UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2004

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

Commission File Number 1-7297

NICOR INC.
(Exact name of registrant as specified in its charter)

Illinois 36-2855175
(State of Incorporation) (I.R.S. Employer
Identification Number)

1844 Ferry Road
Naperville, Illinois 60563-9600 (630) 305-9500
(Address of principal executive offices) (Registrant's telephone number)

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 is an accelerated filer (as
defined in rule 12b-2 of the Act). Yes [X] No [ ].

Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. Common stock, par value
$2.50, outstanding at April 23, 2004, were 44,057,930 shares.

Nicor Inc. Page i
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Table of Contents

Part I - Financial Information

Item 1. Financial Statements (Unaudited) ................................. 1
Consolidated Statements of Operations:
Three months ended
March 31, 2004 and 2003 ........................................ 2
Consolidated Statements of Cash Flows:
Three months ended
March 31, 2004 and 2003 ........................................ 3
Consolidated Balance Sheets:
March 31, 2004 and 2003, and
December 31, 2003 .............................................. 4

Notes to the Consolidated Financial Statements ................... 5

Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................17

Item 3. Quantitative and Qualitative Disclosures about Market Risk........28

Item 4. Controls and Procedures ..........................................28

Part II - Other Information

Item 1. Legal Proceedings ................................................29

Item 2. Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities ...................................29

Item 6. Exhibits and Reports on Form 8-K .................................29

Signature ........................................................30

Exhibit Index ....................................................31

Glossary

Degree day......The extent to which the daily average temperature falls below
65 degrees Fahrenheit. Normal weather for Nicor Gas' service
territory is about 6,000 degree days per year.
ICC.............Illinois Commerce Commission, the agency that regulates
investor-owned Illinois utilities.
FERC............Federal Energy Regulatory Commission, the agency that regulates
the interstate transportation of natural gas, oil and
electricity.
Mcf, MMcf, Bcf..Thousand cubic feet, million cubic feet, billion cubic feet.
PBR.......... Performance-based rate, a regulatory plan that
provided economic incentives based on natural gas
cost performance.
TEU.............Twenty-foot equivalent unit, a measure of volume in
containerized shipping equal to one 20-foot-long container.

Nicor Inc. Page 1
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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

The following condensed unaudited consolidated financial statements of Nicor
Inc. (Nicor) have been prepared by the company pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC). Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States
have been condensed or omitted pursuant to SEC rules and regulations. The
condensed financial statements should be read in conjunction with the financial
statements and the notes thereto included in the company's 2003 Annual Report on
Form 10-K/A (Amendment No. 1).

The information furnished reflects, in the opinion of the company, all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair statement of the results for the interim periods presented. Results for the
interim periods presented are not necessarily indicative of the results to be
expected for the full fiscal year due to seasonal and other factors.

Nicor Inc. Page 2
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Consolidated Statements of Operations (Unaudited)
(millions, except per share data)
Three months ended
March 31
---------------------------
2004 2003
----------- -----------
Operating revenues
Gas distribution (includes revenue taxes
of $70.9 and $62.4, respectively) $ 1,035.1 $ 1,096.7
Shipping 67.7 66.4
Other energy ventures 51.7 21.1
Corporate and eliminations (38.8) (12.9)
----------- -----------
1,115.7 1,171.3
Operating expenses
Gas distribution
Cost of gas 792.2 862.9
Operating and maintenance 63.9 58.5
Depreciation 37.3 36.0
Taxes, other than income taxes 74.6 65.9
Mercury-related costs (recoveries), net (.1) (.3)
Shipping 63.5 60.7
Other energy ventures 48.7 17.5
Litigation charge 38.5 -
Other corporate expenses and eliminations (37.2) (11.2)
----------- -----------
1,081.4 1,090.0
----------- -----------

Operating income 34.3 81.3
Equity investment income (loss), net 1.2 1.3
Other income (expense), net .5 .5
Interest expense, net of amounts capitalized 11.3 9.6
----------- -----------

Income before income taxes and cumulative
effect of accounting change 24.7 73.5
Income taxes 5.1 23.1
----------- -----------

Income before cumulative effect of
accounting change 19.6 50.4
Cumulative effect of accounting change,
net of $3.0 income tax benefit - (4.5)
----------- -----------

Net income 19.6 45.9
Dividends on preferred stock - -
----------- -----------

Earnings applicable to common stock $ 19.6 $ 45.9
=========== ===========

Average shares of common stock outstanding
Basic 44.0 44.0
Diluted 44.2 44.1

Earnings per average share of common stock
Basic
Before cumulative effect of accounting change $ .44 $ 1.14
Cumulative effect of accounting change,
net of tax - (.10)
----------- -----------
Basic earnings per share $ .44 $ 1.04
=========== ===========

Diluted
Before cumulative effect of accounting change $ .44 $ 1.14
Cumulative effect of accounting change,
net of tax - (.10)
----------- -----------
Diluted earnings per share $ .44 $ 1.04
=========== ===========

Dividends declared per share of common stock $ .465 $ .465

The accompanying notes are an integral part of these statements.

Nicor Inc. Page 3
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Consolidated Statements of Cash Flows (Unaudited)
(millions)
Three months ended
March 31
--------------------------
2004 2003
----------- -----------
Operating activities
Net income $ 19.6 $ 45.9
Adjustments to reconcile net income
to net cash flow provided from
operating activities:
Depreciation 41.8 40.4
Deferred income tax expense 9.6 9.9
Cumulative effect of accounting change - 4.5
Gains on sale of property,
plant and equipment - (1.3)
Changes in assets and liabilities:
Receivables, less allowances (19.8) (234.0)
Gas in storage 205.6 31.8
Deferred/accrued gas costs 38.0 (93.3)
Other assets (2.3) 33.6
Accounts payable (87.7) 63.7
Temporary last-in, first-out
liquidation 195.9 258.6
Other liabilities 37.8 .6
Other .3 -
---------- -----------
Net cash flow provided from
operating activities 438.8 160.4
---------- -----------

Investing activities
Capital expenditures (33.6) (36.9)
Net increase in short-term investments (4.3) (1.0)
Net proceeds from sale of property,
plant and equipment .1 1.8
Other (.4) (.1)
---------- -----------
Net cash flow used for investing
activities (38.2) (36.2)
---------- -----------

Financing activities
Short-term borrowings (repayments), net (388.0) (125.0)
Dividends paid (20.5) (20.3)
Repayment of loan against cash
surrender value (11.7) -
Disbursements to reacquire stock - (2.0)
Other .9 .8
---------- -----------
Net cash flow used for financing
activities (419.3) (146.5)
---------- -----------

Net decrease in cash and cash equivalents (18.7) (22.3)

Cash and cash equivalents, beginning of period 50.3 75.2
---------- -----------

Cash and cash equivalents, end of period $ 31.6 $ 52.9
========== ===========

The accompanying notes are an integral part of these statements.

Nicor Inc. Page 4
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Consolidated Balance Sheets (Unaudited)
(millions)

March 31 December 31 March 31
2004 2003 2003
---------- ----------- ----------

Assets

Current assets
Cash and cash equivalents $ 31.6 $ 50.3 $ 52.9
Short-term investments, at cost
which approximates market 37.2 32.9 26.7
Receivables, less allowances of
$29.7, $21.2 and $26.4,
respectively 496.6 476.8 699.5
Gas in storage 30.4 236.0 8.7
Deferred gas costs - - 26.0
Deferred income taxes 66.2 66.8 34.0
Other 54.6 53.1 34.0
----------- ----------- ----------
716.6 915.9 881.8
----------- ----------- ----------
Property, plant and equipment,
at cost
Gas distribution 3,719.2 3,694.8 3,589.9
Shipping 296.7 296.6 305.1
Other 8.2 8.1 6.0
----------- ----------- ----------
4,024.1 3,999.5 3,901.0
Less accumulated depreciation 1,537.4 1,515.3 1,470.6
----------- ----------- ----------
2,486.7 2,484.2 2,430.4
----------- ----------- ----------
Prepaid pension costs 178.2 177.1 177.1
Other assets 227.0 220.0 204.1
----------- ----------- ----------
$ 3,608.5 $ 3,797.2 $ 3,693.4
=========== =========== ==========

