region, quantity, credit limits and available transportation. Natural gas supply pricing is generally tied to published price indices so as to approximate current market prices. These supply contracts also may require the payment of fixed demand charges to ensure the availability of supplies on any given day. The company also purchases natural gas supplies on the spot market to fulfill its supply requirements or to take advantage of favorable short-term pricing.

As part of its purchasing practices, Nicor Gas maintains a price risk hedging strategy to reduce the risk of price volatility. A disciplined approach is used to systematically forward hedge a predetermined portion of forecasted monthly volumes.

As noted previously, transportation customers purchase their own natural gas supplies. About one-half of the natural gas that the company delivers is purchased by transportation customers directly from producers and marketers.

Pipeline transportation. The Nicor Gas distribution and storage system is directly connected to eight interstate pipelines. This provides the company with direct access to most of the major natural gas producing regions in North America. The company has long-term transportation contracts with nearly all of these interstate pipelines and generally has a right-of-first-refusal for contract extensions. The largest of these long-term transportation contracts is with Natural Gas Pipeline Company of America (“NGPL”) which provides approximately 70 percent of the firm transportation capacity. In addition, Nicor Gas enters into short-term winter-only transportation contracts and market-area transportation contracts that enhance Nicor Gas’ operational flexibility.

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Storage. Nicor Gas owns and operates eight underground natural gas storage facilities. This storage system is one of the largest in the gas distribution industry. The storage reservoirs provide a total inventory capacity of about 150 Bcf, approximately 135 Bcf of which can be cycled on an annual basis. The system is designed to meet about 50 percent of the company’s estimated peak-day deliveries and approximately 40 percent of its normal winter deliveries. In addition to company-owned facilities, Nicor Gas has about 40 Bcf of purchased storage services under contracts with NGPL that expire in 2012 and 2013. This level of storage capability provides Nicor Gas with supply flexibility, improves the reliability of deliveries and can mitigate the risk associated with seasonal price movements.

COMPETITION/DEMAND

Nicor Gas is the largest natural gas distributor in Illinois and is regulated by the ICC. The company is the sole distributor of natural gas in essentially all of its service territory. In the commercial and industrial markets, the company’s natural gas services compete with other forms of energy, such as electricity, coal, propane and oil, based on such factors as price, service, reliability and environmental impact. In addition, the company has a tariff that allows negotiation with potential bypass customers. Nicor Gas also offers commercial and industrial customers alternatives in rates and service, increasing its ability to compete in these markets. Other significant factors that impact demand for natural gas include weather, conservatism and economic conditions.

Natural gas deliveries are temperature-sensitive and seasonal since about one-half of all deliveries are used for space heating. Typically, about three-quarters of the deliveries and revenues occur from October through March. Fluctuations in weather have the potential to significantly impact year-to-year comparisons of operating income and cash flow. It is estimated that a 100 degree day variation from normal weather impacts Nicor Gas’ margin, net of income taxes, by approximately $1.3 million under the company’s current rate structure.

Nicor Gas’ large residential customer base provides for a relatively stable level of natural gas deliveries during weak economic conditions. The company’s industrial and commercial customer base is well diversified, lessening the impact of industry-specific economic swings. However, deliveries of natural gas can be negatively affected by conservation, high natural gas prices and the use of alternative energy sources.

REGULATION

Nicor Gas is regulated by the ICC, which governs utility rates and services in Illinois. Those ICC orders and regulations that may significantly affect business performance include the following:

· Base rates, which are set by the ICC, are designed to allow the company an opportunity to recover its costs and earn a fair return for investors. On March 25, 2009, the ICC issued an order approving an increase in Nicor Gas’ 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. On October 7, 2009, the ICC increased the annual base revenues approved for Nicor Gas in the March 25, 2009 order by approximately $11 million as a result of a rehearing decision and increased the rate of return on rate base to 8.09 percent. Therefore, the total annual base revenue increase resulting from these ICC orders is approximately $80 million. For additional information about the rate proceeding, see Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 8 – Notes to the Consolidated Financial Statements – Note 14 – Regulatory Proceedings.

· The company’s ICC-approved tariffs provide that the cost of natural gas purchased for customers will be fully charged to customers without markup. Therefore, the company does not profit from the sale of natural gas. Rather, the company earns income from fixed monthly charges and from variable transportation charges for delivering natural gas to customers. Annually, the ICC initiates a review of the company’s natural gas purchasing practices for prudence, and may disallow the pass-through of

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costs considered imprudent. The annual prudence reviews for calendar years 1999-2010 are open for review.

· The company has ICC-approved tariffs that provide for the pass-through of prudently incurred environmental costs related to the remediation of former 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 of these sites. As of December 31, 2010, the company had recorded a liability in connection with these matters of $28.7 million. These costs are subject to annual ICC review. For additional information on the company’s obligation for manufactured gas plants, see Item 8 – Notes to the Consolidated Financial Statements – Note 16 – Contingencies – Manufactured Gas Plant Sites.

· On February 2, 2010, the ICC approved a bad debt rider which 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 base rates for the respective year. For additional information about the bad debt rider, see Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 8 – Notes to the Consolidated Financial Statements – Note 14 – Regulatory Proceedings.

· As part of the rate order issued in 2009, the ICC approved an energy efficiency rider to fund the costs of energy savings programs. 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, Nicor Gas filed an application with the ICC seeking approval of a new energy efficiency plan on September 29, 2010. The law provides utilities with a rider to collect the costs of the plan from customers. Under its proposed plan, the company estimates that it would bill nearly $100 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. This new energy efficiency plan rider will replace the rider currently in effect. The costs under these riders are subject to annual ICC review.

· 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. For additional information regarding this proceeding, see Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations.

· On January 18, 2011, AGL Resources, Nicor and Nicor Gas filed a joint application with the ICC seeking approval of the merger of AGL Resources and Nicor and other approvals relating to the merger. For additional information regarding this proceeding, see Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Nicor Gas enters into various service agreements with Nicor and its affiliates. Nicor Gas, to the extent required, obtains ICC approvals for these agreements.

The ICC has other rules that impact the operations of utilities in Illinois.

A 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 natural 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 results of the PBR plan are currently under ICC review. Additional information on the plan and the ICC review are presented in Item 8 – Notes to the Consolidated Financial Statements – Note 16 – Contingencies – PBR Plan.

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~~AVAILABLE~~Forward-Looking ~~INFORMATION~~Statements

~~Nicor~~Certain ~~Gas~~expectations ~~files~~and ~~various~~projections ~~reports~~regarding ~~with~~our ~~the~~future ~~SEC. These~~performance ~~reports~~referenced ~~include~~in ~~the~~this ~~annual~~section ~~reports~~and onelsewhere ~~Form~~in ~~10-K~~this report, ~~quarterly~~as ~~reports~~well onas ~~Form~~in ~~10-Q,~~other ~~current~~ reports onwe ~~Form~~file ~~8-K~~with ~~and~~the ~~amendments~~SEC toor ~~those~~otherwise ~~reports~~release ~~filed~~to orthe ~~furnished~~public ~~pursuant~~and toon ~~Section~~our 15website ~~(d)~~are offorward-looking ~~the~~statements ~~Securities~~within ~~Exchange~~the ~~Act~~meaning of ~~1934. Nicor~~the ~~Gas~~United ~~makes~~States ~~all~~federal ofsecurities ~~these~~laws ~~reports~~and ~~available~~are ~~without~~subject ~~charge~~ to ~~the~~uncertainties ~~public~~and onrisks, ~~the~~as ~~investor~~itemized ~~section~~in ofItem ~~the~~1A ~~company’s~~– ~~Internet~~Risk ~~site~~Factors, atin ~~www.nicor.com~~this asForm ~~soon~~10-K. asSenior ~~reasonably~~officers ~~practicable~~and ~~after~~other ~~Nicor~~employees ~~Gas~~may ~~files~~also ~~them~~make ~~with,~~verbal orstatements ~~furnishes~~to ~~them~~analysts, toregulators, the ~~SEC~~media and others that are forward-looking.

~~Item~~Forward-looking 1Astatements involve matters that are not historical facts, and because these statements involve anticipated events or conditions, forward-looking statements often include words such as "anticipate," "assume," “believe,” "can," "could," "estimate," "expect," "forecast," "future," “goal,” "indicate," "intend," "may," “outlook,” "plan," “potential,” "predict," "project,” “proposed,” "seek," "should," "target," "would," or similar expressions. ~~Risk~~ ~~Factors~~You are cautioned not to place undue reliance on our forward-looking statements. Our expectations are not guarantees and are based on currently available competitive, financial and economic data along with our operating plans. While we believe that our expectations are reasonable in view of currently available information, our expectations are subject to future events, risks and uncertainties, and there are numerous factors - many beyond our control - that could cause our actual results to vary significantly from our expectations.

~~The~~Such ~~following~~events, ~~factors~~risks and uncertainties include, but are ~~the~~not ~~most~~limited ~~significant~~to, ~~factors~~changes ~~that~~in ~~can~~price, supply and demand for natural gas and related products; the impact ~~year-~~of changes in state and federal legislation and regulation including any changes related to~~-year~~ ~~comparisons~~climate change; actions taken by government agencies on rates and ~~may~~other ~~affect~~matters; concentration of credit risk; utility and energy industry consolidation; the ~~future~~impact ~~performance~~on cost and timeliness of construction projects by government and other approvals, development project delays, adequacy of supply of diversified vendors, unexpected changes in project costs, including the ~~company. New~~cost ~~risks~~of ~~may~~funds ~~emerge~~to finance these projects; the impact of acquisitions and ~~management~~divestitures; ~~cannot~~direct ~~predict~~or ~~those~~indirect ~~risks~~effects on our business, financial condition or ~~estimate~~liquidity resulting from any change in our credit ratings as a result of the ~~extent~~recent tomerger ~~which~~between ~~they~~AGL ~~may~~Resources ~~affect~~and Nicor or otherwise, or any change in the ~~company’s~~credit ratings of our counterparties or competitors; interest rate fluctuations; financial ~~performance~~market conditions, including recent disruptions in the capital markets and lending environment and the current economic downturn; general economic conditions; uncertainties about environmental issues and the related impact of such issues; the impact of changes in weather, including climate change, on the temperature-sensitive portions of our business; the impact of natural disasters such as hurricanes on the supply and price of natural gas; acts of war or terrorism; the outcome of litigation; and other factors discussed elsewhere herein and in our filings with the SEC.

~~The~~We ~~risks~~caution ~~described~~readers ~~below~~that ~~should be carefully considered in addition to~~ the ~~other~~important ~~cautionary~~factors ~~statements and risks~~ described elsewhere, ~~and the other information contained~~ in this report, ~~and~~among inothers, ~~Nicor~~could ~~Gas’~~cause ~~other~~our ~~filings with the SEC~~business, ~~including~~results ~~its~~of ~~subsequent~~operations ~~reports~~or onfinancial ~~Forms~~condition ~~10-Q~~to ~~and~~differ ~~8-K. The~~significantly ~~risks~~from ~~and~~those ~~uncertainties~~expressed ~~described~~in ~~below~~any ~~are~~forward-looking ~~not the only risks Nicor Gas faces although they are the most significant risks~~statements. ~~See~~ ~~Item~~There 7also –may ~~Management’s~~be Discussion and Analysis of Financial Condition and Results of Operations, Item 7A – Quantitative and Qualitative Disclosures About Market Risk, and Item 8 – Notes to the Consolidated Financial Statements for further discussion of these and other ~~risks~~factors ~~Nicor~~that ~~Gas~~we ~~faces. Additionally,~~cannot ~~see~~anticipate ~~the~~or ~~joint~~that ~~proxy~~are /not ~~prospectus~~described ~~contained~~ in ~~the~~this ~~registration~~report ~~statement~~that oncould ~~Form~~cause ~~S-4~~results ~~filed~~to bydiffer ~~AGL~~significantly ~~Resources~~from onour ~~February 4, 2011~~expectations.

~~Regulation~~Forward-looking statements are only as of ~~Nicor~~the ~~Gas,~~date ~~including~~they ~~changes~~are inmade. ~~the~~We ~~regulatory~~undertake ~~environment~~no inobligation ~~general,~~to ~~may~~publicly ~~adversely~~update ~~affect~~or ~~the~~revise ~~company’s~~any ~~results~~forward-looking statement, whether as a result of ~~operations~~future events, ~~cash~~new ~~flows~~information ~~and~~or ~~financial~~otherwise, ~~condition~~except as required under United States federal securities law.

~~Nicor~~PART Gas is regulated by the ICC, which has general regulatory power over practically all phases of the public utility business in Illinois, including rates and charges, issuance of securities, services and facilities, system of accounts, investments, safety standards, transactions with affiliated interests and other matters.I

~~Nicor~~ITEM Gas is permitted by the ICC’s PGA regulation to adjust the charge to its sales customers on a monthly basis to recover the company’s prudently incurred actual costs to acquire the natural gas it delivers to them1. The company’s gas costs are subject to subsequent prudence reviews by the ICC for which the company makes annual filings. The annual prudence reviews for calendar years 1999-2010 are open for review and any disallowance of costs in those proceedings could adversely affect Nicor Gas’ results of operations, cash flows and financial condition.BUSINESS

~~Additionally,~~Nature Nicor Gas is permitted by ICC regulations to periodically adjust the charge to its customers to recover the company’s prudently incurred actual costs associated with environmental remediation at former manufactured gas plant sites, franchise payments to municipalities, energy efficiency programs and, as approved in February 2010, bad debt expense. These charges are subject to subsequent prudence reviews by the ICC and any disallowance of ~~costs~~Our ~~by the ICC could adversely affect the company’s results of operations, cash flows and financial condition.~~Business

~~Most~~Unless ofthe ~~Nicor~~context ~~Gas’~~requires ~~other~~otherwise, ~~charges~~references ~~are~~to ~~changed~~“we,” ~~only~~“us,” ~~through~~“our,” athe ~~rate~~“company” ~~case~~and ~~proceeding~~“Nicor ~~with~~Gas” ~~the~~are ~~ICC. The~~intended ~~charges~~to ~~established~~mean inNicor aGas ~~rate~~and ~~case~~its ~~proceeding~~subsidiary. Nicor ~~are~~Gas ~~based~~is on an ~~approved~~Illinois ~~level~~corporation offormed ~~operating costs and investment~~ in ~~utility~~1954. On ~~property~~December ~~and~~9, ~~are~~2011, ~~designed~~the topreviously ~~allow~~announced ~~the~~merger ~~company~~between anAGL ~~opportunity~~Resources toand ~~recover~~Nicor ~~those~~was ~~costs~~consummated and towe ~~earn~~became a ~~fair~~wholly ~~return~~owned onsubsidiary ~~that investment based upon an estimated volume~~ of ~~annual~~AGL ~~natural gas deliveries~~Resources. ToCertain ~~the~~terms ~~extent~~used ~~Nicor~~herein ~~Gas’ actual costs to provide utility service~~ are ~~higher~~defined ~~than~~in the ~~levels~~glossary ~~approved~~on bypages ~~the~~3 ~~ICC,~~and ~~or its actual natural gas deliveries are less than the annual volume estimated by the~~ 4.

We are a regulated natural gas distribution utility that serves approximately 2.2 million customers in a service territory that encompasses most of the northern third of Illinois, excluding the city of Chicago. Our primary business activity, and our only reportable segment, is the distribution of natural gas. Our service territory is diverse, providing us with a well-balanced mix of residential, commercial and industrial customers. Residential customers typically account for approximately 50% of natural gas deliveries, while commercial and industrial customers each typically account for approximately 25%. See Operating Metrics on page 22 for operating revenues, deliveries and number of customers by customer classification.

Glossary of Key Terms

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~~ICC,~~Customers ~~Nicor~~have ~~Gas’~~the ~~results~~option of ~~operations~~purchasing their own natural gas supplies, ~~cash~~with ~~flows~~delivery of the gas by us. The larger of these transportation customers also have options that include the use of our storage system and ~~financial~~the ~~condition~~ability ~~could~~to bechoose ~~adversely~~varying ~~affected~~supply ~~until~~backup ~~such~~levels. The ~~time~~choice of transportation service as itcompared ~~files~~to ~~for~~natural ~~and~~gas ~~obtains~~sales ~~ICC~~service ~~approval~~results in less revenue for ~~new~~us ~~charges~~but ~~through~~has ano ~~rate~~direct ~~case~~impact ~~proceeding~~on net operating results. We continue to deliver natural gas, maintain our distribution system and respond to emergencies.

~~Nicor~~We ~~Gas~~also isoperate ~~subject~~the toChicago ~~rules~~Hub, ~~and~~which ~~regulations~~provides ~~pertaining~~natural togas ~~the~~storage ~~integrity~~and oftransmission-related ~~its~~services ~~distribution~~to ~~system~~marketers and ~~environmental~~other ~~compliance~~gas distribution companies. The ~~company’s~~Chicago ~~results~~area ofis ~~operations,~~a ~~cash~~major ~~flows~~market hub for natural gas, and ~~financial~~demand ~~condition~~exists ~~could~~for bestorage ~~adversely~~and ~~affected~~transmission-related services by ~~any~~marketers, ~~additional~~other ~~laws~~gas ordistribution ~~regulations~~companies ~~that~~and ~~are~~electric ~~enacted~~power-generation facilities. Our Chicago Hub addresses that ~~require~~demand. Chicago ~~significant~~Hub ~~increases~~revenues inare ~~the~~passed ~~amount~~directly ofthrough ~~expenditures~~to ~~for~~customers ~~system~~as ~~integrity~~a ~~and~~credit ~~environmental~~to ~~compliance~~our PGA rider.

~~The~~Regulation ~~ICC has other rules that impact the operations of utilities in Illinois. Changes in these rules could impact the company’s results of operations, cash flows~~ and ~~financial~~Rate ~~condition.~~Design

~~Nicor~~Rate ~~Gas~~Structures. We ~~enters~~operate ~~into~~subject ~~various~~to ~~service~~regulations ~~agreements~~and oversight of the Illinois Commission with ~~Nicor~~respect to construction and ~~its~~maintenance of facilities, operations, safety, rates that we charge customers, relationships with our affiliates and other matters. ~~Nicor~~Rates ~~Gas~~charged ~~obtains~~to ~~the~~our ~~required~~customers ~~ICC~~vary ~~approvals~~according ~~for~~to ~~these~~customer ~~agreements~~class (residential, commercial or industrial). The ~~company’s~~Illinois ~~results~~Commission ofapproves ~~operations,~~rates ~~cash~~designed ~~flows~~to ~~and~~provide ~~financial~~us ~~condition~~the ~~could~~opportunity beto ~~adversely~~generate ~~affected~~revenues ifto recover all prudently incurred costs, asincluding a ~~result~~return ofon rate base sufficient to pay interest on debt and provide a ~~change~~reasonable inreturn ~~law~~for orour ~~action~~shareholder. byRate base generally consists of the ~~ICC,~~original ~~new~~cost ~~restrictions~~of ~~are~~utility ~~imposed~~plant ~~that~~in ~~limit~~service, orworking ~~prohibit~~capital and certain other assets; less accumulated depreciation on utility plant in service ~~agreements~~and ~~between~~net ~~Nicor~~deferred ~~Gas~~income tax liabilities, and ~~its~~may ~~affiliates~~include certain other additions or deductions. In accordance with the terms of the Illinois Commission’s order approving the merger of AGL Resources and Nicor, we are not permitted to initiate a rate case proceeding that would increase our rates effective prior to December 9, 2014.

AOur ~~change~~earnings incan ~~the~~be ~~ICC’s~~affected ~~approved~~by ~~rate~~customer ~~mechanism~~consumption ~~for~~patterns ~~recovery~~that are a function of ~~environmental~~weather ~~remediation~~conditions ~~costs~~and atprice ~~former~~levels ~~manufactured~~for natural gas. ~~plant~~Natural ~~sites,~~gas ordeliveries ~~adverse~~are ~~decisions~~temperature-sensitive ~~with~~and ~~respect~~seasonal tosince ~~the~~about ~~prudence~~one-half of ~~costs~~all ~~actually~~deliveries ~~incurred~~are used for space heating. Typically, ~~could~~about ~~adversely~~two-thirds ~~affect~~of the ~~company’s~~deliveries ~~results~~and revenues occur in the Heating Season. Fluctuations in weather have the potential to significantly impact year-to-year comparisons of ~~operations,~~operating income and cash ~~flows~~flow. It is estimated that a 100 degree-day variation from normal weather impacts our margin, net of income taxes, by approximately $1 million under our current rate structure and ~~financial~~depending ~~condition~~on weather patterns.

~~Current~~We ~~environmental~~are ~~laws~~authorized ~~may~~to ~~require~~use ~~the~~a ~~cleanup~~natural ofgas ~~coal~~cost ~~tar~~recovery atmechanism ~~certain~~that ~~former~~allows ~~manufactured~~us to adjust our rates to reflect changes in the wholesale cost of natural gas ~~plant~~and ~~sites~~to ~~for~~ensure ~~which~~we recover all of the ~~company~~costs ~~may~~prudently incurred in ~~part~~purchasing begas ~~responsible~~for our customers. ~~Management~~Therefore, ~~believes~~we ~~that~~do ~~any~~not ~~such~~profit ~~costs~~from ~~that~~the ~~are~~sale ~~not~~of ~~recoverable~~natural ~~from~~gas. Rather, ~~other~~we ~~entities~~earn orincome from ~~insurance~~fixed ~~carriers~~monthly ~~are~~charges ~~recoverable~~and ~~through~~from ~~rates~~variable transportation charges for ~~utility~~delivering ~~services~~natural ~~under~~gas anto ~~ICC-approved~~customers. Annually, ~~mechanism~~the Illinois Commission initiates a review of our natural gas purchasing practices for prudence, and may disallow the ~~recovery~~pass-through of ~~prudently~~costs ~~incurred~~considered ~~costs~~imprudent. AThe ~~change~~annual inprudence ~~this~~reviews ~~rate~~for ~~recovery~~calendar ~~mechanism,~~years ~~however,~~1999-2011 orare aopen ~~decision~~pending resolution by the ~~ICC~~Illinois ~~that~~Commission ~~some~~of orthe ~~all~~proceeding ofconcerning ~~these~~our ~~costs~~PBR ~~were~~plan. See ~~not~~Item ~~prudently~~8 ~~incurred,~~– ~~could~~Financial ~~adversely~~Statements ~~affect~~and ~~the~~Supplementary ~~company’s~~Data ~~results~~– ofNote ~~operations,~~7 ~~cash~~– ~~flows~~Commitments, Guarantees and ~~financial~~Contingencies ~~condition~~for additional information regarding the PBR plan.

AnIn ~~adverse~~addition ~~decision~~to in the ~~proceeding~~natural ~~concerning~~gas ~~Nicor~~cost ~~Gas’~~recovery ~~PBR~~mechanism, ~~plan~~we ~~could~~have ~~result~~several inother acost ~~refund~~recovery ~~obligation~~mechanisms, ~~which~~known ~~could~~as ~~adversely~~riders, ~~affect~~which ~~the~~allow ~~company’s~~us ~~results~~to recover 100% of ~~operations~~certain costs, ~~cash~~such ~~flows~~as bad debt, environmental costs related to the remediation of former manufactured gas plant sites and ~~financial~~energy ~~condition~~efficiency program costs. These riders are further discussed below under “Recent Regulatory Actions” and “Environmental Remediation Costs.”

InRecent ~~2000~~Regulatory Actions. On March 25, ~~Nicor~~2009, ~~Gas~~the ~~instituted~~Illinois aCommission ~~PBR~~issued ~~plan~~an ~~for~~order ~~natural~~approving ~~gas~~an ~~costs. Under~~increase ~~the~~in ~~PBR~~our ~~plan~~base revenues of approximately $69 million, ~~Nicor~~a ~~Gas’~~rate ~~total~~of ~~gas~~return ~~supply~~on ~~costs~~rate ~~were~~base ~~compared~~of to7.58% and a ~~market-sensitive~~rate ~~benchmark~~of return on equity of 10.17%. ~~Savings~~On ~~and~~October ~~losses~~7, ~~relative~~2009, tothe Illinois Commission increased the ~~benchmark~~annual ~~were~~base ~~determined~~revenues ~~annually~~approved ~~and~~in ~~shared~~the ~~equally~~March ~~with~~25, ~~sales~~2009 ~~customers. The~~order ~~PBR~~by ~~plan~~approximately ~~was~~$11 ~~terminated~~million ~~effective~~as ~~January~~a 1,result ~~2003. There~~of ~~are~~a ~~allegations~~rehearing ~~that~~decision ~~Nicor~~and ~~Gas~~increased ~~acted~~the ~~improperly~~rate inof ~~connection~~return ~~with~~on ~~the~~rate ~~PBR~~base ~~plan~~to 8.09%. Therefore, ~~and~~ the ~~ICC~~total isannual ~~reviewing~~base revenue increase resulting from these ~~allegations~~Illinois inCommission aorders ~~pending~~is ~~proceeding~~approximately $80 million. AnFor ~~adverse~~additional ~~decision~~information inabout ~~this~~the rate proceeding, ~~could~~see ~~result~~Item in7 a– ~~refund~~Management’s toDiscussion ~~ratepayers~~and orAnalysis ~~other~~of ~~obligations~~Financial ~~which~~Condition ~~could~~and ~~adversely~~Results ~~affect~~of ~~the~~Operations ~~company’s~~– ~~results~~Legislative ofand ~~operations,~~Regulatory ~~cash~~Update ~~flows~~and Item 8 – Financial Statements and ~~financial~~Supplementary ~~condition~~Data – Note 10 – Regulatory Matters.

~~Nicor~~On ~~Gas~~February ~~relies~~2, on2010, ~~direct~~the ~~connections~~Illinois toCommission ~~eight~~approved ~~interstate~~a ~~pipelines~~bad ~~and~~debt ~~extensive~~rider ~~underground~~that ~~storage~~provides ~~capacity. If~~for ~~these~~the ~~pipelines~~recovery from (or ~~storage~~refund ~~facilities~~to) ~~were~~customers ~~unable~~of tothe ~~deliver~~difference ~~natural~~between ~~gas~~our actual bad debt experience on an annual basis and the benchmark bad debt expense included in our base rates for ~~any~~the ~~reason~~respective ityear. Costs ~~could~~incurred ~~impair~~for ~~Nicor~~bad ~~Gas’~~debt ~~ability~~are subject to ~~meet~~annual ~~its~~Illinois ~~customers’~~Commission ~~full~~prudence ~~requirements~~review. For ~~which~~additional ~~could~~information ~~adversely~~about ~~affect~~ the ~~company~~bad debt rider, see Item 7 – Management’s ~~results~~Discussion and Analysis of ~~operations,~~Financial ~~cash~~Condition ~~flows~~and Results of Operations – Legislative and ~~financial~~Regulatory ~~condition~~Update and Item 8 – Financial Statements and Supplementary Data – Note 10 – Regulatory Matters.

~~Nicor~~Glossary ~~Gas meets its customers’ peak day, seasonal and annual gas requirements through deliveries~~ of ~~natural~~Key gas transported on interstate pipelines, with which it or its natural gas suppliers have contracts, and through withdrawals of natural gas from storage fields it owns or leases. Nicor Gas contracts with multiple pipelines for transportation services. If a pipeline were to fail to perform transportation or storage service, including as a result of war, acts or threats of terrorism, mechanical problems or natural disaster, on a peak day or other day with high volume gas requirements, Nicor Gas’ ability to meet all of its customers’ natural gas requirements may be impaired unless or until alternative arrangements for Terms

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~~delivery~~As part of ~~supply~~the ~~were~~rate ~~put~~order issued in ~~place. Likewise~~2009, ifthe aIllinois ~~storage~~Commission ~~field~~approved ~~owned~~an byenergy ~~Nicor~~efficiency ~~Gas,~~rider orto afund ~~principal~~the ~~Nicor~~costs ~~Gas-owned~~of ~~transmission~~energy orsavings ~~distribution~~programs. In ~~pipeline~~accordance ~~used~~with toan ~~deliver~~Illinois ~~natural~~law enacted in 2009 that requires local gas distribution utilities to ~~the~~establish ~~market~~plans to achieve specified energy savings goals beginning in June 2011, ~~were~~we tofiled bean ~~out~~application with the Illinois Commission seeking approval of ~~service~~a ~~for~~new ~~any~~energy ~~reason,~~efficiency ~~including~~plan asin September 2010. The law provides utilities with a ~~result~~rider to collect the costs of ~~war~~the plan from customers. In May 2011, ~~acts~~the orIllinois ~~threats~~Commission ofapproved ~~terrorism~~our plan. Under our approved plan, ~~mechanical~~we ~~problems~~estimate orthat ~~natural~~we ~~disaster~~would bill approximately $155 million to customers under the rider, ~~this~~over ~~could~~a ~~impair~~three ~~Nicor~~year ~~Gas’~~period ~~ability~~commencing June 1, 2011, to ~~meet~~fund ~~its~~the ~~customers’~~costs ~~full~~of ~~requirements~~various ~~which~~energy ~~could~~savings ~~adversely~~programs ~~affect~~identified in our filing. This new energy efficiency plan rider replaced the ~~company’s~~rider ~~results~~previously ofin ~~operations,~~effect. The ~~cash~~costs ~~flows~~under ~~and~~the ~~financial~~rider ~~condition~~are subject to annual Illinois Commission review.

~~Fluctuations~~On inJuly ~~weather~~1, ~~conservation~~2009, ~~economic~~we ~~conditions~~filed ~~and~~a ~~use~~petition ofseeking ~~alternative~~re-approval ~~fuel~~from ~~sources~~the ~~have~~Illinois Commission of the ~~potential~~operating agreement that governs many inter-company transactions between our affiliates and us. The petition was filed pursuant to ~~adversely~~a ~~affect~~requirement contained in the ~~company~~Illinois Commission order approving our most recent general rate increase and requested that the operating agreement be re-approved without change. On December 9, 2011, the Illinois Commission issued its order approving the operating agreement with the modification that would preclude us from providing certain solicitation services for our affiliates. For additional information regarding this proceeding, see Item 7 – Management’s ~~results~~Discussion and Analysis of ~~operations,~~Financial ~~cash~~Condition ~~flows~~and Results of Operations – Legislative and ~~financial~~Regulatory ~~condition~~Update.

~~When~~On ~~weather~~January ~~conditions~~1, ~~are milder than normal~~2000, ~~Nicor~~we ~~Gas~~instituted ~~has~~a ~~historically~~PBR ~~delivered~~plan ~~less~~for natural gas costs. Under the PBR plan, ~~and~~our ~~consequently~~total ~~may~~gas ~~earn~~supply ~~less~~costs ~~income~~were compared to a market-sensitive benchmark. ~~Nicor~~Savings ~~Gas’~~and ~~natural~~losses ~~gas~~relative ~~deliveries~~to ~~are~~the ~~temperature-sensitive~~benchmark were determined annually and ~~seasonal~~shared ~~since~~equally ~~about~~with ~~one-half~~sales ofcustomers. The ~~all~~PBR ~~deliveries~~plan was terminated effective January 1, 2003. The PBR plan is currently under review by the Illinois Commission as there are ~~used~~allegations ~~for~~that ~~space~~we ~~heating~~acted improperly in connection with the PBR plan. ~~Typically~~In February 2012, ~~about~~we ~~three-quarters~~committed to a stipulated resolution of issues with the ~~deliveries~~Staff ~~and~~of ~~revenues~~the ~~occur~~Illinois ~~from~~Commission, ~~October~~which ~~through~~includes ~~March~~crediting our customers $64 million, but does not constitute an admission of fault. ~~Mild~~This ~~weather~~resulted in ~~the~~a ~~future~~$37 ~~could~~million ~~adversely~~pretax ~~affect~~charge ~~the~~to ~~company’s~~our results in the fourth quarter of ~~operations~~2011, ~~cash~~which ~~flows~~represents the difference between the $64 million proposed credit and ~~financial~~our ~~condition~~previously recorded $27 million liability. InThe ~~addition,~~stipulated ~~factors~~resolution ~~including,~~is ~~but~~subject to review and approval by the Illinois Commission. The Citizens Utility Board and the Illinois Attorney General’s Office are not ~~limited~~parties to, ~~conservation~~this stipulated resolution and continue to pursue their claims in this proceeding. Evidentiary hearings on this matter are scheduled to begin on February 28, ~~economic~~2012. See ~~conditions~~Item 8 – Financial Statements and ~~the~~Supplementary ~~use~~Data of– ~~alternative~~Note ~~fuel~~7 ~~sources~~– ~~could~~Commitments, ~~also~~Guarantees ~~result~~and inContingencies ~~lower~~for ~~customer~~additional ~~demand~~information regarding the PBR plan.

