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

FORM 10-K

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

Securities registered pursuant to Section 12(b) of the Act:

Name of each exchange on
Title of each class which registered
- ----------------------------------------- -------------------------------
Common Stock, par value $2.50 per share New York Stock Exchange
Chicago Stock Exchange

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

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

The aggregate market value of common stock (based on the June 30, 2004
closing price of $33.97) held by non-affiliates of the registrant was
approximately $1.5 billion. As of February 22, 2005, there were 44,113,480
shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the company's 2005 Annual Meeting Definitive Proxy Statement, to be
filed on or about March 11, 2005, are incorporated by reference into Part III.

Nicor Inc. Page i
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Table of Contents
- -----------------

Item No. Description Page No.
- -------- ----------- --------

Glossary ii

Part I
------
1. Business ........................................................ 1
2. Properties ...................................................... 6
3. Legal Proceedings................................................ 6
4. Submission of Matters to a Vote of Security Holders.............. 6
Executive Officers of the Registrant............................. 7

Part II
-------

5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities............... 8
6. Selected Financial Data ......................................... 9
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 10
7A. Quantitative and Qualitative Disclosures about Market Risk....... 33
8. Financial Statements and Supplementary Data ..................... 34
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............................. 71
9A. Controls and Procedures.......................................... 71
9B. Other Information................................................ 72

Part III
--------

10. Directors and Executive Officers of the Registrant............... 73
11. Executive Compensation........................................... 73
12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters...................... 74
13. Certain Relationships and Related Transactions................... 74
14. Principal Accountant Fees and Services........................... 74

Part IV
-------

15. Exhibits and Financial Statement Schedules....................... 75
Signatures....................................................... 77
Exhibit Index.................................................... 78

Nicor Inc. Page ii
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Glossary
- --------

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

Degree day. The extent to which the daily average temperature falls below 65
degrees Fahrenheit. Normal weather for Nicor Gas' service territory, for
purposes of this report, is considered to be about 6,000 degree days per year.

EN Engineering. A 50-percent-owned joint venture that provides engineering and
corrosion services.

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

Horizon Pipeline. A 50-percent-owned joint venture that operates a natural gas
pipeline of approximately 70 miles, stretching from Joliet, Illinois to near the
Wisconsin/Illinois border.

HVAC. Heating, ventilation and air conditioning.

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

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

Nicor Enerchange. A wholly owned business that engages in wholesale marketing of
natural gas supply services primarily in the Midwest, administers the Chicago
Hub for Nicor Gas, and manages Nicor Solutions' product risks.

Nicor Energy. A 50-percent-owned retail energy marketing joint venture which
disposed of its customer contracts and ceased operations during 2003.

Nicor Gas. Northern Illinois Gas Company (doing business as Nicor Gas Company)
is a wholly owned public utility business and one of the nation's largest
distributors of natural gas.

Nicor Services. A wholly owned business that provides product warranty
contracts, repair, maintenance and installation services and equipment to retail
markets, including residential and small commercial customers.

Nicor Solutions. A wholly owned business that offers its residential and small
commercial customers energy-related products that provide for natural gas price
stability and management of their utility-bill.

PBR. Performance-based rate, a regulatory plan which ended on January 1, 2003,
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.

Triton. Triton Container Investments LLC, a cargo container leasing company in
which Nicor has an investment.

Tropical Shipping. A wholly owned business and a leading carrier of
containerized freight in the Bahamas and the Caribbean region.

Nicor Inc. Page 1
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PART I

Item 1. Business
- ------- --------

Nicor Inc. (Nicor), an Illinois corporation formed in 1976, is a holding
company. Gas distribution is Nicor's primary business. Nicor's principal
subsidiaries are Northern Illinois Gas Company (doing business as Nicor Gas
Company (Nicor Gas)), one of the nation's largest distributors of natural gas,
and Tropical Shipping, a leading transporter of containerized freight in the
Bahamas and the Caribbean region. Nicor also owns several energy-related
ventures, including Nicor Services and Nicor Solutions, which provide
energy-related products and services for retail markets, and Nicor Enerchange, a
wholesale natural gas marketing company. As a consolidated group, Nicor had
approximately 3,600 employees at year-end 2004.

Summary financial information for Nicor's major business segments is included in
the Notes to the Consolidated Financial Statements - Note 12 Business Segment
and Geographic Information. The following sections describe Nicor's larger
businesses. Certain terms used herein are defined in the glossary on page ii.