Liabilities and Capitalization

Current liabilities
Long-term obligations
due within one year $ - $ - $ 100.0
Short-term borrowings 187.0 575.0 190.0
Accounts payable 297.7 385.4 613.7
Temporary last-in, first-out
liquidation 195.9 - 258.6
Accrued gas costs 85.0 47.0 -
Dividends payable 20.5 20.5 20.5
Other 79.7 40.8 46.0
----------- ----------- ----------
865.8 1,068.7 1,228.8
----------- ----------- ----------

Deferred credits and other liabilities
Accrued future removal costs 682.0 670.0 635.0
Deferred income taxes 567.8 561.4 395.9
Regulatory income tax liability 47.5 48.4 61.3
Unamortized investment tax credits 34.9 35.6 37.0
Other 159.2 161.6 181.6
----------- ----------- ----------
1,491.4 1,477.0 1,310.8
----------- ----------- ----------

Capitalization
Long-term obligations
Long-term bonds and notes 494.9 495.1 396.3
Mandatorily redeemable
preferred stock 1.8 1.8 -
----------- ----------- ----------
496.7 496.9 396.3
----------- ----------- ----------

Mandatorily redeemable
preferred stock - - 2.0

Common equity
Common stock 110.1 110.1 110.0
Paid-in capital 4.4 3.6 2.0
Retained earnings 646.2 647.1 649.2
Unearned compensation (.2) (.2) (.3)
Accumulated other comprehensive
income (loss), net (5.9) (6.0) (5.4)
----------- ----------- ----------
754.6 754.6 755.5
----------- ----------- ----------
$ 3,608.5 $ 3,797.2 $ 3,693.4
=========== =========== ==========

The accompanying notes are an integral part of these statements.

Nicor Inc. Page 5
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Notes to the Consolidated Financial Statements (Unaudited)

The following notes should be read in conjunction with the consolidated
financial statement notes included in the Nicor Inc. (Nicor) 2003 Annual Report
on Form 10-K/A (Amendment No. 1). Results for the interim periods presented are
not necessarily indicative of the results to be expected for the full fiscal
year due to seasonal and other factors.

1. ACCOUNTING POLICIES

Gas in storage. Gas distribution inventory is carried at cost applying a
last-in, first-out (LIFO) method on a calendar-year basis. For interim periods,
the difference between estimated replacement cost and the LIFO cost for
quantities of gas temporarily withdrawn from storage is recorded in cost of gas
and in current liabilities as a temporary LIFO liquidation.

Regulatory assets and liabilities. Northern Illinois Gas Company (Nicor Gas), a
wholly owned subsidiary of Nicor, is regulated by the Illinois Commerce
Commission (ICC), which establishes the rules and regulations governing utility
rates and services in Illinois. The company applies accounting standards that
recognize the economic effects of rate regulation and, accordingly, has recorded
regulatory assets and liabilities. The company had regulatory assets
(liabilities) as follows (in millions):

March 31 December 31 March 31
2004 2003 2003
---------- ----------- ---------

Accrued future removal costs $ (682.0) $ (670.0) $ (635.0)
Deferred (accrued) gas costs (85.0) (47.0) 26.0
Regulatory income tax liability (47.5) (48.4) (61.3)
Deferred environmental costs 31.8 37.0 39.1
Unamortized losses on
reacquired debt 20.7 20.9 18.8
Other .2 - -
---------- ---------- ---------
$ (761.8) $ (707.5) $ (612.4)
=========== ========== =========

Deferred environmental costs and unamortized losses on reacquired debt are
classified in other noncurrent assets. At December 31, 2003, accrued future
removal costs for all periods presented were reclassified from accumulated
depreciation to a noncurrent liability to conform to new guidance issued to the
utility industry. Accrued future removal costs at March 31, 2003 have similarly
been reclassified to conform to that presentation.

Revenue taxes. Nicor Gas classifies revenue taxes billed to customers as
operating revenues and related taxes due as operating expenses. Revenue taxes
included in operating expense for the quarters ended March 31, 2004 and 2003
were $69.5 million and $61.5 million, respectively.

Income taxes. Nicor recorded an income tax benefit on the litigation charge
discussed in Note 13 - Contingencies - Securities Class Actions at Nicor's
marginal income tax rate of about 40 percent. As a result, the company's
effective income tax rate fell to 21 percent in the first quarter of 2004 as
compared to 31 percent in the first quarter of 2003. The effective income tax
rate for the full year is estimated to be approximately 30 percent.

Nicor Inc. Page 6
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Notes to the Consolidated Financial Statements (Unaudited) (continued)

Stock Options and Awards. Nicor does not recognize compensation expense for
awards granted under its stock-based compensation plans as it continues to apply
the intrinsic value method. Statement of Financial Accounting Standards (FAS)
No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure -
an amendment of FASB Statement No. 123, requires a company that uses the
intrinsic value method to disclose the effect on net income and earnings per
share had it applied the fair value method. The effect of using the fair value
method on Nicor is as follows (in millions):

Three months
ended
March 31
----------------
2004 2003
-------- -------

Net income - as reported $ 19.6 $ 45.9
Less: Total stock-based employee
compensation expense determined
under the fair value method for
all awards, net of tax .2 .2
-------- -------
Net income - pro forma $ 19.4 $ 45.7
======== =======

There would have been no impact on the company's reported first-quarter earnings
per share if compensation expense for stock options had been recognized based
upon the fair value method.

2. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING

Effective January 1, 2003, Nicor's wholesale natural gas marketing business,
Nicor Enerchange, began applying accrual accounting rather than fair value
accounting to gas in storage and certain energy-related contracts, such as
storage and transportation agreements. The change in accounting method relates
to a rescission of Emerging Issues Task Force Consensus No. 98-10, Accounting
for Contracts Involved in Energy Trading and Risk Management Activities, and a
prohibition against recording inventory at fair value. Effective with the
change, Nicor recorded a $4.5 million cumulative effect loss from the change in
accounting principle, which was net of $3 million in income tax benefits.

3. NEW ACCOUNTING PRONOUNCEMENTS

Consolidation of Variable Interest Entities. In December 2003, the Financial
Accounting Standards Board (FASB) issued Interpretation 46(R), Consolidation of
Variable Interest Entities (FIN 46R). FIN 46R addresses the application of
Accounting Research Bulletin 51, Consolidated Financial Statements, to certain
entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support. FIN 46R was effective for Nicor on January 1, 2004, and had no impact
on the company's financial position or results of operations.

Nicor Inc. Page 7
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Notes to the Consolidated Financial Statements (Unaudited) (continued)

4. ACCRUED UNBILLED REVENUES

Receivables include accrued unbilled revenues of $96.1 million, $140 million and
$164.2 million at March 31, 2004, December 31, 2003, and March 31, 2003,
respectively, related primarily to gas distribution operations. Nicor Gas
accrues revenues for estimated deliveries to customers from the date of their
last bill until the balance sheet date.

5. BUSINESS SEGMENT INFORMATION

Financial data by major business segment is presented below (in millions):

Other Corporate
Gas energy and
distribution Shipping ventures eliminations Total
------------ ---------- --------- ------------- ---------

Three months ended March 31, 2004
Operating revenues
External customers $ 999.9 $ 67.7 $ 48.1 $ - $ 1,115.7
Intersegment 35.2 - 3.6 (38.8) -
------------ ---------- --------- ------------- ---------
$ 1,035.1 $ 67.7 $ 51.7 $ (38.8) $ 1,115.7
============ ========== ========= ============= =========

Operating income (loss) $ 67.2 $ 4.2 $ 3.0 $ (40.1) $ 34.3
============ ========== ========= ============= =========

Three months ended March 31, 2003
Operating revenues
External customers $ 1,084.0 $ 66.4 $ 20.9 $ - $ 1,171.3
Intersegment 12.7 - .2 (12.9) -
------------ ---------- --------- ------------- ---------
$ 1,096.7 $ 66.4 $ 21.1 $ (12.9) $ 1,171.3
============ ========== ========= ============= =========

Operating income (loss) $ 73.7 $ 5.7 $ 3.6 $ (1.7) $ 81.3
============ ========== ========= ============= =========

The majority of intersegment revenues represent Nicor Gas revenues related to
customers purchasing utility-bill management products from Nicor Solutions.
Under these products, Nicor Solutions bills a fixed amount to a customer and in
exchange pays the customer's utility bills from Nicor Gas. Intersegment revenues
have been eliminated in the consolidated financial statements.

The $40.1 million loss shown in corporate and eliminations for the three months
ended March 31, 2004 includes a $38.5 million litigation charge related to an
agreement to settle securities class actions as described in the Notes to the
Consolidated Financial Statements - Note 13 Contingencies - Securities Class
Actions.