~~Conservation~~Environmental ~~could~~Remediation ~~adversely affect the company's results of operations, cash flows and financial condition.~~Costs

AsWe aare ~~result~~subject ofto ~~recent~~federal, ~~legislative~~state and ~~regulatory~~local ~~initiatives,~~laws ~~the~~and ~~company~~regulations ~~has~~governing ~~put~~environmental ~~into~~quality ~~place~~and ~~programs~~pollution tocontrol. ~~promote~~These ~~additional~~laws ~~energy~~and ~~efficiency~~regulations byrequire ~~its~~us ~~customers. Funding~~to ~~for~~remove ~~such~~or ~~programs~~remedy isthe ~~being~~effect ~~recovered~~on ~~through~~the aenvironment ~~cost~~of ~~recovery rider. However,~~ the ~~adverse~~disposal ~~impact~~or release of ~~lower~~specified ~~deliveries~~substances ~~and~~at ~~resulting~~former ~~reduced~~manufactured ~~margin~~gas ~~could~~plant ~~adversely~~sites ~~affect~~that ~~the~~were ~~company's~~used ~~results~~in ofthe ~~operations,~~1800’s ~~cash flows~~ and ~~financial~~early ~~condition~~to ~~until~~mid ~~such~~1900’s ~~time~~to asproduce itmanufactured ~~files~~gas ~~for~~from ~~and~~coal, ~~obtains~~creating ~~ICC approval for new charges through~~ a ~~rate~~coal ~~case~~tar ~~proceeding~~byproduct.

~~Possible~~We ~~legislation~~report orestimates ~~regulation~~of ~~intended~~future environmental remediation costs on an undiscounted basis. Our ERC liabilities for certain of our former manufactured gas plant sites are estimated based on probabilistic models of potential costs. These probabilistic models have not been performed on all of our sites, but are expected to ~~address~~be ~~concerns~~completed ~~about~~in ~~climate~~2012. Based ~~change~~on ~~could~~the ~~adversely~~estimates ~~affect~~that we have performed, the ~~company’s~~cleanup ~~results~~cost estimates range from $134 million to $216 million. Our liability for environmental remediation costs at December 31, 2011 is $134 million, of ~~operations~~which $19 million is expected to be paid over the next twelve months. As we continue to conduct the actual remediation and enter into cleanup contracts, ~~cash~~we ~~flows~~are increasingly able to provide conventional engineering estimates of the likely costs of many elements of the remediation program. These estimates contain various engineering uncertainties, and ~~financial~~we ~~condition~~regularly attempt to refine and update these engineering estimates. We have an Illinois Commission-approved tariff that provides for the pass-through of prudently incurred environmental costs related to the remediation of these sites. Costs incurred are subject to annual Illinois Commission prudence review.

~~Future~~See ~~laws~~Item ~~may~~7 ~~mandate~~– ~~reductions~~Management’s inDiscussion ~~greenhouse~~and ~~gas~~Analysis ~~emissions~~of byFinancial ~~the~~Condition ~~company~~ and ~~its~~Results ~~customers~~of inOperations an– ~~effort~~Critical toAccounting ~~address~~Estimates, ~~concerns~~for ~~about~~additional ~~the~~information ~~possible~~about ~~effect~~our ofenvironmental ~~those~~remediation ~~emissions~~costs onand ~~the~~Item ~~climate. If~~8 ~~enacted,~~– ~~such~~Financial ~~laws~~Statements ~~could require the company to reduce emissions~~ and toSupplementary ~~incur~~Data ~~compliance~~– ~~costs~~Note ~~that~~7 ~~could~~– ~~adversely~~Commitments, ~~affect~~Guarantees ~~the~~and ~~company’s~~Contingencies ~~results~~for ofadditional ~~operations,~~information ~~cash~~about ~~flows~~our ~~and~~environmental ~~financial~~remediation ~~condition~~efforts.

~~Natural~~Glossary ~~gas commodity price changes may affect the company’s operating costs and competitive position, which could adversely affect its results~~ of ~~operations,~~Key ~~cash flows and financial condition.~~Terms

Nicor Gas is sensitive to changes in natural gas prices. Natural gas prices historically have been volatile and may continue to be volatile in the future. Prices for natural gas are subject to a variety of factors that are beyond the company’s control. These factors include, but are not limited to, the level of consumer demand for, and the supply of, natural gas, processing, gathering and transportation availability, the level of imports of, and the price of foreign natural gas, legislatively mandated gas supply purchase obligations, the price and availability of alternative fuel sources, weather conditions, natural disasters and political conditions or hostilities in natural gas producing regions.

Any changes in natural gas prices could affect the prices Nicor Gas charges, operating costs and the competitive position of products and services. In accordance with the ICC’s PGA regulations, Nicor Gas adjusts its gas cost charges to sales customers on a monthly basis to account for changes in the price of natural gas. However, changes in natural gas prices can also impact certain operating and financing costs that can only be reflected in Nicor Gas’ charges to customers if approved by the ICC in a rate case. Increases in natural gas prices can also have an adverse effect on margin because such increases can result in lower customer demand.

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~~Nicor~~Competition ~~Gas’ use of derivative instruments could adversely affect the company’s results of operations, cash flows~~ and ~~financial~~Customer ~~condition.~~Demand

~~Nicor~~We ~~Gas~~are ~~uses derivative instruments, including futures, options, forwards and swaps, either traded on exchanges or executed over-~~the~~-counter~~ ~~with~~largest natural gas ~~merchants~~distributor asin ~~well as financial institutions, to hedge natural gas price risk~~Illinois. ~~Fluctuating~~We ~~natural~~face ~~gas~~competition ~~prices~~from ~~cause~~other ~~earnings~~energy ~~and financing costs of Nicor Gas to be impacted~~products. ~~The~~ ~~use~~Our ofprincipal ~~derivative~~competition ~~instruments~~is ~~that~~from ~~are~~electric ~~not~~utilities ~~perfectly~~and ~~matched~~oil toand ~~the~~propane ~~exposure~~providers ~~could~~serving ~~adversely affect~~ the ~~company’s~~residential ~~results~~and ofcommercial ~~operations,~~markets ~~cash~~throughout ~~flows~~our ~~and~~service ~~financial condition~~areas. ~~Also~~ Additionally, ~~when~~the ~~Nicor~~potential ~~Gas’~~displacement ~~derivative instruments either do not qualify for hedge accounting treatment~~ or ~~for~~replacement ~~which hedge accounting is not elected, the company’s results~~ of ~~operations,~~natural ~~cash~~gas ~~flows~~appliances ~~and~~with ~~financial~~electric ~~condition~~appliances ~~could~~is bea ~~adversely~~competitive ~~affected~~factor.

~~Nicor~~Competition ~~Gas~~for isspace ~~subject~~heating toand ~~margin~~general ~~requirements~~household inand ~~connection~~small ~~with~~commercial energy needs generally occurs at the initial installation phase when the customer or builder makes decisions as to which types of equipment to install. Customers generally continue to use the chosen energy source for the life of ~~derivative~~the ~~financial~~equipment. ~~instruments~~Customer ~~and~~demand ~~these~~for ~~requirements~~natural gas could ~~escalate~~be ifaffected ~~prices~~by ~~move~~numerous ~~adversely.~~factors, including:

~~Adverse~~· ~~decisions~~changes in ~~lawsuits~~the ~~seeking~~availability aor ~~variety~~price of ~~damages~~natural ~~allegedly~~gas ~~caused~~and byother ~~mercury~~forms ~~spillage could adversely affect the company’s results~~ of ~~operations, cash flows and financial condition.~~energy

~~Nicor~~· ~~Gas~~general ~~has~~economic incurred, and expects to continue to incur, costs related to its historical use of mercury in various kinds of equipment. 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. Adverse decisions regarding these claims, if not fully covered by such insurance, could adversely affect the company’s results of operations, cash flows and financial condition.conditions

~~Transporting~~· ~~and~~energy storing natural gas involves numerous risks that may result in accidents and other operating risks and costs that could adversely affect the company’s results of operations, cash flows and financial condition.conservation

~~Nicor~~· ~~Gas’~~legislation ~~activities involve a variety of inherent hazards~~ and operating risks, such as leaks, accidents and mechanical problems, which could cause substantial financial losses. In addition, these risks could result in loss of human life, significant damage to property, environmental pollution and impairment of Nicor Gas’ operations, which in turn could lead to substantial losses. In accordance with customary industry practice, Nicor Gas maintains insurance against some, but not all, of these risks and losses. The location of pipelines and storage facilities near populated areas, including residential areas, commercial business centers and industrial sites, could increase the level of damages resulting from these risks. The occurrence of any of these events if not fully covered by insurance could adversely affect the company’s results of operations, cash flows and financial condition.regulations

A· ~~significant decline in~~ the ~~market~~capability ~~value~~to ofconvert ~~investments~~from ~~held~~natural ~~within~~gas ~~the~~to ~~pension~~alternative ~~trust maintained by Nicor Gas adversely affects the company’s results of operations, cash flows and financial condition.~~fuels

~~Nicor~~· Gas sponsors a defined benefit pension plan and, over the years, has made contributions to a trust to fund future benefit obligations of the pension plan participants. A significant decline in the market value of investments held in the trust of the pension plan unfavorably impacts the benefit costs associated with the pension plan and could adversely affect Nicor Gas’ liquidity if additional contributions to the trust are required. These impacts, either individually or in aggregate, may adversely affect the company’s results of operations, cash flows and financial condition.weather

·	new commercial construction and

·	new housing starts.

Our large residential customer base provides for a relatively stable level of natural gas deliveries during weak economic conditions. Our industrial and commercial customer base is well diversified, lessening the impact of industry-specific economic swings.

While there has been some improvement in the economic conditions within the areas we serve, there continues to be high rates of unemployment and depressed housing markets with high inventories, significantly reduced new home construction and a decline in new commercial development. As a result, we have experienced only slight customer additions. Our year-over-year customer addition rate was 0.4% in 2011, compared to 0.2% for 2010. We anticipate overall competition and customer trends in 2012 to be similar to our 2011 results.

We work with regulators and state agencies to educate customers throughout the year about energy costs in advance of the Heating Season, and to ensure that those customers qualifying for the Low Income Home Energy Assistance Program and other similar programs receive any needed assistance and we expect to continue this focus for the foreseeable future. We also have an energy efficiency program whereby we educate our customers about energy efficiency and conservation and provide rebates and other incentives for the purchase of high-efficiency natural gas-fueled equipment.

Sources of Natural Gas Supply

We purchase natural gas supplies in the open market by contracting with producers and marketers. We also purchase transportation and storage services from interstate pipelines that are regulated by the FERC. When firm pipeline services are temporarily not needed, we may release the services in the secondary market under FERC-approved capacity release provisions, with proceeds reducing the cost of natural gas charged to customers.

Peak-use requirements are met through utilization of company-owned storage facilities, pipeline transportation capacity, purchased storage services and other supply sources, arranged by either us or our transportation customers. We have been able to obtain sufficient supplies of natural gas to meet customer requirements. We believe natural gas supply and pipeline capacity will be sufficiently available to meet market demands in the foreseeable future.

Natural gas supply. We maintain a diversified portfolio of natural gas supply contracts. Supply purchases are diversified by supplier, producing region, quantity, credit limits and available transportation. Natural gas supply pricing is generally tied to published price indices so as to approximate current market prices. These supply contracts also may require the payment of fixed demand charges to ensure the availability of supplies on any given day. We also purchase natural gas supplies on the spot market to fulfill our supply requirements or to take advantage of favorable short-term pricing.

In 2011, Illinois enacted laws that required us and other large gas utilities in Illinois to elect either to file rate cases with the Illinois Commission in 2012, 2014 and 2016 or sign contracts to purchase SNG to be produced from two coal gasification plants proposed to be constructed in Illinois. The price of the SNG that may be produced from both of the coal gasification plants may exceed market prices and is dependent upon a variety of factors, including plant construction costs, and is currently not estimable. The Illinois laws provide that prices paid for SNG purchased from the plants are to be considered

Glossary of Key Terms

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Anprudent ~~inability~~and tonot ~~access~~subject ~~financial~~to ~~markets~~review ~~could~~or ~~affect~~disallowance by the ~~execution~~Illinois ofCommission. See ~~Nicor~~Item ~~Gas’~~7 ~~business~~– ~~plan~~Management’s Discussion and ~~could~~Analysis ~~adversely~~of ~~affect~~Financial ~~the~~Condition ~~company’s~~and ~~results~~Results of ~~operations,~~Operations ~~cash~~– ~~flows~~Contractual Obligations and ~~financial~~Commitments ~~condition~~and Item 8 – Financial Statements and Supplementary Data – Note 7 – Commitments, Guarantees and Contingencies for additional information about the SNG plant legislation.

~~Nicor~~As ~~Gas~~part ~~relies on access to both short- and long-term capital markets as a significant source~~ of ~~liquidity~~our ~~for~~purchasing ~~capital~~practices, ~~and~~we ~~operating requirements not satisfied by the cash flows from its operations. Management believes that Nicor Gas will~~ maintain ~~sufficient~~a ~~access~~price torisk ~~these~~hedging ~~financial~~strategy markets based upon current credit ratings. However, certain disruptions outside of Nicor Gas’ control or events of default under its debt agreements may increase its cost of borrowing or restrict its ability to ~~access~~reduce ~~one or more financial markets. Such disruptions could include an economic downturn,~~ the ~~bankruptcy~~risk of anprice ~~unrelated energy company or downgrades to Nicor Gas’ credit ratings~~volatility. ~~Furthermore,~~A ~~Nicor~~disciplined ~~Gas’~~approach ~~ability to incur indebtedness or issue debt securities~~ is ~~restricted~~used ~~by the covenants set forth in the Merger Agreement. Restrictions on Nicor Gas’ ability~~ to ~~access~~systematically ~~financial~~forward ~~markets~~hedge ~~may~~a ~~affect~~predetermined ~~its~~portion ~~ability to execute its business plan as scheduled and could adversely affect the company’s results~~ of ~~operations,~~forecasted ~~cash~~monthly ~~flows and financial condition~~volumes.

~~Nicor~~As ~~Gas~~noted ~~has~~previously, ~~credit~~transportation ~~risk~~customers ~~that~~purchase ~~could~~their ~~adversely~~own ~~affect~~natural ~~the~~gas ~~company’s~~supplies. About ~~results~~one-half of ~~operations,~~the ~~cash~~natural ~~flows~~gas ~~and~~that ~~financial~~we ~~condition~~deliver is purchased by transportation customers directly from producers and marketers.

~~Nicor~~Pipeline ~~Gas~~transportation. Our ~~extends~~distribution ~~credit~~and storage system is directly connected to ~~its~~eight ~~counterparties~~interstate pipelines. ~~Despite~~This ~~what~~provides ~~the~~us ~~company~~with ~~believes~~direct access to bemost ~~prudent~~of ~~credit~~the ~~policies~~major ~~and~~natural ~~the~~gas ~~maintenance~~producing ofregions ~~netting~~in ~~arrangements,~~North ~~the~~America. We ~~company~~have islong-term ~~exposed~~transportation tocontracts ~~the~~with ~~risk~~nearly ~~that~~all itof ~~may~~these ~~not~~interstate bepipelines ~~able~~and togenerally ~~collect~~have ~~amounts~~a ~~owed~~right-of-first-refusal tofor itcontract extensions. IfThe ~~counterparties~~largest ~~fail~~of tothese ~~perform~~long-term ~~and~~transportation ~~any~~contracts ~~collateral~~is ~~the~~with ~~company~~Natural ~~has~~Gas ~~secured~~Pipeline isCompany ~~inadequate,~~of itAmerica ~~could~~(“NGPL”) ~~adversely~~which ~~affect~~provides ~~the~~approximately ~~company’s~~65% ~~results~~ of ~~operations~~our firm transportation capacity. In addition, ~~cash~~we ~~flows~~enter into short-term winter-only transportation contracts and ~~financial~~market-area ~~condition~~transportation contracts that enhance our operational flexibility.

~~The~~Storage. We ~~company~~own and operate eight underground natural gas storage facilities. This storage system is ~~involved~~one of the largest in ~~legal~~the orgas ~~administrative~~distribution ~~proceedings~~industry. The ~~before~~storage ~~various~~reservoirs ~~courts~~have a total inventory capacity of about 150 Bcf, approximately 135 Bcf of which can be cycled on an annual basis. The system is designed to meet about 50% of our estimated peak-day deliveries and ~~governmental~~approximately ~~bodies~~40% ~~that~~of ~~could~~our ~~adversely~~normal ~~affect~~winter ~~the~~deliveries. In addition to company’s-owned ~~results~~facilities, we have about 40 Bcf of ~~operations~~purchased storage services under contracts with NGPL that expire in 2013. This level of storage capability provides us with supply flexibility, ~~cash~~improves ~~flows~~the reliability of deliveries and ~~financial~~can ~~condition~~mitigate the risk associated with seasonal price movements.

The company is involved in legal or administrative proceedings before various courts and governmental bodies with respect to general claims, rates, taxes, environmental issues, billing, credit and collection matters, intersegment services, gas cost prudence reviews and other matters. Adverse decisions regarding these matters, to the extent they require the company to make payments in excess of amounts provided for in its financial statements, could adversely affect the company’s results of operations, cash flows and financial condition.Employees

~~Changes~~As inof ~~taxation~~February, ~~could~~1, ~~adversely~~2012, ~~affect~~we ~~the~~had ~~company’s~~approximately ~~results~~2,050 ofemployees. In ~~operations~~addition, ~~cash~~our ~~flows~~affiliate, ~~and~~AGL ~~financial~~Services ~~condition~~Company provides personnel services to us pursuant to a services agreement. Many of these employees are located at Nicor Gas facilities.

~~Various~~Approximately ~~tax~~65% ~~and~~of ~~fee~~our ~~increases~~employees ~~may~~are ~~occur~~represented inunder ~~locations~~a incollective ~~which~~bargaining ~~the~~agreement ~~company~~with ~~operates. For example,~~ the ~~Illinois~~International ~~corporate~~Brotherhood ~~income~~of ~~tax~~Electrical ~~rate~~Workers ~~was~~(Local ~~increased effective January 1, 2011~~No. ~~The~~ ~~company~~19) ~~cannot~~that ~~predict~~expires ~~whether~~February ~~other legislation or regulation will be introduced~~28, ~~the form of any legislation or regulation, or whether any such legislation or regulation will be passed by the legislatures or other governmental bodies~~2014. ~~New~~We ~~taxes~~believe orthat anwe ~~increase~~have ina ~~tax~~good ~~rates~~working ~~would~~relationship ~~increase~~with ~~tax~~our ~~expense~~unionized ~~and could adversely affect the company’s results of operations, cash flows and financial condition~~employees.

Available Information

Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports that we file with, or furnish to, the SEC are available free of charge at AGL Resources’ website, www.aglresources.com, as soon as reasonably practicable after we electronically file such reports with or furnish such reports to the SEC. However, the website and any contents thereof should not be considered to be incorporated by reference into this document. We will furnish copies of such reports free of charge upon written request to our Investor Relations department. You can contact our Investor Relations department at:

AGL Resources Inc.

Investor Relations

P.O. Box 4569

Atlanta, GA 30302-4569

404-584-4000

ITEM 1A. RISK FACTORS

The following factors are the most significant factors that can impact year-to-year comparisons and may affect the future performance of the company. New risks may emerge and we cannot predict those risks or estimate the extent to which they may affect our financial performance.

The risks described below should be carefully considered in addition to the other cautionary statements and risks described elsewhere, and the other information contained in this report and in our other filings with the SEC, including our subsequent reports on Forms 10-Q and 8-K. The risks and uncertainties described below are not the only risks we face, although they are the most significant risks.

Glossary of Key Terms

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Risks Related to ~~the~~Our ~~Proposed Merger with AGL Resources~~Business

~~The~~Risks ~~merger~~related ~~may~~to ~~not~~the beregulation ~~completed,~~of ~~which~~our business could ~~adversely~~ affect ~~Nicor’s~~the ~~business~~rates ~~operations~~we are able to charge, our costs and ~~stock~~our ~~price~~profitability.

ToOur ~~complete~~business ~~the~~is ~~merger,~~regulated ~~AGL~~by ~~Resources~~the ~~shareholders~~Illinois ~~must~~Commission. ~~approve~~This ~~the~~authority ~~issuance~~regulates ofmany ~~shares~~aspects of ~~AGL~~our ~~Resources~~operations, ~~common~~including ~~stock~~construction asand ~~contemplated~~maintenance byof ~~the~~facilities, ~~Merger~~operations, ~~Agreement~~safety, ~~and~~rates ~~the~~that ~~amendment~~we tocharge ~~AGL~~customers, ~~Resources’~~relationships ~~amended~~with our affiliates and ~~restated~~other ~~articles~~matters. Our ofability ~~incorporation~~to obtain rate increases to ~~increase~~maintain ~~the~~our ~~number~~current rates of ~~directors~~return ~~that~~and ~~may~~recover ~~serve~~regulatory onassets ~~AGL~~recorded ~~Resources’~~in ~~board~~accordance ofwith ~~directors,~~authoritative ~~and~~guidance ~~Nicor~~related ~~shareholders~~to ~~must~~regulated ~~approve~~operations ~~the~~depends ~~Merger~~on ~~Agreement. In~~regulatory ~~addition~~discretion, ~~each~~and ofthere ~~AGL~~can ~~Resources~~be ~~and~~no ~~Nicor~~assurance ~~must~~that ~~also~~we ~~make~~will ~~certain~~be ~~filings~~able ~~with~~to ~~and~~ obtain ~~certain~~rate ~~other~~increases ~~approvals~~or ~~and~~continue ~~consents~~receiving ~~from~~our ~~various~~currently ~~federal~~authorized ~~and~~rates ~~state~~of ~~governmental~~return ~~and~~including the recovery of our regulatory ~~authorities~~assets and liabilities.

~~AGL~~We ~~Resources~~are ~~and~~permitted ~~Nicor~~by ~~have~~the ~~not~~Illinois ~~obtained~~Commission’s ~~all~~PGA ~~regulatory~~regulation ~~clearances,~~to ~~consents~~adjust ~~and~~the ~~approvals~~charge ~~required~~ to ~~complete~~our ~~the~~sales ~~merger. Governmental~~customers oron ~~regulatory~~a ~~agencies~~monthly ~~could~~basis ~~still~~to ~~seek~~recover toour ~~block~~prudently orincurred ~~challenge~~actual costs to acquire the ~~merger~~natural orgas ~~could~~we ~~impose~~deliver. Our ~~restrictions~~gas ~~they~~costs ~~deem~~are ~~necessary~~subject orto ~~desirable~~subsequent inprudence ~~the~~reviews ~~public~~by ~~interest~~the asIllinois aCommission ~~condition~~for towhich ~~approving~~we ~~the~~make ~~merger~~annual filings. IfThe ~~these~~annual ~~approvals~~prudence ~~are~~reviews ~~not~~for ~~received,~~calendar oryears ~~they~~1999-2011 are ~~not~~open ~~received~~for onreview ~~terms~~and ~~that~~any ~~satisfy~~disallowance ~~the~~of ~~conditions~~costs ~~set forth~~ in ~~the~~those ~~Merger~~proceedings ~~Agreement,~~could ~~then~~adversely ~~neither~~affect ~~AGL~~our ~~Resources~~results ~~nor~~of ~~Nicor~~operations, ~~will~~cash beflows ~~obligated~~and tofinancial ~~complete the merger~~condition.

~~In addition~~Additionally, we are permitted by Illinois Commission regulations to periodically adjust the ~~Merger~~charge ~~Agreement~~to ~~contains~~our ~~other~~customers ~~customary~~to ~~closing~~recover ~~conditions~~our prudently incurred actual costs associated with environmental remediation at former manufactured gas plant sites, ~~which~~franchise ~~may~~payments ~~not~~to bemunicipalities, ~~satisfied~~energy orefficiency ~~waived. If~~programs, ~~AGL~~bad ~~Resources~~debt expense and ~~Nicor~~municipal utility taxes. Certain of these charges are ~~unable~~subject to ~~complete~~subsequent prudence reviews by the ~~merger,~~Illinois ~~Nicor~~Commission ~~Gas~~and ~~would~~any bedisallowance ~~subject~~of tocosts aby ~~number~~the Illinois Commission could adversely affect our results of ~~risks~~operations, ~~including~~cash ~~the~~flows ~~following:~~and financial condition.

·Most of our other charges are changed only through a rate case proceeding with the ~~company~~Illinois ~~would~~Commission. The ~~not~~charges ~~realize~~established in a rate case proceeding are based on an approved level of operating costs and investment in utility property and are designed to allow us an opportunity to recover those costs and to earn a fair return on that investment based upon an estimated volume of annual natural gas deliveries. As a condition to the ~~anticipated~~approval ~~benefits~~by the Illinois Commission of the merger of AGL Resources and Nicor, ~~including~~we ~~increased~~are ~~operating~~not ~~efficiencies;~~allowed to initiate a rate case proceeding that would increase our rates effective prior to December 9, 2014. To the extent our actual costs to provide utility service are higher than the levels approved by the Illinois Commission, or our actual natural gas deliveries are less than the annual volume estimated by the Illinois Commission, our results of operations, cash flows and financial condition could be adversely affected until such time as we file for and obtain Illinois Commission approval for new charges through a rate case proceeding.

·In ~~the~~2011, ~~attention~~Illinois ofenacted ~~Nicor~~laws ~~Gas’~~that ~~management~~required ~~may~~us ~~have~~and ~~been~~other ~~diverted~~large gas utilities in Illinois to elect either to file rate cases with the ~~merger~~Illinois ~~rather~~Commission ~~than~~in 2012, 2014 and 2016 or sign contracts to ~~its~~purchase ~~own~~SNG ~~operations~~to ~~and~~be ~~the~~produced ~~pursuit~~from oftwo ~~other~~coal ~~opportunities~~gasification ~~that~~plants ~~could~~proposed ~~have~~to ~~been~~be ~~beneficial~~constructed in Illinois. On September 30, 2011, we signed an agreement to purchase approximately 25 Bcf of SNG annually from one of the ~~company;~~proposed facilities for a 10-year term beginning as early as 2015. For additional information on the SNG plant legislation, see Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Legislative and regulatory update.

·We ~~the~~are ~~potential~~subject ~~loss~~to ofrules ~~key~~and ~~personnel~~regulations ~~during~~pertaining to the ~~pendency~~integrity of ~~the~~our ~~merger~~distribution assystem ~~employees~~and ~~may~~environmental ~~experience~~compliance. Our ~~uncertainty~~results ~~about~~of ~~their~~operations, ~~future~~cash ~~roles~~flows ~~with~~and financial condition could be adversely affected by any additional laws or regulations that are enacted that require significant increases in the ~~combined~~amount ~~company;~~of expenditures for system integrity and environmental compliance.

·The ~~Nicor~~Illinois ~~Gas~~Commission ~~will~~has ~~have~~other ~~been~~rules ~~subject~~that toimpact ~~certain restrictions on~~ the ~~conduct~~operations of ~~its~~utilities ~~business,~~in ~~which~~Illinois. Changes ~~may~~in ~~prevent~~these itrules ~~from~~could ~~making~~impact ~~certain~~our ~~acquisitions~~results orof ~~dispositions~~operations, orcash ~~pursuing~~flows ~~certain~~and ~~business~~financial ~~opportunities while the merger is pending~~condition.

~~Nicor~~We isenter ~~required~~into tovarious ~~pay~~service agreements with AGL Resources aand ~~termination~~its ~~fee~~affiliates. We ~~and~~obtain the ~~reimbursement~~required ofIllinois ~~merger-related~~Commission ~~out-~~approvals for these agreements. Our results of~~-pocket~~ ~~expenses~~operations, cash flows and financial condition could be adversely affected if, ~~Nicor~~as ~~terminates~~a result of a change in law or action by the ~~Merger~~Illinois ~~Agreement~~Commission, ~~under~~new restrictions are imposed that limit or prohibit certain ~~circumstances~~service ~~specified~~agreements inbetween ~~the~~us ~~Merger~~and ~~Agreement~~our affiliates or rate recovery of costs incurred by us under those service agreements.

The ~~occurrence~~Dodd-Frank ofWall ~~any~~Street Reform and Consumer Protection Act of ~~these~~2010 ~~events~~(“Dodd-Frank ~~individually~~Act”) orintroduced a comprehensive new regulatory framework for swaps and security-based swaps. Although the SEC and other regulators are still in ~~combination~~the process of adopting rules to implement the new framework, it is possible that our operations could ~~have~~be asubject ~~material~~to ~~adverse~~the ~~effect~~new regulations, depending on the ~~company’s~~ultimate ~~results~~definitions of ~~operations~~key terms in the Dodd-Frank Act such as “swap,” “swap dealer” and “major swap participant.” This may require increased use of our working capital if the regulations increase our collateral requirements related to derivatives utilized in our business.

~~Nicor~~Glossary isof ~~subject~~Key ~~to contractual restrictions in the Merger Agreement that may hinder its operations pending the merger.~~Terms

The Merger Agreement restricts Nicor, without AGL Resources’ consent, from making certain acquisitions and taking other specified actions until the merger occurs or the Merger Agreement terminates. These restrictions may prevent Nicor from pursuing otherwise attractive business opportunities and making other changes to its business prior to completion of the merger or termination of the Merger Agreement.

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~~The~~We ~~merger~~could isincur ~~subject~~significant compliance costs if we must adjust to ~~receipt~~new ofregulations. ~~consent~~In oraddition, ~~approval~~as ~~from~~the ~~governmental~~regulatory ~~entities~~environment ~~that~~for ~~could~~our ~~delay~~industry orincreases ~~prevent~~in complexity, the ~~completion~~risk of ~~the~~inadvertent ~~merger~~noncompliance could also increase. If we fail to comply with applicable regulations, whether existing or ~~that~~new ones, we could ~~cause~~be ~~abandonment~~subject ofto fines, penalties or other enforcement action by the ~~merger~~authorities that regulate our operations, or otherwise be subject to material costs and liabilities.

ToOur ~~complete~~business ~~the~~is ~~merger,~~subject ~~AGL Resources and Nicor need~~ to ~~obtain~~environmental ~~approvals~~regulation ~~or consents from, or make filings with, a number of United States federal~~ and ~~state~~our ~~public~~costs ~~utility,~~to ~~antitrust~~comply ~~and~~could ~~other~~be ~~regulatory~~significant. ~~authorities,~~Any ~~including,~~changes ~~among~~in ~~others,~~existing ~~the~~environmental ~~Federal~~regulation ~~Trade~~could ~~Commission,~~affect ~~the~~our ~~Department~~results of ~~Justice,~~operations ~~the ICC~~ and ~~the~~financial ~~California Public Utilities Commission~~condition.

~~While~~Our ~~the~~operations ~~company~~and ~~believes~~properties ~~that~~are ~~AGL~~subject ~~Resources~~to ~~and~~extensive ~~Nicor~~environmental ~~will~~regulation ~~receive~~pursuant ~~the~~to ~~required~~a ~~statutory~~variety ~~approvals~~of federal, state and ~~other~~municipal ~~clearances~~laws ~~for~~and ~~the~~regulations. ~~merger~~Such environmental legislation imposes, ~~there~~among ~~can~~other bethings, norestrictions, ~~assurance~~liabilities asand toobligations ~~the~~associated ~~timing~~with ofstorage, ~~these~~transportation, ~~approvals~~treatment and ~~clearances. If~~disposal ~~such~~of ~~approvals~~hazardous substances and ~~clearances~~waste ~~are~~and ~~received,~~in ~~they~~connection ~~may~~with ~~impose~~spills, ~~terms~~releases ~~that~~and doemissions ~~not~~of ~~satisfy~~various substances into the ~~conditions~~environment. ~~set~~Environmental ~~forth~~legislation inalso ~~the~~requires ~~Merger~~that ~~Agreement~~our facilities, ~~which~~sites ~~could~~and ~~permit~~other ~~AGL~~properties ~~Resources~~associated orwith ~~Nicor~~our tooperations ~~terminate~~be operated, maintained, abandoned and reclaimed to the ~~Merger~~satisfaction ~~Agreement~~of applicable regulatory authorities. A ~~substantial~~Our ~~delay~~current incosts ~~obtaining~~to ~~the~~comply ~~required~~with ~~authorizations,~~these ~~approvals~~laws orand ~~consents~~regulations orcan ~~the~~be ~~imposition~~significant to our results of ~~unfavorable~~operations ~~terms,~~and ~~conditions~~financial orcondition. ~~restrictions~~Failure ~~contained~~to incomply ~~such~~with ~~authorizations~~these laws and regulations and failure to obtain any required permits and licenses may expose us to fines, ~~approvals~~penalties or ~~consents~~interruptions in our operations that could ~~prevent~~be ~~the~~material ~~consummation~~to ofour ~~the~~results ~~merger~~of operations.