GAS DISTRIBUTION

General
- -------

Nicor Gas, a regulated natural gas distribution utility, serves over 2.1 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 and its customer base has grown steadily over the years, providing the
company with a well-balanced mix of residential, commercial and industrial
customers. Residential customers typically account for approximately 45 to 50
percent of natural gas deliveries, while commercial and industrial customers
each typically account for about 25 to 30 percent. See Gas Distribution
Statistics on page 16 for operating revenues, deliveries and number of customers
by customer classification. Nicor Gas had approximately 2,300 employees at
year-end 2004.

Nicor Gas maintains franchise agreements with most of the communities it serves,
allowing it to construct, operate and maintain distribution facilities in those
communities. Franchise agreement terms range up to 50 years. Currently, about 15
percent of the agreements will expire within five years.

Customers have the option of purchasing their own 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 gas sales service results in less revenue for Nicor Gas but has no
direct impact on net operating results.

Nicor Gas also operates other ventures, such as the Chicago Hub, which provides
natural gas storage and transmission-related services to marketers and other gas
distribution companies.

Sources of Natural Gas Supply
- ------------------------------

Nicor Gas purchases natural gas supplies in the open market by contracting with
producers and marketers. Pipeline transportation and purchased storage services
are regulated by the Federal Energy Regulatory Commission (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 company's cost of gas charged to customers.

Nicor Inc. Page 2
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Item 1. Business (continued)
- ------- --------------------

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. Gas supply pricing
is generally tied to published price indices so as to approximate current market
prices. These supply contracts also may provide for the payment of fixed demand
charges to ensure the availability of supplies on any given day and are
typically negotiated annually.

The company also purchases gas supplies on the spot market to fulfill its supply
requirements or to take advantage of favorable short-term pricing. Spot gas
purchases accounted for about one-half of the company's total gas purchases in
the last three years. The majority of such spot purchases are made during the
summer months and are directed toward satisfying storage injection requirements.

As part of its purchasing policy, Nicor Gas maintains a price risk hedging
strategy to reduce the risk of short-term 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 gas supplies.
About one-half of the gas that the company delivers is purchased by
transportation customers directly from producers and marketers rather than from
Nicor Gas.

Pipeline transportation. Nicor Gas is directly connected to eight interstate
pipelines, providing access to most of the major natural gas producing regions
in North America. The company's primary long-term transportation contracts are
as follows (daily availability in MMBtus):

Availability Contract Expiration
------------ -------------------
Natural Gas Pipeline Company (NGPL) 698,000 March 2006
Horizon Pipeline 300,000 May 2012
Tennessee Gas Pipeline Company (TGPC) 300,000 October 2009
Midwestern Gas Transmission Company (MGT) 297,000 October 2006
Northern Natural Gas Company 206,000 October 2008
Natural Gas Pipeline Company (NGPL) 200,000 March 2007
ANR Pipeline (ANR) 25,000 October 2009

The company has a right of first refusal for contract extensions except for the
TGPC contract. In addition, Nicor Gas enters into short-term transportation
contracts that extend for one heating season only. Nicor Gas has also entered
into agreements with NGPL, Northern Border Pipeline, ANR and MGT for additional
capacity that is generally for the purpose of transporting natural gas within
Illinois, after receiving the natural gas from producing regions.

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. With about 140 Bcf of annual storage capacity, the system is designed
to meet about 50 percent of the company's estimated peak-day deliveries and
approximately 30 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 2006

Nicor Inc. Page 3
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Item 1. Business (continued)
- ------- --------------------

and 2007. 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, as a regulated
monopoly, has the exclusive right to distribute natural gas in its service
territory. Substantially all single-family homes in Nicor Gas' service territory
are heated with natural gas. 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. Other significant factors that impact
demand for natural gas include weather 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 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 2002 and 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 has been in effect since the
first quarter of 2003 due to partially offsetting weather risks within the
consolidated Nicor group.

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, management believes that
declines since 2000 in natural gas deliveries to industrial customers may be
permanent. Management also believes that deliveries for power generation, which
have declined in recent years, will remain relatively flat.

During periods of high natural gas prices, deliveries of natural gas can be
negatively affected by conservation and the use of alternative energy sources.
While natural gas prices have fluctuated greatly over the last several years,
natural gas has traditionally maintained a pricing advantage over electricity
and it is expected to maintain an advantage in the foreseeable future.