Nicor Inc. Page 8
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Notes to the Consolidated Financial Statements (Unaudited)(continued)

6. EQUITY INVESTMENT INCOME (LOSS), NET

Equity investment income (loss), net includes the following (in millions):

Three months ended
March 31
--------------------
2004 2003
--------- ---------

Triton Container Investments (Triton) $ 1.5 $ 1.3
Affordable housing investments (.4) (.6)
Horizon Pipeline .3 .3
All other (.2) .3
--------- ---------
$ 1.2 $ 1.3
========= =========

7. OTHER INCOME (EXPENSE), NET

Other income (expense), net includes the following (in millions):

Three months ended
March 31
--------------------
2004 2003
--------- ---------

Interest income $ .5 $ .6
Other income .2 .2
Other expense (.2) (.3)
--------- ---------
$ .5 $ .5
========= =========

8. COMPREHENSIVE INCOME

Total comprehensive income, as defined by FAS 130, Reporting Comprehensive
Income, is equal to net income plus other comprehensive income and is as follows
(in millions):

Three months ended
March 31
--------------------
2004 2003
--------- ---------

Net income $ 19.6 $ 45.9
Net other comprehensive income
(loss), after tax .1 .9
--------- ---------
Total comprehensive income $ 19.7 $ 46.8
========= =========

Net other comprehensive income (loss) consists primarily of unrealized gains and
losses from derivative financial instruments accounted for as cash flow hedges,
including Nicor's share of such amounts from joint ventures and other
equity-method investees.

Nicor Inc. Page 9
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Notes to the Consolidated Financial Statements (Unaudited) (continued)

9. FAIR VALUE OF FINANCIAL INSTRUMENTS

The recorded amount of short-term investments and short-term borrowings
approximates fair value because of the short maturity of the instruments.
Long-term debt outstanding, including current maturities, is recorded at the
principal balance outstanding. The principal balance of Nicor Gas' First
Mortgage Bonds outstanding was $500 million at March 31, 2004 and December 31,
2003, and $450 million at March 31, 2003. Based on quoted market interest rates,
the fair value of the company's First Mortgage Bonds outstanding, including
current maturities, was approximately $546 million, $530 million and $487
million at March 31, 2004, December 31, 2003 and March 31, 2003, respectively.

10. POSTRETIREMENT BENEFITS

Nicor Gas maintains a noncontributory defined benefit pension plan covering
substantially all employees hired prior to 1998. Pension benefits are based on
years of service and highest average salary for management employees and job
level for unionized employees. The benefit obligation related to collectively
bargained benefits considers the company's past practice of regular benefit
increases to reflect current wages. Nicor Gas also provides health care and life
insurance benefits to eligible retired employees under a plan that includes a
limit on the company's share of cost for most future retirees. The company's
postretirement benefit costs have been considered in rate proceedings on the
accrual basis.

About one-fourth of the net periodic benefit cost or credit related to these
plans has been capitalized as a cost of constructing gas distribution facilities
and the remainder is included in gas distribution operating and maintenance
expense. Net periodic benefit cost (credit) included the following components
(in millions):

Pension
benefits Other benefits
--------------- -----------------
2004 2003 2004 2003
------- ------- -------- -------

Three months ended March 31
Service cost $ 2.2 $ 1.8 $ .6 $ .5
Interest cost 4.0 4.1 2.5 2.8
Expected return on plan assets (8.0) (7.2) (.2) (.3)
Recognized net actuarial loss .5 1.1 1.2 .7
Amortization of unrecognized
transition obligation - - - .8
Amortization of prior service
cost .2 .2 - -
------ ------ ------- -------
Net periodic benefit cost (credit) $ (1.1) $ - $ 4.1 $ 4.5
======= ======= ======= =======

In 2003, the company amended the retiree health care plan as it applies to
non-unionized employees to improve consistency of benefits among participant
groups and reduce the company's share of plan costs effective January 1, 2004.
The resultant cost reduction is reflected in the 2004 net periodic benefit costs
presented above. In April 2004, the plan was amended to make cost-sharing
changes for unionized employees. The impact of the April 2004 amendment is
expected to be immaterial.

Nicor Inc. Page 10
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Notes to the Consolidated Financial Statements (Unaudited) (continued)

11. RELATED PARTY TRANSACTIONS

In the first quarter of 2004 and 2003, Horizon Pipeline, a 50-percent-owned
joint venture of Nicor, charged Nicor Gas $2.7 million and $2.6 million,
respectively, for natural gas transportation under rates that have been accepted
by the Federal Energy Regulatory Commission.

In each of the first quarters of 2004 and 2003, EN Engineering, a
50-percent-owned joint venture of Nicor, charged Nicor Technologies, a wholly
owned subsidiary of Nicor, $.9 million for engineering and corrosion services.

12. GUARANTEES AND INDEMNITIES

Nicor and certain subsidiaries enter into various financial and performance
guarantees and indemnities providing assurance to third parties.

Financial guarantees. The company has issued financial guarantees extending
through 2007 on behalf of its wholly owned subsidiaries and other affiliates,
guaranteeing payment by these affiliates under the terms of various existing or
potential contracts. These contracts relate primarily to physical and financial
transactions in energy commodities and related services, and operating lease
obligations. The maximum potential payment under these guarantees was $185
million and $188 million at March 31, 2004 and 2003, respectively, of which $183
million and $162 million, respectively, related to parental guarantees of
existing or potential subsidiary obligations that are reflected as liabilities
in Nicor's consolidated balance sheet when incurred by the subsidiaries. The
remaining $2 million and $26 million of maximum potential payments at March 31,
2004 and 2003, respectively, related to guarantees on behalf of Nicor Energy, a
50-percent-owned retail energy marketing joint venture, and guarantees of
operating lease obligations that are not reflected as liabilities in Nicor's
consolidated balance sheet.

Tropic Equipment Leasing Inc. (TEL), a wholly owned subsidiary of Nicor, holds
the company's interests in Triton, a cargo container leasing company. TEL has a
contingent liability to restore to zero any deficit in its equity account for
income tax purposes in the unlikely event that Triton is liquidated and a
deficit balance remains. This contingent liability continues for the life of the
Triton partnerships and any payment is effectively limited to the assets of TEL,
which were about $3 million and $10 million at March 31, 2004 and 2003,
respectively. Nicor believes the likelihood of any such payment by TEL is
remote.

Performance guarantees. Nicor Services markets separately priced product
warranty contracts that provide for the repair of heating, ventilation and air
conditioning (HVAC) equipment, natural gas lines, and other appliances within
homes. Revenues from these product warranty contracts are recognized ratably
over the coverage period, and repair costs are charged to expense as incurred.
Repair expenses of $.7 million and $1.0 million were incurred in the first
quarter of 2004 and 2003, respectively.

Indemnities. In certain instances, Nicor has undertaken to indemnify current
property owners and others against costs associated with the effects and/or
remediation of contaminated sites for which the company may be responsible under
applicable federal or state environmental laws. Nicor has also indemnified, to
the fullest extent permitted under the laws of the State of Illinois and any
other applicable laws, its present and former directors, officers and employees
against expenses they may incur in connection with

Nicor Inc. Page 11
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Notes to the Consolidated Financial Statements (Unaudited)(continued)

litigation they are a party to by reason of their association with the company,
subject to certain limitations. It is not possible to estimate the maximum
potential payment under these indemnifications.

13. CONTINGENCIES

The following contingencies of Nicor 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's liquidity or financial condition.

Performance-Based Rate (PBR) Plan. Nicor Gas' PBR plan for natural gas costs
went into effect in 2000 and was terminated by the company effective January 1,
2003. Under the PBR plan, Nicor Gas' total gas supply costs were compared to a
market-sensitive benchmark. Savings and losses relative to the benchmark were
determined annually and shared equally with sales customers. The PBR plan is
currently under Illinois Commerce Commission (ICC) review.

There are allegations that the company acted improperly in connection with the
PBR plan, and the ICC and others are reviewing these allegations. On June 27,
2002 the Citizens Utility Board (CUB) filed a motion to reopen the record in the
ICC's proceedings to review the PBR plan (the ICC Proceedings). As a result of
the motion to reopen, Nicor Gas, the Cook County State's Attorney Office
(CCSAO), the staff of the ICC and CUB entered into a stipulation providing for
additional discovery. The Illinois Attorney General's Office has also intervened
in this matter. In addition, the Illinois Attorney General's Office issued Civil
Investigation Demands (CIDs) to CUB and the ICC staff. The CIDs ordered that CUB
and the ICC staff produce all documents relating to any claims that Nicor Gas
may have presented, or caused to be presented, false information related to its
PBR plan. Parties who were plaintiffs in a dismissed class action proceeding
against the company could potentially intervene in these proceedings. The
company has committed to cooperate fully in the reviews of the PBR plan.