~~Governmental~~In ~~authorities~~addition, claims against us under environmental laws and regulations could ~~seek~~result in material costs and liabilities. Existing environmental regulations could also be revised or reinterpreted, new laws and regulations could be adopted or become applicable to ~~block~~us or ~~challenge~~our facilities, and future changes in environmental laws and regulations could occur. With the ~~merger~~trend astoward ~~they~~stricter ~~deem~~standards, ~~necessary~~greater orregulation, ~~desirable~~more extensive permit requirements and an increase in the ~~public~~number ~~interest~~and types of assets operated by us subject to environmental regulation, our environmental expenditures could increase in the future, particularly if those costs are not fully recoverable from our customers. Additionally, the discovery of presently unknown environmental conditions could give rise to expenditures and liabilities, including fines or penalties, which could have a material adverse effect on our business, results of operations or financial condition.

~~Nicor~~An ~~will~~adverse bedecision ~~subject~~in tothe ~~various~~proceeding ~~uncertainties~~concerning ~~while~~our ~~the~~PBR ~~merger~~plan iscould ~~pending~~result ~~that~~in ~~may~~a ~~cause~~refund ~~disruption~~obligation ~~and~~which ~~may~~could ~~make~~adversely itaffect ~~more~~our ~~difficult~~results toof ~~maintain~~operations, ~~relationships~~cash ~~with~~flows ~~employees,~~and ~~suppliers,~~financial ~~or customers~~condition.

~~Uncertainty~~On ~~about~~January ~~the~~1, ~~effect~~2000, ofwe ~~the~~instituted ~~merger~~a onPBR ~~employees~~plan for natural gas costs. Under the PBR plan, ~~suppliers~~our ~~and~~total ~~customers~~gas ~~may~~supply ~~have~~costs anwere ~~adverse~~compared ~~effect~~to ona ~~Nicor~~market-sensitive benchmark. ~~Although~~Savings ~~Nicor~~and ~~intends~~losses relative to ~~take~~the ~~steps~~benchmark ~~designed~~were todetermined ~~reduce~~annually ~~any~~and ~~adverse~~shared ~~effects,~~equally ~~these~~with ~~uncertainties~~sales ~~may~~customers. The ~~impair~~PBR ~~Nicor’s~~plan ~~abilities~~was toterminated ~~attract~~effective January 1, ~~retain~~2003. There ~~and~~are ~~motivate~~allegations ~~key~~that ~~personnel~~we ~~until~~acted improperly in connection with the ~~merger~~PBR plan, and the Illinois Commission is ~~completed~~reviewing ~~and~~these ~~for~~allegations in a ~~period~~pending ofproceeding. In ~~time~~October ~~thereafter~~2011, ~~and~~rebuttal ~~could~~testimony ~~cause~~was ~~customers~~submitted requesting refunds of $85 million by Staff of the Illinois Commission, ~~suppliers~~$255 million by the Illinois Attorney General’s Office and ~~others~~$305 ~~that~~million ~~deal~~by ~~with~~the ~~Nicor~~Citizens toUtility ~~seek~~Board. An adverse decision in this proceeding could result in a refund to ~~change~~ratepayers or ~~terminate~~other ~~existing~~obligations ~~business~~which ~~relationships~~could ~~with~~adversely ~~Nicor~~affect orour ~~not~~business, ~~enter~~results ~~into~~of ~~new~~operations ~~relationships~~and orfinancial ~~transactions~~condition.

~~Employee~~In ~~retention~~February ~~and~~2012, ~~recruitment~~we ~~may~~committed beto ~~challenging~~a ~~prior~~stipulated toresolution of issues with the ~~completion~~Staff of the ~~merger~~Illinois Commission, aswhich ~~employees~~includes ~~and~~crediting ~~prospective~~our ~~employees~~customers ~~may~~$64 ~~experience~~million, ~~uncertainty~~but ~~about~~does ~~their~~not ~~future~~constitute ~~roles~~an ~~with~~admission ~~the~~of ~~combined company~~fault. IfThis resulted in a $37 million pretax charge to our results in the fourth quarter of 2011, ~~despite~~which ~~Nicor’s~~represents ~~retention~~the difference between the $64 million proposed credit and ~~recruiting~~our ~~efforts,~~previously ~~key~~recorded ~~employees~~$27 ~~depart~~million orliability. The ~~fail~~stipulated resolution is subject to ~~continue~~review ~~employment~~and ~~with~~approval ~~Nicor~~by ~~because~~the ofIllinois ~~issues~~Commission. The ~~relating~~Citizens Utility Board and the Illinois Attorney General’s Office are not parties to the ~~uncertainty~~stipulated resolution and ~~difficulty~~continue ofto ~~integration~~pursue ortheir aclaims ~~desire~~in ~~not~~this proceeding. Evidentiary hearings on this matter are scheduled to ~~remain~~begin ~~with~~on ~~the~~February ~~combined~~28, ~~company~~2012. See Item 8 – Financial Statements and Supplementary Data – Note 7 – Commitments, ~~the~~Guarantees ~~company’s~~and ~~financial~~Contingencies ~~results~~for ~~could~~additional beinformation ~~adversely~~regarding ~~affected~~the PBR plan.

~~Pending~~We ~~shareholder~~rely ~~suits~~on ~~could~~direct ~~delay~~connections orto ~~prevent~~eight ~~the~~interstate ~~closing~~pipelines ofand ~~the~~extensive ~~merger~~underground orstorage ~~otherwise~~capacity. ~~adversely~~A ~~impact~~decrease in the ~~business~~availability of adequate pipeline transportation and ~~operations~~storage ofcapacity ~~Nicor~~could reduce our revenues and profits.

~~Nicor,~~We ~~its~~meet ~~board~~our ofcustomers’ ~~directors~~peak day, ~~AGL~~seasonal ~~Resources,~~and ~~one~~annual orgas ~~both~~requirements ofthrough ~~AGL~~deliveries ~~Resources’~~of ~~acquisition~~natural ~~subsidiaries~~gas ~~and,~~transported inon ~~one~~interstate ~~instance~~pipelines, ~~Nicor’s~~with ~~Executive~~which ~~Vice~~we ~~President~~or ~~and~~our ~~Chief~~natural ~~Financial~~gas ~~Officer,~~suppliers have ~~been~~contracts, ~~named~~and asthrough ~~defendants~~withdrawals inof ~~five~~natural ~~putative~~gas ~~class~~from ~~action~~storage ~~lawsuits~~fields ~~brought~~we byown ~~purported~~or ~~Nicor~~lease. We ~~shareholders~~contract ~~challenging~~with ~~Nicor’s~~multiple ~~proposed~~pipelines ~~merger~~for ~~with~~transportation ~~AGL Resources~~services. ~~The~~If ~~shareholder~~a ~~actions~~pipeline ~~variously~~were ~~allege,~~to ~~among~~fail ~~other things, that the Nicor board of directors breached its fiduciary duties~~ to ~~Nicor~~perform ~~and~~transportation ~~its~~or ~~shareholders~~storage byservice, ~~(i)~~including ~~approving~~as ~~the~~a ~~sale~~result of ~~Nicor~~war, toacts ~~AGL~~or ~~Resources~~threats atof anterrorism, ~~inadequate~~mechanical ~~purchase~~problems ~~price~~or ~~(and~~natural ~~thus~~disaster, ~~failing~~on toa ~~maximize~~peak ~~value~~day toor ~~Nicor~~other ~~shareholders);~~day ~~(ii)~~with ~~conducting~~high anvolume ~~inadequate~~gas ~~sale~~requirements, ~~process~~our byability ~~agreeing~~ to ~~preclusive~~meet ~~deal~~all ~~protection~~of ~~provisions~~our incustomers’ ~~the~~natural ~~Merger~~gas ~~Agreement;~~requirements ~~and~~may ~~(iii)~~be ~~failing~~impaired tounless ~~disclose~~or ~~material~~until ~~information~~alternative ~~regarding~~arrangements ~~the~~for ~~proposed~~delivery ~~merger~~of tosupply ~~Nicor~~were ~~shareholders~~put in place. ~~The~~Likewise, ~~complaints~~if ~~also~~a ~~allege~~storage ~~that~~field ~~AGL~~owned ~~Resources~~by ~~and~~the ~~Nicor~~company, ~~aided~~or ~~and~~a ~~abetted~~principal ~~these~~company-owned ~~alleged~~transmission ~~breaches~~or ofdistribution ~~fiduciary~~pipeline ~~duty. The~~used ~~shareholder~~to ~~actions~~deliver ~~seek,~~natural ~~among~~gas ~~other~~to ~~things,~~the ~~declaratory and injunctive relief~~market, ~~including~~were ~~orders~~to ~~enjoining~~be ~~the~~out ~~defendants~~of ~~from~~service ~~consummating~~for ~~the~~any ~~proposed merger and~~reason, inincluding ~~certain~~as ~~circumstances,~~a ~~damages. No assurances can be~~

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~~given~~result ~~as to the outcome~~ of ~~these lawsuits~~war, ~~including~~acts ~~the costs associated with defending these lawsuits~~ or ~~any~~threats ~~other~~of ~~liabilities~~terrorism, ormechanical ~~costs~~problems ~~the parties may incur in connection with the litigation~~ or ~~settlement~~natural ~~of these lawsuits. Furthermore~~disaster, ~~one~~this ofcould ~~the~~impair ~~conditions~~our ability to ~~closing~~meet ~~the~~our ~~merger~~customers’ isfull ~~that~~requirements ~~there are no injunctions issued by any court preventing the completion of the transactions. No assurance can be given that these lawsuits will not result in such an injunction being issued~~ which could ~~prevent~~adversely oraffect ~~delay~~our ~~the~~results ~~closing~~ of ~~the~~operations, ~~transactions~~cash ~~contemplated~~flows byand ~~the~~financial ~~Merger Agreement~~condition.

~~Nicor~~We ~~will~~may ~~incur~~be ~~significant~~exposed ~~transaction,~~to ~~merger-related~~certain regulatory and ~~restructuring~~financial ~~costs~~risks inrelated ~~connection~~to ~~with~~climate ~~the merger~~change.

~~Nicor~~Climate ~~expects~~change tois ~~incur~~receiving ~~costs~~ever ~~associated~~increasing ~~with~~attention ~~combining~~from ~~its~~scientists ~~operations~~and ~~with~~legislators ~~those~~alike. ofThe ~~AGL~~debate ~~Resources,~~is ongoing as ~~well~~to asthe ~~transaction~~extent ~~fees~~to ~~and~~which ~~other~~our ~~costs~~climate ~~related~~is tochanging, the ~~merger~~potential causes of this change and its potential impacts. ~~These~~ ~~costs~~Some ~~will~~attribute beglobal ~~expensed~~warming asto ~~incurred~~increased levels of greenhouse gases, including carbon dioxide, which has led to significant legislative and regulatory efforts to limit greenhouse gas emissions.

~~AGL~~Presently ~~Resources’~~there ~~inability~~are tono ~~obtain~~federally mandated greenhouse gas reduction requirements in the ~~financing~~United ~~necessary~~States. However, there are a number of legislative and regulatory proposals to ~~complete~~address ~~the~~greenhouse ~~transaction~~gas ~~could~~emissions, ~~delay~~which are in various phases of discussion or ~~prevent~~implementation. ~~the~~The ~~completion~~outcome of ~~the~~federal ~~merger~~and state actions to address global climate change could result in a variety of regulatory programs including potential new regulations, additional charges to fund energy efficiency activities, or other regulatory actions. These actions could:

~~AGL~~· ~~Resources~~result ~~intends~~in toincreased ~~finance~~costs ~~the~~associated ~~cash portion of the merger consideration~~ with ~~debt~~our financing. To this end, AGL Capital Corporation (a subsidiary of AGL Resources), entered into a bridge facility pursuant to which, subject to certain conditions and limitations, the lenders agree to provide loans to AGL Capital Corporation in an aggregate principal amount of $1.05 billion. AGL Resources and/or AGL Capital Corporation may issue debt securities, preferred stock, common equity, or other securities, bank loans, or other debt financings in lieu of all or a portion of the drawing under the bridge facility.operations

~~Under~~· ~~the~~increase ~~terms~~other ofcosts ~~the Merger Agreement, if all of the conditions~~ to ~~closing~~our are satisfied and the proceeds of the financing or alternative financing necessary to complete the transaction are not available, the Merger Agreement may be terminated by either party, so long as such party is not in material breach of its representations, warranties or covenants in the Merger Agreement that was a proximate cause of the financing failure. In such event, AGL Resources is required to pay Nicor a financing failure fee of $115 million.business

~~The~~· ~~availability~~affect ~~of funds under~~ the ~~bridge~~demand ~~facility~~for isnatural ~~subject to certain conditions including~~gas, among others, the absence of a material adverse effect on AGL Resources or Nicor, pro forma compliance with a consolidated total debt to total capitalization ratio of 70 percent, the ability of AGL Capital Corporation to achieve certain minimum credit ratings and the ability of AGL Capital Corporation to achieve a certain liquidity level at closing. If AGL Resources is unable to timely obtain the financing because one of the conditions to the financing fails to be satisfied, the closing of the merger could be significantly delayed or may not occur at all.

·	impact the prices we charge our customers.

Because natural gas is a fossil fuel with low carbon content, it is possible that future carbon constraints could create additional demand for natural gas, both for production of electricity and direct use in homes and businesses.

Any adoption by federal or state governments mandating a substantial reduction in greenhouse gas emissions could have far-reaching and significant impacts on the energy industry. We cannot predict the potential impact of such laws or regulations on our future financial condition, results of operations or cash flows.

Changes in weather conditions may affect our earnings.

Weather conditions and other natural phenomena can have a large impact on our earnings. Severe weather conditions can impact our suppliers and the pipelines that deliver gas to our distribution system. When weather conditions are milder than normal, we have historically delivered less natural gas, and consequently may earn less income. Our natural gas deliveries are temperature-sensitive and seasonal since about one-half of all deliveries are used for space heating. Typically, about two-thirds of our deliveries and revenues occur in the Heating Season. Fluctuations in weather have the potential to significantly impact year-over-year comparisons of operating income and cash flow. We estimate that a 100 degree-day variation from normal weather impacts our margin, net of income taxes, by approximately $1 million under our current rate structure and depending upon weather patterns.

Conservation could adversely affect our results of operations, cash flows and financial condition.

As a result of recent legislative and regulatory initiatives, we have put into place programs to promote additional energy efficiency by our customers. Funding for such programs is being recovered through a cost recovery rider. However, the adverse impact of lower deliveries and resulting reduced margin could adversely affect our results of operations, cash flows and financial condition until such time as we file for and obtain Illinois Commission approval for new charges through a rate case proceeding. As a condition to the approval by the Illinois Commission of the merger of AGL Resources and Nicor, we are not allowed to initiate a rate case proceeding that would increase our rates effective prior to December 9, 2014.

We face increasing competition, and if we are unable to compete effectively, our revenues, operating results and financial condition will be adversely affected which may limit our ability to grow our business.

The natural gas business is highly competitive, increasingly complex, and we are facing increasing competition from other companies that supply energy, including electric companies and oil and propane providers. The primary competitive factor is price. Changes in the price or availability of natural gas relative to other forms of energy and the ability of end-users to convert to alternative fuels affect the demand for natural gas. In the case of commercial and industrial customers, adverse economic conditions, including higher gas costs, could also cause these customers to bypass or disconnect from our systems in favor of special competitive contracts with lower per-unit costs.

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~~Item~~Changes ~~1B.~~or ~~Unresolved~~downturns ~~Staff~~in ~~Comments~~the economy could adversely affect our customers and negatively impact our financial results.

~~None~~The slowdown in the United States economy, along with increased mortgage defaults, and significant decreases in new home construction, home values and investment assets, has adversely impacted the financial well-being of many households in the United States. We cannot predict if the administrative and legislative actions to address this situation will be successful in reducing the severity or duration of this downturn. As a result, our customers may use less gas in future Heating Seasons and it may become more difficult for them to pay their natural gas bills. This may slow collections and lead to higher than normal levels of accounts receivables, bad debt and financing requirements.

~~Item~~Inflation 2and increased gas costs could adversely impact our ability to control operating expenses and capital costs, increase our level of indebtedness and adversely impact our customer base. ~~Properties~~

~~The~~Inflation ~~company’s~~has ~~properties~~caused increases in certain operating expenses and has required us to replace assets at higher costs. We attempt to control costs in part through implementation of best practices and business process improvements, many of which are ~~located~~facilitated through investments in information systems and technology. We have a process in place to continually review the ~~territory~~adequacy ~~described~~of ~~under~~our ~~Item~~rates 1in –relation ~~Business,~~to the increasing cost of providing service and the inherent regulatory lag in adjusting those rates. As a condition to the approval by the Illinois Commission of the merger of AGL Resources and Nicor, we are ~~suitable~~not allowed to initiate a rate case proceeding that would increase our rates effective prior to December 9, ~~adequate~~2014. Historically, we have been able to control operating expenses and ~~utilized~~investments within the amounts authorized to be collected in ~~its~~rates, ~~operations~~and we intend to continue to do so. However, any inability by us to control our expenses in a reasonable manner together with the restriction imposed on our right to initiate a rate proceeding could adversely influence our future results.

~~The~~Rapid increases in the price of purchased gas ~~distribution,~~cause ~~transmission~~us ~~and~~to ~~storage~~experience ~~system~~a ~~includes~~significant ~~approximately~~increase ~~34,000~~in ~~miles~~short-term ofdebt ~~steel,~~because ~~plastic~~we ~~and~~must ~~cast~~pay ~~iron~~suppliers ~~main;~~for ~~approximately~~gas ~~2.0~~when ~~million~~it ~~steel~~is purchased, ~~plastic/aluminum~~which ~~composite,~~can ~~plastic~~be ~~and~~significantly ~~copper~~in ~~services~~advance ~~connecting~~of ~~the~~when ~~mains~~these tocosts ~~customers’~~may ~~premises;~~be ~~and~~recovered ~~eight~~through ~~underground~~the ~~storage~~collection ~~fields~~of monthly customer bills for gas delivered. ~~Other~~ ~~properties~~Increases ~~include~~in ~~buildings,~~purchased ~~land,~~gas ~~motor~~costs ~~vehicles,~~also ~~meters,~~slow ~~regulators,~~our ~~compressors,~~collection ~~construction~~efforts ~~equipment,~~as ~~tools,~~customers ~~communication~~are ~~and~~more ~~computer~~likely ~~equipment~~to delay the payment of their gas bills, ~~software~~leading ~~and~~to ~~office~~higher-than-normal ~~equipment~~accounts receivable. This situation results in higher short-term debt levels.

~~Most~~We ofhave ~~the~~credit ~~company’s~~risk ~~distribution~~that ~~and~~could ~~transmission~~adversely ~~property,~~affect ~~and~~our ~~underground~~results ~~storage~~of ~~fields are located on property owned by others and used by the company through easements~~operations, ~~permits~~cash orflows ~~licenses. The company owns most of the buildings housing its administrative offices~~ and ~~the~~financial ~~land on which they sit~~condition.

~~Substantially~~We ~~all~~extend ~~gas~~credit ~~distribution~~to ~~properties~~our counterparties. Despite performing credit analyses prior to extending credit and seeking to effectuate netting arrangements, we are ~~subject~~exposed to the ~~lien~~risk ofthat we may not be able to collect amounts owed to us. If the ~~indenture~~counterparty ~~securing~~to ~~Nicor~~such ~~Gas’~~a ~~First~~transaction ~~Mortgage~~fails ~~Bonds~~to perform and any collateral we have secured is inadequate, we could experience material financial losses.

~~Additional~~Transporting ~~information~~and ~~about~~storing ~~Nicor~~natural ~~Gas’~~gas ~~business~~involves isnumerous ~~presented~~risks inthat ~~Item~~may 1Aresult –in ~~Risk~~accidents ~~Factors, Item 7 – Management’s Discussion~~ and ~~Analysis~~other ofoperating ~~Financial~~risks ~~Condition~~ and ~~Results of Operations and Item 8 – Notes to the Consolidated Financial Statements~~costs.

~~Item~~Our 3activities involve a variety of inherent hazards and operating risks, such as leaks, accidents, including third party damages, and mechanical problems, which could cause substantial financial losses. ~~Legal~~ In ~~Proceedings~~addition, these risks could result in serious injury to employees and non-employees, loss of human life, significant damage to property, environmental pollution and impairment of our operations, which in turn could lead to substantial losses to us. In accordance with customary industry practice, we maintain insurance against some, but not all, of these risks and losses. The location of pipelines and storage facilities near populated areas, including residential areas, commercial business centers and industrial sites, could increase the level of damages resulting from these risks. The occurrence of any of these events if not fully covered by insurance could adversely affect our results of operations, cash flows and financial condition.

~~Illinois~~The ~~Attorney~~cost ~~General Subpoena. On February 8, 2010, the Office~~ of ~~the~~providing ~~Attorney~~retirement ~~General~~plan ~~for~~benefits ~~the State of Illinois (“IOAG”) issued a subpoena~~ to ~~Nicor~~eligible ~~Gas~~employees ~~to provide documents in connection with an IOAG investigation pursuant to the Illinois Whistleblower Reward~~ and ~~Protection~~qualified ~~Act. On~~retirees November 30, 2010, the IOAG issued Nicor Gas an amended request for information. According to the subpoena, the IOAG investigation relates to billing practices used with certain customer accounts involving government funds. While the company believes its billing practices comply with ICC requirements, the company is ~~unable~~subject to ~~predict~~changes ~~the~~in ~~outcome~~pension offund ~~this~~values ~~matter~~and orchanging ~~reasonably~~demographics ~~estimate its potential exposure, if any,~~ and ~~has~~may ~~not~~have ~~recorded~~ a ~~liability~~material ~~associated~~adverse ~~with~~effect ~~this~~on ~~matter~~our financial results.

~~Also~~We ~~see~~maintain ~~Item~~a 7noncontributory -defined ~~Management’s~~benefit ~~Discussion~~pension plan covering substantially all employees hired prior to 1998. We also provide health care and ~~Analysis~~life insurance benefits to eligible retired employees under our retiree medical benefit plan that includes a limit on our share of ~~Financial~~cost ~~Condition~~for ~~and~~employees ~~Results~~hired after 1982. The cost of ~~Operations~~providing –these ~~Other~~benefits ~~Matters~~to eligible current and ~~Item~~former 8employees –is ~~Notes~~subject to ~~the~~changes ~~Consolidated~~in ~~Financial~~the ~~Statements~~market –value ~~Note~~of 1our –pension ~~Proposed~~fund ~~Merger~~assets, ~~with~~changing ~~AGL~~demographics, ~~Resources~~including ~~and~~longer ~~Note~~life 16expectancy –of ~~Contingencies,~~beneficiaries ~~which~~and ~~are~~changes ~~incorporated~~in ~~herein~~health bycare ~~reference~~cost trends.

~~Item~~Glossary ~~4. (Removed~~of ~~and~~Key ~~Reserved)~~Terms

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~~PART~~Any IIsustained declines in equity markets and reductions in bond yields may have a material adverse effect on the value of investments held in the pension plan’s trust. A reduction in the value of such investments unfavorably impacts the benefit costs associated with the pension plan and could adversely affect our liquidity if additional contributions to the trust are required. These impacts, either individually or in aggregate, may adversely affect our results of operations, cash flows and financial condition.

~~Item~~Natural 5.disasters, ~~Market~~terrorist ~~for~~activities ~~Registrant’s~~and ~~Common~~the ~~Equity,~~potential ~~Related~~for ~~Stockholder~~military ~~Matters~~ and ~~Issuer~~other ~~Purchases~~actions ofcould ~~Equity~~adversely ~~Securities~~affect our business.

~~All~~Natural disasters may damage our assets. The threat of ~~the~~terrorism ~~outstanding~~and ~~common~~the ~~stock~~impact of ~~Nicor~~retaliatory ~~Gas~~military isand ~~owned~~other action by ~~Nicor. There~~the isUnited noStates ~~public~~and ~~trading~~its allies may lead to increased political, economic and financial market ~~for~~instability and volatility in the ~~company’s~~price ~~common~~of ~~stock~~natural gas that could affect our operations. ~~During~~ ~~2010~~In ~~and~~addition, ~~2009~~future acts of terrorism could be directed against companies operating in the United States, and companies in the ~~company~~energy ~~declared~~industry ~~dividends~~may onface ~~its~~a ~~common~~heightened ~~stock~~risk ~~totaling~~of ~~approximately~~exposure ~~$116~~to ~~million~~acts of terrorism. These developments have subjected our operations to increased risks. The insurance industry has also been disrupted by these events. As a result, the availability of insurance covering risks against which we and ~~$69~~our ~~million~~competitors typically insure may be limited. In addition, ~~respectively~~the insurance we are able to obtain may have higher deductibles, higher premiums and more restrictive policy terms.

~~Item~~A 7.security ~~Management’s~~breach ~~Discussion~~could ~~and~~disrupt ~~Analysis~~our ofoperating ~~Financial~~systems, ~~Condition~~shutdown ~~and~~our ~~Results~~facilities ofor ~~Operations~~expose confidential personal information.

~~The~~Security ~~purpose~~breaches of ~~this~~our ~~financial~~information ~~review~~technology isinfrastructure, toincluding ~~explain~~cyber-attacks ~~changes in operating results~~ and ~~financial~~cyber ~~condition~~terrorism, ~~from~~could ~~2008~~lead to ~~2010~~system ~~and~~disruptions toor ~~discuss~~generate ~~business~~facility ~~trends~~shutdowns. ~~that~~If ~~might~~such ~~affect~~an ~~Nicor~~attack ~~Gas. Certain~~or ~~terms~~security ~~used~~breach ~~herein~~were ~~are~~to ~~defined~~occur, inour ~~the~~business, ~~glossary~~results onof ~~pages~~operations ii and ~~iii. The~~financial ~~discussion~~condition iscould ~~organized~~be ~~into~~materially ~~seven~~adversely ~~sections~~affected. –In ~~Summary~~addition, ~~Results~~such ofan ~~Operations,~~attack ~~Financial~~could ~~Condition~~affect ~~and~~our ~~Liquidity,~~ability ~~Other~~to ~~Matters,~~service ~~Outlook~~our indebtedness, ~~Contingencies~~our ability to raise capital and ~~Critical~~our ~~Accounting~~future ~~Estimates~~growth opportunities.

~~SUMMARY~~Additionally, the protection of customer, employee and company data is critical to us. A breakdown or a breach in our systems that results in the unauthorized release of individually identifiable customer or other sensitive data could occur and have a material adverse effect on our reputation, operating results and financial condition. Such a breakdown or breach could also materially increase the costs we incur to protect against such risks. There is no guarantee that the procedures that we have implemented to protect against unauthorized access to secured data are adequate to safeguard against all data security breaches.

~~Nicor~~Risks ~~Gas,~~Related ato ~~wholly~~Our ~~owned~~Corporate ~~subsidiary of Nicor, is one of the nation’s largest natural gas distribution companies,~~ and itFinancial ~~is Nicor’s primary business.~~Structure

~~Operating~~We ~~income~~depend on our ability to successfully access the capital and ~~net~~financial ~~income~~markets. Any ~~are~~inability ~~presented~~to ~~below~~access ~~(in~~the ~~millions):~~capital or financial markets may limit our ability to execute our business plan or pursue improvements that we may rely on for future growth.

	2010		2009		2008
Operating income	$	136.4	$	111.3	$	96.3
Net income	$	100.9	$	75.0	$	59.6

We rely on access to both short-term money markets (in the form of commercial paper and lines of credit) and long-term capital markets as a source of liquidity for capital and operating requirements not satisfied by the cash flow from our operations. Certain market disruptions may increase our cost of borrowing or affect our ability to access one or more financial markets. Such market disruptions could result from:

~~Net~~· ~~income~~adverse ~~increased~~economic ~~$25.9 million in 2010 compared to the prior year due to higher margin ($47.4 million pretax increase).~~conditions

~~Net~~· ~~income~~adverse ~~increased~~general ~~$15.4~~capital ~~million~~market in 2009 compared to the prior year due primarily to higher margin ($39.0 million pretax increase) and lower interest expense ($2.9 million pretax decrease), partially offset by higher depreciation expense ($6.5 million pretax increase), operating and maintenance expense ($5.9 million pretax increase) and lower interest income ($4.0 million pretax decrease).conditions

~~Proposed~~· ~~merger~~poor ~~with~~performance ~~AGL~~and ~~Resources. In~~health ~~December 2010, Nicor entered into a Merger Agreement with AGL Resources, which the company expects will be complete in the second half~~ of ~~2011. In accordance with~~ the ~~Merger~~utility ~~Agreement,~~industry ~~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 adjustment in certain circumstances.general

~~Completion~~· ofbankruptcy ~~the~~or ~~proposed~~financial ~~merger~~distress isof ~~conditioned~~unrelated ~~upon,~~energy ~~among other things, shareholder approval by both~~ companies, ~~expiration~~ or termination of any applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, and approval by, among others, the ICC. The company anticipates that the necessary approvals will be obtained.marketers

·	significant decrease in the demand for natural gas

·	adverse regulatory actions

·	terrorist attacks on our facilities or our suppliers, or

·	extreme weather conditions.

The amount of our working capital requirements in the near-term will primarily depend on the market price of natural gas and weather. Higher natural gas prices may adversely impact our accounts receivable collections and may require us to increase borrowings to fund our operations.

While we believe we can meet our capital requirements from our operations and our available sources of financing, we can provide no assurance that we will continue to be able to do so in the future, especially if the market price of natural gas increases significantly in the near-term. The future effects on our business, liquidity and financial results due to

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Inmarket ~~January~~disruptions ~~2011,~~could ~~Nicor,~~be ~~Nicor~~material ~~Gas~~ and ~~AGL~~adverse ~~Resources~~to ~~filed~~us, aboth ~~joint~~in ~~application with~~ the ~~ICC~~ways ~~for~~described ~~approval of the proposed merger. As stated~~ above, ~~approval~~or byin ~~the~~ways ~~ICC~~that iswe ado ~~condition to completion of the merger. The application did~~ not ~~request~~currently 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 completionanticipate. ~~The ICC has eleven months to act upon the application.~~

~~The~~If ~~Merger~~we ~~Agreement~~breach ~~contains~~any ~~certain~~of ~~termination rights for both Nicor and AGL Resources, and further provides for~~ the ~~payment~~financial ofcovenants ~~fees and expenses upon termination~~ under ~~specified~~our ~~circumstances. For~~credit ~~additional information relating to the proposed merger~~facility, ~~please~~our ~~see~~debt ~~Nicor’s~~service ~~Form~~obligations ~~8-K~~could ~~filed~~be ~~on December 7, 2010~~accelerated. Further information concerning the proposed merger was included in a joint proxy statement/prospectus contained in the registration statement on Form S-4 that was filed with the SEC by AGL Resources on February 4, 2011.

NoOur ~~adjustments~~existing ~~have~~credit ~~been~~facility ~~made~~contains tofinancial covenants. If we breach any of the financial ~~statements~~covenants asunder athis agreement, our debt repayment obligations could be accelerated. In such event, we may not be able to refinance or repay all our indebtedness, which would result in a material adverse effect on our business, results of ~~the~~operations ~~proposed~~and ~~merger~~financial condition.