Regulation
- ----------

Nicor Gas is regulated by the Illinois Commerce Commission (ICC), which
establishes the rules and regulations governing utility rates and services in
Illinois. Those rules or regulations that may significantly affect business
performance include the following:

o 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
November 4, 2004, Nicor Gas filed with the ICC for an overall increase in
rates of approximately $83 million (or about 16.5 percent of base rates
revenue). For additional information about the rate proceeding, see the Notes
to the Consolidated Financial Statements - Note 17 Rate Proceeding.

o 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 make any profit from the sale of natural gas.
Rather, the company earns income from a fixed monthly charge and from
variable transportation charges for delivering the natural gas to customer
premises. The ICC

Nicor Inc. Page 4
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Item 1. Business (continued)
- ------- --------------------

annually reviews the company's natural gas purchasing practices for prudence,
and may disallow the pass-through of costs considered imprudent.

o As with the cost of natural gas, the company has a tariff that provides for
the pass-through of prudently incurred environmental clean-up costs related
to former manufactured gas plant sites. This pass-through is also subject to
annual ICC review.

o The ICC also has other rules that impact the company's operations. Changes in
these rules can impact operating and capital costs. For example, past changes
relating to customer payment plans and credit/collection policies have
impacted the company's accounts receivable write-off experience.

A performance-based rate (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 results of the PBR plan are
currently under ICC review. Additional information on the plan and the ICC
review are presented in Management's Discussion and Analysis - Contingencies -
Performance-Based Rate Plan.

Properties
- ----------

The gas distribution, transmission and storage system includes approximately
32,000 miles of steel, plastic and cast iron main; approximately 1.9 million
steel, plastic/aluminum composite, plastic and copper services connecting the
mains to customers' premises; and eight underground storage fields. Other
properties include buildings, land, motor vehicles, meters, regulators,
compressors, construction equipment, tools, communication and computer
equipment, software and office equipment.

Most of the company's distribution and transmission property, and underground
storage fields are located on property owned by others and used by the company
through easements, permits or licenses. The company owns most of the buildings
housing its administrative offices and the land on which they sit.

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

Additional information about Nicor Gas' business is presented in Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
Notes to the Consolidated Financial Statements.

SHIPPING

Tropical Shipping is one of the largest containerized cargo carriers in the
Bahamas and the Caribbean, a region characterized by modest market growth and
intense competition. Tropical Shipping's financial results can be significantly
affected by general economic conditions in the United States, the Caribbean
region and Canada. The company is a major carrier of exports from the east coast
of the United States and Canada to the Caribbean region. The company's shipments
consist primarily of southbound cargo such as building materials, food and other
necessities for developers, manufacturers and residents in the Caribbean, as
well as tourist-related shipments intended for use in hotels and resorts, and on
cruise ships. The balance of Tropical Shipping's cargo consists primarily of
northbound shipments of apparel and agricultural products, and interisland
shipments. The company also provides other related services such as inland
transportation and cargo insurance.

Nicor Inc. Page 5
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Item 1. Business (continued)
- ------- --------------------

At December 31, 2004, Tropical Shipping's fleet consisted of 10 owned vessels
and 10 chartered vessels with a container capacity totaling approximately 6,100
TEUs. In addition to the vessels, the company owns containers,
container-handling equipment, chassis and other equipment. Real property, more
than half of which is leased, includes office buildings, cargo handling
facilities and warehouses located in the United States, Canada, and some of the
ports served.

Additional information about Tropical Shipping's business is presented in
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the Notes to the Consolidated Financial Statements.

OTHER ENERGY VENTURES

Nicor owns several energy-related ventures, including two companies marketing
energy-related products and services, and a wholesale natural gas marketing
company. Nicor also has equity interests in several joint ventures including a
FERC-regulated natural gas pipeline. In 2003, the company substantially
liquidated its investment in a former retail energy marketing joint venture.

Nicor Services and Nicor Solutions are businesses that provide energy-related
products and services for retail markets, including residential and small
commercial customers. Nicor Services operates in northern Illinois and provides
product warranty contracts, repair, maintenance and installation services and
equipment covering heating, air conditioning and related equipment, such as
natural gas piping inside homes and ductwork. Nicor Solutions offers its
residential and small commercial customers in the Nicor Gas service territory
energy-related products that provide for natural gas price stability and
management of their utility bill, including natural gas utility-bill management
plans as well as natural gas price protection plans. These products mitigate
and/or eliminate the risks of colder-than-normal weather and/or changes in
natural gas prices.

Nicor Enerchange is a business that engages in wholesale marketing of natural
gas supply services primarily in the Midwest, administers the Chicago Hub for
Nicor Gas, and manages Nicor Solutions' product risks.