In response to these allegations, on July 18, 2002, the Nicor Board of Directors
appointed a special committee of independent, non-management directors to
conduct an inquiry into issues surrounding natural gas purchases, sales,
transportation, storage and such other matters as may come to the attention of
the special committee in the course of its investigation. The special committee
presented the report of its counsel (Report) to Nicor's Board of Directors on
October 28, 2002.

In response, the Nicor Board of Directors directed the company's management to,
among other things, make appropriate adjustments to account for, and fully
address, the adverse consequences to ratepayers of the items noted in the
Report, and conduct a detailed study of the adequacy of internal accounting and
regulatory controls. The adjustments were made in financial statements resulting
in a $24.8 million liability at March 31, 2004. Included in such $24.8 million
liability is a $4.1 million loss contingency. In addition, Nicor Gas estimates
that there is $26.9 million due to the company from the 2002 PBR plan year,
which has not been recognized in the financial statements due to uncertainties
surrounding the PBR plan. The net of these items and interest income on certain
components results in a $2.8 million reimbursement the company is seeking as of
March 31, 2004, pending resolution of the proceedings discussed below. The
company took steps to correct the weaknesses and deficiencies identified in the
detailed study of the adequacy of internal controls.

Nicor Inc. Page 12
- -------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements (Unaudited) (continued)

Pursuant to the agreement of all parties, including the company, the ICC
re-opened the 1999 and 2000 purchased gas adjustment filings for review of
certain transactions related to the PBR plan and consolidated the reviews of the
1999-2002 purchased gas adjustment filings with the PBR plan review.

On February 5, 2003, the CCSAO and CUB filed a motion for $27 million in
sanctions against the company in the ICC Proceedings. In that motion, CCSAO and
CUB alleged that Nicor Gas' responses to certain CUB data requests were false.
Also on February 5, 2003, CUB stated in a press release that, in addition to $27
million in sanctions, it would seek additional refunds to consumers. On March 5,
2003, the ICC staff filed a response brief in support of CUB's motion for
sanctions. On May 1, 2003, the Administrative Law Judges issued a ruling denying
CUB and CCSAO'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 CCSAO, CUB or other parties to
the ICC Proceedings.

In November 2003, the ICC staff, CUB, CCSAO and the Illinois Attorney General's
Office (IAGO) filed their respective direct testimony in the ICC Proceedings.
The ICC staff is seeking refunds to customers of approximately $108 million and
CUB and CCSAO were jointly seeking refunds to customers of approximately $143
million. The IAGO direct testimony alleges adjustments in a range from $145
million to $190 million. The IAGO testimony as filed is presently unclear as to
the amount which IAGO seeks to have refunded to customers. On February 27, 2004
the above referenced intervenors filed their rebuttal testimony in the ICC
Proceedings. In such rebuttal testimony, CUB and CCSAO amended the alleged
amount to be refunded to customers from approximately $143 million to $190
million. Nicor Gas filed rebuttal testimony in January 2004, which is consistent
with the findings of the special committee Report and, as noted above, seeks a
reimbursement to Nicor Gas of approximately $2.8 million. The parties to the ICC
Proceedings have agreed to a stay of the evidentiary hearings on this matter in
order to undertake additional third party discovery.

Nicor is unable to predict the outcome of any of the foregoing reviews or the
company's potential exposure thereunder. Because the PBR plan and historical gas
costs are still under ICC review, the final outcome could be materially
different than the amounts reflected in the company's financial statements as of
March 31, 2004.

Nicor Energy. Nicor is a 50-percent owner of Nicor Energy, a retail energy
marketing joint venture with Dynegy Marketing and Trade.

As a result of an audit and review process in 2002, accounting irregularities
were identified at Nicor Energy. Appropriate accounting adjustments were made by
Nicor in restated financial statements previously filed with the United States
Securities and Exchange Commission (SEC).

Nicor Energy has disposed of all of its customer accounts and is in the process
of liquidating its remaining assets and resolving remaining contingent
liabilities. Nicor's investment in Nicor Energy was written off in the third
quarter of 2002 due to the belief at that time that Nicor ultimately would not
recover its investment balance. During 2003, Nicor recorded gains of $9.6
million upon the receipt of cash from Nicor Energy. No recoveries occurred in
the first quarter of either 2004 or 2003, and any future gains or losses are not
expected to be material. Nicor's maximum exposure under a guarantee commitment
on behalf of Nicor Energy as of March 31, 2004 was about $1 million. Nicor
believes it is unlikely that a payment will be required under this guarantee.

Nicor Inc. Page 13
- -------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements (Unaudited) (continued)

On December 10, 2003, the United States Attorney for the Northern District of
Illinois indicted three former employees of Nicor Energy and an outside lawyer
for Nicor Energy. The indictments alleged that the defendants fraudulently
deprived Nicor Energy, a 50/50 joint venture between Nicor Inc. and Dynegy Inc.,
of their honest services and caused a loss to investors in Nicor Inc. and Dynegy
Inc. During the time period covered by the indictments, Nicor Energy was a stand
alone entity with its own management and was operated independently from Nicor
Inc. and Nicor Gas. None of the individuals indicted are employees of Nicor Inc.
or Nicor Gas nor were they at the time of the charged conduct. The three former
employees of Nicor Energy have pled guilty to certain charges. Separately, on
December 10, 2003, the SEC filed its own civil enforcement action against the
same three former employees and one additional former employee of Nicor Energy.
While Nicor is unable to predict the final outcome of these matters, the
resolution of such matters is not expected to have a material adverse impact on
the company's financial condition or results of operations.

SEC and U.S. Attorney Inquiries. In 2002, the staff of the SEC informed Nicor
and Nicor Energy that the SEC is conducting a formal inquiry regarding both the
PBR plan and Nicor Energy. A representative of the Office of the United States
Attorney for the Northern District of Illinois has notified Nicor that that
office is conducting an inquiry on the same matters that the SEC is
investigating, and a grand jury is also reviewing these matters. In April 2004,
Nicor was advised by the SEC Division of Enforcement that it intended to
recommend to the SEC that it bring a civil injunctive action against Nicor,
alleging that Nicor violated Sections 17(a) of the Securities Act of 1933 and
Sections 10(b) and 13(a) of the Securities Exchange Act of 1934 and Rules 10b-5,
12b-20, 13a-1 and 13a-13 thereunder. The SEC may also seek injunctive relief,
disgorgement and civil penalties. The SEC staff invited Nicor to make a formal
response (known as a Wells Submission) with respect to the proposed
recommendation. Nicor is unable to predict the outcome of these inquiries or
Nicor's potential exposure related thereto and has not recorded a liability
associated with the outcome of these contingencies.

Securities Class Actions. Following a July 18, 2002 Nicor press release
concerning Nicor Energy and the PBR plan, several purported class actions were
brought against Nicor, Thomas Fisher (Chairman and CEO) and Kathleen Halloran
(former Executive Vice President Finance and Administration and current
Executive Vice President and Chief Risk Officer). The actions were brought in
the United States District Court for the Northern District of Illinois, Eastern
Division, and have been consolidated. On February 14, 2003, plaintiffs filed an
amended complaint adding as defendants George Behrens (Vice President of
Administration and Treasurer), Philip Cali (former Executive Vice President of
Operations) and Arthur Andersen LLP, the company's former independent auditor.
The plaintiffs seek to represent a class consisting of all persons or entities
who purchased Nicor common stock on the open market during the period from
November 24, 1999 through and including July 19, 2002. They allege that the
defendants violated Section 10(b) and Section 20(a) of the Securities Exchange
Act of 1934 and Rule 10b-5 thereunder. Plaintiffs allege that during the class
period defendants misrepresented the PBR plan, Nicor's historical financial
condition and results of operations, and its future prospects. The class is
seeking compensatory damages, prejudgment interest, and attorneys' fees and
costs. On April 16, 2004 Nicor announced that its board of directors had
approved an agreement to settle the above referenced action. Under the terms of
the settlement, all claims against Nicor and Nicor-related defendants will be
dismissed without any finding or admission of wrongdoing or liability, for a
payment of $38.5 million. On April 30, 2004 the court granted preliminary
approval of the settlement. The final-approval hearing is scheduled for
July 9, 2004. The financial statements for the first quarter of 2004 reflect
an accrual, as a litigation charge, of $38.5 million related to this
agreement (the related liability is included in other current liabilities).