~~Rate~~A ~~proceeding. On~~downgrade ~~March 25, 2009, the ICC issued an order approving an increase~~ in ~~base~~our ~~revenues~~credit ofrating ~~approximately~~could ~~$69~~negatively ~~million,~~affect aour ~~rate~~ability ofto ~~return~~access oncapital ~~rate~~or ~~base~~may ofrequire ~~7.58~~us ~~percent~~to ~~and~~provide aadditional ~~rate~~collateral ofto ~~return~~certain ~~on equity of 10~~counterparties.~~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.~~

OnOur ~~April~~senior ~~24,~~debt ~~2009,~~is ~~Nicor~~currently ~~Gas~~assigned ~~filed~~investment agrade ~~request~~credit ~~for~~ratings. ~~rehearing~~If ~~with~~ the ~~ICC~~rating ~~concerning~~agencies ~~the~~downgrade ~~capital~~our ~~structure~~ratings, ~~contained~~particularly inbelow ~~the~~investment ~~ICC’s rate order contending the company’s return on rate base should be higher. On October 7~~grade, ~~2009,~~it ~~the~~may ~~ICC~~significantly ~~issued~~limit ~~its~~our ~~decision~~access onto ~~rehearing in which it increased~~ the ~~annual~~commercial ~~base~~paper ~~revenues~~market ~~approved~~and ~~for~~our ~~Nicor~~borrowing ~~Gas~~costs inwould ~~the~~increase. ~~March~~In 25addition, ~~2009~~we ~~order~~would bylikely ~~approximately~~be ~~$11~~required ~~million, increasing the rate of return on rate base~~ to ~~8.09~~pay ~~percent. Nicor Gas placed the rates approved in the rehearing decision into effect on~~ a ~~prospective~~higher ~~basis~~interest onrate ~~October 15, 2009. Therefore, the total annual base revenue increase authorized~~ in ~~the~~future ~~rate~~financings ~~case~~and ~~originally~~our ~~filed~~potential bypool ~~the~~of ~~company~~investors inand ~~April~~funding ~~2008~~sources iswould ~~approximately~~likely ~~$80 million~~decrease.

~~Bad debt rider. In September 2009~~Additionally, ~~Nicor~~if ~~Gas~~our ~~filed~~credit ~~for~~ratings ~~approval~~fall ofto anon-investment ~~bad~~grade ~~debt~~status, ~~rider~~we ~~with~~will ~~the~~be ~~ICC~~required ~~under~~to anprovide ~~Illinois~~additional ~~state~~support ~~law~~for ~~which~~certain ~~took effect in July 2009~~counterparties. On ~~February~~In 2,December ~~2010~~2011, ~~the~~after ~~ICC issued an order approving~~ the ~~company’s~~completion ~~proposed bad debt rider. This rider provides for recovery from customers~~ of the ~~amount~~merger ~~over~~between ~~the~~AGL ~~benchmark~~Resources ~~for~~and ~~bad~~Nicor, ~~debt~~our ~~expense~~credit ~~established~~ratings inwere ~~the~~graded ~~company’s~~as ~~rate cases. It also provides for refunds to customers if bad debt expense is below such benchmarks.~~follows:

As· aS&P ~~result~~lowered ofour ~~the~~corporate ~~February~~credit ~~2010~~rating ~~order,~~from ~~Nicor~~AA ~~Gas~~to ~~recorded~~BBB+ inand ~~income~~our acommercial ~~net~~paper ~~recovery~~rating ~~related~~from A-1+ to ~~2008~~A-2 and ~~2009~~noted ~~of $31.7 million in~~ the ~~first~~outlook ~~quarter of 2010, all of which has been collected. The benchmark, against which 2010 actual bad debt experience~~ is ~~compared,~~now ~~is approximately $63 million~~Stable. ~~The company’s actual 2010 bad debt experience was $35.7 million, resulting in a refund to customers of $27.3 million which will be refunded over a 12-month period beginning June 2011.~~

~~Health~~· ~~Care~~Moody’s ~~Reform~~lowered ~~Legislation. The~~our ~~Health~~senior ~~Care~~unsecured ~~Act~~rating ~~contains~~from aA2 ~~provision that eliminates the tax deduction related~~ to ~~Medicare~~A3 ~~Part~~and Dour ~~subsidies~~commercial ~~received~~paper ~~after~~rating ~~2012. Federal~~from ~~subsidies~~P-1 ~~are provided~~ to ~~sponsors of retiree health benefit plans, such as Nicor Gas, that provide a benefit that is at least actuarially equivalent to the benefits under Medicare Part D~~P-2. ~~Such~~ ~~subsidies have reduced the company~~Moody’s ~~actuarially~~revised ~~determined~~its ~~projected~~outlook ~~benefit~~from ~~obligation~~Negative ~~and annual net periodic benefit costs. Due~~ to ~~the change in taxation, in the first quarter of 2010 Nicor Gas reduced deferred tax assets by $17~~Stable.5 million, reversed an existing regulatory income tax liability of $10.0 million, established a regulatory income tax asset of $7.0 million and recognized a $0.5 million charge to income tax expense. Beginning in 2010, the change in taxation will also reduce earnings by an estimated $1.7 million annually for periods subsequent to the enactment date.

As of December 31, 2011, if our credit rating had fallen below investment grade, we would have been required to provide collateral of approximately $6 million to continue conducting business with certain counterparties.

As a result of cross-default provisions in our borrowing arrangements, we may be unable to satisfy all our outstanding obligations in the event of a default on our part.

Our credit facility contains cross-default provisions. Should an event of default occur under some of our debt agreements, we face the prospect of being in default under other of our debt agreements, obligated in such instance to satisfy a large portion of our outstanding indebtedness and unable to satisfy all our outstanding obligations simultaneously.

The use of derivative instruments in the normal course of business could result in financial losses that negatively impact our results of operations and cash flows.

We use derivative instruments, including futures, options, forwards and swaps, to manage our commodity risk. We could recognize financial losses on these contracts as a result of volatility in the market values of the underlying commodities or if a counterparty fails to perform under a contract. In the absence of actively quoted market prices and pricing information from external sources, the valuation of these derivative instruments can involve management’s judgment and the use of estimates. As a result, changes in the underlying assumptions or use of alternative valuation methods could adversely affect the value of the reported fair values of these contracts.

We are subject to margin requirements in connection with the use of derivative financial instruments and these requirements could escalate if prices move adversely.

We are involved in legal or administrative proceedings before various courts and governmental bodies that could adversely affect our results of operations, cash flows and financial condition.

We are involved in legal or administrative proceedings before various courts and governmental bodies with respect to general claims, rates, taxes, environmental issues, billing, credit and collection matters, gas cost prudence reviews and other matters. Adverse decisions regarding these matters, to the extent they require us to make payments in excess of amounts provided for in our financial statements, could adversely affect our results of operations, cash flows and financial condition.

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~~Additionally,~~Changes ~~the~~in ~~Health~~taxation ~~Care~~could ~~Act~~adversely ~~contains~~affect ~~other~~our ~~provisions~~results ~~that~~of ~~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~~operations, ~~but~~cash ~~will~~flows ~~continue to evaluate the impact of future regulations~~ and ~~interpretations~~financial condition.

~~Capital~~Various ~~market~~tax ~~environment. The~~and ~~volatility~~fee increases may occur in ~~the~~locations ~~capital~~in ~~markets~~which ~~over~~we operate. For example, the ~~past~~Illinois ~~three~~corporate ~~years~~income ~~has~~tax ~~caused~~rate ~~general~~was ~~concern~~increased ~~over~~effective January 1, 2011. We cannot predict whether other legislation or regulation will be introduced, the ~~valuations~~form of ~~investments~~any legislation or regulation, ~~exposure~~or towhether ~~increased~~any ~~credit~~such ~~risk~~legislation ~~and~~or ~~pressures~~regulation onwill ~~liquidity. The~~be ~~company~~passed ~~continues~~by tothe ~~review~~legislatures ~~its~~or ~~investments,~~other ~~exposure~~governmental tobodies. New ~~credit~~taxes ~~risk~~or ~~and~~an ~~sources~~increase ofin ~~liquidity~~tax ~~and~~rates ~~does~~would ~~not~~increase ~~currently~~tax ~~expect~~expense ~~any~~and ~~future~~could ~~material~~adversely ~~adverse~~affect ~~impacts~~our ~~relating~~results toof ~~this~~operations, ~~past~~cash ~~volatility~~flows and financial condition.

~~RESULTS~~ITEM OF1B. UNRESOLVED ~~OPERATIONS~~STAFF COMMENTS

~~The~~We ~~following~~do ~~discussion~~not ~~summarizes~~have any unresolved comments from the ~~major~~SEC ~~items~~staff ~~impacting~~regarding ~~Nicor~~our ~~Gas’~~periodic ~~operating~~or ~~income~~current reports under the Securities Exchange Act of 1934, as amended.

~~Operating~~ITEM ~~revenues~~2. 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 $63.6 million in 2010 compared to the prior year due to higher natural gas costs (approximately $110 million increase), revenue from the bad debt and energy efficiency riders ($32.5 million and $8.8 million, respectively) and the impact of the increase in base rates (approximately $20 million increase), partially offset by warmer weather in 2010 (approximately $75 million decrease) and lower demand unrelated to weather (approximately $25 million decrease).PROPERTIES

~~Operating~~Our ~~revenues~~properties ~~decreased~~are ~~$1,066.1~~located ~~million~~ in ~~2009 compared to~~ the ~~prior~~territory ~~year~~described ~~due~~under ~~primarily~~Item to1 ~~lower~~– ~~natural gas costs (approximately $900 million decrease)~~Business, ~~warmer weather in 2009 (approximately $140 million decrease)~~ and ~~lower~~are ~~demand unrelated to weather (approximately $60 million decrease)~~suitable, ~~partially~~adequate ~~offset~~and byutilized ~~the impact of the increase~~ in ~~base~~our ~~rates (approximately $60 million increase)~~operations.

~~Margin. Nicor~~The ~~Gas utilizes a measure it refers to as “margin” to evaluate the operating income impact of revenues. Revenues include natural~~ gas ~~costs~~distribution, ~~which~~transmission ~~are~~and ~~passed~~storage ~~directly~~system ~~through~~includes toapproximately ~~customers without markup~~34,000 ~~subject~~miles toof ~~ICC review~~steel, plastic and ~~revenue~~cast ~~taxes,~~iron ~~for~~main; ~~which~~approximately ~~Nicor~~two ~~Gas~~million ~~earns~~steel, aplastic/aluminum ~~small administrative fee. These items often cause significant fluctuations in revenues~~composite, ~~with~~plastic ~~equal~~ and ~~offsetting~~copper ~~fluctuations~~services inconnecting ~~cost~~the ofmains ~~gas~~to ~~and~~customers’ ~~revenue~~premises; ~~tax~~and ~~expense,~~eight ~~with~~underground nostorage ~~direct impact on margin~~fields. ~~The~~Other ~~2009~~properties ~~rate~~include ~~orders~~buildings, ~~included~~land, amotor ~~franchise~~vehicles, ~~gas~~meters, ~~cost~~regulators, ~~recovery~~compressors, ~~rider~~construction ~~and~~equipment, ~~a rider to recover the costs associated with energy efficiency programs. Additionally~~tools, incommunication ~~February~~and ~~2010~~computer ~~the ICC approved the company’s bad debt rider. As a result~~equipment, ~~changes~~software ~~in revenue included in margin attributable to these riders are expected to generally be offset by changes within operating~~ and ~~maintenance~~office ~~expense~~equipment.

AMost ~~reconciliation~~of our distribution and transmission property, and underground storage fields are located on property owned by others and used by us through easements, permits or licenses. We own most of ~~revenues~~the buildings housing our administrative offices and ~~margin~~the ~~follows~~land ~~(in~~on ~~millions):~~ which they sit.

	2010			2009			2008
Revenues	$	2,204.4		$	2,140.8		$	3,206.9
Cost of gas		(1,364.1	)		(1,345.7	)		(2,427.8	)
Revenue tax expense		(145.9	)		(148.1	)		(171.1	)
Margin	$	694.4		$	647.0		$	608.0

Substantially all gas distribution properties are subject to the lien of the indenture securing our first mortgage bonds.

Additional information about our business is presented in Item 1 – Business, Item 1A – Risk Factors, Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 8 – Notes to the Consolidated Financial Statements.

ITEM 3. LEGAL PROCEEDINGS

See Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 8 – Financial Statements and Supplementary Data – Note 7 – Commitments, Guarantees and Contingencies – Litigation, which are incorporated herein by reference.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

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~~Margin~~PART increased $47.4 million in 2010 compared to the prior year due primarily to revenue from the bad debt and energy efficiency riders ($32.5 million and $8.8 million, respectively) and the impact of the increase in base rates (approximately $20 million increase), partially offset by warmer weather in 2010 (approximately $8 million decrease), lower interest on customer balances ($5.5 million decrease) and lower demand unrelated to weather (approximately $4 million decrease).II

~~Margin~~ITEM ~~increased $39~~5.0 MARKET ~~million~~FOR inREGISTRANT’S ~~2009~~COMMON ~~compared to the prior year due to the impact of the increase in base rates (approximately $60 million increase)~~EQUITY, ~~partially~~RELATED ~~offset~~STOCKHOLDER byMATTERS ~~warmer~~AND ~~weather~~ISSUER ~~(approximately~~PURCHASES $8OF ~~million~~EQUITY ~~decrease), lower demand unrelated to weather (approximately $5 million decrease) and lower revenue from cost recovery riders (approximately $3 million decrease).~~SECURITIES

~~Operating~~All ~~and~~of ~~maintenance~~our ~~expense. Operating~~outstanding ~~and~~common ~~maintenance~~stock ~~expense~~is ~~decreased~~owned ~~$0.5~~by ~~million~~AGL inResources ~~2010~~since ~~compared to~~ the ~~prior~~completion ~~year. Factors~~of ~~contributing to~~ the ~~decrease~~merger ~~include~~between ~~lower~~AGL ~~company~~Resources ~~use~~ and ~~storage-related~~Nicor ~~gas~~on ~~costs~~December ~~($7.~~9 ~~million decrease)~~, ~~lower pension expense ($4~~2011.6 There ~~million~~is ~~decrease,~~no ~~net~~public oftrading ~~capitalization),~~market ~~lower~~for ~~billing~~our ~~and~~common ~~call center-related costs ($2~~stock.9 Dividends ~~million~~declared ~~decrease), lower costs~~ on ~~legal~~our ~~matters~~common ~~($2.6~~stock ~~million~~were ~~decrease), higher bad debt expense (~~$~~10.6~~57 million ~~increase)~~in 2011 and ~~higher costs associated with the energy efficiency program (~~$~~8.8~~116 million ~~increase). Bad debt expense~~ in 2010 ~~was $63~~.8 We ~~million~~are ~~compared~~restricted toby ~~$53.2~~regulation ~~million~~ in the ~~prior~~amount ~~year. Bad~~we ~~debt~~can ~~expense~~dividend ~~in 2010 includes the recognition of the $31.7 million benefit associated with the net under recovery of bad debt expense from 2008 and 2009; $63.0 million of expense assumed~~ to beour ~~collected~~parent ~~through base rates; and $32~~company.5 Dividends ~~million~~are ofallowed ~~expense~~only ~~which is equal~~ to the ~~revenue~~extent ~~recognized~~of ~~under~~our ~~the~~retained ~~bad~~earnings ~~debt rider~~balance.

~~Operating~~ITEM ~~and maintenance expense increased $5~~7.9 million in 2009 compared to the prior year due primarily to higher payroll and benefit-related costs ($26.5 million increase of which $21.8 million relates to higher pension expense, net of capitalization), the absence of prior year cost recoveries of previously incurred costs ($3.9 million, of which $2.0 million relates to a 2007 investigation of the presence of PCBs in the company MANAGEMENT’sS ~~distribution~~DISCUSSION ~~system~~AND ~~and~~ANALYSIS ~~$1.9~~OF ~~million~~FINANCIAL ~~relates~~CONDITION toAND ~~legal~~RESULTS ~~cost~~OF recoveries from a counterparty with whom Nicor previously did business during the PBR timeframe), higher postage charges ($2.0 million increase) and higher costs on legal matters ($1.8 million increase). Partially offsetting these amounts were lower bad debt expense ($17.5 million decrease due to lower revenues attributable principally to lower natural gas costs), lower company use and storage-related gas costs ($7.3 million decrease) and lower costs associated with the aforementioned cost recovery riders approved in the 2009 rate orders ($5.7 million decrease).OPERATIONS

~~Other~~EXECUTIVE operating expenses. In 2010 and 2008, the company recorded favorable (unfavorable) reserve adjustments of $1.3 million and $(0.6) million, respectively, associated with the company’s mercury inspection and repair program. Additional information about the company’s mercury inspection and repair program is presented in Item 8 – Notes to the Consolidated Financial Statements – Note 16 – Contingencies – Mercury.SUMMARY

~~Other~~We ~~income~~are ~~(expense)~~one of the nation’s largest natural gas distribution companies. ~~Pretax~~Our ~~other~~operations ~~income~~are ~~was~~subject $1to regulation and oversight by the Illinois Commission.8 The ~~million~~Illinois Commission approves natural gas rates designed to provide us the opportunity to generate revenues to recover the cost of natural gas delivered to our customers and our fixed and variable costs such as depreciation, ~~$1.0~~interest, ~~million~~maintenance and $5overhead costs, and to earn a reasonable return.2 Our ~~million~~earnings incan ~~2010~~be affected by customer consumption patterns that are a function of weather conditions, ~~2009~~price levels for natural gas and ~~2008,~~general ~~respectively~~economic conditions that may impact our customers’ ability to pay for gas consumed.

~~Property~~On ~~sale~~December ~~gains~~9, ~~and~~2011, ~~losses~~the ~~vary~~previously ~~from~~announced ~~year-to-year~~merger ~~depending~~between ~~upon~~AGL ~~property~~Resources ~~sales~~and ~~activity. During~~Nicor ~~2010~~was consummated and ~~2008,~~we ~~Nicor~~became ~~Gas~~a ~~realized~~wholly ~~pretax~~owned ~~gains~~subsidiary of $1AGL Resources.3 As ~~million~~a ~~and~~condition ~~$0.8~~to ~~million~~the Illinois Commission’s approval of the merger, ~~respectively. The~~we ~~company~~are ~~periodically~~not ~~assesses~~allowed ~~its~~to ~~ownership~~initiate ofa ~~certain~~rate ~~real~~case ~~estate~~proceeding ~~holdings~~that would increase our rates effective prior to December 9, 2014.

Because of our significant outstanding public debt, the impact of the acquisition (push-down accounting) is not required to be and has not been reflected in our consolidated financial statements.

Legislative and regulatory update

PBR plan. The PBR plan is currently under review by the Illinois Commission as there are allegations that we acted improperly in connection with the PBR plan. In February 2012, we committed to a stipulated resolution of issues with the Staff of the Illinois Commission related to our PBR plan. The stipulated resolution includes crediting our customers $64 million, but does not constitute an admission of fault. This resulted in a $37 million pretax charge to our results in the fourth quarter of 2011, which represents the difference between the $64 million proposed credit and our previously recorded $27 million liability. The stipulated resolution is subject to review and approval by the Illinois Commission. The Citizens Utility Board and the Illinois Attorney General’s Office are not parties to the stipulated resolution and continue to pursue their claims in this proceeding. Evidentiary hearings on this matter are scheduled to begin on February 28, 2012. See Item 8 – Financial Statements and Supplementary Data – Note 7 – Commitments, Guarantees and Contingencies for additional information regarding the PBR plan.

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

On April 24, 2009, we filed a request for rehearing with the Illinois Commission concerning the capital structure contained in the Illinois Commission’s rate order contending our return on rate base should be higher. On October 7, 2009, the Illinois Commission issued its decision on rehearing in which it increased our annual base revenues approved in the March 25, 2009 order by approximately $11 million, increasing the rate of return on rate base to 8.09%. We placed the rates approved in the rehearing decision into effect on a prospective basis on October 15, 2009. Therefore, the total annual base revenue increase authorized in the rate case we originally filed in April 2008 is approximately $80 million.

Bad debt rider. In September 2009, we filed for approval of a bad debt rider with the Illinois Commission under an Illinois state law which took effect in July 2009. On February 2, 2010, the Illinois Commission issued an order approving our proposed bad debt rider. This rider provides for recovery from customers of the amount over the benchmark for bad debt expense established in our rate cases. It also provides for refunds to customers if bad debt expense is below such benchmarks.

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~~Interest~~As a result of the February 2010 order, we recorded in income ~~decreased~~a net recovery related to 2008 and 2009 of $~~0.7~~32 million in the first quarter of 2010, ~~compared~~all toof ~~the~~which ~~prior~~has ~~year~~been ~~due~~collected. The tobenchmark, ~~lower~~against ~~interest~~which on2011 ~~tax~~and ~~matters~~2010 (actual bad debt experience is compared, is approximately $~~0.7~~63 million ~~decrease)~~. ~~Interest~~Our ~~income~~actual ~~decreased~~2011 bad debt experience was $~~4.0~~31 million, resulting in ~~2009~~a ~~compared~~refund to ~~the~~customers ~~prior~~of ~~year~~$32 ~~due~~million ~~primarily~~which towill ~~the~~be ~~impact~~refunded ofbetween ~~lower~~June ~~average~~2012 ~~investment~~and ~~balances~~May ~~($2~~2013.5 Our actual 2010 bad debt experience was $36 million, ~~decrease)~~resulting ~~and~~in ~~interest~~a onrefund ~~tax~~to ~~matters~~customers (of $~~1.2~~27 million ~~decrease)~~which is being refunded between June 2011 and May 2012.

~~Income~~Energy ~~tax~~Efficiency ~~expense~~Plan. ~~The~~On ~~effective~~September ~~income~~29, ~~tax~~2010, ~~rate~~we ~~was~~filed ~~37.0~~an ~~percent,~~application ~~35.0~~with ~~percent~~the ~~and~~Illinois ~~34.2~~Commission ~~percent~~seeking ~~for~~approval ~~2010,~~of ~~2009~~an ~~and~~energy ~~2008,~~efficiency ~~respectively~~plan. The ~~higher~~filing ~~effective~~was ~~income~~made ~~tax~~pursuant ~~rate~~to inan ~~2010~~Illinois ~~compared~~law toenacted ~~the~~in ~~prior~~2009 ~~year~~that isrequires ~~due~~local ~~primarily~~gas todistribution ~~higher~~utilities ~~pretax~~to ~~income~~establish ~~(which~~plans ~~causes~~to aachieve ~~higher~~specified ~~effective~~energy ~~income~~savings ~~tax~~goals ~~rate~~beginning ~~since~~in ~~permanent~~June ~~differences~~2011 and ~~tax~~provides ~~credits~~utilities ~~are~~with a ~~smaller~~rider ~~share~~to ofcollect ~~pretax~~the ~~income)~~costs ~~and~~of the ~~unfavorable~~plan ~~impact~~from ofcustomers. In May 2011, the ~~tax~~Illinois ~~law~~Commission ~~change~~approved ~~with~~our ~~respect~~plan. Under our approved plan, we estimate that our billings to ~~Medicare~~customers ~~Part~~under Dthe ~~subsidies~~rider will be approximately $155 million over a three year period commencing June 1, 2011. ~~The~~ These ~~higher~~amounts ~~effective~~will ~~income~~fund ~~tax~~the ~~rate~~costs of various energy savings programs identified in ~~2009~~our ~~compared~~filing. This tonew ~~2008~~energy ~~reflects~~efficiency ~~higher~~plan ~~pretax~~rider ~~income~~replaced the rider previously in ~~2009~~effect. The costs under the rider are subject to annual Illinois Commission review.

~~Interest~~Petition ~~expense~~for Re-approval of Operating Agreement. ~~Interest~~On ~~expense~~July ~~decreased~~1, ~~$0.3~~2009, ~~million~~we infiled ~~2010~~a ~~compared~~petition toseeking re-approval from the ~~prior~~Illinois ~~year~~Commission of the operating agreement that governs many inter-company transactions between our affiliates and us. ~~Factors~~The ~~contributing~~petition was filed pursuant to a requirement contained in the ~~decrease~~Illinois ~~were~~Commission ~~lower~~order ~~interest~~approving onour ~~income~~most ~~tax~~recent ~~matters~~general ~~($2~~rate increase and requested that the operating agreement be re-approved without change.0 A ~~million~~number ~~decrease),~~of ~~higher~~parties ~~average~~intervened ~~borrowing~~in ~~levels~~the proceeding (~~$1.1~~the ~~million~~“operating ~~increase~~agreement proceeding”) and ~~higher~~sought ~~bank~~modifications ~~commitment~~on ~~fees~~a ~~($1~~prospective basis to the operating agreement.0 Among ~~million~~other ~~increase)~~things, those parties sought changes that would preclude us from continuing to provide sales solicitation services to support warranty products that are sold by Nicor Services. ~~Interest~~We ~~expense~~opposed ~~decreased~~this $2modification to the operating agreement.9 As ~~million~~the Illinois Commission was required to evaluate future transactions between our affiliates and us in ~~2009~~connection ~~compared~~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 Illinois Commission Administrative Law Judge assigned to the ~~prior~~merger ~~year~~proceeding ~~due~~determined to ~~lower~~address ~~average~~the ~~interest~~matters ~~rates~~raised ~~($5~~in the operating agreement proceeding in the merger proceeding.2 On ~~million~~December ~~decrease)~~9, ~~partially~~2011, ~~offset~~the byIllinois ~~higher~~Commission ~~average~~issued ~~borrowing~~its ~~levels~~order ~~($1~~in the merger proceeding approving the operating agreement with a modification that would preclude us from providing certain solicitation services for our affiliates.5 This ~~million~~is ~~increase)~~not expected to have a material impact on our results of operations, cash flows and financial position.

Substitute Natural Gas Plant Legislation. In 2011, Illinois enacted laws that required us and other large gas utilities in Illinois to elect either to file rate cases with the Illinois Commission in 2012, 2014 and 2016 or sign contracts to purchase SNG to be produced from two coal gasification plants proposed to be constructed in Illinois. We signed an agreement on September 30, 2011 to purchase approximately 25 Bcf of SNG annually from one of the proposed facilities for a 10-year term beginning as early as 2015. The price of the SNG under this contract could potentially be about $9.95 per Mcf or more. The counterparty intends to construct a 60 Bcf per year coal gasification plant in southern Illinois.

Additionally, on October 11, 2011, the Illinois Power Agency (“IPA”) approved the form of a draft 30-year contract for the purchase by us of approximately 20 Bcf per year of SNG from a second proposed plant beginning as early as 2018. In November 2011, we filed a lawsuit against the IPA and the developer of this second proposed plant contending that the draft contract approved by the IPA does not conform to certain requirements of the enabling legislation. The lawsuit is pending in circuit court in DuPage County, Illinois. In accordance with the enabling legislation, the draft contract approved by the IPA for the second proposed plant was submitted to the Illinois Commission for further approvals by that regulatory body. The Illinois Commission issued an order on January 10, 2012 approving a final form of contract for the second plant. The final form of contract approved by the Illinois Commission modified the draft contract submitted by the IPA in various respects. Both we and the developer of the plant have filed applications for rehearing with the Illinois Commission seeking changes to the final form of contract it approved.

The price of the SNG that may be produced from both of the coal gasification plants may exceed market prices and is dependent upon a variety of factors, including plant construction costs, and is currently not estimable. Illinois laws provide that prices paid for SNG purchased from the plants are to be considered prudent and not subject to review or disallowance by the Illinois Commission.

Financial Reform Legislation. The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) was enacted in July 2010, representing an overhaul of the framework for regulation of United States financial markets. We are currently evaluating the provisions of the Dodd-Frank Act and the potential impact that it may have on us. However, we believe that an aspect of the Dodd-Frank Act which requires that various regulatory agencies, including the SEC and the Commodities Futures Trading Commission, establish additional regulations for participating in financial markets for hedging certain risks inherent in our business, including commodity risks, may be applicable to us. As a

Glossary of Key Terms

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Nicor Gas Company
Operating Statistics
	2010		2009		2008
Operating revenues (millions)
Sales
Residential	$	1,443.9	$	1,377.9	$	2,176.2
Commercial		355.9		350.4		551.4
Industrial		39.9		38.2		61.9
		1,839.7		1,766.5		2,789.5
Transportation
Residential		46.3		47.1		40.9
Commercial		75.1		79.1		82.2
Industrial		40.3		39.4		38.3
Other		1.7		4.1		25.7
		163.4		169.7		187.1
Other revenues
Revenue taxes		148.1		150.3		174.0
Environmental cost recovery		10.7		12.5		9.7
Chicago Hub		4.1		7.7		11.3
Other		38.4		34.1		35.3
		201.3		204.6		230.3
	$	2,204.4	$	2,140.8	$	3,206.9
Deliveries (Bcf)
Sales
Residential		188.2		199.8		214.4
Commercial		49.0		52.7		54.7
Industrial		6.0		6.3		6.4
		243.2		258.8		275.5
Transportation
Residential		22.8		25.4		25.6
Commercial		83.3		89.6		93.1
Industrial		104.7		102.1		103.9
		210.8		217.1		222.6
		454.0		475.9		498.1
Year-end customers (thousands)
Sales
Residential		1,788		1,763		1,760
Commercial		134		132		130
Industrial		8		8		8
		1,930		1,903		1,898
Transportation
Residential		206		218		222
Commercial		48		50		53
Industrial		4		5		5
		258		273		280
		2,188		2,176		2,178
Other statistics
Degree days		5,720		6,106		6,348
Colder than normal (1)		2%		9%		9%
Average gas cost per Mcf sold	$	5.49	$	5.06	$	8.76
(1) Normal weather for Nicor Gas' service territory, for purposes of this report, is considered to be 5,600 degree days per year for 2010 and 2009 and 5,830 degree days per year for 2008.

result, the costs of participating in financial markets for hedging certain risks may be increased as a result of the new legislation. We may also incur additional costs associated with our compliance with new regulations and anticipated additional reporting and disclosure obligations.

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 a provision that eliminates the tax deduction related to Medicare Part D subsidies received after 2012. Federal subsidies are provided to sponsors of retiree health benefit plans, such as Nicor Gas, that provide a benefit that is at least actuarially equivalent to the benefits under Medicare Part D. Such subsidies have reduced our actuarially determined projected benefit obligation and annual net periodic benefit costs. Due to the change in taxation, in the first quarter of 2010 we reduced deferred tax assets by $18 million, reversed an existing regulatory income tax liability of $10 million, established a regulatory income tax asset of $7 million and recognized a $1 million charge to income tax expense. The change in taxation will reduce earnings by an estimated $2 million annually for periods subsequent to the enactment date.

Additionally, the Health Care Act contains other provisions that may impact our obligation for retiree health care benefits. We do not currently believe these provisions will materially increase our retiree medical plan benefit obligation, but we will continue to evaluate the impact of future regulations and interpretations.

Natural gas price volatility. Volatility in the natural gas market arises from a number of factors such as weather fluctuations or changes in supply or demand for natural gas in different regions of the country. The volatility of natural gas commodity prices has a significant impact on our customer rates and our long-term competitive position against other energy sources. Our natural gas acquisition strategy is designed to secure sufficient supplies of natural gas to meet the needs of our customers and to hedge gas prices to reduce price volatility.

It is possible that natural gas prices will remain low for an extended period based on current levels of excess supply relative to market demand for natural gas and the lack of demand by commercial and industrial enterprises. However, as economic conditions improve the demand for natural gas may increase, natural gas prices could rise and higher volatility could return to the natural gas markets.

Seasonality. Our operating revenues and operating income are seasonal. Approximately 71% of operating revenues and 56% of operating income for the year ended December 31, 2011 were generated during the first and fourth quarters of 2011. Seasonality also affects the comparison of certain Consolidated Statements of Financial Position items such as receivables, unbilled revenue, inventories and short-term debt across quarters. However, these items are comparable when reviewing our annual results. Our base operating expenses, excluding cost of gas sold, and interest expense are incurred relatively equally over any given year. Our operating results, however, can vary significantly from quarter to quarter as a result of seasonality.

RESULTS OF OPERATIONS

We generate substantially all our operating revenues through the sale and distribution of natural gas. We include in our consolidated revenues an estimate of revenues from natural gas distributed, but not yet billed, from the date of the last bill to the end of the reporting period. No individual customer or industry accounts for a significant portion of our revenues. The following table provides our operating income and net income.

In millions	2011		2010		2009

Operating income	$	83	$	136	$	111

Net income	$	50	$	101	$	75

Net income decreased $51 million in 2011 compared to the prior year due to lower margin ($44 million pretax decrease), an unfavorable adjustment to our previously recorded liability associated with our PBR plan ($37 million pretax), higher depreciation expense ($5 million pretax increase), partially offset by lower interest expense ($4 million pretax decrease), lower operating and maintenance expense ($2 million pretax decrease) and a lower effective income tax rate.

Net income increased $26 million in 2010 compared to the prior year due to higher margin ($47 million pretax increase).

The following discussion summarizes the major items impacting our operating income.

Glossary of Key Terms

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~~FINANCIAL~~Operating ~~CONDITION~~revenues. Operating ~~AND~~revenues ~~LIQUIDITY~~are impacted by changes in natural gas costs, which are passed directly through to customers without markup, subject to Illinois Commission review, and cost recovery riders, which are generally offset by operating and maintenance expense with no impact on operating income. Operating revenues decreased $140 million in 2011 compared to the prior year due to lower natural gas costs (approximately $115 million decrease) and lower revenue from cost recovery riders ($46 million decrease), partially offset by higher demand unrelated to weather (approximately $15 million increase).