During 2002, Horizon Pipeline, a 50-percent-owned joint venture with NGPL, put
into operation a natural gas pipeline of approximately 70 miles stretching from
Joliet, Illinois to near the Wisconsin/Illinois border. Nicor Gas has contracted
for approximately 80 percent of Horizon Pipeline's capacity under a 10-year
agreement at rates that have been accepted by FERC.

Nicor Energy is a 50-percent-owned former retail energy marketing joint venture
with Dynegy Marketing and Trade. During 2003, Nicor Energy disposed of its
customer contracts and ceased operations. For information about Nicor Energy see
the Notes to the Consolidated Financial Statements - Note 19 Contingencies -
Nicor Energy.

Additional information about Nicor's other energy ventures is presented in
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the Notes to the Consolidated Financial Statements.

CORPORATE

Nicor has an equity investment in Triton Container Investments LLC, a cargo
container leasing business.

Nicor Inc. Page 6
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Item 1. Business (concluded)
- ------- --------------------

AVAILABLE INFORMATION

Nicor files various reports with the Securities and Exchange Commission (SEC).
These reports include the annual reports on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K and amendments to those reports filed or
furnished pursuant to Section 13 (a) of the Securities Exchange Act of 1934.
Nicor makes all of these reports available without charge to the public on the
investor relations section of the company's internet site at www.nicor.com as
soon as reasonably practicable after Nicor files them with, or furnishes them
to, the SEC.

Item 2. Properties
- ------- ----------

Information concerning Nicor and its major subsidiaries' properties is included
in Item 1, Business, and is incorporated herein by reference. These properties
are suitable, adequate and utilized in the company's operations.

Item 3. Legal Proceedings
- ------- -----------------

See the Notes to the Consolidated Financial Statements - Note 17 Rate Proceeding
and Note 19 Contingencies, which are incorporated herein by reference.

Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------

None.

Nicor Inc. Page 7
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Executive Officers of the Registrant
- ------------------------------------

Name Age Current Position and Background
- -------------------- ---- ---------------------------------------------------

Thomas L. Fisher 60 Chairman, Nicor and Nicor Gas (since 1996);
Chief Executive Officer, Nicor (since 1995) and
Nicor Gas (1988-2003); and President, Nicor
(1994-2002) and Nicor Gas (1988-2002).

Russ M. Strobel 52 Chief Executive Officer, Nicor Gas (since 2003);
President, Nicor and Nicor Gas (since 2002);
Executive Vice President, General Counsel and
Corporate Secretary, Nicor and Nicor Gas (2002);
Senior Vice President, General Counsel and
Corporate Secretary, Nicor and Nicor Gas
(2000-2002); Partner, Altheimer & Gray, attorneys
(2000); and Partner, Jenner & Block, attorneys
(1986-2000).

Richard L. Hawley 55 Executive Vice President and Chief Financial
Officer, Nicor and Nicor Gas (since 2003); Vice
President and Chief Financial Officer, Puget
Energy, Inc. (2000-2002) and Puget Sound Energy,
Inc. (1998-2002); and Partner, Coopers & Lybrand
(1984-1998).

Claudia J. Colalillo 55 Senior Vice President Human Resources and
Corporate Communications, Nicor and Nicor Gas
(since 2002); Vice President Human Resources,
Nicor and Nicor Gas (1998-2002).

Rocco J. D'Alessandro 46 Senior Vice President Operations, Nicor Gas (since
2002); Vice President Customer Service, Nicor Gas
(1999-2002); various managerial positions, Nicor
Gas (1989-1999).

Daniel R. Dodge 51 Senior Vice President Diversified Ventures and
Corporate Planning, Nicor and Nicor Gas (since
2002); Vice President Business Development, Nicor
and Nicor Gas (1998-2002).

George M. Behrens 49 Vice President and Treasurer, Nicor and Nicor Gas
(since 2004); Vice President Administration and
Treasurer, Nicor and Nicor Gas (2000-2004); Vice
President Administration, Nicor and Nicor Gas
(1999-2000); Vice President and Controller, Nicor
and Nicor Gas (1998-1999); and Vice President
Accounting, Nicor Gas (1996-1998).

Paul C. Gracey, Jr. 45 Vice President, General Counsel and Secretary,
Nicor and Nicor Gas (since 2002); Vice President
and General Counsel, Midwest Generation, Chicago,
independent power producer (2000-2002); Vice
President and General Counsel, Edison Mission
Energy Limited, London, England, independent power
producer (1993-2000).