Nicor Inc. Page 14
- -------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements (Unaudited) (continued)

Shareholder Derivative Lawsuits. Also following Nicor's issuance of the press
release concerning Nicor Energy and the PBR plan, three purported derivative
lawsuits were brought against Thomas Fisher (Chairman and CEO), Kathleen
Halloran (former Executive Vice President Finance and Administration and current
Executive Vice President and Chief Risk Officer) and all members of Nicor's
Board of Directors (the "individual defendants"). Nicor was named as a nominal
defendant in all three suits, which have since been consolidated in an amended
complaint. The actions were brought in the Circuit Court of Cook County,
Illinois, Chancery Division. The plaintiffs allege that the individual
defendants breached their fiduciary duties to Nicor by allegedly causing or
allowing Nicor to disseminate to the market materially misleading and inaccurate
information, failing to establish and maintain adequate accounting controls and
approving the PBR plan despite allegedly knowing that the plan was unlawful or
that ICC approval would be improperly obtained. Plaintiffs also contend that two
of the defendants (Mr. Fisher and Mr. Birdsall) engaged in improper insider
selling of Nicor stock at inflated prices. The plaintiffs seek compensatory and
punitive damages, attorneys' fees and costs, and other relief against the
individual defendants on behalf of Nicor but do not seek any damages against the
company. On May 8, 2003, Nicor filed a Motion to Dismiss. On October 7, 2003,
the Court granted Nicor's Motion to Dismiss and Plaintiffs were granted leave to
file a Consolidated Third Amended Complaint. In November 2003, the Plaintiffs
filed a Consolidated Third Amended Complaint and in December 2003, Nicor filed a
Motion to Dismiss. The Court denied Nicor's Motion to Dismiss on March 26, 2004.
Nicor is unable to predict the outcome of this litigation or Nicor's potential
exposure related thereto and has not recorded a liability associated with the
outcome of this contingency.

Fixed Bill Service. On April 29, 2003, a second amended purported class action
complaint was filed in the Circuit Court of Cook County, Illinois against Nicor
Energy Services Company (Nicor Services) alleging violation of the Illinois
Consumer Fraud and Deceptive Practices Act (ICFA) by Nicor Services relating to
the fixed bill service offered by Nicor Services. Nicor Services offered a fixed
bill product under which it paid the annual gas service portion of a customer's
Nicor Gas utility bill in exchange for twelve equal monthly payments by the
customer to Nicor Services, regardless of changes in the price of natural gas or
weather. The plaintiff is seeking compensatory damages, prejudgment and
postjudgment interest, punitive damages, attorneys' fees and injunctive relief.
Nicor is unable to predict the outcome of this litigation or to reasonably
estimate its potential exposure related thereto and has not recorded a liability
associated with this contingency.

Horizon Pipeline Lien. The general contractor on the construction of the Horizon
Pipeline (Horizon) filed a $5.7 million Notice of Claim for Lien against
Horizon. On May 23, 2003, Horizon filed a Declaratory Judgment Complaint in the
United States District Court for the District of Colorado seeking resolution of
this dispute. On June 23, 2003, the general contractor filed an answer and
counterclaim to Horizon's complaint seeking in excess of $11 million in damages
from Horizon. While Nicor is unable to predict the outcome of this matter, its
resolution is not expected to have a material adverse impact on the company's
financial condition or results of operations.

Mercury. Nicor Gas has incurred, and expects to continue to incur, costs related
to its historical use of mercury in various kinds of company equipment.

Nicor Gas is a defendant in several private lawsuits, all in the Circuit Courts
of Cook and DuPage Counties, Illinois, claiming a variety of unquantified
damages (including bodily injury, property and punitive damages) allegedly
caused by mercury-containing regulators. Under the terms of a class action
settlement agreement, Nicor Gas will continue, until 2006, to provide medical
screening to persons exposed to mercury from its equipment, and will use its
best efforts to replace any remaining inside

Nicor Inc. Page 15
- -------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements (Unaudited) (continued)

residential mercury regulators by 2005. The class action settlement permitted
class members to "opt out" of the settlement and pursue their claims
individually. Nicor Gas is currently defending claims brought by 31 households.

As of March 31, 2004, Nicor Gas had remaining an estimated liability of $21.5
million, representing management's best estimate of future costs, including
potential liabilities relating to remaining lawsuits, based on an evaluation of
currently available information. Actual costs may vary from this estimate. The
company will continue to reassess its estimated obligation and will record any
necessary adjustment, which could be material to operating results in the period
recorded.

Nicor Gas continues to pursue recovery from insurers and independent contractors
that had performed work for the company, but believes that it has now collected
the majority of such recoveries. When received, these recoveries are recorded as
a reduction to gas distribution operating expense. Nicor Gas recovered
approximately $18 million and $20 million of pretax mercury-related costs, net
of legal fees, from insurers and independent contractors in 2003 and 2002,
respectively. Nicor Gas recovered approximately $.1 million and $.3 million of
pretax mercury-related costs, net of legal fees, from insurers and independent
contractors in the first quarter of 2004 and 2003, respectively.

The final disposition of these mercury-related matters is not expected to have a
material adverse impact on the company's financial condition.

Manufactured Gas Plant Sites. Manufactured gas plants were used in the 1800's
and early to mid 1900's to produce manufactured gas from coal, creating a coal
tar byproduct. Current environmental laws may require the cleanup of coal tar at
certain former manufactured gas plant sites.

To date, Nicor Gas has identified about 40 properties for which it may, in part,
be responsible. Most of these properties are not presently owned by the company.
Information regarding preliminary site reviews has been presented to the
Illinois Environmental Protection Agency (IEPA) for certain properties. More
detailed investigations and remedial activities are complete, in progress or
planned at many of these sites. The results of the detailed site-by-site
investigations determine the extent additional remediation is necessary and
provide a basis for estimating additional future costs which, based on industry
experience, could be significant. In accordance with ICC authorization, the
company is and has been recovering these costs from its customers, subject to
annual prudence reviews.

In December 2001, a purported class action lawsuit was filed against Exelon
Corporation, Commonwealth Edison Company and Nicor Gas in the Circuit Court of
Cook County alleging, among other things, that the ongoing cleanup of a former
manufactured gas plant site in Oak Park, Illinois is inadequate. Since then,
additional lawsuits have been filed related to this same former manufactured gas
plant site. These lawsuits seek, in part, unspecified damages for property
damage, nuisance, and various personal injuries that allegedly resulted from
exposure to contaminants allegedly emanating from the site, and punitive
damages. Management cannot predict the outcome of this litigation or the
company's potential exposure thereto and has not recorded a liability associated
with this contingency.

Nicor Inc. Page 16
- -------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements (Unaudited)(concluded)

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

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

Other. In a recent Illinois Supreme Court decision, the court affirmed the
appellate court's decision to permit proceedings to move forward against Nicor
Gas relating to a home explosion, which resulted in a fatality, allegedly caused
by a faulty gas appliance connector installed by the homeowner. Although unable
to determine the ultimate outcome of the above-referenced proceeding, the
resolution is not expected to have a material adverse impact on the company's
financial condition or results of operations. The company is unable to predict
any potential operational impact of the Illinois Supreme Court decision on
Nicor. In addition to the matters set forth above, the company is involved in
legal or administrative proceedings before various courts and agencies with
respect to general claims, rates, taxes, environmental and other matters.
Although unable to determine the ultimate outcome of these other contingencies,
management believes that it has recorded appropriate liabilities when reasonably
estimable.

On April 27, 2004 one of Nicor's Directors and Officers (D&O) insurance carriers
agreed to pay $29 million to a third party escrow agent on behalf of Nicor and
its insured directors and officers to be used to satisfy Nicor directors' and
officers' liabilities and expenses associated with claims asserted against them
in a securities class action, a shareholder derivative lawsuit and related
matters, with any remaining balance to be paid to Nicor. Nicor's financial
statements do not reflect any benefit related to such future payment because the
amount of funds to be held in escrow ultimately attributable to Nicor, if any,
is not presently determinable. Nicor also continues to seek coverage from its
other D&O insurance carrier for additional coverage in connection with the same
matters but is unable to predict the outcome of this matter and therefore no
potential insurance recoveries have been reflected in the financial statements.