~~The~~Operating ~~company~~revenues ~~believes~~increased it$63 ~~has~~million ~~access~~in 2010 compared to ~~adequate~~the ~~resources~~prior year due to ~~meet~~higher ~~its~~natural ~~needs~~gas ~~for~~costs ~~capital~~(approximately ~~expenditures,~~$110 ~~debt~~million ~~redemptions~~increase), ~~dividend~~revenue ~~payments~~from ~~and~~cost ~~working~~recovery ~~capital. These~~riders ~~resources~~($43 ~~include~~million ~~net~~increase) ~~cash~~and ~~flow~~the ~~from~~impact ~~operating~~of ~~activities,~~the ~~access~~increase toin ~~capital~~base ~~markets,~~rates ~~lines~~(approximately of$20 ~~credit~~million ~~and~~increase), ~~short-term~~partially ~~investments. Capital~~offset ~~market~~by ~~conditions~~warmer ~~are~~weather ~~not~~in ~~currently~~2010 ~~expected~~(approximately to$75 ~~have~~million adecrease) ~~material~~and ~~adverse~~lower ~~impact~~demand onunrelated ~~the~~to ~~company’s~~weather ~~ability~~(approximately to$25 ~~access~~million ~~capital~~decrease).

~~Operating~~Margin. We ~~cash~~utilize ~~flows~~a measure referred to as “margin” to evaluate the operating income impact of revenues. ~~The~~Margin ~~company’s~~is ~~business~~a non-GAAP measure that is ~~highly~~calculated ~~seasonal~~as revenues minus cost of gas and revenue tax expense, which excludes operating ~~cash~~and ~~flow~~maintenance ~~may~~expense, ~~fluctuate~~depreciation, ~~significantly~~taxes ~~during~~other ~~the~~than ~~year~~income taxes and ~~from~~income ~~year-to-year~~tax ~~due~~expense. These toitems ~~factors~~are ~~such~~included in our calculation of operating income as ~~weather,~~reflected in our Consolidated Statements of Income. Revenues include natural gas ~~prices~~costs, ~~the~~which ~~timing~~are ofpassed ~~collections~~directly ~~from~~through to customers without markup, ~~natural~~subject ~~gas~~to ~~purchasing~~Illinois Commission review, and ~~storage~~revenue ~~and~~taxes, ~~hedging~~for ~~practices~~which we earn a small administrative fee. ~~The~~We ~~company~~believe ~~relies~~margin onis ~~short-term~~a ~~financing,~~better ~~backed~~indicator bythan ~~bank~~operating ~~lines~~revenues ofbecause ~~credit~~these items often cause significant fluctuations in revenues, towith ~~meet~~equal ~~seasonal~~and ~~increases~~offsetting fluctuations in ~~working~~cost ~~capital~~of ~~needs~~gas and revenue tax expense, and no direct impact on margin. ~~Cash~~Margin ~~requirements~~should ~~generally~~not ~~increase~~be ~~over~~considered ~~the~~an ~~last~~alternative ~~half~~to, ofor ~~the~~more ~~year~~meaningful ~~due~~indication toof ~~increases~~our inoperating ~~natural~~performance ~~gas~~than ~~purchases~~operating revenues, ~~gas~~as determined in ~~storage~~accordance ~~and~~with ~~accounts receivable~~GAAP. ~~During~~In ~~the~~addition, ~~first~~our ~~half~~margin may not be comparable to a similarly titled measure of ~~the~~another ~~year,~~company. We ~~positive~~have ~~cash~~a ~~flow~~franchise ~~generally~~gas ~~results~~cost ~~from~~recovery rider, a rider to recover the ~~sale~~costs ofassociated ~~gas~~with inenergy ~~storage~~efficiency programs, and ~~the~~effective ~~collection~~February of2010, ~~accounts~~a ~~receivable~~bad debt rider. ~~This~~Changes ~~cash~~in isrevenue ~~typically~~included ~~used~~in margin attributable to ~~substantially~~these ~~reduce,~~riders orare ~~eliminate,~~expected ~~short-term~~to ~~debt~~generally ~~during~~be ~~the~~offset ~~first~~by ~~half~~changes ofwithin ~~the~~operating ~~year~~and maintenance expense with generally no impact on operating income.

~~Nicor~~A ~~Gas~~reconciliation ~~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~~revenues ~~due to daily settlements resulting from changes in natural gas futures prices. The company manages these fluctuations with short-term borrowings~~ and ~~investments.~~margin follows:

Net cash flow provided from operating activities decreased $161.3 million for the year ended December 31, 2010 compared to the prior year. The significant factors contributing to the decrease in cash flow are primarily a result of lower average natural gas prices at the beginning of the 2009/2010 heating season compared to the 2008/2009 heating season and include:

In millions	2011			2010			2009

Revenues	$	2,064		$	2,204		$	2,141
Cost of gas		(1,260	)		(1,364	)		(1,346	)
Revenue tax expense		(154	)		(146	)		(148	)
Margin	$	650		$	694		$	647

·Margin adecreased ~~decrease~~$44 ofmillion ~~$155~~in 2011 compared to the prior year.1 Margin ~~million~~includes the revenue from ~~changes~~the riders noted above which totaled $3 million in ~~receivables~~2011 and $49 million in 2010. Margin excluding those riders increased $2 million compared to the prior year due to higher ~~receivable~~demand ~~balances~~unrelated atto ~~the~~weather ~~end~~(approximately of$2 ~~2008~~million ~~versus~~increase) ~~2009;~~ and colder weather (approximately $1 million increase), partially offset by lower interest on customer balances (approximately $1 million decrease).

·Margin aincreased ~~decrease~~$47 ofmillion ~~$87~~in 2010 compared to the prior year.2 Revenues from the riders noted above totaled $49 million ~~from~~in ~~changes~~2010 and $6 million in ~~margin~~2009. Margin ~~accounts~~excluding ~~related~~those riders increased $4 million compared to ~~derivative~~the ~~instruments~~prior year due primarily to the ~~decline~~impact of the increase in ~~gas~~base ~~prices~~rates (approximately $20 million increase), partially offset by warmer weather in 2010 (approximately $8 million decrease), lower interest on customer balances ($6 million decrease) and lower demand unrelated to weather (approximately $4 million decrease).

InOperating ~~addition~~and maintenance expense. Operating and maintenance expense decreased $2 million in 2011 compared to the prior year. Operating and maintenance expense related to riders noted above decreased $46 million compared to the prior year. Excluding the impact of such riders, operating and maintenance expense increased $44 million compared to the ~~company~~prior ~~had~~year ~~higher~~due ~~volumes~~to the absence of ~~gas~~2010’s recovery of 2008 and 2009 bad debt expense under the bad debt rider ($32 million) and higher workers’ compensation and general claims expense ($11 million increase) principally due to changes in ~~storage~~estimates atas ~~December~~our 31methodologies were revised to reflect how our new management approaches such matters from a business standpoint. Total bad debt expense, ~~2010~~including ~~when~~the impact of the bad debt rider, was $46 million compared to $64 million in the prior year. Bad debt expense includes $(17) million in 2011 and $33 million in 2010 of expense (income) which is equal to the revenue recognized under the bad debt rider and $63 million of expense assumed to be collected through base rates in both years. Bad debt expense in 2010 also includes the recognition of the $32 million benefit associated with the net under recovery of bad debt expense from 2008 and 2009.

~~Net~~Glossary cash flow provided from operating activities increased $554.5 million for the year ended December 31, 2009 compared to the prior year. The significant factors contributing to the increase in cash flow are primarily a result of ~~lower~~Key ~~average natural gas prices at the beginning of the 2008/2009 heating season compared to the 2007/2008 heating season and include:~~ Terms

· an increase of $222.8 million from changes in receivables due to higher receivable balances at the end of 2008 versus 2009; and

· an increase of $198.6 million from changes in margin accounts related to derivative instruments due to the decline in gas prices.

In addition, the company had lower volumes of gas in storage at December 31, 2009 when compared to 2008.

Investing activities. Net cash flow used for investing activities was $182.7 million, $187.7 million and $222.7 million in 2010, 2009 and 2008, respectively.

Capital expenditures is an internal measure utilized by management that represents cash additions to property, plant and equipment, adjusted for items including the accrual of work performed through period end and other non-cash items, contributions in aid of construction and expenditures associated with asset retirement obligations.

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~~Capital~~Operating ~~expenditures~~and maintenance expense decreased $51 million in 2010 compared to the prior year. Operating and maintenance expense related to riders noted above increased $~~198~~43 million incompared ~~2010~~to ~~from~~the prior year which includes $~~203~~33 million related to the bad debt rider that was implemented in ~~2009~~2010. ~~Factors~~Excluding ~~contributing~~the impact of such riders, operating and maintenance expense decreased $44 million compared to the ~~decrease~~prior ~~include~~year ~~lower~~due ~~expenditures~~primarily to the recognition of the $32 million benefit associated with ~~gas~~the ~~distribution,~~net ~~transmission~~under recovery of bad debt expense from 2008 and 2009. Other factors contributing to the decrease include lower company use and storage-related ~~system~~gas ~~improvements~~costs (~~approximately~~ $68 million decrease), lower ~~facility~~pension ~~construction~~expense (~~approximately~~ $35 million decrease), lower ~~capitalized~~billing ~~overhead~~and call center-related costs ~~attributable~~($3 tomillion decrease), lower ~~postretirement~~costs ~~benefit~~on ~~costs~~legal ~~(approximately~~matters ($23 million decrease) and higher ~~information~~bad ~~technology~~debt ~~improvements~~expense (~~approximately~~ $810 million increase). Bad debt expense in 2010 was $64 million compared to $53 million in the prior year.

~~Capital~~Other ~~expenditures~~operating ~~decreased~~expenses. In ~~$26~~the ~~million~~fourth toquarter ~~$203~~of ~~million~~2011, inwe ~~2009~~recorded ~~from~~an ~~$229~~unfavorable ~~million~~adjustment inof ~~2008~~$37 ~~due~~million to ~~the~~our ~~impact~~previously ofrecorded ~~lower~~liability ~~customer~~associated ~~additions~~with ~~(approximately~~our ~~$10~~PBR ~~million~~plan. Additional ~~decrease),~~ information ~~technology~~about ~~improvements~~the ~~(approximately~~PBR ~~$10~~plan ~~million~~is ~~decrease),~~presented ~~facility~~in ~~construction~~Item ~~(approximately~~8 $9– ~~million~~Financial ~~decrease)~~Statements and ~~lower~~Supplementary ~~expenditures~~Data ~~associated~~– ~~with~~Note ~~gas distribution, transmission and storage system improvements (approximately $~~7 ~~million~~– ~~decrease)~~Commitments, ~~partially~~Guarantees ~~offset~~and ~~by higher capitalized overhead costs attributable to higher postretirement benefit costs (approximately $9 million increase)~~Contingencies.

~~Capital~~Income ~~expenditures~~tax ~~are~~expense. The ~~expected~~effective income tax rate was 35.5% in 2011, 37.0% in 2010 and 35.0% in 2009. The lower effective income tax rate in 2011 compared to ~~increase~~2010 $7is ~~million~~due primarily to ~~$205~~the ~~million~~lower pretax income in 2011 ~~from~~(which ~~$198~~causes ~~million~~a lower effective income tax rate since tax credits are a larger share of pretax income), partially offset by an increase in the Illinois state income tax rate from 7.3% in 2010 to 9.5% in 2011. ~~Factors~~The ~~contributing~~higher effective income tax rate in 2010 compared to ~~this~~the ~~expected~~prior ~~increase~~year ~~include~~is due primarily to higher ~~expenditures~~pretax ~~associated~~income ~~with~~(which ~~facility~~causes ~~construction~~a ~~and~~higher ~~new~~effective ~~service~~income ~~additions~~tax rate since permanent differences and ~~lower~~tax ~~expenditures~~credits ~~associated~~are ~~with~~a ~~gas~~smaller ~~distribution,~~share ~~transmission~~of pretax income) and ~~storage~~the ~~system~~unfavorable ~~improvements~~impact of the tax law change with respect to Medicare Part D subsidies.

~~Financing~~Interest ~~activities~~expense. ~~Nicor~~The ~~Gas’~~following ~~access~~table toprovides ~~financing~~additional atdetail ~~competitive rates is, in part, dependent~~ on ~~its~~interest ~~credit~~expense ~~ratings. The current credit ratings~~ for ~~Nicor~~the ~~Gas~~last ~~are~~three ~~as follows:~~years.

	Standard & Poor’s		Moody’s	Fitch
In millions	2011			2010			2009
Commercial Paper	A-1+		P-1	F-1
Interest expense	$	32		$	36		$	37
Senior Secured Debt	AA		Aa3	AA-
Average debt outstanding (1)	$	729		$	769		$	891
Senior Unsecured Debt	AA		A2	A+
Average rate		4.4	%		4.7	%		4.2	%
Corporate Credit Rating	AA		n/a	n/a

~~In December 2010, Standard and Poor’s~~ (~~“S&P”~~1), ~~Moody’s~~Daily ~~and~~average ~~Fitch~~of ~~affirmed~~all ~~Nicor~~outstanding ~~Gas’ credit ratings~~debt. S&P changed Nicor Gas’ outlook from stable to credit watch with negative implications. Moody’s changed the outlook from stable to negative. Fitch maintained Nicor Gas’ outlook as stable. Both S&P and Moody’s attributed the change in outlook to the proposed merger with AGL Resources.

~~Long-term~~Interest ~~debt. The~~expense ~~company~~decreased ~~typically~~$4 ~~uses~~million in 2011 compared to the ~~net~~prior ~~proceeds~~year ~~from~~due ~~long-term~~to ~~debt~~lower ~~for~~average ~~refinancing~~interest ~~outstanding~~rates ~~debt~~($3 million decrease) and lower interest on income tax matters ($2 million decrease), ~~for~~partially ~~construction~~offset ~~programs~~by higher bank commitment fees ($1 million increase). Lower average interest rates were due to the ~~extent~~February ~~not~~2011 ~~provided~~refinancing byof ~~internally~~$75 ~~generated~~million ~~funds~~first mortgage bonds. Interest expense decreased $1 million in 2010 compared to the prior year. Factors contributing to the decrease were lower interest on income tax matters ($2 million decrease), higher average long-term debt borrowing levels ($1 million increase) and ~~for~~higher ~~general~~bank ~~corporate~~commitment ~~purposes~~fees ($1 million increase).

InOperating ~~February~~metrics. Selected weather, revenue, customer and volume metrics for 2011, ~~Nicor~~2010 ~~Gas~~and ~~issued~~2009, ~~$75~~which ~~million~~we ~~First~~consider ~~Mortgage~~to ~~Bonds~~be atsome ~~2.86~~of ~~percent~~the key performance indicators for our business, ~~due~~are presented in ~~2016~~the following tables. We measure the effects of weather on our business through aHeating ~~private~~Degree ~~placement~~Days. ~~and~~Generally, ~~utilized~~increased ~~the~~Heating ~~proceeds~~Degree toDays ~~retire~~result ~~the~~in ~~$75~~greater ~~million~~demand 6for gas on our distribution system.~~625~~ ~~percent~~However, ~~First~~extended ~~Mortgage~~and ~~Bond~~unusually ~~series~~mild ~~which~~weather ~~matured~~during inthe ~~February~~Heating ~~2011~~Season can have a significant negative impact on demand for natural gas.

InOur ~~February~~customer ~~2009,~~metrics highlight the ~~$50~~average ~~million~~number ~~5.37~~of ~~percent~~customers ~~First~~to ~~Mortgage~~which ~~Bond~~we ~~series~~provide ~~matured and was retired~~services. In ~~July~~This ~~2009,~~number ~~Nicor~~of ~~Gas~~customers ~~issued~~can ~~$50~~be ~~million~~impacted ~~First~~by ~~Mortgage~~natural ~~Bonds~~gas ~~at 4.70 percent~~prices, ~~due~~economic inconditions ~~2019~~and ~~through~~competition afrom ~~private~~alternative ~~placement~~fuels.

InVolume ~~determining~~metrics ~~that~~present the ~~bonds~~effects ~~issued in 2011 and 2009 qualified for exemption from registration under Section 4(2)~~ of ~~the~~weather ~~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~~our ~~institutional~~customers’ ~~investor~~demand ~~that purchased the bonds represented that it was purchasing the bonds~~ for ~~its~~natural ~~own account and not with a view to distribute them~~gas.

~~Substantially~~Glossary ~~all gas distribution properties are subject to the lien~~ of ~~the~~Key ~~indenture securing Nicor Gas’ First Mortgage Bonds.~~Terms

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At December 31, 2010, Nicor Gas had the capacity to issue approximately $470 million of additional First Mortgage Bonds under the terms of its indenture. On February 25, 2009, Nicor Gas filed a shelf registration with a $225 million capacity, which became effective on March 20, 2009.

Weather
Heating Degree Days (1)
	Normal	2011	2010	2009	2011 vs. 2010 colder (warmer)	2010 vs. 2009 colder (warmer)	2011 vs. normal colder (warmer)	2010 vs. normal colder (warmer)	2009 vs. normal colder (warmer)
Year ended December 31,	5,600	5,892	5,720	6,106	3%	(6)%	5%	2%	9%

(1) Obtained from the Chicago Midway Airport weather station. Normal represents a ten-year average from 1998 through 2007, which was established in our last rate case.

Nicor Gas believes it is in compliance with its debt covenants. Nicor Gas’ long-term debt agreements do not include ratings triggers or material adverse change provisions.


Operating Revenues	Year ended December 31,			2011 vs. 2010	2010 vs. 2009
In millions	2011	2010	2009	% change	% change

Sales
Residential	$ 1,327	$ 1,444	$ 1,378	(8.1)%	4.8 %
Commercial	334	356	351	(6.2)%	1.4 %
Industrial	38	40	38	(5.0)%	5.3 %
Total sales	1,699	1,840	1,767	(7.7)%	4.1 %
Transportation
Residential	43	46	47	(6.5)%	(2.1)%
Commercial	75	75	79	-	(5.1)%
Industrial	42	40	40	5.0 %	-
Other	2	2	4	-	(50.0)%
Total transportation	162	163	170	(.6)%	(4.1)%
Other revenues
Revenue taxes	155	148	150	4.7 %	(1.3)%
Customer late fees	17	18	24	(5.6)%	(25.0)%
Energy efficiency plan	12	12	3	-	300.0 %
Environmental cost recovery	6	11	12	(45.5)%	(8.3)%
Chicago Hub	2	4	8	(50.0)%	(50.0)%
Other	11	8	7	37.5 %	14.3 %
Total other revenues	203	201	204	1.0 %	(1.5)%
Total operating revenues	$ 2,064	$ 2,204	$ 2,141	(6.4)%	2.9 %

In dollars
Average gas cost per Mcf sold	$ 4.99	$ 5.49	$ 5.06	(9.1)%	8.5 %

Average Customers	Year ended December 31,			2011 vs. 2010	2010 vs. 2009
In thousands	2011	2010	2009	% change	% change

Sales
Residential	1,791	1,775	1,759	.9 %	.9 %
Commercial	134	131	130	2.3 %	.8 %
Industrial	8	8	7	-	14.3 %
Total sales	1,933	1,914	1,896	1.0 %	.9 %
Transportation
Residential	202	210	220	(3.8)%	(4.5)%
Commercial	46	48	52	(4.2)%	(7.7)%
Industrial	4	5	5	(20.0)%	-
Total transportation	252	263	277	(4.2)%	(5.1)%
Total customers	2,185	2,177	2,173	.4 %	.2 %

Volumes
In billion cubic feet (Bcf)	Year ended December 31,			2011 vs. 2010	2010 vs. 2009
	2011	2010	2009	% change	% change
Sales
Residential	192	188	200	2.1 %	(6.0)%
Commercial	50	49	53	2.0 %	(7.5)%
Industrial	6	6	6	-	-
Total sales	248	243	259	2.1 %	(6.2)%
Transportation
Residential	22	23	25	(4.3)%	(8.0)%
Commercial	85	83	90	2.4 %	(7.8)%
Industrial	107	105	102	1.9 %	2.9 %
Total transportation	214	211	217	1.4 %	(2.8)%
Total volumes	462	454	476	1.8 %	(4.6)%

~~Short-term~~Glossary debt. In April 2010, Nicor Gas established a $400 million, 364-day revolving credit facility, expiring April 2011, to replace the $550 million, 364-day revolving credit facility, which was set to expire in May 2010 and 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~~Key paper. The company had $425 million and $494 million of commercial paper outstanding at December 31, 2010 and 2009, respectively. During 2010, the commercial paper borrowing levels ranged from $512 million to no commercial paper and averaged $269 million. During 2009, the commercial paper borrowing levels ranged from $740 million to $216 million and averaged $415 million. The average borrowing levels are calculated using average daily balances for each day for the year. 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.Terms

Nicor Gas participates in a cash management system with other subsidiaries of Nicor. Under this system, at December 31, 2010, Nicor Gas had owed $40 million to Nicor which is payable on demand.

Common stock. The company paid dividends of approximately $106 million, $70 million and $51 million in 2010, 2009 and 2008, respectively. Nicor Gas is restricted by regulation in the amount it can dividend to Nicor. Dividends are only allowed to the extent of Nicor Gas’ retained earnings balance.

Other. Nicor Gas is restricted by regulation in the amount it can loan to or from affiliates. The balance of cash advances from Nicor Gas to an affiliate at any time shall not exceed the unused balance of funds actually available to that affiliate under its existing bank credit agreements or its commercial paper facilities with unaffiliated third parties. In addition, Nicor Gas may not extend cash advances to an affiliate if Nicor Gas has any outstanding short-term borrowings. Similarly, the balance of cash advances to Nicor Gas from an affiliate shall 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.

Off-balance sheet arrangements. Nicor Gas has certain guarantees, as further described in Item 8 – Notes to the Consolidated Financial Statements – Note 15 – Guarantees and Indemnities. The company believes the likelihood of any such payment under these guarantees is remote. No liability has been recorded for these guarantees.

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~~Contractual~~LIQUIDITY ~~obligations. As~~AND ofCAPITAL ~~December 31, 2010, Nicor Gas had contractual obligations with payments due as follows (in millions):~~RESOURCES

	Payments due by period
	Less than 1 year		1-3 years		3-5 years		More than 5 years		Total
Purchase obligations	$	366.4	$	225.4	$	29.0	$	4.4	$	625.2
Long-term debt		75.0		-		-		425.0		500.0
Fixed interest on long-term debt		26.1		51.3		51.3		342.7		471.4
Operating leases		1.0		1.4		1.3		.5		4.2
Other long-term obligations		.3		.5		.5		.5		1.8
	$	468.8	$	278.6	$	82.1	$	773.1	$	1,602.6

Overview The acquisition of natural gas and pipeline capacity and working capital requirements are our most significant short-term financing requirements. The need for long-term capital is driven primarily by capital expenditures and maturities of long-term debt. The liquidity required to fund our working capital, capital expenditures and other cash needs is primarily provided by our operating activities. Our short-term cash requirements not met by cash from operations are primarily satisfied with short-term borrowings under our commercial paper program, which is supported by our credit facility. We regularly evaluate our funding strategy and profile to ensure that we have sufficient liquidity for our short-term and long-term needs in a cost-effective manner.

InOur ~~addition~~capital tomarket ~~the~~strategy ~~contractual obligations included in the table above, Nicor Gas~~ has ~~potential~~continued ~~liabilities~~ to ~~taxing~~focus ~~authorities~~on ~~(unrecognized~~maintaining ~~tax~~a ~~benefits)~~strong ~~which~~Consolidated ~~are~~Statements ~~dependent~~of onFinancial ~~the~~Position, ~~resolution~~ensuring ofample ~~particular~~cash ~~income~~resources ~~tax~~and ~~positions. The~~daily ~~timing~~liquidity, ofaccessing ~~future~~capital ~~cash~~markets ~~outflows,~~at iffavorable ~~any,~~times ~~associated~~as ~~with~~necessary, ~~such~~managing ~~potential~~critical ~~liabilities~~business isrisks ~~uncertain. The~~and ~~company~~maintaining ~~had~~a nobalanced ~~liability~~capital ~~for~~structure ~~unrecognized~~through ~~tax~~the ~~benefits~~appropriate atissuance ~~December~~of ~~31,~~long-term ~~2010~~debt securities.

~~The~~Our ~~company~~issuance ~~also~~of ~~has~~ long-term ~~obligations~~debt ~~for~~is ~~postretirement~~subject ~~benefits~~to ~~which~~customary ~~are~~approval ~~not~~or ~~included~~review inby ~~the~~state ~~above~~and ~~table. Information~~federal ~~regarding~~regulatory ~~the~~bodies ~~company’s~~including ~~obligations~~the ~~for~~Illinois ~~postretirement~~Commission ~~benefits can be found in Item 8 – Notes to~~ and the ~~Consolidated Financial Statements – Note 9 – Postretirement Benefits~~SEC.

~~Purchase~~We ~~obligations~~believe ~~consist~~the ~~primarily~~amounts available to us under our credit facility, through the issuance of ~~natural~~debt ~~gas~~securities, ~~purchase~~combined ~~agreements~~with cash provided by operating activities, ~~and~~will ~~natural~~continue ~~gas~~to ~~transportation~~allow us to meet our needs for working capital, capital expenditures, anticipated debt redemptions, interest payments on debt obligations, dividend payments and ~~storage~~other ~~contracts~~cash needs through the next several years. ~~Natural~~ ~~gas~~Our ~~purchase~~ability ~~agreements~~to ~~include~~satisfy our working capital requirements and our debt service obligations, toor ~~purchase~~fund ~~natural~~planned ~~gas~~capital atexpenditures, will substantially depend upon our future ~~market~~operating ~~prices~~performance (which will be affected by prevailing economic conditions), ~~calculated~~and ~~using~~financial, ~~NYMEX~~business ~~futures~~and ~~prices~~other asfactors, some of ~~December~~which 31we are unable to control. These factors include, ~~2010~~among others, regulatory changes, the price of and demand for natural gas and operational risks.

~~Operating~~We ~~leases~~will ~~are~~continue ~~primarily~~to ~~for~~evaluate ~~office~~our ~~space~~need ~~and~~to ~~equipment. Rental~~increase ~~expense~~available ~~under~~liquidity ~~operating~~based ~~leases~~on ~~was~~our ~~$0.8~~view ~~million~~of working capital requirements, ~~$1.2~~including ~~million~~the ~~and~~impact ~~$1.2~~of ~~million~~changes in ~~2010~~natural gas prices, ~~2009~~liquidity requirements established by rating agencies and ~~2008,~~other ~~respectively~~factors. ~~Other~~See ~~long-term~~Item ~~obligations~~1A ~~consist~~– ofRisk ~~redeemable~~Factors, ~~preferred~~for ~~stock~~additional information on items that could impact our liquidity and capital resource requirements.

~~OTHER~~Credit ~~MATTERS~~Ratings Our borrowing costs and our ability to obtain adequate and cost effective financing are directly impacted by our credit ratings as well as the availability of financial markets. In addition, credit ratings are important to our counterparties when we engage in certain transactions including over-the-counter derivatives. It is our long-term objective to maintain or improve our credit ratings on our debt in order to manage our existing financing costs.

~~Application~~Credit ~~for~~ratings ~~Approval~~and ofoutlooks ~~Energy~~are ~~Efficiency~~opinions ~~Plan. On~~subject ~~September~~to ~~29,~~ongoing ~~2010,~~review ~~Nicor~~by ~~Gas~~the ~~filed~~rating anagencies ~~application~~and ~~with~~may ~~the~~periodically ~~ICC~~change. Each ~~seeking~~rating ~~approval~~should ofbe anevaluated ~~energy~~independently ~~efficiency~~of ~~plan~~other ratings. The ~~filing~~rating ~~was~~agencies ~~made~~regularly ~~pursuant~~review toour anperformance, ~~Illinois~~prospects ~~law~~and ~~enacted~~financial incondition ~~2009~~and ~~that~~reevaluate ~~requires~~their ~~local~~ratings ~~gas~~of ~~distribution~~our ~~utilities~~long-term todebt ~~establish~~and ~~plans~~short-term toborrowings, ~~achieve~~our ~~specified~~corporate ~~energy~~ratings, ~~savings~~including ~~goals~~our ~~beginning~~ratings inoutlook. There ~~June~~is ~~2011~~no ~~and~~guarantee ~~provides~~that ~~utilities with~~ a ~~rider~~rating towill ~~collect~~remain ~~the~~in ~~costs~~effect offor ~~the~~any ~~plan~~given ~~from~~period ~~customers. Under~~of ~~its~~time ~~proposed~~or ~~plan, the company estimates~~ that ita ~~would~~rating ~~bill~~will ~~nearly~~not ~~$100~~be ~~million~~lowered toor ~~customers~~withdrawn ~~under~~entirely ~~the~~by ~~rider, over~~ a ~~three~~rating ~~year~~agency ~~period~~if, ~~commencing~~in ~~June~~its 1judgment, ~~2011,~~circumstances toso ~~fund~~warrant. A ~~the~~credit ~~costs~~rating ofis ~~various~~not ~~energy~~a ~~savings~~recommendation ~~programs~~to ~~identified~~buy, insell ~~the~~or ~~company’s~~hold ~~filing~~securities.

~~Petition~~Factors ~~for~~we ~~Re-approval~~consider ofimportant ~~Operating~~in ~~Agreement. On~~assessing ~~July~~our 1,credit ~~2009,~~ratings ~~Nicor~~include ~~Gas~~our ~~filed~~Consolidated aStatements ~~petition seeking re-approval from the ICC~~ of ~~the~~Financial ~~operating~~Position ~~agreement~~leverage, ~~that~~capital ~~governs~~spending, ~~many~~earnings, ~~inter-company~~cash ~~transactions~~flow ~~between~~generation, ~~Nicor~~available ~~Gas~~liquidity and ~~its~~overall ~~affiliates. The~~business 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 changerisks. AWe ~~number~~do ofnot ~~parties~~ have ~~intervened~~any intrigger ~~the~~events ~~proceeding~~in ~~and~~our ~~are~~debt ~~seeking~~instruments ~~modifications on a prospective basis to the operating agreement. Among the proposals are 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~~tied ~~by Nicor Services. Specifically, Nicor Services currently uses Nicor Gas personnel~~ to ~~assist~~changes in ~~some~~our ~~sales~~specified ~~solicitation~~credit ~~for these warranty products and to provide repair services for some of these products~~ratings. ~~Nicor~~ ~~Gas~~The ~~does~~following ~~not~~table ~~believe~~summarizes ~~these~~our ~~proposed~~credit ~~modifications~~ratings ~~are~~as ~~appropriate and is opposing them. This proceeding is not expected to have a material impact on Nicor Gas’ results~~ of ~~operations~~December 31, ~~cash flows and financial condition~~2011. ~~As the ICC will be~~

	S&P	Moody’s	Fitch
Corporate rating	BBB+	n/a	A
Commercial paper	A-2	P-2	F-1
Senior unsecured	BBB+	A3	A+
Senior secured	A	A1	AA-
Ratings outlook	Stable	Stable	Stable

In December 2011, subsequent to the completion of our merger with AGL Resources, all three of the rating agencies reassessed our credit ratings. Fitch affirmed our ratings. S&P downgraded our corporate rating from AA to BBB+ and our commercial paper rating from A-1+ to A-2. Moody’s downgraded our senior unsecured rating from A2 to A3 and our commercial paper rating from P-1 to P-2. The downgrades primarily resulted from the new ownership structure with AGL Resources and we do not expect them to materially impact our borrowing costs.

Glossary of Key Terms

Table of Contents

~~required~~Our tocredit ~~evaluate~~ratings ~~future~~depend ~~transactions~~largely ~~between~~on ~~Nicor~~our ~~Gas~~financial performance, and ~~its~~a ~~affiliates~~downgrade in ~~connection~~our ~~with~~current ~~the~~ratings, ~~joint~~particularly ~~application~~below ofinvestment ~~AGL Resources~~grade, ~~Nicor~~will increase our borrowing costs and ~~Nicor~~could ~~Gas~~limit ~~for~~our ~~approval~~access ofto the ~~merger~~commercial ofpaper ~~AGL~~market. In ~~Resources~~addition, ~~and~~we ~~Nicor,~~would ~~Nicor~~likely ~~Gas~~be ~~has~~required to pay a ~~motion~~higher ~~pending~~interest ~~with~~rate ~~the~~in ~~ICC~~future tofinancings, ~~suspend~~and ~~this~~our ~~proceeding~~potential pool of investors and funding sources could decrease.