Gerald P. O'Connor 53 Vice President Administration and Finance, Nicor
and Nicor Gas (since 2004); Temporary General
Manager - Internal Audit, Nicor and Nicor Gas
(2003-2004); Partner, Tatum Partners LLC
(2003-2004); Vice President and Chief Financial
Officer, Aux Sable Liquid Products LLP (2000-2002);
Vice President Finance and Administration,
Illinova Energy Partners Inc. (1995-2000).

Nicor Inc. Page 8
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PART II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters
- ------- -------------------------------------------------------------------
and Issuer Purchases of Equity Securities
-----------------------------------------

Nicor common stock is listed on the New York and Chicago Stock Exchanges. At
February 22, 2005, there were approximately 23,700 common stockholders of
record.

Stock price Dividends
-------------------
Quarter High Low Declared
---------- --------- --------- ---------

2004
First $ 37.43 $ 32.49 $ .465
Second 35.65 32.04 .465
Third 37.36 32.37 .465
Fourth 39.65 35.89 .465

2003
First $ 35.62 $ 23.70 $ .465
Second 39.30 27.05 .465
Third 37.70 33.51 .465
Fourth 36.62 32.03 .465
----------------------------------------------------------

The following table presents common stock repurchase activity for the fourth
quarter of 2004:

Total Number Approximate
of Shares Dollar Value
Purchased of Shares that
as Part of May Yet Be
Total Publicly Purchased
Number of Average Announced Under the
Shares Price Paid Plans or Plans or
Period Puchased per Share Programs (1) Programs (1)
- ---------------------- ---------- ---------- ------------ ---------------

October 1 to 31, 2004 - $ - - $ 21,513,176
November 1 to 30, 2004 - - - 21,513,176
December 1 to 31, 2004 - - - 21,513,176
---------- ---------- -----------
- $ - -
========== ========== ===========

(1) In September 2001, Nicor announced a $50 million common stock repurchase
program, under which 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 2003.

On December 30, 2004, the company transferred 8,141 shares of its common stock
to one individual in connection with the 2003 purchase of the assets and
assumption of the certain liabilities of a heating and air conditioning business
owned by that individual. The shares were sold without registration under the
Securities Act of 1933, pursuant to an exemption under Rule 505 of Regulation D
under the Securities Act of 1933. The issuance was effected without general
solicitation or advertising.

Nicor Inc. Page 9
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Item 6. Selected Financial Data
- ------- -----------------------
(in millions, except per share data)

Year ended December 31
------------------------------------------------
2004 2003 2002 2001 2000
-------- -------- -------- -------- --------

Operating revenues $2,739.7 $2,662.7 $1,897.4 $2,366.3 $2,159.3

Operating income $ 137.7 $ 189.4 $ 226.5 $ 219.2 $ 85.6

Income before cumulative
effect of accounting change $ 75.1 $ 109.8 $ 128.0 $ 122.1 $ 35.8

Net income $ 75.1 $ 105.3 $ 128.0 $ 122.1 $ 35.8

Earnings per common share
Basic
Before cumulative effect
of accounting change $ 1.71 $ 2.49 $ 2.90 $ 2.70 $ .77
Basic earnings per share 1.71 2.39 2.90 2.70 .77

Diluted
Before cumulative effect
of accounting change $ 1.70 $ 2.48 $ 2.88 $ 2.69 $ .77
Diluted earnings per
share 1.70 2.38 2.88 2.69 .77

Dividends declared per
common share $ 1.86 $ 1.86 $ 1.84 $ 1.76 $ 1.66

Property, plant and equipment
Gross $4,143.6 $3,999.5 $3,872.8 $3,733.0 $3,588.9
Net 2,549.8 2,484.2 2,421.8 2,343.6 2,270.9

Total assets $3,975.2 $3,797.2 $3,524.4 $3,182.2 $3,460.6

Capitalization
Long-term bonds and notes,
net of current
maturities $ 495.3 $ 495.1 $ 396.2 $ 446.4 $ 347.1
Mandatorily redeemable
preferred stock 1.6 1.8 4.3 6.1 6.4
Common equity 749.1 754.6 728.4 704.2 705.2
-------- -------- -------- -------- --------
$1,246.0 $1,251.5 $1,128.9 $1,156.7 $1,058.7
======== ======== ======== ======== ========

In 2004, a $38.5 million litigation charge was recorded to operating expense
relating to an agreement to settle a securities class action lawsuit.

Nicor Inc. Page 10
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Item 7. Management's Discussion and Analysis of Financial Condition
- ------- -----------------------------------------------------------
and Results of Operations
-------------------------

The purpose of this financial review is to explain changes in operating results
and financial condition from 2002 to 2004 and to discuss business trends and
uncertainties that might affect Nicor. Certain terms used herein are defined in
the glossary on page ii. The discussion is organized into five sections -
Summary, Results of Operations, Financial Condition and Liquidity, Critical
Accounting Estimates and Other Factors That May Affect Business Performance.