Nicor Inc. Page 17
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations

The following discussion should be read in conjunction with the Management's
Discussion and Analysis section of the Nicor Inc. (Nicor) 2003 Annual Report on
Form 10-K/A (Amendment No. 1). Results for the interim periods presented are not
necessarily indicative of the results to be expected for the full fiscal year
due to seasonal and other factors.

SUMMARY

Nicor's first quarter 2004 earnings were significantly impacted by a $38.5
million pretax litigation charge related to an agreement in April 2004 to settle
the securities class actions. The charge reduced net income by $23.2 million and
diluted earnings per share by $.52. More information about this agreement is
presented within the Notes to the Consolidated Financial Statements - Note 13
Contingencies - Securities Class Actions.

First quarter 2004 diluted earnings per share was $.44 compared to $1.04 in the
first quarter of 2003. Net income for the 2004 quarter decreased to $19.6
million compared to $45.9 million a year ago. Contributing to the decrease were
lower operating results in the gas distribution and shipping segments and at
Nicor's other energy ventures, and the first quarter 2004 litigation charge. In
the first quarter of 2003, a $4.5 million cumulative effect loss from an
accounting change was recorded for Nicor Enerchange, Nicor's wholesale natural
gas marketing company.

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

Three months
ended
March 31
-----------------
2004 2003
-------- -------

Gas distribution $ 67.2 $ 73.7
Shipping 4.2 5.7
Other energy ventures 3.0 3.6
Corporate and eliminations (40.1) (1.7)
-------- -------
$ 34.3 $ 81.3
======== =======

The following summarizes operating income comparisons for major business
segments:

o Gas distribution operating income decreased $6.5 million in the first quarter
of 2004 compared to the 2003 first quarter due primarily to higher operating
expenses ($5.4 million).

o Shipping operating income decreased $1.5 million in the first quarter of 2004
compared to the corresponding prior-year period due to the absence of a
property sales gain recognized last year ($1.3 million). The positive effect
of increased volumes shipped was essentially offset by the impacts of lower
average rates due to a change in cargo mix and higher operating costs.

Nicor Inc. Page 18
- -------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)

o Other energy ventures operating income decreased $.6 million in the first
quarter of 2004 compared to the first quarter of 2003. A decline at Nicor
Solutions, one of Nicor's retail energy-related products and services
businesses ($6.2 million), was partially offset by higher operating results
from Nicor Enerchange, the company's wholesale natural gas marketing business
($4.4 million), and the absence of prior year losses from former business
activities ($.9 million).

o Corporate and eliminations operating loss increased $38.4 million due to the
first quarter 2004 litigation charge ($38.5 million) related to an agreement
to settle the securities class actions. More information about this
settlement is presented within the Notes to the Consolidated Financial
Statements - Note 13 Contingencies - Securities Class Actions.

These factors are discussed in more detail in the Results of Operations section.

RESULTS OF OPERATIONS

The following discussion provides additional information about the major items
impacting Nicor's results of operations.

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

Three months
ended
March 31
--------------------
2004 2003
--------- ---------

Gas distribution $ 1,035.1 $ 1,096.7
Shipping 67.7 66.4
Other energy ventures 51.7 21.1
Corporate and eliminations (38.8) (12.9)
--------- ---------
$ 1,115.7 $ 1,171.3
========= =========

Gas distribution revenues decreased to $1,035.1 million in the first quarter of
2004 from $1,096.7 million in 2003 due primarily to warmer weather
(approximately $50 million). Revenues also decreased due to lower natural gas
costs ($4.8 million), which are passed directly through to customers without
markup subject to Illinois Commerce Commission (ICC) review.

First quarter 2004 shipping revenues increased due to higher volumes shipped
($4.5 million) partially offset by lower average rates ($3.0 million). Higher
volumes reflect increased activity related to an improvement in overall market
conditions while lower average rates reflect a change in cargo mix.

Nicor Inc. Page 19
- -------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)

The $30.6 million increase in 2004 first-quarter revenues for other energy
ventures resulted primarily from higher revenues at Nicor Solutions ($23.7
million), reflecting a significant increase in the number of customers
purchasing utility-bill management products. Nicor Enerchange also contributed
increased revenues ($5.2 million), related largely to providing risk-management
services that Nicor Solutions previously outsourced to an external party.

Corporate and eliminations reflects primarily the elimination of intersegment
revenues, as described in the Notes to the Consolidated Financial Statements -
Note 5 Business Segment Information.

Gas distribution margin. Nicor utilizes a measure it refers to as "gas
distribution margin" to evaluate the operating income impact of gas distribution
revenues. Gas distribution revenues include natural gas costs, which are passed
directly through to customers without markup, subject to ICC review, and revenue
taxes, for which Nicor Gas earns only a small administrative fee. These items
often cause significant fluctuations in gas distribution revenues, and yet they
have virtually no direct impact on gas distribution operating income. Therefore,
Nicor Gas excludes these items in evaluating performance.

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

Three months
ended
March 31
---------------------
2004 2003
--------- ---------

Gas distribution revenues $ 1,035.1 $ 1,096.7
Cost of gas (792.2) (862.9)
Revenue tax expense (69.5) (61.5)
--------- --------
Gas distribution margin $ 173.4 $ 172.3
========= ========

Gas distribution margin increased slightly in 2004 due primarily to increased
natural gas deliveries unrelated to weather ($1.8 million) and increased
customer finance and late payment charges ($1 million) related to higher amounts
past due. These improvements were partially offset by smaller contributions from
the Chicago Hub ($1 million) and the negative impact of warmer-than-normal
weather in 2004 ($1.1 million). While 2003 volumes were higher than normal due
to colder weather, there was no margin impact because Nicor Gas had hedged the
impact of weather in the first quarter of 2003.

Gas distribution operating and maintenance expense. Gas distribution operating
and maintenance expense increased $5.4 million in the first quarter of 2004 to
$63.9 million. The increase from the prior-year period was due primarily to
higher bad debt expense ($4.3 million) and an increase to the estimated
liability for legal defense costs related to the PBR plan review ($2.5 million).
These negative factors were partially offset by the absence of weather
protection expenses in 2004 ($1.4 million).

Shipping operating expenses. Shipping segment operating expenses rose $2.8
million in the first quarter of 2004 due primarily to lower property sales gains
($1.3 million) and higher wage and benefit costs ($.7 million) due primarily to
one-time severance payments.

Nicor Inc. Page 20
- -------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)

Other energy ventures operating expenses. The $31.2 million increase in the 2004
operating expenses compared to 2003 was due primarily to increased expenses at
Nicor Solutions ($30 million) associated with increased revenues.

Litigation charge. The first quarter 2004 litigation charge ($38.5 million)
relates to an agreement to settle the securities class actions. More information
about this agreement is presented within the Notes to the Consolidated Financial
Statements - Note 13 Contingencies - Securities Class Actions.

Other corporate operating expenses and eliminations. Other corporate operating
expenses were zero and $1.7 million in the first quarter of 2004 and 2003,
respectively. The decrease is attributable primarily to lower legal ($.8
million) and employee benefit ($.6 million) expenses. Intercompany eliminations
aggregated $37.2 million and $12.9 million in the first quarter of 2004 and
2003, respectively, related primarily to utility-bill management products.

Interest expense. Interest expense for the three-month period ended March 31,
2004 increased $1.7 million to $11.3 million due to an increase in average
borrowing levels, partially offset by a decrease in average interest rates.

Income taxes. The company's effective income tax rate fell to 21 percent in the
first quarter of 2004 as compared to 31 percent in the first quarter of 2003
principally due to recording an income tax benefit on the litigation charge
discussed above at Nicor's marginal income tax rate of about 40 percent. The
effective income tax rate for the full year is estimated to be approximately 30
percent.

Cumulative effect of accounting change. The cumulative effect of a January 1,
2003 required accounting change relates to the application of accrual
accounting, rather than fair value accounting, to gas in storage and certain
energy-related contracts, such as storage and transportation contracts, at Nicor
Enerchange.