~~Financial~~Default ~~Reform~~Provisions Our ~~Legislation. Financial~~debt ~~Reform~~instruments ~~Legislation~~and ~~was~~other ~~enacted~~financial ~~into~~obligations ~~law~~include onprovisions ~~July 21~~that, ~~2010,~~if ~~and~~not ~~includes~~complied awith, ~~provision~~could ~~that~~require ~~requires~~early ~~certain~~payment ~~over-the-counter~~or ~~derivative~~similar ~~transactions to~~actions. Our becredit ~~executed~~facility ~~through~~contains ancustomary ~~exchange~~events orof ~~centrally~~default, ~~cleared~~including, ~~and~~but ~~also~~not ~~includes~~limited ~~provisions~~to, ~~under~~the ~~which~~failure ~~the~~to ~~Commodity~~pay ~~Futures~~any ~~Trading~~interest ~~Commission~~or ~~may~~principal ~~impose~~when ~~collateral~~due, ~~requirements. Final~~the ~~rules~~failure onto ~~major~~furnish ~~provisions~~financial instatements within the ~~legislation~~timeframe ~~will~~established beby ~~established~~each ~~through~~debt ~~rulemakings. While~~facility, the ~~company~~failure ~~does~~to ~~not~~comply ~~currently~~with ~~believe~~certain ~~the~~affirmative ~~legislation~~and ~~will~~negative ~~have~~covenants, across-defaults ~~material~~to ~~impact~~certain onother ~~its~~material ~~results~~indebtedness in excess of ~~operations~~specified amounts, ~~cash~~incorrect ~~flows~~or ~~and~~misleading ~~financial~~representations ~~condition~~or warranties, ~~the~~insolvency ~~company~~or ~~will~~bankruptcy, ~~continue~~fundamental tochange ~~evaluate~~of control, the ~~legislation~~occurrence of certain Employee Retirement Income Security Act events, and ~~future~~judgments ~~rulemakings~~in excess of specified amounts.

~~Synthetic~~Our ~~Natural~~credit ~~Gas~~facility ~~Plant~~contains ~~Legislation. In~~certain ~~January~~non-financial ~~2011~~covenants that, ~~the~~among ~~Illinois~~other ~~House and Senate passed legislation regarding two proposed synthetic natural gas plants. Unless vetoed by the governor~~things, ~~the~~restrict ~~legislation~~liens ~~will~~and ~~go into effect no later than March 15~~encumbrances, ~~2011~~loans and ~~will~~investments, ~~require~~acquisitions, ~~Nicor~~dividends ~~Gas~~ and other ~~major~~restricted ~~Illinois~~payments, ~~natural~~asset ~~gas utilities to either: (a) submit to rate cases in 2011~~dispositions, ~~2013~~mergers and ~~2015,~~consolidations ~~or (b) purchase under long-term contracts (30 years for one plant~~ and ~~10 years for the~~ other) ~~natural~~matters ~~gas~~customarily ~~from~~restricted ~~the~~in ~~plants~~such ~~at a cost that may exceed the market price of natural gas~~agreements. ~~The legislation would allow Nicor Gas to recover the gas costs, and any related transportation costs, through the PGA without any further prudence review.~~

~~OUTLOOK~~Our credit facility also includes a financial covenant that requires us to maintain a ratio of total debt to total capitalization of no more than 70% at the end of any fiscal month. Our ratio of total debt to total capitalization, as calculated in accordance with our debt covenant, includes standby letters of credit and surety bonds and excludes accumulated OCI. Adjusting for these items, our total debt-to-total capitalization ratio for December 31, 2011 was 60%, which is within our required range.

~~Nicor~~We ~~Gas’~~were ~~2011~~in ~~outlook~~compliance ~~assumes~~with ~~weather~~all ~~based on historical patterns, but excludes, among other things, the impact (including any merger and integration costs incurred in 2011)~~ of ~~the~~our ~~proposed~~debt ~~merger~~provisions ~~with AGL Resources~~ and ~~the ICC’s PBR plan/PGA review~~covenants, ~~other~~both ~~contingencies,~~financial orand ~~future changes in tax law~~non-financial, ~~and~~as ~~other impacts that could occur because~~ of ~~future~~December ~~volatility in the natural gas markets. While these items could materially affect 2011 earnings~~31, ~~they are currently not estimable~~2011.

~~Nicor~~Our ~~Gas’~~ratio ~~estimated~~of ~~operating~~total ~~results~~debt ~~will~~to ~~decrease~~total incapitalization ~~2011~~is astypically agreater ~~result~~at of the ~~absence~~beginning of the ~~prior~~Heating ~~year~~Season ~~$32~~as ~~million~~we ~~pretax~~make ~~benefit~~additional ~~attributable~~short-term borrowings to ~~the~~fund ~~ICC’s~~our ~~approval~~natural ofgas ~~the~~purchases ~~company’s~~and ~~bad~~meet ~~debt~~our ~~rider~~working capital requirements. Maintaining sufficient cash flow is necessary to maintain attractive credit ratings. For more information on our default provisions, ~~higher~~see ~~operating~~Item ~~and~~8 ~~maintenance~~– ~~costs~~Financial Statements and ~~higher~~Supplementary ~~depreciation~~Data ~~expense~~– Note 6 – Debt. The components of our total debt to total capitalization ratio, as calculated from our Consolidated Statements of Financial Position, are provided in the following table.

The company estimates that a 100 degree day variation from normal weather affects Nicor Gas’ margin, net of income taxes, by approximately $1.3 million.

	December 31,
	2011			2010
Short-term debt		29	%		29	%
Long-term debt		31			31
Total debt		60			60
Equity		40			40
Total capitalization		100	%		100	%

~~The~~Cash ~~company also expects 2011 net income to be adversely impacted by higher state income taxes.~~Flows

~~CONTINGENCIES~~The following table provides a summary of our operating, investing and financing cash flows for the last three years.

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.

In millions	2011			2010			2009
Net cash provided by (used in):
Operating activities	$	293		$	321		$	483
Investing activities		(194	)		(183	)		(188	)
Financing activities		(99	)		(139	)		(296	)
Net decrease in cash and cash equivalents		-			(1	)		(1	)
Cash and cash equivalent at beginning of period		-			1			2
Cash and cash equivalent at end of period	$	-		$	-		$	1

~~PBR~~Cash ~~plan~~flow from operating activities. ~~Nicor~~We ~~Gas’~~prepare ~~PBR~~our ~~plan~~Consolidated ~~for~~Statements ~~natural~~of ~~gas~~Cash ~~costs~~Flows ~~went~~using ~~into~~the ~~effect~~indirect inmethod. Under ~~2000~~this ~~and~~method, ~~was~~we ~~terminated~~reconcile net income to cash flows from operating activities by ~~the~~adjusting ~~company~~net ~~effective~~income ~~January~~for 1,those ~~2003. Under~~items ~~the~~that ~~PBR~~impact ~~plan,~~net ~~Nicor~~income ~~Gas’~~but ~~total~~may ~~gas~~not ~~supply~~result ~~costs~~in ~~were~~actual ~~compared~~cash toreceipts aor ~~market-sensitive~~payments ~~benchmark~~during the period. ~~Savings~~These reconciling items include depreciation and ~~losses~~amortization, ~~relative~~deferred toincome taxes and changes in the ~~benchmark~~Consolidated ~~were~~Statements ~~determined~~of ~~annually~~Financial ~~and~~Position ~~shared~~for ~~equally~~working ~~with~~capital ~~sales~~from ~~customers. The~~the ~~PBR~~beginning ~~plan~~to isthe ~~currently~~end ~~under~~of ~~ICC~~the period.

Year-over-year changes in our operating cash flows are due primarily to working capital changes resulting from the impact of weather, the price of natural gas, natural gas storage, the timing of customer collections, payments for natural gas purchases and deferred gas cost recoveries.

Glossary of Key Terms

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InWe ~~response~~maintain tomargin ~~these~~accounts ~~allegations,~~related ~~on July 18, 2002, the Nicor Board of Directors appointed a special committee of independent, non-management directors~~ to ~~conduct~~financial anderivative ~~inquiry~~transactions. These ~~into~~margin ~~issues~~accounts ~~surrounding natural gas purchases, sales, transportation, storage and such other matters as~~ may ~~come~~cause tolarge ~~the~~fluctuations ~~attention~~in ofcash ~~the~~needs ~~special~~or ~~committee~~sources in ~~the~~a ~~course~~relatively ofshort ~~its~~period ~~investigation. The special committee presented the report~~ of ~~its~~time ~~counsel~~due ~~(“Report”)~~ to ~~Nicor’s~~daily ~~Board~~settlements ofresulting ~~Directors~~from onchanges ~~October~~in ~~28,~~natural ~~2002~~gas futures prices. AWe ~~copy~~manage ofthese ~~the~~fluctuations ~~Report~~with isshort-term ~~available~~borrowings ~~at the Nicor website~~ and ~~has been previously produced to all parties in the ICC Proceedings~~investments.

In2011 ~~response,~~compared ~~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.2010 ~~The~~Net ~~adjustments~~cash ~~were~~flow ~~made~~provided infrom ~~prior~~operating ~~years’~~activities ~~financial~~decreased ~~statements resulting in a~~ $~~24.8~~28 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~~or ~~is discussed below~~9%, ~~was~~for ~~made in 2004 increasing~~ the ~~recorded~~year ~~liability~~ended toDecember ~~$26.6 million. Nicor Gas estimates that there is $26.9 million due to the company from the 2002 PBR plan year~~31, ~~which~~2011 ~~has~~compared ~~not been recognized in the financial statements due~~ to ~~uncertainties surrounding~~ the ~~PBR~~prior ~~plan~~year. InThe ~~addition,~~significant ~~interest~~factors ~~due~~contributing to the ~~company~~decrease ~~on certain components of these amounts has not been recognized~~ in ~~the~~cash ~~financial~~flow 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.include:

~~Pursuant~~· toa ~~the~~decrease ~~agreement~~ of ~~all~~$52 ~~parties,~~million ~~including~~from ~~the~~changes ~~company,~~in ~~the~~accounts ~~ICC~~payable ~~re-opened~~resulting ~~the~~from ~~1999~~lower ~~and~~natural ~~2000 purchased~~ gas ~~adjustment~~purchases ~~filings~~in ~~for~~December ~~review~~2011 ofcompared ~~certain transactions related~~ to ~~the~~December ~~PBR plan and consolidated the reviews of the 1999-2002 purchased gas adjustment filings with the PBR plan review.~~2010;

On· ~~February 5, 2003, CUB filed~~ a ~~motion~~decrease ~~for~~of $2720 million inattributable ~~sanctions against the company in the ICC Proceedings. In that motion, CUB alleged that Nicor Gas’ responses~~ to ~~certain~~deferred ~~CUB~~compensation ~~data~~liabilities ~~requests~~paid ~~were~~during ~~false. Also~~2011; 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 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,~~an ~~the~~increase ~~company became aware~~ of ~~additional~~$29 ~~information~~million ~~relating to the activities of individuals affecting the PBR plan for the period~~ from ~~1999~~changes ~~through~~in ~~2002,~~receivables ~~including~~due ~~information~~to ~~consisting~~a ofdecrease ~~third~~in ~~party~~volumes ~~documents~~sold ~~and~~to ~~recordings~~our ofcustomers ~~telephone~~as ~~conversations from Entergy-Koch Trading, LP (“EKT”),~~ a ~~natural~~result ~~gas,~~of ~~storage~~warmer ~~and~~weather ~~transportation~~in ~~trader and consultant with whom Nicor did business under~~ the ~~PBR~~fourth ~~plan. Review~~quarter of ~~additional~~2011 ~~information~~compared ~~completed in 2004 resulted in the $1.8 million adjustment~~ to the ~~previously~~prior ~~recorded liability referenced above~~year.

~~The~~2010 ~~evidentiary~~compared ~~hearings~~to on2009 Net ~~this~~cash ~~matter~~flow ~~were~~provided ~~stayed~~from inoperating ~~2004~~activities indecreased ~~order~~$162 tomillion, ~~permit~~or 34%, for the ~~parties~~year toended ~~undertake~~December ~~additional~~31, ~~third~~2010 ~~party~~compared ~~discovery~~to ~~from~~the ~~EKT~~prior year. In The ~~December~~significant ~~2006,~~factors contributing to the ~~additional~~decrease ~~third~~in ~~party~~cash ~~discovery~~flow ~~from~~are ~~EKT~~primarily ~~was~~a ~~obtained~~result ~~and~~of ~~the~~lower ~~ALJs~~average ~~issued~~natural agas ~~scheduling~~prices ~~order~~at ~~that~~the ~~provided~~beginning ~~for~~of ~~Nicor~~the ~~Gas~~2009/2010 Heating Season compared to ~~submit~~the ~~direct~~2008/2009 Heating Season and include:

·	a decrease of $155 million from changes in receivables due to higher receivable balances at the end of 2008 versus 2009; and

·	a decrease of $87 million from changes in margin accounts related to derivative instruments due to the decline in natural gas prices.

In addition, we had higher volumes of gas in storage at December 31, 2010 when compared to 2009.

Cash flow from investing activities. Our net cash used in investing activities consists primarily of PP&E expenditures. Our estimated capital expenditures for 2012 and our actual capital expenditures incurred are described below.

Capital expenditures increased $11 million, or 6%, to $198 million in 2011 from $187 million in 2010. Factors contributing to the increase include higher facility construction (approximately $14 million increase) and lower information technology improvements (approximately $5 million decrease).

Capital expenditures decreased $6 million, or 3%, to $187 million in 2010 from $193 million in 2009. Factors contributing to the decrease include lower expenditures associated with gas distribution, transmission and storage system improvements (approximately $6 million decrease), lower facility construction (approximately $3 million decrease), lower capitalized overhead costs attributable to lower retirement plan benefit costs (approximately $2 million decrease) and higher information technology improvements (approximately $8 million increase).

Capital expenditures are expected to increase $7 million, or 3%, to $205 million in 2012 from $198 million in 2011. Factors contributing to this expected increase include higher expenditures associated with gas distribution, transmission and storage system improvements, partially offset by lower expenditures associated with facility construction.

Cash flow from financing activities. Our capitalization and financing strategy is intended to ensure that we are properly capitalized with the appropriate mix of equity and debt securities. This strategy includes active management of the percentage of total debt relative to total capitalization, as well as the term and interest rate profile of our debt securities.

Our cash used in financing activities was $99 million in 2011 compared to cash used of $139 million in 2010. The decreased use of cash of $40 million, or 29%, was due primarily to a decrease in dividends paid. Our cash used in financing activities was $139 million in 2010 compared to cash used of $296 million in 2009. The decreased use of cash of $157 million, or 53%, was due primarily to our decreased commercial paper borrowings levels in 2009 as a result of lower working capital requirements.

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~~Nicor~~Short-term ~~Gas~~Debt Our isshort-term ~~unable~~debt toduring ~~predict~~2011 ~~the~~was ~~outcome~~comprised of ~~the~~borrowings ~~ICC’s~~under ~~review~~our orcommercial ~~the~~paper ~~company’s~~program ~~potential exposure thereunder. Because the PBR plan~~ and ~~historical~~a ~~gas~~loan ~~costs~~from ~~are~~our ~~still under ICC review, the final outcome could be materially different than the amounts reflected in the company’s financial statements as of December 31, 2010~~affiliate.

Mercury. Information about mercury contingencies is presented in Item 8 – Notes to the Consolidated Financial Statements – Note 16 – Contingencies – Mercury.

In millions	Year-end balance outstanding (1)		Daily average balance outstanding (2)		Minimum balance outstanding (2)		Largest balance outstanding (2)
Commercial paper	$	452	$	214	$	-	$	514
Loan from affiliate		-		15		-		54
Total short-term debt	$	452	$	229	$	-	$	568

~~Manufactured~~(1) ~~gas~~As ~~plant~~of ~~sites. The~~December ~~company~~31, ~~is conducting environmental investigations and remedial activities at former manufactured gas plant sites~~2011. ~~Additional information about these sites is presented in Item 8 – Notes to the Consolidated Financial Statements – Note 16 – Contingencies – Manufactured Gas Plant Sites.~~

~~Municipal~~(2) ~~tax~~For ~~matters. Information about municipal tax contingencies is presented in Item 8 – Notes to~~ the ~~Consolidated~~year ~~Financial~~ended ~~Statements~~December –31, ~~Note 16 – Contingencies – Municipal Tax Matters~~2011.

~~Other.~~ The ~~company~~largest, isminimum ~~involved~~and indaily ~~legal~~average orbalances ~~administrative~~borrowed ~~proceedings~~under ~~before~~our ~~various~~commercial ~~courts~~paper ~~and~~program ~~agencies~~is ~~with~~important ~~respect~~when toassessing ~~general~~the ~~claims,~~intra-period ~~taxes,~~fluctuation ~~environmental,~~of ~~gas~~our ~~cost~~short-term ~~prudence~~borrowings ~~reviews~~ and ~~other~~any ~~matters~~potential liquidity risk. ~~See~~Our ~~Item~~year-end 8short-term –debt ~~Notes~~outstanding toand ~~the~~our ~~Consolidated~~largest ~~Financial~~short-term ~~Statements~~debt –balance ~~Note~~outstanding 16were –significantly ~~Contingencies~~higher –than ~~Other~~our average short-term debt outstanding during 2011 due to our seasonal cash requirements.

~~CRITICAL~~Such ~~ACCOUNTING~~cash ~~ESTIMATES~~requirements generally increase between June and December as we purchase natural gas for storage in advance of the Heating Season. The timing differences of when we pay our suppliers for natural gas purchases and when we recover our costs from our customers through their monthly bills can significantly affect our cash requirements. Our short-term debt balances are typically reduced during the Heating Season as a significant portion of our current assets, primarily natural gas inventories, are converted into cash.

~~Nicor~~On ~~Gas~~December ~~prepares~~15, ~~its~~2011, ~~consolidated~~we ~~financial~~entered ~~statements~~into ina ~~accordance~~$700 ~~with~~million ~~accounting~~revolving ~~principles~~credit ~~generally~~facility, ~~accepted~~which inmatures on December 15, 2016 to replace the ~~United~~$400 ~~States~~million, ~~which~~364-day ~~regularly~~revolving ~~require~~credit ~~Nicor~~facility, ~~Gas’~~which ~~management~~was set to ~~exercise~~expire ~~judgment~~in April 2012 and the $600 million, three-year revolving credit facility, which was set to expire in April 2013. The credit facility supports our commercial paper program and provides the ~~selection~~flexibility to meet working capital and ~~application~~other ofliquidity ~~accounting~~requirements. The ~~methods~~interest rate payable on borrowings under the credit facility is calculated either at the alternative base rate, plus an applicable interest margin, or LIBOR, plus an applicable interest margin. The ~~application~~applicable ofinterest ~~accounting~~margin ~~methods~~used ~~includes~~in ~~making~~both ~~estimates~~interest ~~using~~rate ~~subjective~~calculations ~~assumptions~~will vary according to our current credit ratings. At December 31, 2011 and ~~judgments~~2010, ~~about~~we ~~matters~~had ~~that~~no ~~are~~outstanding ~~inherently~~borrowings ~~uncertain~~under these facilities.

The ~~use~~timing of ~~estimates~~natural ~~and~~gas ~~the~~withdrawals ~~selection~~is ofdependent ~~accounting~~on ~~policies~~the ~~affect~~weather ~~Nicor~~and ~~Gas’~~natural ~~reported~~gas ~~results~~market ~~and~~conditions, ~~financial~~both ~~condition. The~~of ~~company~~which ~~has~~impact ~~adopted~~the ~~several~~price ~~significant~~of ~~accounting~~natural ~~policies~~gas. ~~and~~Increasing isnatural ~~required~~gas tocommodity ~~make~~prices can have a significant ~~accounting~~impact ~~estimates~~on ~~that~~our ~~are~~commercial ~~important~~paper toborrowings. ~~understanding~~Based ~~its~~on ~~financial~~current ~~statements. These~~natural ~~significant~~gas ~~policies~~prices and ~~estimates~~our ~~are~~expected ~~described~~purchases ~~throughout~~during ~~Item~~the 8upcoming –injection ~~Notes~~season, we believe that we have sufficient liquidity to cover our working capital needs for the ~~Consolidated~~upcoming ~~Financial~~Heating ~~Statements~~Season.

~~Although~~The ~~there~~lenders ~~are~~under ~~numerous~~our ~~areas~~credit infacility ~~which~~are ~~Nicor~~major ~~Gas’~~financial ~~management~~institutions ~~makes~~with ~~significant~~investment ~~accounting~~grade ~~estimates,~~credit itratings ~~believes~~as ~~its~~of ~~critical~~December ~~estimates~~31, ~~are~~2011. ~~those~~It ~~that~~is ~~require~~possible ~~management’s~~that ~~most~~one ~~difficult and subjective~~ or ~~complex~~more ~~judgments. Nicor~~lending ~~Gas’~~commitments ~~management~~could ~~has~~be aunavailable ~~practice~~to ofus ~~reviewing~~if ~~its~~the ~~critical~~lender ~~accounting~~defaults ~~estimates~~due ~~and~~to ~~policy~~lack ~~decisions with the audit committee~~ of ~~its~~funds ~~board~~or ~~of directors~~insolvency. ~~Its~~ ~~critical estimates typically involve loss contingencies~~However, ~~derivative~~based ~~instruments,~~on ~~pension~~our ~~and~~current ~~other~~assessment ~~postretirement~~of ~~benefits,~~our ~~credit~~lenders’ ~~risk~~creditworthiness, ~~unbilled~~we ~~revenues~~believe ~~and~~the ~~regulatory~~risk ~~assets~~of ~~and~~lender ~~liabilities~~default ~~because~~is ~~they are estimates which could materially impact Nicor Gas’ financial statements~~minimal.

~~Loss~~Prior ~~contingencies. Nicor~~to ~~Gas~~the ~~records~~merger ~~contingent~~between ~~losses~~AGL asResources ~~liabilities when a loss is both probable~~ and ~~the amount or range of loss~~Nicor, ~~including~~we ~~related~~participated ~~legal~~in ~~defense~~a ~~costs,~~cash ismanagement ~~reasonably~~system ~~estimable. When~~with ~~only~~other asubsidiaries ~~range~~ of ~~potential loss is estimable, the company records a liability for the minimum anticipated loss.~~ Nicor ~~Gas is involved in various legal and regulatory proceedings and is exposed to various loss contingencies~~. ~~These~~Under ~~loss~~this ~~contingencies~~system, ~~are~~at inDecember ~~some~~31, ~~cases resolved in stages over time~~2010, ~~estimates~~we ~~may~~owed ~~change~~$40 ~~significantly~~million ~~from period~~ to ~~period,~~Nicor ~~and~~which ~~the~~was ~~company’s~~repaid ~~ultimate~~in ~~obligations may differ materially~~ 2011.

Long-term Debt Our long-term debt matures more than one year from December 31, 2011 and consists of first mortgage bonds. Our long-term cash requirements primarily depend upon the level of capital expenditures, long-term debt maturities and decisions to refinance long-term debt.

In February 2011, we issued $75 million first mortgage bonds at 2.86%, due in 2016 through a private placement and utilized the proceeds to retire the $75 million 6.625% first mortgage bond series which matured in February 2011.

In determining that the bonds issued in 2011 qualified for exemption from registration under Section 4(2) of the Securities Act of 1933, we 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.

Substantially all gas distribution properties are subject to the lien of the indenture securing our first mortgage bonds.

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~~Derivative~~First ~~instruments. The~~mortgage ~~rules~~bonds ~~for~~may ~~determining~~be ~~whether~~issued aby ~~contract~~Nicor ~~meets~~Gas ~~the~~under ~~definition~~an ofindenture adated ~~derivative~~as ~~instrument,~~of ~~contains~~January an1, ~~embedded derivative requiring bifurcation~~1954, oras ~~qualifies~~supplemented ~~for hedge accounting treatment are numerous~~ and ~~complex. The~~modified, ~~treatment~~as ofnecessary, aamong ~~single~~Northern ~~contract~~Illinois ~~may~~Gas ~~vary~~Company ~~from~~doing ~~period~~business toas ~~period~~Nicor ~~depending~~Gas ~~upon~~Company ~~accounting~~and ~~elections,~~The ~~changes~~Bank ~~in management’s assessment~~ of ~~the~~New ~~likelihood~~York ofMellon ~~future~~Trust ~~hedged~~Company, ~~transactions~~N.A., oras ~~new interpretations of accounting rules~~trustee. AsAt aDecember ~~result~~31, ~~management~~2011, ~~judgment~~we ishad ~~required in~~ the ~~determination~~capacity ofto ~~the~~issue ~~appropriate~~approximately ~~accounting~~$480 ~~treatment. In~~million ~~addition, the estimated fair value~~ of ~~derivative~~additional ~~instruments~~first ~~may~~mortgage ~~change~~bonds ~~significantly~~under ~~from period to period depending upon market conditions, and changes in hedge effectiveness may impact~~ the ~~accounting~~terms ~~treatment. These~~of ~~determinations~~our ~~and changes in estimates may have a material impact on reported results~~indenture.

~~Pension~~Dividends and other postretirement benefits. The company’s cost of providing postretirement benefits is dependent upon various factors and assumptions, including life expectancies, the discount rate used in determining the projected benefit obligation, the expected long-term rate of return on ~~plan~~Common ~~assets, the long-term rate of compensation increase and anticipated health care costs~~Stock. ~~Actual~~Our ~~experience~~common instock ~~any~~dividend ~~one~~payments ~~period,~~were ~~particularly~~$82 ~~the~~million actual return on plan assets, often varies significantly from these mostly long-term assumptions. When cumulatively significant, the gains and losses generated from such variances are amortized into operating income over the remaining service lives of employees covered by the plans (approximately 9 years for the pension plan and 12 years for the health care plan). Additional information is presented in ~~Item 8 – Notes to the Consolidated Financial Statements – Note 9 – Postretirement Benefits~~2011, ~~including~~$106 ~~plan~~million ~~asset investment allocation, estimated future benefit payments, general descriptions of the plans, significant assumptions, the impact of certain changes~~ in ~~assumptions~~2010 and ~~significant~~$70 ~~changes~~million in ~~estimates~~2009.

~~The~~Other. We ~~company’s~~are ~~postretirement~~restricted ~~benefit~~by ~~expense~~regulation ~~(net of capitalization) included~~ in ~~operating~~the ~~income~~amount ~~was~~we ~~$19.6~~can ~~million,~~dividend ~~$24.6~~to ~~million~~our ~~and~~parent $2company.~~7 million in 2010, 2009 and 2008, respectively.~~ ~~The~~Dividends ~~company~~are ~~expects~~allowed only to ~~record~~the ~~postretirement~~extent ~~benefit expense (net~~ of ~~capitalization)~~our ~~for~~retained ~~2011~~earnings ~~of $18~~balance.~~7 million.~~ ~~Significant~~We ~~market~~currently ~~declines~~are inprohibited ~~the~~by ~~values~~regulations of ~~plan assets in 2008 caused~~ the ~~increase~~Illinois inCommission ~~postretirement~~from ~~benefit~~loaning ~~expense~~money ~~for~~to ~~the years after 2008~~affiliates.

~~Actuarial assumptions affecting 2011 include an expected long~~Off-~~term~~balance ~~rate~~sheet ~~of return on plan assets of 8~~arrangements.25 We ~~percent~~have ~~and~~certain ~~discount rates of 5.40 percent for the company’s defined benefit pension plan and 5.20 percent for the health care and other benefits plans~~guarantees, ~~compared~~as ~~with~~further andescribed ~~8.25 percent rate of return on plan assets and discount rates of 5.45 percent and 5.75 percent, respectively,~~ in ~~the~~Item ~~prior~~8 ~~year. Nicor~~– ~~Gas~~Financial ~~establishes~~Statements ~~its expected long-term return on asset assumption by considering historical~~ and ~~projected~~Supplementary ~~returns~~Data ~~for~~– ~~each~~Note ~~investment~~7 ~~asset~~– ~~category~~Commitments, ~~asset~~Guarantees ~~allocations~~ and ~~the effects of active plan management~~Contingencies. ~~Projected~~We ~~returns~~believe ~~are calculated with~~ the ~~assistance~~likelihood of ~~independent~~any ~~firms~~such ~~via~~payment ~~probability-based~~under ~~models. The~~these ~~discount~~guarantees ~~rates for each plan were determined by performing a cash flow matching study using the Citigroup Pension Discount Curve. The Citigroup Pension Discount Curve~~ is ~~constructed from a Treasury yield curve and adjusted by adding a corporate bond spread~~remote. ~~The~~No ~~corporate~~liability ~~bond~~has ~~spread~~been isrecorded ~~developed~~for ~~from~~these ~~a large pool of high quality corporate bonds and mitigates the risks associated with selecting individual corporate bonds whose values may not be representative of the broader market~~guarantees.

Contractual Obligations and Commitments

We have incurred various contractual obligations and financial commitments in the normal course of our operating and financing activities that are reasonably likely to have a material effect on liquidity or the availability of requirements for capital resources. Contractual obligations include future cash payments required under existing contractual arrangements, such as debt and lease agreements. These obligations may result from both general financing activities and from commercial arrangements that are directly supported by related revenue-producing activities. Contingent financial commitments represent obligations that become payable only if certain predefined events occur, such as financial guarantees, and include the nature of the guarantee and the maximum potential amount of future payments that could be required of us as the guarantor. The following table illustrates our expected future contractual obligation payments, such as debt and lease agreements, and commitments and contingencies as of December 31, 2011.

In millions	Total		2012		2013 & 2014		2015 & 2016		2017 & thereafter
Recorded contractual obligations:
Long-term debt	$	500	$	-	$	-	$	125	$	375
Short-term debt		452		452		-		-		-
Environmental remediation liabilities (1)		134		19		53		36		26
Total	$	1,086	$	471	$	53	$	161	$	401

Unrecorded contractual obligations and commitments (2)
Gas supply, pipeline charges and storage capacity (3)	$	448	$	254	$	175	$	19	$	-
Interest charges (4)		454		28		56		51		319
Standby letters of credit, performance/surety bonds (5)		7		6		1		-		-
Operating leases (6)		3		1		1		1		-
Other (7)		11		3		4		4		-
Total	$	923	$	292	$	237	$	75	$	319

(1)	Costs are recoverable through a rate rider mechanism, subject to Illinois Commission review.

(2)	In accordance with GAAP, these items are not reflected in our Consolidated Statements of Financial Position.

(3)

Costs are primarily recoverable through a natural gas cost recovery mechanism, subject to Illinois Commission review. The gas supply amount includes amounts for our commodity purchase commitments of 56 Bcf at floating gas prices calculated using forward natural gas prices as of December 31, 2011. Also includes $2 million of fixed price charges related to commodity purchase commitments that are recorded in our Consolidated Statements of Financial Position.

(4)	In addition, as of December 31, 2011, we have $6 million of accrued interest in our Consolidated Statements of Financial Position that will be paid in 2012.

(5)	We provide guarantees to certain municipalities and other agencies in support of payment obligations.

(6)	Operating leases are primarily for real estate licenses.

(7)	Includes purchase commitments related primarily to future equipment purchases.

In addition, we have $2 million of mandatorily redeemable preferred stock which is payable ratably between 2012 and 2017 and is recorded on our Consolidated Statements of Financial Position.

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~~The~~We ~~discount~~also ~~rate~~have islong-term ~~critical~~obligations tofor ~~the~~retirement ~~measurement~~plan ofbenefits which are not included in the ~~plans’~~above ~~costs~~table. ~~Additionally~~In 2012, ~~the~~we ~~assumed~~expect ~~rate~~to ofmake ~~return~~no oncontributions ~~plan~~to ~~assets~~our ispension ~~critical~~plan and expect to ~~the~~contribute ~~determination~~about of$15 ~~the~~million ~~pension~~(before ~~plan’s~~Medicare ~~cost~~subsidies) to our retiree medical plan. ~~The~~Additional ~~following~~information ~~table~~regarding ~~illustrates~~our ~~the~~obligations ~~effect~~for ofretirement aplan ~~one-percentage-point~~benefits ~~change~~can be found in ~~these~~Item ~~actuarial~~8 ~~assumptions~~– onFinancial ~~2010’s~~Statements ~~net~~and ~~benefit~~Supplementary ~~cost~~Data ~~(in~~– ~~millions):~~Note 5 – Employee Benefit Plans.