SUMMARY

Nicor Inc. (Nicor) is a holding company with two principal business segments -
gas distribution and shipping. Nicor Gas is one of the nation's largest natural
gas distribution companies, and it is Nicor's primary business. Tropical
Shipping is a containerized shipping business serving the Bahamas and the
Caribbean region that typically represents most of the balance of Nicor's
operating income. Nicor also owns or has equity interests in several
energy-related businesses.

Net income and diluted earnings per common share are presented below (in
millions, except per share data):

2004 2003 2002
-------- -------- --------

Income before cumulative effect of
accounting change $ 75.1 $ 109.8 $ 128.0
Net income 75.1 105.3 128.0
Earnings per average share of common stock:
Diluted - before cumulative effect
of accounting change 1.70 2.48 2.88
Diluted - after cumulative effect
of accounting change 1.70 2.38 2.88

Net income was lower in 2004 compared with 2003 due in large part to a $38.5
million pretax litigation charge recorded in the first quarter of 2004 related
to an agreement to settle securities class action lawsuits. The charge reduced
net income by $23.2 million and diluted earnings per share by $.52. For more
information, see the Notes to the Consolidated Financial Statements - Note 19
Contingencies - Securities Class Actions.

Results for 2004 were also impacted by lower operating results in the gas
distribution segment and an absence of gains that occurred in 2003 related to
the company's previously written off investment in Nicor Energy. Partially
offsetting these negative factors were higher operating results in the shipping
segment and at Nicor's other energy ventures, a decrease in the effective income
tax rate, and the absence of a cumulative effect loss that occurred in 2003 due
to a change in accounting method at Nicor Enerchange.

Net income was lower in 2003 compared with 2002 due primarily to lower operating
results from the gas distribution segment, the cumulative effect of a change in
accounting methods and an increase in the effective income tax rate. These
factors were partially offset by improved equity investment results due
primarily to cash received from the previously written off investment in Nicor
Energy.

Operating results of the gas distribution business were positively impacted in
2003 and 2002 by the recognition of recoveries from insurers and contractors
and/or reserve reductions for Nicor Gas' mercury inspection and repair program.
The recognition of net recoveries from insurers and contractors and/or reserve
reductions increased pretax income by $17.8 million and $29.0 million in 2003
and 2002, respectively. For details of Nicor Gas' mercury inspection and repair
program, see the Notes to the Consolidated Financial Statements - Note 19
Contingencies - Mercury.

Nicor Inc. Page 11
- -------------------------------------------------------------------------------

Item 7. Management's Discussion and Analysis of Financial Condition
- ------- -----------------------------------------------------------
and Results of Operations (continued)
-------------------------------------

In late 2004, Nicor Gas filed a proposal for a rate increase with the Illinois
Commerce Commission (ICC). For more information, see Other Factors That May
Affect Business Performance - Gas Distribution - Rate Proceeding.

In January 2005, Nicor reached a preliminary agreement to settle the shareholder
derivative lawsuits, contingent upon court approval. The company also reached a
final settlement agreement with its Directors and Officers insurance carrier and
a preliminary settlement agreement with its excess insurance carrier. For more
information, see the Notes to the Consolidated Financial Statements - Note 19
Contingencies - Shareholder Derivative Lawsuits and Contingencies - Other. As
discussed in Note 19, the company's 2004 results do not reflect the impact of
these settlements.

With the passage of the American Jobs Creation Act of 2004, the company is
assessing the extent, if any, to which the undistributed foreign earnings of
Tropical Shipping will be repatriated in 2005. For additional information, refer
to Other Factors That May Affect Business Performance - Shipping.

Details of various financial and operating information by segment can be found
on the pages that follow.

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

2004 2003 2002
--------- --------- ---------

Gas distribution $ 130.8 $ 166.2 $ 207.0
Shipping 31.6 22.7 21.2
Other energy ventures 19.3 7.9 6.4
Corporate and eliminations (44.0) (7.4) (8.1)
--------- -------- ---------
$ 137.7 $ 189.4 $ 226.5
========= ======== =========

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

o Gas distribution operating income decreased $35.4 million in 2004 as compared
to 2003 due primarily to decreased insurance recoveries relating to the
mercury inspection and repair program ($17.8 million, net of costs), higher
operating and maintenance expenses ($14.8 million), the negative impact
of warmer weather than in 2003 (approximately $6 million) and higher
depreciation expense ($5.3 million). These negative factors were partially
offset by an increase in gains on property sales ($5.5 million) and the
impact of an increased number of customers ($3.3 million).