Nicor Inc. Page 21
- -------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)

Gas Distribution Statistics

Three months ended
March 31
------------------------------
2004 2003
------------- ------------
Operating revenues (millions)
Sales
Residential $ 720.0 $ 765.8
Commercial 158.0 171.9
Industrial 22.7 26.8
------------- ------------
900.7 964.5
------------- ------------
Transportation
Residential 8.1 7.1
Commercial 25.2 25.9
Industrial 10.9 11.3
Other 5.1 5.1
------------- ------------
49.3 49.4
------------- ------------
Other revenues
Revenue taxes 70.9 62.4
Environmental cost recovery 6.6 15.7
Chicago Hub 1.4 2.4
Other 6.2 2.3
------------- ------------
85.1 82.8
------------- ------------
$ 1,035.1 $ 1,096.7
============= ============
Deliveries (Bcf)
Sales
Residential 99.9 107.6
Commercial 21.6 23.4
Industrial 3.2 3.7
------------- ------------
124.7 134.7
------------- ------------
Transportation
Residential 8.8 8.1
Commercial 37.4 39.7
Industrial 36.9 36.5
------------- ------------
83.1 84.3
------------- ------------
207.8 219.0
============= ============
Customers at end of period (thousands)
Sales
Residential 1,759.0 1,748.9
Commercial 115.8 111.0
Industrial 7.4 7.1
------------- ------------
1,882.2 1,867.0
------------- ------------
Transportation
Residential 144.4 122.4
Commercial 58.6 61.2
Industrial 6.2 6.6
------------- ------------
209.2 190.2
------------- ------------
2,091.4 2,057.2
============= ============

Other statistics
Degree days 3,030 3,254
Colder (warmer) than normal (2)% 6%
Average gas cost per Mcf sold $ 6.30 $ 6.36

Nicor Inc. Page 22
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)

Shipping Statistics

Three months
ended
March 31
-----------------
2004 2003
-------- -------

TEUs shipped (thousands) 45.7 42.7
Revenue per TEU $ 1,484 $ 1,549
Ports served 24 24
Vessels operated 16 17

FINANCIAL CONDITION AND LIQUIDITY

Operating cash flows. The gas distribution business is highly seasonal and
operating cash flow may fluctuate significantly during the year and from
year-to-year due to factors such as weather, natural gas prices, the timing of
collections from customers, and natural gas purchasing and storage practices.
The company relies on short-term financing to meet seasonal increases in working
capital needs. Cash requirements generally increase over the third and fourth
quarters due to increases in natural gas purchases, gas in storage and accounts
receivable. As discussed in the 2003 Form 10-K/A (Amendment No. 1), the year-end
gas in storage balance was higher than a year earlier due to an increased
quantity of owned gas. Over the first and second quarters, positive cash flow
generally occurs from the sale of gas in storage and the collection of accounts
receivable. This cash is typically used to reduce short-term debt to near zero
during the second quarter. Net cash flow provided from operating activities
increased $278.4 million to $438.8 million in the 2004 first quarter from $160.4
million in the prior-year period.

Financing activities. Nicor Inc. and Nicor Gas maintain short-term line of
credit agreements with major domestic and foreign banks. These agreements, which
serve as backup for the issuance of commercial paper, allow for borrowings of
$500 million through September 2004. The company had $187 million of commercial
paper borrowings outstanding at March 31, 2004. The company is in compliance
with the covenants relating to its short-term line of credit agreements at March
31, 2004. 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.

On March 18, 2004, Nicor announced a quarterly dividend on common stock of 46.5
cents per share payable May 1, 2004.

Agreement to Settle the Securities Class Actions. On April 16, 2004, Nicor paid
$38.5 million to a third-party escrow fund in response to an agreement to settle
the securities class actions. Payment of this settlement did not have a material
impact on the company's financial condition or liquidity. More information about
this agreement is presented within the Notes to the Consolidated Financial
Statements - Note 13 Contingencies - Securities Class Actions.

Nicor Inc. Page 23
- -------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)

CRITICAL ACCOUNTING ESTIMATES

See Management's Discussion and Analysis - Critical Accounting Estimates in the
2003 Annual Report on Form 10-K/A (Amendment No. 1) for a detailed discussion of
the company's critical accounting policies.

FACTORS THAT MAY AFFECT BUSINESS PERFORMANCE

Weather. Natural gas deliveries are temperature-sensitive and seasonal since
about one-half of all deliveries are used for space heating. Typically, about 70
percent of 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.

In the first quarter of 2003, Nicor Gas purchased earnings protection against
the impact of significantly warmer-than-normal or colder-than-normal weather. No
such protection was in effect in the first quarter of 2004. It is estimated that
a 100-degree-day variation from normal weather affects Nicor's gas-distribution
earnings by about 2-1/2 cents per share. However, since mid-2003 Nicor also
bears the partially offsetting weather risk associated with the utility-bill
management products marketed by Nicor Solutions. The amount of this offset will
vary depending on the time of year, weather patterns, the number of customers
for these products and the market price for natural gas. In the first quarter of
2004, the weather impact of utility-bill management products was insignificant.
The company will continue to evaluate its coverage options to determine whether
it wishes to purchase any external weather protection.

Gas distribution labor negotiations. On April 7, 2004, Nicor Gas announced that
the International Brotherhood of Electrical Workers Local 19 ratified a new
five-year labor agreement which expires on February 28, 2009. This agreement
covers approximately 1,500 physical and clerical employees of Nicor Gas.

Property sale. Property sale gains and losses vary from year-to-year depending
upon property sales activity. The company continues to assess its ownership of
real estate holdings and anticipates an increase in property sale activity in
2004.

Contingencies. The following contingencies of Nicor 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's liquidity or financial
condition.

Performance-based rate plan. Nicor Gas' PBR plan for natural gas costs went into
effect in 2000 and was terminated by the company effective January 1, 2003.
Under the PBR plan, Nicor Gas' total gas supply costs were compared to a
market-sensitive benchmark. Savings and losses relative to the benchmark were
determined annually and shared equally with sales customers. The PBR is
currently under Illinois Commerce Commission (ICC) review.

Nicor Inc. Page 24
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)

o Certain transactions increased customer costs in the aggregate amount of
approximately $15 million.
o No improper Nicor affiliated-party transactions or improper hedging
activities were identified.
o Inadvertent accounting errors occurred, sometimes to the benefit of customers
and sometimes to the benefit of Nicor Gas.
o No criminal activity or fraud was identified.

Nicor Inc. Page 25
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)

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 CCSAO, CUB or other parties to the ICC Proceedings.

Nicor Energy. Significant developments occurred in 2002 and 2003 relating
to Nicor's 50-percent interest in Nicor Energy. Information about these
developments is presented within the Notes to the Consolidated Financial
Statements - Note 13 Contingencies - Nicor Energy.

On December 10, 2003, the United States Attorney for the Northern District of
Illinois indicted three former employees of Nicor Energy and an outside lawyer
for Nicor Energy. The indictments alleged that the defendants fraudulently
deprived Nicor Energy, a 50/50 joint venture between Nicor Inc. and Dynegy Inc.,
of their honest services and caused a loss to investors in Nicor Inc. and Dynegy
Inc. During the time period covered by the indictments, Nicor Energy was a stand
alone entity with its own management and was operated independently from Nicor
Inc. and Nicor Gas. None of the individuals indicted are employees of Nicor Inc.
or Nicor Gas nor were they at the time of the charged conduct. The three former
employees of Nicor Energy have pled guilty to certain charges. Separately, on
December 10, 2003, the United States Securities and Exchange Commission (SEC)
filed its own civil enforcement action against the same three former employees
and one additional former employee of Nicor Energy. While Nicor is unable to
predict the final outcome of these matters, the resolution of such matters is
not expected to have a material adverse impact on the company's financial
condition or results of operations.

Nicor Inc. Page 26
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)

Securities Class Actions. Nicor and certain of its executives are defendants in
a consolidated class action lawsuit. Information about this action is presented
within the Notes to the Consolidated Financial Statements - Note 13
Contingencies - Securities Class Actions.

Shareholder Derivative Lawsuits. Certain Nicor executives and all members of its
Board of Directors are defendants in a consolidated derivative lawsuit. Further
information about this lawsuit is presented within the Notes to the Consolidated
Financial Statements - Note 13 Contingencies - Shareholder Derivative Lawsuits.

Mercury. Future operating results may be impacted by adjustments to the
company's estimated mercury liability or by related recoveries. Additional
information about mercury contingencies is presented in the Notes to the
Consolidated Financial Statements - Note 13 Contingencies - Mercury.