Actuarial assumption	Increase (decrease)		Effect on net benefit cost
Discount rate	1.0	%	$(6.2	)
	(1.0	%)	7.4
Rate of return on plan assets	1.0	%	(3.5	)
	(1.0	%)	3.5

Pursuant to an Illinois law enacted in 2011, we signed an agreement in the third quarter of 2011 to purchase approximately 25 Bcf of SNG annually from a proposed coal gasification plant for a 10-year term beginning as early as 2015. Since the agreement is contingent upon various milestones to be achieved by the counterparty to the agreement, our obligation is not certain at this time. For additional information on the SNG plant legislation, see caption “Legislative and regulatory update.”

Credit risk. The company is required to estimate counterparty credit risk in estimating the fair values of certain derivative instruments. The company’s counterparties consist primarily of major energy companies and financial institutions. This concentration of counterparties may materially impact the company’s exposure to credit risk resulting from market, economic or regulatory conditions. To manage this credit risk, the company believes it maintains prudent credit policies to determine and monitor the creditworthiness of counterparties. In doing so, the company seeks guarantees or collateral, in the form of cash or letters of credit, limits its exposure to any one counterparty, and, in some instances, enters into netting arrangements to mitigate counterparty credit risk. However, the volatility in the capital markets over the past three years has made it more difficult for the company to assess the creditworthiness of its counterparties. Based on this uncertainty, actual losses relating to credit risk could materially vary from Nicor Gas’ estimates.CONTINGENCIES

The ~~company~~following ~~maintains~~contingencies anare ~~allowance~~in ~~for~~various ~~doubtful~~stages ~~accounts for estimated losses from the failure~~ of ~~its~~investigation ~~customers~~or ~~to make required payments~~disposition. ~~Such~~Although ~~estimates~~in ~~are~~some ~~based~~cases onwe ~~historical~~are ~~experience,~~unable ~~existing~~to ~~economic~~estimate ~~conditions~~the ~~and~~amount ~~certain~~of ~~collection-related~~loss ~~patterns. Circumstances~~reasonably ~~which~~possible ~~could~~in ~~affect~~addition ~~these estimates include, but are not limited~~ to, ~~customer~~any ~~credit~~amounts ~~issues,~~already ~~natural gas prices~~recognized, ~~customer~~it ~~deposits~~is ~~and~~possible ~~economic~~that ~~conditions. Actual~~the ~~credit~~resolution ~~losses~~of ~~could~~these ~~vary~~contingencies, ~~materially~~either ~~from~~individually ~~Nicor~~or ~~Gas’~~in ~~estimates. Nicor Gas’ allowance for doubtful accounts at December 31~~aggregate, ~~2010,~~will ~~2009~~require ~~and~~us ~~2008~~to ~~was~~take ~~$25.2~~charges ~~million~~against, ~~$30.8~~or ~~million~~will ~~and~~result ~~$42.5 million, respectively, as presented on Schedule II~~ in ~~Item~~reductions ~~15 – Exhibits~~in, ~~Financial~~future ~~Statement Schedules~~earnings. ~~The~~It ~~impact of credit losses to Nicor Gas’ results of operations~~ is ~~substantially mitigated by~~ the ~~bad~~opinion ~~debt~~of ~~rider~~our management that ~~was approved by~~ the ~~ICC~~resolution onof ~~February~~these 2contingencies, ~~2010. The~~either ~~bad~~individually ~~debt~~or ~~rider~~in ~~provides~~aggregate, ~~for~~could ~~the~~be ~~recovery~~material ~~from (or refund~~ to) ~~customers~~earnings ofin ~~the~~a ~~difference~~particular ~~between~~period ~~Nicor~~but ~~Gas’~~is ~~actual~~not ~~bad~~expected ~~debt~~to ~~experience~~have ona anmaterial ~~annual~~adverse ~~basis~~impact ~~and~~on ~~the~~our ~~benchmark~~liquidity ~~bad~~or ~~debt~~financial ~~expense included in its rates for the respective year~~condition.

~~Unbilled~~PBR ~~revenues~~plan. ~~Nicor~~Our ~~Gas~~PBR ~~accrues~~plan ~~revenues~~ for natural gas ~~deliveries~~costs ~~not~~went ~~yet~~into ~~billed~~effect toon ~~customers~~January ~~from~~1, 2000 and was terminated by us effective January 1, 2003. Under the ~~last~~PBR ~~billing~~plan, ~~date~~our total gas supply costs were compared to ~~month~~a market-~~end~~sensitive benchmark. ~~Accrued~~Savings ~~unbilled~~and ~~revenue~~losses ~~estimates~~relative ~~are~~to ~~dependent~~the ~~upon~~benchmark awere ~~number~~determined ofannually ~~customer-usage~~and ~~factors~~shared ~~which~~equally ~~require~~with ~~management~~sales ~~judgment,~~customers. The ~~including~~PBR ~~weather~~plan ~~factors~~is currently under Illinois Commission review. ~~These~~There ~~estimates~~ are ~~adjusted~~allegations ~~when~~that ~~actual~~we ~~billings~~acted ~~occur~~improperly in connection with the PBR plan, and ~~variances~~the Illinois Commission and others are reviewing these allegations. On June 27, 2002, the Citizens Utility Board (“CUB”) filed a motion to reopen the record in ~~estimates~~the ~~can~~Illinois beCommission’s ~~material~~proceedings to review the PBR plan (the “Illinois Commission Proceedings”). ~~Accrued~~As ~~unbilled~~a ~~revenues~~result of the motion to reopen, we entered into a stipulation with the staff of the Illinois Commission and CUB providing for ~~Nicor~~additional ~~Gas~~discovery. The atIllinois ~~December~~Attorney 31General’s Office (“IAGO”) has also intervened in this matter. In addition, ~~2010~~the IAGO issued Civil Investigation Demands (“CIDs”) to CUB and ~~2009~~the ~~were~~Illinois ~~$141~~Commission staff.8 The ~~million~~CIDs ordered that CUB and ~~$137.7~~the ~~million~~Illinois Commission staff produce all documents relating to any claims that we may have presented, ~~respectively~~or caused to be presented, false information related to our PBR plan. We have committed to cooperate fully in the reviews of the PBR plan.

~~Regulatory~~In ~~assets~~response ~~and~~to ~~liabilities. Nicor~~these ~~Gas~~allegations, ison ~~regulated~~July by18, ~~the ICC~~2002, ~~which establishes~~ the ~~rules~~Nicor ~~and~~Board ~~regulations~~of ~~governing~~Directors ~~utility~~appointed ~~rates~~a ~~and~~special ~~services~~committee inof ~~Illinois. As~~independent, ~~a rate~~non-~~regulated~~management ~~company,~~directors ~~Nicor~~to ~~Gas~~conduct isan ~~required~~inquiry tointo ~~recognize~~issues ~~the~~surrounding ~~economic~~natural ~~effects~~gas ofpurchases, ~~rate regulation and~~sales, ~~accordingly~~transportation, ~~has~~storage ~~recorded regulatory assets~~ and ~~liabilities. Regulatory~~such ~~assets~~other ~~represent~~matters ~~probable~~as ~~future~~may ~~revenue~~come ~~associated with certain costs that are expected~~ to bethe ~~recovered~~attention ~~from~~of ~~customers~~the ~~through~~special ~~rate~~committee ~~riders~~in orthe ~~base~~course ~~rates,~~of ~~upon~~its ~~approval by the ICC~~investigation. ~~Regulatory~~The ~~liabilities~~special ~~represent~~committee ~~probable~~presented ~~future~~the ~~reductions~~report inof ~~revenues~~its ~~collected~~counsel ~~from~~(“Report”) ~~ratepayers~~to ~~through a rate rider or base rates, or probable future expenditures. If~~ Nicor ~~Gas~~’s ~~operations~~Board ~~become no longer subject to rate regulation, a write-off~~ of ~~net~~Directors ~~regulatory liabilities would be required. Additional information~~ on ~~regulatory~~October ~~assets~~28, ~~and liabilities is presented in Item 8 – Notes to the Consolidated Financial Statements – Note 2 – Accounting Policies~~2002.

In response, the Nicor Board of Directors directed our 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. By the end of 2003, we 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 us, the Illinois Commission 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 us in the Illinois Commission Proceedings. In that motion, CUB alleged that our 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 Illinois Commission staff filed a response brief in support of CUB’s motion for sanctions. On May 1, 2003, the Administrative Law Judges 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 Illinois Commission, and the Illinois Commission has indicated that it will not rule on the appeal until the final disposition of the Illinois Commission Proceedings. It is not possible to determine how the Illinois Commission will resolve the claims of CUB or other parties to the Illinois Commission Proceedings.

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~~This~~In ~~document~~2004, ~~includes~~we ~~certain~~became ~~forward-looking~~aware ~~statements about the expectations~~ of ~~Nicor~~additional ~~Gas. Although~~information ~~Nicor~~relating ~~Gas~~to ~~believes~~the ~~these~~activities ~~statements~~of ~~are~~individuals ~~based~~affecting onthe ~~reasonable~~PBR ~~assumptions,~~plan ~~actual~~for ~~results~~the ~~may~~period ~~vary materially~~ from ~~stated~~1999 ~~expectations. Such~~through ~~forward-looking~~2002, ~~statements~~including ~~may~~information beconsisting ~~identified by the use~~ of ~~forward-looking~~third ~~words~~party ordocuments ~~phrases~~and ~~such~~recordings asof ~~“anticipate,”~~telephone ~~“believe,”~~conversations ~~“expect,”~~from ~~“intend,”~~Entergy-Koch ~~“may~~Trading,” ~~“planned,”~~LP (“~~potential,~~EKT” ~~“should~~),” ~~“will,”~~a ~~“would,”~~natural ~~“project~~gas,” ~~“estimate,”~~storage ~~“ultimate”,~~and ortransportation ~~similar~~trader ~~phrases. Actual~~and ~~results~~consultant ~~may~~with ~~differ~~whom ~~materially~~we ~~from~~did ~~those~~business ~~indicated~~under in the ~~company’s~~PBR ~~forward-looking~~plan. Review ~~statements due, among other things, to the outcome~~ of ~~the~~additional ~~proposed~~information ~~merger~~completed ~~between~~in ~~Nicor~~2004 ~~and~~resulted ~~AGL~~in ~~Resources,~~ the ~~direct~~$1.8 ormillion ~~indirect~~adjustment ~~effects~~to ~~of legal contingencies (including litigation) and~~ the ~~resolution~~previously ofrecorded ~~those~~liability ~~issues,~~referenced ~~including the effects of an ICC review, and undue reliance should not be placed on such statements~~above.

~~Specifically~~The ~~with~~evidentiary ~~respect~~hearings on this matter were stayed in 2004 in order to permit the ~~proposed~~parties ~~merger~~to ~~between~~undertake ~~Nicor~~additional ~~and~~third ~~AGL~~party ~~Resources~~discovery from EKT. In December 2006, the ~~company’s~~additional ~~expectations~~third ~~are~~party ~~subject~~discovery from EKT was obtained and the Administrative Law Judges issued a scheduling order that provided for us to ~~future~~submit ~~events~~direct testimony by April 13, ~~risks~~2007. We ~~and~~submitted ~~uncertainties~~direct testimony in April 2007, rebuttal testimony in April 2011 and ~~there~~surrebuttal ~~are~~testimony ~~several~~in ~~factors~~December –2011. In ~~many~~surrebuttal ~~beyond~~testimony, we sought approximately $6 million, which included interest due to us of $2.0 million as of December 31, 2011. The staff of the ~~company’s~~Illinois ~~control~~Commission, –IAGO ~~that~~and ~~could~~CUB ~~cause~~submitted ~~results~~direct testimony to ~~differ~~the ~~significantly~~Illinois ~~from~~Commission ~~its~~in ~~expectations~~April 2009 and rebuttal testimony in October 2011. In ~~Such~~rebuttal ~~events~~testimony, ~~risks~~the staff of the Illinois Commission, IAGO and ~~uncertainties~~CUB ~~include~~requested refunds of $85 million, ~~but~~$255 ~~are~~million ~~not~~and ~~limited~~$305 ~~to:~~million, respectively.

·In February 2012, we committed to a stipulated resolution of issues with the ~~possibility~~Staff ~~that~~of the ~~company’s~~Illinois ~~business~~Commission, ~~may~~which ~~suffer~~includes ascrediting our customers $64 million, but does not constitute an admission of fault. This resulted in a ~~result~~$37.4 million pretax charge to our results in the fourth quarter of 2011, which represents the ~~uncertainty~~difference ~~surrounding~~between the ~~merger;~~$64 million proposed credit and our previously recorded $26.6 million liability. The stipulated resolution is subject to review and approval by the Illinois Commission. CUB and IAGO are not parties to the stipulated resolution and continue to pursue their claims in this proceeding. Evidentiary hearings on this matter are scheduled to begin on February 28, 2012.

·We are unable to predict the ~~possibility~~outcome ~~that~~of ~~AGL~~the ~~Resources~~Illinois ~~and~~Commission’s ~~Nicor~~review ~~will~~or ~~not~~our ~~receive~~potential exposure. Because the ~~regulatory~~PBR ~~approvals~~plan ~~required~~and tohistorical ~~complete~~gas ~~the~~costs ~~merger~~are orstill ~~that~~under Illinois Commission review, the ~~merger~~final ~~will~~outcome ~~not~~could be ~~consummated~~materially ~~for~~different ~~other~~from ~~reasons;~~the amounts reflected in our financial statements as of December 31, 2011.

·Environmental ~~the~~remediation ~~possibility~~costs. We ofare ~~adverse~~conducting ~~decisions~~environmental ininvestigations ~~pending~~ and ~~potential~~remedial ~~state~~activities ~~and~~at ~~federal~~former ~~class~~manufactured ~~action~~gas ~~lawsuits,~~plant ~~including~~sites. Additional ~~five~~information ~~shareholder~~about ~~suits,~~these ~~relating~~sites tois ~~the~~presented ~~merger;~~in Item 8 – Financial Statements and Supplementary Data – Note 7 – Commitments, Guarantees and Contingencies.

·Municipal ~~the~~tax ~~possibility~~matters. Information ~~that~~about ~~the~~municipal ~~company~~tax ~~may~~contingencies ~~not~~is bepresented ~~able~~in toItem ~~maintain~~8 ~~relationships~~– ~~with~~Financial ~~its~~Statements ~~employees,~~and ~~suppliers,~~Supplementary orData ~~customers~~– asNote a7 ~~result~~– ofCommitments, ~~the~~Guarantees ~~uncertainty~~and ~~surrounding the merger~~Contingencies.

~~Other~~Nicor ~~factors~~Services ~~that~~Warranty ~~could~~Product ~~cause~~Actions. ~~materially~~Information ~~different~~about ~~results~~warranty ~~include,~~product ~~but~~contingencies ~~are~~is ~~not~~presented ~~limited~~in ~~to,~~Item ~~weather~~8 ~~conditions;~~– ~~natural~~Financial ~~disasters;~~Statements ~~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~~Supplementary ~~conditions;~~Data ~~accidents,~~– ~~leaks,~~Note ~~equipment~~7 ~~failures,~~– ~~service interruptions~~Commitments, ~~environmental~~Guarantees ~~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 terrorismContingencies.

~~Readers~~Illinois ~~are~~Attorney ~~cautioned~~General ~~not to place undue reliance on these forward-looking statements, which speak only as of the date of this filing~~Subpoena. ~~Nicor~~Information ~~Gas~~about ~~undertakes~~the noIllinois ~~obligation~~Attorney toGeneral ~~publicly~~subpoena ~~release~~is ~~any~~presented ~~revision~~in toItem ~~these~~8 ~~forward-looking~~– ~~statements~~Financial toStatements ~~reflect~~and ~~events~~Supplementary orData ~~circumstances~~– ~~after~~Note ~~the~~7 ~~date~~– ofCommitments, ~~this~~Guarantees ~~filing~~and Contingencies.

Other. We are 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 8 – Financial Statements and Supplementary Data – Note 7 – Commitments, Guarantees and Contingencies.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of our financial statements in conformity with GAAP requires us to make estimates and judgments that affect the reported amounts in our consolidated financial statements and accompanying notes. Those judgments and estimates have a significant effect on our financial statements because they result primarily from the need to make estimates about the effects of matters that are inherently uncertain. Actual results could differ from those estimates. We frequently re-evaluate our judgments and estimates that are based upon historical experience and various other assumptions that we believe to be reasonable under the circumstances.

We believe that of our significant accounting policies described in Item 8 – Financial Statements and Supplementary Data – Note 2 – Significant Accounting Policies and Methods of Application, the following policies represent those that may involve a higher degree of uncertainty, judgment and complexity; these include Contingencies, Environmental remediation costs, Derivative and hedging activities, Pension and retiree medical plan benefits, Credit risk, Unbilled revenues and Regulatory assets and liabilities.

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~~Item~~Contingencies. Our 7Aaccounting policies for contingencies cover a variety of business activities, including contingencies for potentially uncollectible receivables, rate matters, and legal and environmental exposures. ~~Quantitative~~ We accrue for these contingencies, including related legal defense costs, when our assessments indicate that it is probable that a liability has been incurred or an asset will not be recovered, and ~~Qualitative~~an ~~Disclosures~~amount ~~About~~can ~~Market~~be ~~Risk~~reasonably estimated in accordance with authoritative guidance related to contingencies. We base our estimates for these liabilities on currently available facts and our estimates of the ultimate outcome or resolution of the liability in the future. When only a range of potential loss is estimable, we record a liability for the minimum amount of potential loss.

~~Nicor~~Actual ~~Gas~~results ismay ~~exposed~~differ tofrom ~~market~~estimates, ~~risk~~and inestimates ~~the~~can ~~normal~~be, ~~course~~and ofoften ~~its~~are, ~~business~~revised ~~operations,~~either ~~including~~negatively ~~the~~or ~~risk~~positively, ofdepending ~~loss~~on ~~arising~~actual ~~from~~outcomes ~~adverse~~or changes in ~~natural~~the ~~gas~~facts ~~commodity~~or ~~prices~~expectations ~~and~~surrounding ~~interest~~each ~~rates~~potential exposure. ~~Nicor~~Changes ~~Gas’~~in ~~practice~~the isestimates related to ~~manage~~contingencies ~~these~~could ~~risks~~have ~~utilizing~~a ~~derivative~~negative ~~instruments~~impact on our results of operations, cash flows or financial position. Our contingencies are further discussed in Item 8 – Financial Statements and ~~other~~Supplementary ~~methods~~Data – Note 7 – Commitments, asGuarantees ~~deemed~~and ~~appropriate~~Contingencies.

~~Commodity~~Environmental ~~price~~remediation ~~risk~~costs. ~~With~~We ~~regard~~are subject to ~~commodity~~legislation ~~price~~and ~~risk,~~regulation ~~the~~by ~~company~~federal, ~~has~~state ~~established policies~~ and ~~procedures~~local authorities with respect to ~~the~~environmental ~~management~~matters. ofAdditionally, ~~such~~we ~~risks~~owned and ~~the~~operated ~~use~~a number of ~~derivative~~manufactured ~~instruments~~gas toplant ~~hedge~~sites ~~its~~at ~~exposure~~which tohazardous ~~such~~substances ~~risks~~may be present. We have identified 26 sites for which we may have some responsibility. ~~Company~~Most ~~management~~of ~~oversees~~these ~~compliance~~sites are not presently owned by us. In accordance with ~~such~~GAAP, ~~policies~~we have established reserves for environmental remediation obligations when it is probable that a liability exists and ~~procedures~~the amount or range of amounts can be reasonably estimated. These estimates contain various engineering uncertainties, and we continuously attempt to refine these estimates.

AsWe acannot ~~regulated~~perform ~~utility,~~precise ~~Nicor~~engineering ~~Gas’~~soil ~~exposure~~and togroundwater ~~market~~cleanup ~~risk~~estimates ~~caused~~for bycertain ~~changes~~of inour ~~commodity~~former ~~prices~~manufactured isgas ~~substantially~~plant ~~mitigated~~sites. ~~because~~As ofwe ~~Illinois~~continue ~~rate~~to ~~regulation~~conduct ~~allowing for~~ the ~~recovery~~actual ofremediation ~~prudently~~and ~~incurred~~enter ~~natural~~into ~~gas~~cleanup ~~supply costs from customers. However~~contracts, ~~substantial~~we ~~changes~~are inincreasingly ~~natural~~able ~~gas~~to ~~prices~~provide ~~may~~conventional ~~impact~~engineering ~~Nicor~~estimates ~~Gas’~~of ~~earnings~~the bylikely ~~increasing~~costs orof ~~decreasing~~many ~~the~~elements ~~cost~~ of ~~gas~~the ~~used~~remediation byprogram and the ~~company,~~liabilities ~~storage-related~~may ~~gas~~increase ~~costs,~~as ~~and~~estimates ~~other~~are ~~operating~~refined and ~~financing~~remediation ~~expenses~~efforts proceed. ~~The~~We ~~company~~report ~~expects~~estimates toof ~~purchase~~future inenvironmental ~~2011~~remediation ~~about~~costs 2on ~~Bcf~~an ofundiscounted ~~natural~~basis. Our ~~gas~~ERC liabilities for ~~its~~certain ~~own~~of ~~use~~our ~~and~~sites toare ~~cover~~estimated ~~storage-related~~based ~~gas~~on probabilistic models of potential costs. ~~The~~These ~~volume~~probabilistic ofmodels ~~natural~~have ~~gas~~not ~~purchased~~been byperformed ~~the~~on ~~company~~all of our sites, ~~which~~but isare ~~exposed~~expected to ~~market~~be ~~risk,~~completed ~~has~~in ~~declined~~2012. Based ~~over~~on the ~~last~~estimates ~~two~~that ~~years~~we ashave aperformed, ~~result~~the ofcleanup ~~certain~~cost ~~changes~~estimates ~~approved~~range infrom ~~the~~$134 ~~2009~~million ~~rate~~to ~~orders~~$216 million. ~~The~~Our ~~level~~liability for environmental remediation costs at December 31, 2011 is $134 million, of ~~natural~~which ~~gas~~$19 ~~prices~~million ~~may~~is ~~also~~expected ~~impact~~to ~~customer~~be ~~gas~~paid ~~consumption~~over ~~and~~the ~~therefore~~next ~~margin~~twelve months. ~~The~~Our ~~actual~~liability ~~impact~~increased by $81 million in the fourth quarter of ~~natural~~2011 ~~gas~~primarily ~~price~~as ~~fluctuations~~a onresult ~~Nicor~~of ~~Gas’~~the ~~earnings~~completion isof ~~dependent~~a ~~upon~~probabilistic ~~several~~model ~~factors,~~for ~~including~~one ~~the~~of ~~company’s~~our ~~hedging~~major ~~practices~~sites. ~~The~~In ~~company~~accordance ~~generally~~with ~~hedges~~Illinois ~~its~~Commission ~~forecasted~~authorization, ~~company~~we ~~use~~have been recovering, and ~~storage-related~~expect ~~gas~~to continue to recover, these costs ~~through~~from ~~the~~our ~~use~~customers, ofsubject ~~swap~~to ~~agreements~~annual prudence reviews.

~~Credit~~Details ~~risk. Nicor~~of ~~Gas~~our ~~has~~environmental aremediation ~~diversified~~costs ~~customer~~are ~~base,~~discussed ~~which limits its exposure to concentrations of credit risk~~ in ~~any~~Item ~~one~~8 ~~industry~~– orFinancial ~~income~~Statements ~~class~~ and ~~believes~~Supplementary ~~that~~Data it– ~~maintains~~Note ~~prudent~~2 ~~credit~~– ~~policies. Additionally,~~Significant ~~the~~Accounting ~~company~~Policies ~~offers~~and ~~options~~Methods toof ~~help~~Application ~~customers manage their bills, such as energy assistance programs for low-income customers~~ and aNote ~~budget~~7 ~~payment~~– ~~plan that spreads gas bills more evenly throughout the year. This risk has been substantially mitigated by the bad debt rider approved by the ICC on February 2~~Commitments, ~~2010.~~Guarantees ~~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~~Contingencies.

~~The~~Derivatives ~~company~~and ishedging ~~also~~activities. The ~~exposed~~authoritative guidance to ~~credit~~determine ~~risk~~whether ina contract meets the ~~event~~definition of a ~~counterparty~~derivative instrument, ~~customer~~contains oran ~~supplier~~embedded ~~defaults~~derivative onrequiring abifurcation, ~~contract~~or toqualifies ~~pay~~ for orhedge ~~deliver~~accounting ~~product~~treatment atare ~~agreed-upon~~numerous ~~terms~~ and ~~conditions~~complex. To ~~manage~~The ~~this~~treatment ~~credit~~of ~~risk,~~a ~~the~~single ~~company~~contract ~~believes~~may itvary ~~maintains~~from ~~prudent~~period ~~credit policies~~ to ~~determine~~period ~~and~~depending ~~monitor~~upon ~~the~~accounting ~~creditworthiness of counterparties. In doing so~~elections, ~~the~~changes ~~company seeks guarantees or collateral,~~ in ~~the~~our ~~form~~assessment of ~~cash~~the orlikelihood ~~letters~~ of ~~credit,~~future ~~limits~~hedged ~~its~~transactions ~~exposure~~or tonew ~~any~~interpretations ~~one~~of ~~counterparty,~~accounting ~~and,~~guidance. inAs ~~some~~a ~~instances~~result, ~~enters~~judgment ~~into~~is ~~netting~~required ~~arrangements~~in todetermining ~~mitigate~~the ~~counterparty~~appropriate ~~credit~~accounting ~~risk~~treatment. ~~However,~~ ~~the~~In ~~volatility~~addition, in the ~~capital~~estimated ~~markets~~fair ~~over~~value ~~the~~of ~~past~~derivative ~~three~~instruments ~~years~~may ~~has~~change ~~made~~significantly itfrom ~~more~~period ~~difficult for the company~~ to ~~assess~~period ~~the~~depending ~~creditworthiness~~upon ofmarket ~~its counterparties. Based on this uncertainty~~conditions, ~~the~~and ~~company~~changes ~~has~~in ~~taken~~hedge ~~additional~~effectiveness ~~steps~~may ~~including,~~impact ~~but~~the ~~not~~accounting ~~limited to, reducing available credit to some of its counterparties~~treatment.

~~Interest~~We ~~rate~~use ~~risk. Nicor~~derivative ~~Gas~~instruments isfor ~~exposed~~the topurchase ~~changes~~of innatural ~~interest~~gas ~~rates~~for our customers. ~~The~~These ~~company~~derivatives ~~manages~~are ~~its~~reflected ~~interest~~at ~~rate~~fair ~~risk~~value byand ~~issuing~~are ~~primarily~~not ~~fixed-rate~~designated ~~long-term~~as ~~debt~~hedges. Realized ~~with~~gains ~~varying~~or ~~maturities,~~losses ~~refinancing~~on ~~certain~~such ~~debt~~instruments ~~and,~~are atincluded ~~times,~~in ~~hedging~~ the ~~interest~~cost ~~rate~~of ongas ~~anticipated~~delivered ~~borrowings. At~~and ~~December~~are ~~31,~~passed ~~2010,~~through ifdirectly ~~market~~to ~~rates~~customers, ~~were~~subject to ~~hypothetically~~review ~~increase~~ by 10the ~~percent~~Illinois ~~from Nicor Gas’ weighted-average floating interest rate on commercial paper~~Commission, ~~interest~~and ~~expense~~therefore ~~would~~ have ~~increased~~no ~~causing~~direct ~~Nicor~~impact ~~Gas’~~on earnings ~~to decrease by less than $0~~.1 ~~million~~Unrealized changes in ~~2010. For~~the ~~further information about debt securities, interest rates and~~ fair ~~values,~~value ~~see~~of ~~Item~~these 8derivative –instruments ~~Notes~~are todeferred ~~the~~as ~~Consolidated~~regulatory ~~Financial~~assets ~~Statements~~or ~~– Note 5 – Short-Term and Long-Term Debt and Note 6 – Fair Value Measurements~~liabilities.

We also enter 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.

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~~Nicor~~Additionally, ~~Gas~~as ~~Company~~required by the authoritative guidance, we are required to classify our derivative assets and liabilities based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels. The determination of the fair value of our derivative instruments incorporates various factors required under the guidance. These factors include:

Item 8.	Financial Statements and Supplementary Data
		Page
Report of Independent Registered Public Accounting Firm		32
Financial Statements:
	Consolidated Statements of Income	34
	Consolidated Statements of Cash Flows	35
	Consolidated Balance Sheets	36
	Consolidated Statements of Retained Earnings	38
	Consolidated Statements of Comprehensive Income	38
	Notes to the Consolidated Financial Statements	39

·	the creditworthiness of the counterparties involved

·	events specific to a given counterparty

·	the impact of our nonperformance risk on our liabilities.

We have recorded derivative instrument assets of $3 million at December 31, 2011 and $8 million at December 31, 2010. Additionally, we have recorded derivative liabilities of $25 million at December 31, 2011 and $54 million at December 31, 2010.

If there is a significant change in the underlying market prices or pricing assumptions we use in pricing our derivative assets or liabilities, we may experience a significant impact on our financial position, results of operations and cash flows. Our derivative and hedging activities are described in further detail in Item 8 – Financial Statements and Supplementary Data – Note 2 – Significant Accounting Policies and Methods of Application.

Pension and retiree medical plan benefits. We maintain a noncontributory defined benefit pension plan and a defined benefit retiree medical plan that provides health care and life insurance benefits to eligible retired employees. Our pension and retiree medical plan costs and liabilities are determined on an actuarial basis and are affected by numerous assumptions and estimates. We annually review the estimates and assumptions underlying our pension and retiree medical plan costs and liabilities and update them when appropriate. The critical actuarial assumptions used to develop the required estimates for our pension and retiree medical plan include the following key factors:

·	assumed discount rates

·	expected return on plan assets

·	the market value of plan assets

·	assumed mortality table

·	assumed health care costs

·	assumed compensation increases

·	assumed rates of retirement

·	assumed rates of termination

The discount rate is utilized in calculating the actuarial present value of our pension and retiree medical plan obligations and our annual net pension and retiree medical plan costs. We based our discount rate on a yield curve provided by our actuaries that is derived from a portfolio of high quality (rated AA or better) corporate bonds and the equivalent annuity cash flows.

The expected long-term rate of return on assets is used to calculate the expected return on plan assets component of our annual pension plan cost. We estimate the expected return on plan assets by evaluating expected bond returns, equity risk premiums, asset allocations, the effects of active plan management, the impact of periodic plan asset rebalancing and historical and projected returns for each investment asset category. We also consider guidance from our investment advisors in making a final determination of our expected rate of return on assets. To the extent the actual rate of return on assets realized over the course of a year is greater than or less than the assumed rate, that year’s annual pension plan cost is not affected. Rather, this gain or loss reduces or increases future pension plan costs. Differences between actuarial assumptions and actual plan results are deferred and amortized into cost when the accumulated differences exceed 10% of the greater of the projected benefit obligation (PBO) or the fair value of plan assets. If necessary, the excess is amortized over the remaining service period of active employees covered by the plans (approximately 9 years for the pension plan and 11 years for the retiree medical plan).

During 2011, we recorded net periodic benefit costs (net of capitalization) of $19 million related to our pension and retiree medical benefit plans. We estimate that in 2012, we will record net periodic pension and retiree medical plan benefit costs (net of capitalization) of $27 million, an $8 million increase compared to 2011. In determining our estimated expenses for 2012, our actuarial consultant assumed an 8.25% expected return on plan assets and the following discount rates.

		Pension plan				Retiree medical plan
Discount rate			4.60	%			4.50	%

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Table of Contents

~~REPORT~~The OFactuarial ~~INDEPENDENT~~assumptions ~~REGISTERED~~we ~~PUBLIC~~use ~~ACCOUNTING~~may ~~FIRM~~differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal and retirement rates, and longer or shorter life spans of participants. The following table illustrates the effect of changing the critical actuarial assumptions for our pension and retiree medical plans while holding all other assumptions constant.

To the Board of Directors and Stockholder of Northern Illinois Gas Company

In millions

Actuarial assumptions

Percentage-point change in assumption

Increase (decrease) in PBO/APBO

Increase (decrease) in cost

Expected long-term return on plan assets

+/- 1%

- / -

(4) / 4

Discount rate

+/- 1%

(79) / 86

(7) / 7

WeSee have audited the accompanying consolidated balance sheets of Northern Illinois Gas Company and subsidiary (the “Company”) as of December 31, 2010 and 2009, and the related consolidated statements of income, retained earnings, comprehensive income, and cash flows for each of the three years in the period ended December 31, 2010. Our audits also included the financial statement schedule at Item ~~15(a)(2). We~~8 ~~also~~– ~~have~~Financial ~~audited~~Statements the Company’s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for these financial statements and ~~financial~~Supplementary ~~statement~~Data ~~schedule,~~– ~~for~~Note ~~maintaining~~5 ~~effective~~– ~~internal~~Employee ~~control~~Benefit ~~over~~Plans ~~financial reporting, and~~ for ~~its~~additional ~~assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting~~information. Our responsibility is to express an opinion on these financial statements and financial statement schedule and an opinion on the Company's internal control over financial reporting based on our audits.