Gas distribution operating income decreased $40.8 million in 2003 as compared
to 2002 due primarily to increased operating and maintenance expenses ($20.5
million), lower Chicago Hub results ($8.1 million), higher depreciation ($5.9
million) and lower property sale gains ($3.7 million). Operating income also
reflects $17.8 million of mercury-related insurance recoveries in 2003 as
compared to $29 million of mercury-related insurance recoveries and reserve
reductions in 2002. The impact of weather colder than the prior year was an
increase in operating income of about $3 million.

Nicor Inc. Page 12
- -------------------------------------------------------------------------------

o Shipping operating income for 2004 increased $8.9 million compared to 2003
due to increased revenues ($38.5 million) driven by the impact of higher
volumes shipped and higher average rates, partially offset by lower charter
income and increased operating expenses ($29.6 million), primarily voyage,
inland transportation, port and other costs.

Shipping operating income for 2003 rose $1.5 million compared to 2002 due to
increased revenues from higher volumes shipped ($3.1 million), higher average
rates ($1.4 million) and increased charter income ($1.8 million). These
improvements were largely offset by higher fuel costs ($3.1 million) as well
as higher other operating expenses ($2.0 million) in 2003.

o Operating income from Nicor's other energy ventures for 2004 increased $11.4
million compared to 2003 due primarily to higher operating results at Nicor
Enerchange ($5.8 million) and at Nicor's energy-related products and services
businesses ($4.2 million), and the absence of prior-year losses from former
business activities ($0.8 million). The improvements were due predominantly
to an increased average number of utility-bill management customers at Nicor
Solutions and related risk-management activities handled by Nicor Enerchange
instead of by an outside party.

Operating income from Nicor's other energy ventures for 2003 increased $1.5
million compared to 2002. Operating results were higher in Nicor's
energy-related products and services businesses ($0.7 million). Also
favorably impacting the year was the absence of project losses, as occurred
in 2002, on former energy system development activities ($2.7 million).

o The increase in operating loss at Corporate is due primarily to the 2004
litigation charge of $38.5 million relating to the settlement of the
securities class action lawsuits.

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

RESULTS OF OPERATIONS

Details of various financial and operating information by segment can be found
in the tables throughout this review. The following discussion summarizes the
major items impacting Nicor's operating income.

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

2004 2003 2002
---------- ---------- ----------

Gas distribution $ 2,362.1 $ 2,351.6 $ 1,590.7
Shipping 310.7 272.2 266.0
Other energy ventures 155.3 96.5 56.9
Corporate and eliminations (88.4) (57.6) (16.2)
---------- ---------- ----------
$ 2,739.7 $ 2,662.7 $ 1,897.4
========== ========== ==========

Gas distribution revenues are impacted by changes in natural gas costs, which
are passed directly through to customers without markup, subject to ICC review.
For the year 2004, gas distribution revenues increased $10.5 million as compared
to 2003 due primarily to higher natural gas costs ($96.5 million) and higher
revenue taxes ($16.5 million). These positive factors were largely offset by the
negative effect of warmer weather than in 2003 (approximately $100 million).

Nicor Inc. Page 13
- -------------------------------------------------------------------------------

Gas distribution revenues increased nearly 50 percent in 2003 compared to 2002
due primarily to higher natural gas costs, which are passed directly through to
customers without markup, subject to ICC review. The revenue effect of higher
natural gas costs was approximately $680 million. Revenues also increased in
2003 by about $40 million due to colder weather than the prior year. While
residential deliveries rose on colder weather, industrial deliveries fell due
largely to lower power-generation load affected by mild summer weather.

In 2004, shipping segment operating revenues increased over 2003 due primarily
to higher volumes shipped ($31.9 million) and higher average rates ($8.7
million), partially offset by decreased charter income ($2.1 million). These
higher volumes reflect increased tourism and post-hurricane construction
activity in the Caribbean region and the Bahamas. Rates were higher due to a
general rate increase and higher cost recovery surcharges for fuel and security.

In 2003, shipping segment operating revenues increased over 2002 due primarily
to higher volumes shipped ($3.1 million), higher average rates ($1.4 million)
and increased charter income ($1.8 million). The higher volumes reflect
increased activity resulting from an acquisition that occurred in April 2002.