Manufactured gas plant sites. The company is conducting environmental
investigations and remedial activities at former manufactured gas plant sites.
Additional information about these sites is presented in the Notes to the
Consolidated Financial Statements - Note 13 Contingencies - Manufactured Gas
Plant Sites.

Other contingencies. The company is involved in legal or administrative
proceedings before various courts and agencies with respect to general claims,
rates, taxes, environmental and other matters. See the Notes to the Consolidated
Financial Statements - Note 13 Contingencies.

Nicor Inc. Page 27
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (concluded)

Market risk. Nicor is exposed to market risk in the normal course of its
business operations, including the risk of loss arising from adverse changes in
natural gas and fuel commodity prices, and interest rates. There has been no
material change in the company's exposure to market risk since the filing of the
2003 Annual Report on Form 10-K/A (Amendment No. 1).

Energy trading activities. At March 31, 2004, Nicor Enerchange, Nicor's
wholesale natural gas marketing business, held derivative contracts with the
following fair values (in millions):

Maturity
-------------------------------
Total Less than 1 to 3 3 to 5
Source of Fair Value Fair Value 1 Year Years Years
----------- --------- -------- ---------
Prices actively quoted $ 2.1 $ 2.0 $ .1 $ -
Prices based on pricing models - - - -
--------- --------- -------- ---------
Total $ 2.1 $ 2.0 $ .1 $ -
========= ========= ======== =========

CAUTION CONCERNING FORWARD-LOOKING STATEMENTS

This document includes certain forward-looking statements about the expectations
of Nicor, and its subsidiaries and affiliates. Although Nicor believes these
statements are based on reasonable assumptions, actual results may vary
materially from stated expectations. Such forward-looking statements may be
identified by the use of forward-looking words or phrases such as "anticipate,"
"believe," "expect," "intend," "may," "planned," "potential," "should," "will,"
"would," "project," "estimate," or similar phrases. Actual results may differ
materially from those indicated in the company's forward-looking statements due
to the direct or indirect effects of legal contingencies (including litigation)
and the resolution of those issues, including the effects of an ICC review and
SEC and U.S. Attorney inquiries, and undue reliance should not be placed on such
statements. Other factors that could cause materially different results include,
but are not limited to, weather conditions; natural gas and other fuel prices;
fair value accounting adjustments; health care costs; insurance costs or
recoveries; legal costs; borrowing needs; interest rates; credit conditions;
economic and market conditions; Caribbean tourism; 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, methods, judgments or estimates; performance
of major suppliers and contractors; labor relations; and acts of terrorism.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date of this filing. Nicor undertakes no
obligation to publicly release any revision to these forward-looking statements
to reflect events or circumstances after the date of this filing.

Nicor Inc. Page 28
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Item 3. Quantitative and Qualitative Disclosures about Market Risk

For disclosures about market risk, see Management's Discussion and Analysis -
Market Risk, which is incorporated herein by reference.

Item 4. Controls and Procedures

The company carried out an evaluation under the supervision and with the
participation of the company's management, including its Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of
the company's disclosure controls and procedures as of the end of the period
covered by this Quarterly Report on Form 10-Q (the "Evaluation").

In designing and evaluating the disclosure controls and procedures, management
recognizes that any disclosure controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and management is required to apply its judgment in
evaluating the cost-benefit relationship of possible disclosure controls and
procedures. Based on the Evaluation, the company's Chief Executive Officer and
Chief Financial Officer concluded that the company's disclosure controls and
procedures, as of the end of the period covered by this Quarterly Report on Form
10-Q, were effective at the reasonable assurance level to ensure that
information required to be disclosed by the company in reports that it files or
submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in SEC rules and
forms.

There has been no change in the company's internal controls over financial
reporting during the company's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the company's internal
control over financial reporting.

Nicor Inc. Page 29
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PART II - OTHER INFORMATION

Item 1. Legal Proceedings

See Management's Discussion and Analysis - Contingencies and the Notes to the
Consolidated Financial Statements - Note 13 Contingencies, which are
incorporated herein by reference.

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases
of Equity Securities

Under a common stock repurchase program, Nicor may purchase its common stock as
market conditions permit through open market transactions and to the extent cash
flow is available after other cash needs and investment opportunities. There
were no repurchases under this program in 2004, and at March 31, 2004,
approximately $22 million remained authorized for the repurchase of common
stock. However, Nicor did make the following common stock repurchases in the
first quarter of 2004, related primarily to its Automatic Dividend Reinvestment
and Stock Purchase Plans:
(c) Total
Number of (d)Maximum
Shares Number of
Purchased as Shares that
Part of May Yet be
(a)Total Publicly Purchased
Number of (b)Average Announced Under the
Shares Price Paid Plans or Plans or
Period Purchased per Share Programs Programs
- ------------------ ---------- ----------- ----------- ------------

January 1 to 31,2004 3,659 $ 34.18 - -
February 1 to 29, 2004 54,066 33.74 - -
March 1 to 31, 2004 6,960 36.39 - -
---------- ----------- ----------- ------------
64,685 $ 34.05 - -
========== =========== =========== ============

Item 6. Exhibits and Reports on Form 8-K

(a) See Exhibit Index beginning on page 31 filed herewith.

(b) On January 16, 2004, Nicor filed a Form 8-K under Item 5, regarding a
press release dated January 15, 2004 announcing the appointment of a new
director to the board of directors.

On February 10, 2004, Nicor furnished a Form 8-K*, under Items 7 and 12,
regarding a press release dated February 9, 2004 announcing financial
results for the year ended December 31, 2003 and providing 2004 earnings
guidance.

On March 23, 2004, Nicor furnished a Form 8-K* under Item 9, regarding
analyst presentations of March 23 and March 24, 2004.

* This furnished Form 8-K is not to be deemed filed or incorporated by
reference into any filing.

Nicor Inc. Page 30
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Signature

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

Nicor Inc.

April 30, 2004 /s/ JEFFREY L. METZ
-------------- --------------------------
(Date) Jeffrey L. Metz
Vice President and Controller

Nicor Inc. Page 31
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Exhibit Index

Exhibit
Number Description of Document

3.01 * Articles of Incorporation of the company. (File No.
2-55451, Form S-14, Nicor Inc., Exhibit 1-03 and
Exhibit B of Amendment No. 1 thereto.)

3.02 * Amendment to Articles of Incorporation of the company.
(Proxy Statement dated April 20, 1979, Nicor Inc., Item
3 thereto.)

3.03 * Amendment to Articles of Incorporation of the company.
(File No. 2-68777, Form S-16, Nicor Inc., Exhibit 2-01.)

3.04 * Amendment to Articles of Incorporation of the company.
(File No. 1-7297, Form 10-K for 1985, Nicor Inc.,
Exhibit 3-03.)

3.05 * Amendment to Articles of Incorporation of the
company. (Proxy Statement dated March 12, 1987, Nicor
Inc., Exhibit A and Exhibit B thereto.)

3.06 * Amendment to Articles of Incorporation of the company.
(File No. 1-7297, Form 10-K for 1992, Nicor Inc.,
Exhibit 3-06.)

3.07 * Amendments to Articles of Incorporation of the
company. (Proxy Statement dated March 9, 1994, Nicor
Inc., Exhibit A-1 and Exhibit B thereto.)

3.08 * Amendment to Articles of Incorporation of the company.
(Proxy Statement dated March 6, 1998, Nicor Inc., Item
2 thereto.)

3.09 * By-Laws of the company as amended by the company's
Board of Directors on January 15, 2004. (File No.
1-7297, Form 10-K for 2003, Nicor Inc., Exhibit 3.09.)

10.01 2004 Long-Term Incentive Program.

10.02 2004 Incentive Compensation Plan.

10.03 First Amendment to Nicor Inc. 1995 Directors' Stock Plan.

31.1 Rule 13a-14(a)/15d-14(a) Certification.

31.2 Rule 13a-14(a)/15d-14(a) Certification.

32.1 Section 1350 Certification.

32.2 Section 1350 Certification.

Nicor Inc. Page 32
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Exhibit Index (concluded)

Exhibit
Number Description of Document

* These exhibits have been previously filed with the Securities and Exchange
Commission as exhibits to registration statements or to other filings with
the Commission and are incorporated herein as exhibits by reference. The
file number and exhibit number of each such exhibit, where applicable, are
stated, in parentheses, in the description of such exhibit.

Upon written request, the company will furnish free of charge a copy of any
exhibit. Requests should be sent to Investor Relations at the corporate
headquarters.