Credit risk. We ~~conducted~~are ~~our~~required ~~audits~~to inestimate ~~accordance~~counterparty ~~with~~credit ~~the~~risk ~~standards~~in ofestimating the ~~Public~~fair ~~Company~~values ~~Accounting~~of ~~Oversight~~certain ~~Board~~derivative ~~(United States)~~instruments. ~~Those~~Our ~~standards~~counterparties ~~require~~consist ~~that~~primarily weof ~~plan~~major ~~and~~energy ~~perform~~companies ~~the~~and ~~audit to obtain reasonable assurance about whether the~~ financial ~~statements~~institutions. This ~~are~~concentration ~~free~~ of ~~material~~counterparties ~~misstatement~~may ~~and~~materially ~~whether~~impact ~~effective~~our ~~internal~~exposure ~~control~~to ~~over~~credit ~~financial~~risk ~~reporting~~resulting ~~was~~from ~~maintained~~market, ineconomic ~~all~~or ~~material~~regulatory ~~respects~~conditions. ~~Our~~To ~~audits~~manage ofthis ~~the~~credit ~~financial statements included examining~~risk, onwe abelieve ~~test~~we ~~basis,~~maintain ~~evidence~~prudent ~~supporting~~credit ~~the~~policies ~~amounts~~to determine and ~~disclosures~~monitor in the ~~financial~~creditworthiness ~~statements,~~of ~~assessing~~our ~~the~~counterparties. In ~~accounting~~doing ~~principles~~so, ~~used~~we ~~and~~seek ~~significant~~guarantees ~~estimates~~or ~~made by management~~collateral, ~~and~~in ~~evaluating~~ the ~~overall~~form ~~financial~~of ~~statement~~cash ~~presentation. Our~~or ~~audit~~letters of ~~internal~~credit, ~~control~~we ~~over~~limit ~~financial~~our ~~reporting~~exposure ~~included~~to ~~obtaining~~any anone ~~understanding~~counterparty, ofand, ~~internal~~in ~~control~~some ~~over~~instances, ~~financial~~we ~~reporting,~~enter ~~assessing~~into ~~the~~netting ~~risk~~arrangements ~~that~~to amitigate ~~material~~counterparty ~~weakness~~credit ~~exists~~risk. However, ~~testing~~the ~~and~~volatility ~~evaluating~~in the ~~design~~capital ~~and~~markets ~~operating~~over ~~effectiveness~~the ofpast ~~internal~~several ~~control~~years ~~based~~has onmade ~~the~~it ~~assessed~~more ~~risk. Our~~difficult ~~audits~~for ~~also~~us ~~included~~to ~~performing~~assess ~~such~~the ~~other~~creditworthiness ~~procedures~~of asour wecounterparties. Based ~~considered~~on ~~necessary~~this inuncertainty, ~~the~~actual ~~circumstances. We~~losses ~~believe~~relating ~~that~~to ~~our~~credit ~~audits~~risk ~~provide~~could amaterially ~~reasonable~~vary ~~basis~~from ~~for~~ our ~~opinions~~estimates.

AWe ~~company's~~maintain ~~internal~~an ~~control~~allowance ~~over~~for ~~financial~~doubtful ~~reporting~~accounts isfor aestimated ~~process~~losses ~~designed~~from ~~by, or under~~ the ~~supervision~~failure of, ~~the~~our ~~company's~~customers ~~principal~~to ~~executive~~make ~~and~~required ~~principal~~payments. Such ~~financial~~estimates ~~officers,~~are orbased ~~persons~~on ~~performing~~historical ~~similar functions~~experience, ~~and~~existing ~~effected~~economic byconditions ~~the company's board of directors, management,~~ and ~~other~~certain ~~personnel~~collection-related topatterns. Circumstances ~~provide~~which ~~reasonable~~could ~~assurance~~affect ~~regarding~~these ~~the~~estimates ~~reliability~~include, ofbut ~~financial~~are ~~reporting~~not ~~and~~limited ~~the~~to, ~~preparation~~customer ofcredit ~~financial~~issues, ~~statements~~natural ~~for~~gas ~~external~~prices, ~~purposes~~customer indeposits ~~accordance~~and ~~with~~economic ~~generally accepted accounting principles~~conditions. AActual ~~company's~~credit ~~internal~~losses ~~control~~could ~~over~~vary ~~financial~~materially ~~reporting~~from ~~includes~~our ~~those~~estimates. Our ~~policies~~allowance ~~and~~for ~~procedures~~doubtful ~~that~~accounts ~~(1)~~was ~~pertain~~$21 tomillion ~~the~~at ~~maintenance~~December ~~of records that~~31, ~~in reasonable detail~~2011, ~~accurately~~$25 ~~and~~million ~~fairly~~at ~~reflect~~December ~~the~~31, ~~transactions~~2010 and ~~dispositions~~$31 ofmillion ~~the~~at ~~assets~~December of31, ~~the~~2009, ~~company;~~as ~~(2)~~presented ~~provide~~on ~~reasonable~~Schedule ~~assurance~~II ~~that~~in ~~transactions~~Item ~~are~~15 ~~recorded~~- asExhibits, ~~necessary~~Financial toStatement ~~permit~~Schedules. The ~~preparation~~credit ofrisk ~~financial~~exposure ~~statements~~is insubstantially ~~accordance~~mitigated ~~with~~by ~~generally~~the ~~accepted~~bad ~~accounting~~debt ~~principles~~rider ~~and~~ that ~~receipts~~was ~~and~~approved ~~expenditures~~by of the ~~company~~Illinois ~~are~~Commission ~~being~~on ~~made~~February ~~only~~2, in2010. The ~~accordance~~bad ~~with~~debt ~~authorizations~~rider ofprovides ~~management~~for ~~and directors of~~ the ~~company;~~recovery ~~and~~from (3or refund to) ~~provide~~customers ~~reasonable~~of ~~assurance~~the ~~regarding~~difference ~~prevention~~between orour ~~timely~~actual ~~detection~~bad ofdebt ~~unauthorized~~experience ~~acquisition,~~on ~~use,~~an orannual ~~disposition~~basis ofand the ~~company's~~benchmark ~~assets~~bad ~~that~~debt ~~could~~expense ~~have~~included ain ~~material~~our ~~effect~~rates onfor the ~~financial~~respective ~~statements~~year.

~~Because~~Unbilled ofrevenues. We ~~the~~accrue ~~inherent~~revenues ~~limitations~~for ofestimated ~~internal~~deliveries ~~control~~not ~~over~~yet ~~financial~~billed ~~reporting,~~to ~~including~~customers from the ~~possibility~~date of ~~collusion~~their orlast ~~improper~~bill ~~management~~until ~~override~~the ofbalance ~~controls,~~sheet ~~material~~date. Accrued ~~misstatements~~unbilled ~~due~~revenue toestimates ~~error~~are ordependent ~~fraud~~upon ~~may not be prevented or detected on~~ a ~~timely~~number ~~basis. Also, projections~~ of ~~any~~customer-usage ~~evaluation~~factors ofwhich ~~the~~require ~~effectiveness~~management ofjudgment, ~~the~~including ~~internal~~weather ~~control~~factors. These ~~over~~estimates ~~financial~~are ~~reporting~~adjusted towhen ~~future~~actual ~~periods~~billings ~~are~~occur, ~~subject~~and tovariances ~~the~~in ~~risk~~estimates ~~that~~can ~~the~~be ~~controls~~material. Accrued ~~may~~unbilled ~~become~~revenues ~~inadequate~~were ~~because~~$107 ofmillion ~~changes~~at inDecember ~~conditions~~31, or2011 ~~that~~and ~~the~~$142 ~~degree~~million ofat ~~compliance~~December ~~with~~31, ~~the policies or procedures may deteriorate~~2010.

Regulatory assets and liabilities. We account for the financial effects of regulation in accordance with authoritative guidance related to regulated entities whose rates are designed to recover the costs of providing service. In accordance with this guidance, incurred costs and estimated future expenditures that would otherwise be charged to expense in the current period are capitalized and recorded as regulatory assets when it is probable that such costs or expenditures will be recovered in rates in the future. Similarly, we recognize regulatory liabilities when it is probable that regulators will require customer refunds through future rates or when revenue is collected from customers for expenditures that have not yet been incurred. Generally, regulatory assets are amortized into expense and regulatory liabilities are amortized into income over the period authorized by the Illinois Commission. If our operations become no longer subject to rate regulation, a write-off of net regulatory liabilities would be required. Additional information on regulatory assets and liabilities is presented in Item 8 – Financial Statements and Supplementary Data – Note 2 – Significant Accounting Policies and Methods of Application.

Glossary of Key Terms

Table of Contents

~~REPORT OF INDEPENDENT REGISTERED PUBLIC~~ ACCOUNTING ~~FIRM (concluded)~~DEVELOPMENTS

InOn ~~our~~May ~~opinion~~12, ~~the consolidated financial statements referred to above present fairly~~2011, ~~in all material respects,~~ the ~~financial~~FASB ~~position~~issued ofauthoritative ~~the~~guidance ~~Company~~related asto offair ~~December~~value ~~31,~~measurements. ~~2010~~The ~~and~~guidance ~~2009,~~expands ~~and~~ the ~~results~~qualitative ~~of its operations~~ and ~~its~~quantitative ~~cash~~disclosures ~~flows~~ for ~~each~~Level of3 ~~the~~significant ~~three~~unobservable ~~years in the period ended December 31~~inputs, ~~2010,~~permits ~~in conformity with accounting principles generally accepted in~~ the ~~United~~use ~~States~~ of ~~America. Also,~~premiums inand ~~our~~discounts ~~opinion, such financial statement schedule, when considered in relation~~ to ~~the~~value ~~basic~~an ~~consolidated~~instrument ~~financial~~if ~~statements~~it ~~taken~~is asstandard apractice ~~whole,~~and ~~presents~~limits ~~fairly,~~best inuse ~~all~~valuation ~~material~~to ~~respects,~~non-financial ~~the~~assets ~~information~~and ~~set forth therein~~liabilities. ~~Also,~~ inThis ~~our~~guidance ~~opinion,~~will ~~the~~be ~~Company~~effective ~~maintained,~~for inus ~~all~~beginning ~~material~~January ~~respects~~1, ~~effective~~2012. ~~internal~~We ~~control~~do ~~over~~not ~~financial~~expect ~~reporting~~the asguidance ofto ~~December~~have ~~31,~~a ~~2010,~~material ~~based~~impact on ~~the~~our ~~criteria~~consolidated ~~established~~financial ~~in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission~~statements.

~~/s/~~On ~~DELOITTE~~June &16, ~~TOUCHE~~2011, ~~LLP~~the FASB issued authoritative guidance related to comprehensive income. The guidance eliminates the option to present OCI in the Statements of Equity, but instead allows companies to elect to present net income and OCI in one continuous statement (Statements of Comprehensive Income) or in two consecutive statements. This guidance does not change any of the components of net income or OCI. This guidance will be effective for us beginning January 1, 2012, and will not have a material impact on our consolidated financial statements.

~~Chicago,~~ITEM ~~Illinois~~7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

~~February~~We 24are exposed to risks associated with natural gas prices, ~~2011~~interest rates and credit. Natural gas price risk is defined as the potential loss that we may incur as a result of changes in the fair value of natural gas. Interest rate risk results from our portfolio of debt instruments that we issue to provide financing and liquidity for our business. Credit risk results from the extension of credit throughout all aspects of our business.

Natural Gas Price Risk

We are authorized to use a natural gas cost recovery mechanism that allows us to adjust rates to reflect changes in the wholesale cost of natural gas and to ensure we recover all of the costs prudently incurred in purchasing gas for our customers. We enter into derivative instruments to hedge the impact of market fluctuations in natural gas prices for customers. These derivatives 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 through directly to customers 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.

Substantial changes in natural gas prices may impact our earnings by increasing or decreasing the cost of gas used, storage-related gas costs, and other operating and financing expenses. We expect to purchase about 2 Bcf of natural gas in 2012 for our own use and to cover storage-related gas costs. The level of natural gas prices may also impact customer gas consumption and therefore margin. The actual impact of natural gas price fluctuations on our earnings is dependent upon several factors, including our hedging practices. We generally hedge a portion of our forecasted company use and storage-related gas costs through the use of swap agreements.

Interest Rate Risk

We manage interest rate risk by issuing primarily fixed-rate long-term debt with varying maturities, refinancing certain debt and, at times, hedging the interest rate on anticipated borrowings. Interest rate fluctuations expose our commercial paper to changes in interest expense and cash flows. Based on the average variable-rate commercial paper for 2011, a 100 basis point change in market interest rates would have resulted in an increase in pretax interest expense of approximately $2 million on an annualized basis.

Credit Risk

We have a diversified customer base, which limits our exposure to concentrations of credit risk in any one industry or income class and we believe that we maintain prudent credit policies. Additionally, we offer options to help customers manage their bills, such as energy assistance programs for low-income customers and a budget payment plan that spreads gas bills more evenly throughout the year. Customer credit risk has been substantially mitigated by the bad debt rider approved by the Illinois Commission on February 2, 2010. The bad debt rider provides for the recovery from (or refund to) customers of the difference between our actual bad debt experience on an annual basis and the benchmark bad debt expense included in our rates for the respective year.

Glossary of Key Terms

Table of Contents

Nicor Gas Company
Consolidated Statements of Income
(millions)
	Year ended December 31
	2010			2009			2008
Operating revenues (includes revenue taxes of $148.1, $150.3 and $174.0, respectively)	$	2,204.4		$	2,140.8		$	3,206.9
Operating expenses
Cost of gas		1,364.1			1,345.7			2,427.8
Operating and maintenance		298.4			298.9			293.0
Depreciation		183.6			177.4			170.9
Taxes, other than income taxes		164.6			167.6			189.4
Mercury-related		(1.3	)		-			.6
Income tax expense		58.6			39.9			28.9
		2,068.0			2,029.5			3,110.6
Operating income		136.4			111.3			96.3
Other income (expense)
Property sale gains		1.3			-			.8
Interest income		.8			1.5			5.5
Other income		1.3			1.1			.8
Other expense		(1.6	)		(1.6	)		(1.9	)
Income tax expense on other income		(.7	)		(.4	)		(2.1	)
		1.1			.6			3.1
Interest expense
Interest on debt, net of amounts capitalized		36.3			34.3			36.6
Other		.3			2.6			3.2
		36.6			36.9			39.8
Net income	$	100.9		$	75.0		$	59.6
The accompanying notes are an integral part of these statements.

We are also exposed to credit risk in the event a counterparty, customer or supplier defaults on a contract to pay for or deliver product at agreed-upon terms and conditions. To manage this credit risk, we believe that we maintain prudent credit policies to determine and monitor the creditworthiness of counterparties. In doing so, we seek guarantees or collateral, in the form of cash or letters of credit, we limit our exposure to any one counterparty, and, in some instances, we enter into netting arrangements to mitigate counterparty credit risk. However, the volatility in the capital markets over the past three years has made it more difficult for us to assess the creditworthiness of our counterparties. Based on this uncertainty, we have taken additional steps including, but not limited to, reducing available credit to some of our counterparties.

Certain of our derivative instruments contain credit-risk-related or other contingent features that could increase the payments for collateral we post in the normal course of business when our financial instruments are in net liability positions. As of December 31, 2011 for agreements with such features, our derivative instruments with liability fair values totaled approximately $6 million for which we had posted no collateral to our counterparties. If it was assumed that we had to post the maximum contractually specified collateral or settle the liability, we would have been required to pay approximately $6 million at December 31, 2011.

Glossary of Key Terms

Table of Contents

Nicor Gas Company
Consolidated Statements of Cash Flows
(millions)
	Year ended December 31
	2010			2009			2008
Operating activities
Net income	$	100.9		$	75.0		$	59.6
Adjustments to reconcile net income to net cash flow provided from (used for) operating activities:
Depreciation		183.6			177.4			170.9
Deferred income tax expense		22.7			25.8			3.0
Changes in assets and liabilities:
Receivables, less allowances		23.1			178.2			(44.6	)
Gas in storage		(14.5	)		69.0			(60.8	)
Deferred/accrued gas costs		21.4			24.7			(104.1	)
Derivative instruments		(13.9	)		(77.7	)		136.7
Margin accounts - derivative instruments		(2.3	)		84.9			(113.7	)
Pension benefits		(15.1	)		(21.5	)		179.1
Regulatory postretirement asset		1.6			39.6			(186.3	)
Other assets		20.8			8.5			(60.5	)
Accounts payable		(27.2	)		(47.5	)		(9.8	)
Customer credit balances and deposits		(31.1	)		(45.6	)		(47.2	)
Health care and other postretirement benefits		31.3			3.5			12.2
Other liabilities		31.5			(1.9	)		(2.4	)
Other items		(11.5	)		(9.8	)		(4.0	)
Net cash flow provided from (used for) operating activities		321.3			482.6			(71.9	)
Investing activities
Additions to property, plant and equipment		(187.4	)		(192.7	)		(230.0	)
Other investing activities		4.7			5.0			7.3
Net cash flow used for investing activities		(182.7	)		(187.7	)		(222.7	)
Financing activities
Proceeds from issuing long-term debt		-			50.0			75.0
Disbursements to retire long-term obligations		(.5	)		(50.5	)		(75.5	)
Net issuances (repayments) of commercial paper		(69.0	)		(223.9	)		348.9
Net proceeds of loan from affiliates		40.0			-			-
Dividends paid		(106.0	)		(69.7	)		(50.9	)
Other financing activities		(3.6	)		(2.5	)		(1.2	)
Net cash flow provided from (used for) financing activities		(139.1	)		(296.6	)		296.3
Net increase (decrease) in cash and cash equivalents		(.5	)		(1.7	)		1.7
Cash and cash equivalents, beginning of year		.6			2.3			.6
Cash and cash equivalents, end of year	$	.1		$	.6		$	2.3
Supplemental information
Income taxes paid, net	$	22.0		$	6.3		$	49.3
Interest paid, net of amounts capitalized		28.3			31.4			50.8
The accompanying notes are an integral part of these statements.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholder of Northern Illinois Gas Company

In our opinion, the accompanying consolidated statements of financial position and the related consolidated statements of income, retained earnings, comprehensive income, and cash flows present fairly, in all material respects, the financial position of Northern Illinois Gas Company and its subsidiary (the "Company") at December 31, 2011, and the results of their operations and their cash flows for the year ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein for the year ended December 31, 2011 when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit. We conducted our audit of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP

Chicago, Illinois

February 22, 2012

Glossary of Key Terms

Table of Contents

Nicor Gas Company
Consolidated Balance Sheets
(millions)
ASSETS
	December 31
	2010		2009
Gas distribution plant, at cost	$	4,733.6	$	4,598.2
Less accumulated depreciation		1,879.1		1,803.4
Gas distribution plant, net		2,854.5		2,794.8
Current assets
Cash and cash equivalents		.1		.6
Receivables, less allowances of $25.2 and $30.8, respectively		378.4		398.9
Receivables - affiliates		9.5		12.1
Gas in storage		119.2		104.7
Derivative instruments		7.4		4.7
Margin accounts - derivative instruments		49.8		43.6
Other		98.7		144.4
Total current assets		663.1		709.0
Regulatory postretirement asset		193.3		195.4
Other assets		144.0		130.5
Total assets	$	3,854.9	$	3,829.7
The accompanying notes are an integral part of these statements.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholder of Northern Illinois Gas Company

We have audited the accompanying consolidated statements of financial position of Northern Illinois Gas Company and subsidiary (the "Company") as of December 31, 2010, and the related consolidated statements of income, retained earnings, comprehensive income, and cash flows for each of the two years in the period ended December 31, 2010. Our audits also included the 2010 and 2009 financial statement schedule at Item 15(a)(2). These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Northern Illinois Gas Company and subsidiary as of December 31, 2010, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2010, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the 2010 and 2009 basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

/s/ DELOITTE & TOUCHE LLP

Chicago, Illinois

February 24, 2011

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Table of Contents

Nicor Gas Company
Consolidated Balance Sheets
(millions, except share data)
CAPITALIZATION AND LIABILITIES
	December 31
	2010			2009
Capitalization
Long-term obligations
Long-term debt, net of unamortized discount	$	498.4		$	498.2
Preferred stock, cumulative, $100 par value per share, 800,000 shares authorized
Mandatorily redeemable preferred stock, 4.48% and 5.00% series, 21,000 shares outstanding in 2010
and 26,000 shares outstanding in 2009, net of amount due within one year		1.8			2.1
Total long-term obligations		500.2			500.3
Nonredeemable preferred stock, 4.60% and 5.00% convertible series, 14,008 shares outstanding		1.4			1.4
Common equity
Common stock, $5 par value per share, 25,000,000 shares authorized, 32,365 shares reserved for share-based
awards and 15,232,414 shares outstanding		76.2			76.2
Paid-in capital		108.1			108.1
Retained earnings		471.6			486.7
Accumulated other comprehensive loss
Cash flow hedges		(.6	)		(.5	)
Postretirement benefit plans		(6.5	)		(6.5	)
Total accumulated other comprehensive loss		(7.1	)		(7.0	)
Total common equity		648.8			664.0
Total capitalization		1,150.4			1,165.7
Current liabilities
Long-term obligations due within one year		.3			.5
Short-term debt - affiliates		40.0			-
Short-term debt - other		425.0			494.0
Accounts payable		239.0			264.4
Customer credit balances and deposits		110.6			141.7
Derivative instruments		50.4			55.6
Other		112.1			82.0
Total current liabilities		977.4			1,038.2
Deferred credits and other liabilities
Regulatory asset retirement liability		843.9			796.8
Deferred income taxes		364.7			328.2
Health care and other postretirement benefits		229.7			199.7
Asset retirement obligation		190.6			191.3
Other		98.2			109.8
Total deferred credits and other liabilities		1,727.1			1,625.8
Commitments and contingencies
Total capitalization and liabilities	$	3,854.9		$	3,829.7
The accompanying notes are an integral part of these statements.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Based on our evaluation under the framework in Internal Control – Integrated Framework issued by COSO, our management concluded that our internal control over financial reporting was effective as of December 31, 2011, in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to the rules of the SEC that permit us to provide only management’s report in this annual report.

February 22, 2012

/s/ Henry P. Linginfelter

Henry P. Linginfelter

Chairman and Chief Executive Officer

/s/ Andrew W. Evans

Andrew W. Evans

Executive Vice President and Chief Financial Officer

Glossary of Key Terms

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Nicor Gas Company
Consolidated Statements of Retained Earnings
Consolidated Statements of Financial Position - Assets
(millions)
	As of December 31,
	Year ended December 31
In millions	2011			2010
	2010			2009			2008
Gas distribution plant, at cost	$	4,889		$	4,734
Balance at beginning of year	$	486.7		$	480.4		$	472.4
Less accumulated depreciation		1,961			1,879
Net income		100.9			75.0			59.6
Gas distribution plant, net (Note 2)		2,928			2,855
Dividends on common stock		(115.9	)		(68.6	)		(51.3	)
Current assets
Other		(.1	)		(.1	)		(.3	)
Receivables, less allowances of $21 in 2011 and $25 in 2010 (Note 2)		328			378
Balance at end of year	$	471.6		$	486.7		$	480.4
Receivables - affiliates		8			10
Consolidated Statements of Comprehensive Income
Gas in storage (Note 2)		116			119
(millions)
Deferred income taxes (Note 2 and Note 8)		41			26
	Year ended December 31
Derivative instruments (Note 2, Note 3 and Note 4)		2			7
	2010			2009			2008
Margin accounts - derivative instruments (Note 2 and Note 4)		21			50
Net income	$	100.9		$	75.0		$	59.6
Other		60			73
Other comprehensive income (loss)
Total current assets		576			663
Loss on cash flow hedges (net of income tax of $(0.8), $(1.5) and $(1.7), respectively)		(1.3	)		(2.5	)		(2.5	)
Regulatory retirement plan asset (Note 2 and Note 5)		253			193
Reclassifications of hedge losses to net income (net of income tax of $0.7 and $3.4 for 2010 and 2009, respectively)		1.2			5.0			-
Other assets		191			144
Postretirement gains (losses) (net of income tax of $0.1, $0.9 and $(3.9), respectively)		-			1.2			(6.0	)
Total assets	$	3,948		$	3,855
Other comprehensive income (loss), net of tax		(.1	)		3.7			(8.5	)
See Notes to Consolidated Financial Statements
Comprehensive income	$	100.8		$	78.7		$	51.1
The accompanying notes are an integral part of these statements.

Glossary of Key Terms

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Notes to the Consolidated Financial Statements

Nicor Gas Company
Consolidated Statements of Financial Position - Capitalization and Liabilities

	As of December 31,
In millions, except share amounts	2011			2010

Capitalization
Long-term debt, net of unamortized discount (Note 3 and Note 6)	$	499		$	498
Preferred stock, cumulative, $100 par value per share, 800,000 shares authorized
Mandatorily redeemable preferred stock, 4.48% and 5.00% series, 18,000 shares outstanding in 2011 and 21,000 shares
outstanding in 2010, net of amount due within one year		2			2
Nonredeemable preferred stock, 4.60% and 5.00% convertible series, 14,008 shares outstanding		1			1
Common equity
Common stock, $5 par value per share, 25,000,000 shares authorized, 32,365 shares reserved for share-based awards
and 15,232,414 shares outstanding		76			76
Paid-in capital		108			108
Retained earnings		465			472
Accumulated other comprehensive loss
Cash flow hedges		(1	)		(1	)
Retirement plans		(8	)		(6	)
Total accumulated other comprehensive loss		(9	)		(7	)
Total common equity		640			649
Total capitalization		1,142			1,150
Current liabilities
Short-term debt - affiliates (Note 6 and Note 9)		-			40
Short-term debt - other (Note 6)		452			425
Accounts payable		138			239
Customer credit balances and deposits		102			111
Derivative instruments (Note 2, Note 3 and Note 4)		25			50
Other		129			112
Total current liabilities		846			977
Deferred credits and other liabilities
Regulatory asset retirement liability (Note 2)		896			844
Deferred income taxes (Note 2 and Note 8)		401			365
Retiree medical plan benefits (Note 2 and Note 5)		269			230
Asset retirement obligation (Note 2 and Note 7)		200			191
Other		194			98
Total deferred credits and other liabilities		1,960			1,728
Commitments, guarantees and contingencies (Note 7)
Total capitalization and liabilities	$	3,948		$	3,855

See Notes to Consolidated Financial Statements

~~Nicor~~Glossary ~~Gas, a wholly owned subsidiary~~ of ~~Nicor,~~Key is one of the nation’s largest distributors of natural gas, serving 2.2 million customers in a service territory that encompasses most of the northern third of Illinois, excluding the city of Chicago. Certain terms used herein are defined in the glossary on pages ii and iii.Terms

1. PROPOSED MERGER WITH AGL RESOURCES

In December 2010, Nicor entered into an Agreement and Plan of Merger (the “Merger Agreement”) with AGL Resources, a copy of which was filed with the SEC. In accordance with the Merger Agreement, each share of Nicor stock, other than shares to be cancelled and Dissenting Shares (as defined in the Merger Agreement), outstanding at the Effective Time (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, the SEC’s clearance of a registration statement registering AGL Resources common stock, expiration or termination of any applicable waiting period under the Hart-Scott-Rodino Antitrust Improvement Act and regulatory approval by the ICC.

The Merger Agreement provides certain termination rights for both Nicor and AGL Resources, and provides for the payment of fees and expenses upon the termination of the Merger Agreement under certain circumstances. The company currently anticipates the merger will be completed in the second half of 2011. Although the company believes that Nicor and AGL Resources will receive the required authorizations, approvals and consents to complete the proposed merger, there can be no assurance as to the timing of these authorizations, approvals and consents or as to the ultimate ability to obtain such authorizations, consents or approvals (or any additional authorizations, approvals or consents which may otherwise become necessary) or that such authorizations, approvals or consents will be obtained on terms and subject to conditions satisfactory to Nicor and AGL Resources.

For additional information concerning the proposed merger, please see Nicor’s Form 8-K filed with the SEC on December 7, 2010 and the Form S-4 registration statement filed with the SEC by AGL Resources on February 4, 2011.

No adjustments have been made to the financial statements as a result of the proposed merger.

2. ACCOUNTING POLICIES

General. Nicor Gas and its affiliates reimburse each other for transactions between the companies.

Consolidation. The consolidated financial statements include the accounts of Nicor Gas and its wholly owned subsidiary. All significant intercompany balances and transactions have been eliminated.

Statement of Income presentation. The focus of Nicor Gas’ Statement of Income presentation is the regulatory treatment of revenues and expenses. Operating revenues and expenses (including income taxes) on which rate-regulated utility operating income is based are those that ordinarily are included in the determination of utility revenue requirements.

Use of estimates. The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates that affect reported amounts. Actual results could differ from those estimates and such differences could be material. Accounting estimates requiring significant management judgment involve accrued unbilled revenues, derivative instruments, regulatory assets and liabilities, pension and other postretirement benefits,

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potential asset impairments, asset retirement obligations, loss contingencies including environmental contingencies, credit risk and income taxes.

Nicor Gas Company
Consolidated Statements of Income

	Years ended December 31,
In millions	2011			2010		2009

Operating revenues (includes revenue taxes of $155 in 2011, $148 in 2010 and $150 in 2009) (Note 2)	$	2,064		$	2,204	$	2,141
Operating expenses
Cost of gas (Note 2)		1,260			1,364		1,346
Operating and maintenance		295			297		299
Depreciation (Note 2)		189			184		177
Taxes, other than income taxes		172			164		168
Performance-based rate plan (Note 7)		37			-		-
Income tax expense (Note 8)		28			59		40
Total operating expenses		1,981			2,068		2,030
Operating income		83			136		111
Other income (expense), net		(1	)		1		1
Interest expense
Interest on debt, net of amounts capitalized		34			36		34
Other		(2	)		-		3
Total interest expense		32			36		37
Net income	$	50		$	101	$	75

See Notes to Consolidated Financial Statements

~~Subsequent~~Glossary ~~events. The~~of ~~company’s~~Key ~~management evaluated subsequent events for potential recognition and disclosure through the date the financial statements were issued.~~Terms

Cash and cash equivalents. Cash equivalents are comprised of highly liquid investments with an initial maturity of three months or less. The carrying value of these investments approximates fair value.

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.

The company had regulatory assets and liabilities at December 31 as follows (in millions):

	2010		2009
Regulatory assets - current
Regulatory postretirement asset	$	21.1	$	20.6
Deferred gas costs		6.5		24.9
Other		7.4		5.4
Regulatory assets - noncurrent
Regulatory postretirement asset		193.3		195.4
Deferred gas costs		1.4		4.4
Deferred environmental costs		25.0		18.1
Unamortized losses on reacquired debt		13.1		14.2
Other		9.6		8.9
	$	277.4	$	291.9

Regulatory liabilities - current
Regulatory asset retirement liability	$	17.2	$	14.5
Bad debt rider		16.4		-
Other		7.7		2.7
Regulatory liabilities - noncurrent
Regulatory asset retirement liability		843.9		796.8
Regulatory income tax liability		18.2		39.1
Bad debt rider		11.7		-
Other		.9		.8
	$	916.0	$	853.9

All items listed above are classified in Other on the 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

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efficiency costs charged to its customers. However, there is no interest associated with the under or overcollections of bad debt expense.

Nicor Gas Company
Consolidated Statements of Comprehensive Income

	Years ended December 31,
In millions	2011			2010			2009

Net income	$	50		$	101		$	75
Other comprehensive income (loss)
Loss on cash flow hedges (net of income tax of $(1) in 2011 and 2010 and $(2) in 2009)		(1	)		(1	)		(2	)
Reclassifications of hedge losses to net income (net of income tax of $1 in 2011 and 2010 and $3 in 2009)		1			1			5
Gains (losses) on retirement plans (net of income tax of $(1) in 2011, $0 in 2010 and $1 in 2009)		(2	)		-			1
Other comprehensive income (loss), net of tax		(2	)		-			4
Comprehensive income	$	48		$	101		$	79

See Notes to Consolidated Financial Statements







Consolidated Statements of Retained Earnings

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