The 2004 increase in revenues for other energy ventures was due primarily to
higher revenues at Nicor's energy-related products and services businesses
($52.4 million), and Nicor Enerchange ($7.2 million). The improvements were due
predominantly to an increased average number of utility-bill management
customers at Nicor Solutions and related risk-management activities handled by
Nicor Enerchange instead of by an outside party.

The 2003 increase in revenues for other energy ventures was due primarily to the
company's energy-related products and services businesses ($49.4 million),
largely reflecting new customers and products, such as utility-bill management
products introduced in 2002. Negatively impacting 2003 were decreased revenues
from Nicor's former energy system development activities ($10.1 million).

Corporate and eliminations primarily reflects the elimination of gas
distribution revenues against Nicor Solutions' expenses for customers purchasing
the utility-bill management products.

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

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

2004 2003 2002
---------- ---------- ----------

Gas distribution revenues $ 2,362.1 $ 2,351.6 $ 1,590.7
Cost of gas (1,695.0) (1,692.7) (970.1)
Revenue tax expense (139.4) (130.9) (92.4)
---------- ---------- ----------
Gas distribution margin $ 527.7 $ 528.0 $ 528.2
========== ========== ==========

For the year 2004, gas distribution margin was essentially unchanged from 2003,
although affected by a number of offsetting factors. Warmer weather than in 2003
(approximately $6 million) and an adjustment

Nicor Inc. Page 14
- -------------------------------------------------------------------------------

related to prior-year Performance Based Rate (PBR) plan results ($1.8 million)
had a negative effect on margin. These negative factors were partially offset by
the impact of an increased number of customers ($3.3 million), higher average
rates charged during the period ($2.2 million) and higher revenue tax
administration fees ($1.0 million).

Although margin for 2003 and 2002 were essentially equal, a number of factors
had offsetting impacts. Negatively impacting margin in 2003 was a smaller
contribution from the Chicago Hub and other gas supply-related activities ($10.9
million) and lower industrial deliveries, mainly for power generation ($2.9
million). The company believes commercial and industrial deliveries were
unfavorably impacted by general economic conditions and higher natural gas
prices. Positively impacting margin were increased customer finance and late
payment charges (about $8 million) related to higher natural gas prices in 2003.
The absence of PBR plan losses as occurred in 2002 ($4.1 million) and increased
deliveries due to colder weather than the prior year (about $7 million),
partially offset by an unfavorable variance from the company's weather hedge in
2003 compared to 2002 ($3.5 million), also positively impacted margin.

Gas distribution operating and maintenance expense. Gas distribution operating
and maintenance expense for 2004 of $234.9 million was $14.8 million higher than
2003 due primarily to increases in legal defense costs associated with the
PBR-related litigation ($5.4 million) and payroll costs ($3.5 million),
adjustments related to customer reimbursements ($3.1 million), higher bad debt
expense ($2.7 million), due in part to high natural gas prices, and higher
compliance costs ($2.6 million). These negative factors were partially offset by
higher pension credits ($3.6 million).

The increase in gas distribution operating and maintenance expense for 2003 over
2002 of $20.5 million was due primarily to higher pension costs ($9.7 million),
higher insurance expense ($4.2 million), increased bad debt expense ($4.1
million), increased natural gas costs to operate company equipment and
facilities ($3.2 million) and higher health care costs ($2.7 million). These
negative factors were partially offset by lower expenses related to the review
of the company's PBR plan ($6.5 million).

Operating and maintenance expenses at Nicor Gas are expected to continue to
rise.

Other gas distribution operating expenses. Property sale gains and losses vary
from year-to-year depending upon property sales activity. During 2004, Nicor Gas
realized a $5.9 million gain on the sale of land. The company continues to
assess its ownership of real estate holdings and anticipates a decrease in
property sale activity in 2005.

Mercury-related costs (recoveries), net reflect the estimated costs, credits and
recoveries associated with the company's mercury inspection and repair program.
Recoveries and costs were insignificant in 2004. However, in 2003 and 2002,
Nicor Gas reached agreements with insurers and independent contractors whereby
the company recovered approximately $18 million and $20 million, respectively,
of mercury-related costs. In addition, in 2002, a $9 million adjustment lowered
the mercury-related reserve and reduced operating expense. Additional
information about the company's mercury inspection and repair program is
presented in the Notes to the Consolidated Financial Statements - Note 19
Contingencies - Mercury.

Shipping operating expenses. Shipping segment operating expenses increased $29.6
million in 2004 as compared to 2003 due primarily to higher voyage, inland
transportation and port costs ($16.0 million), payroll and related costs ($4.7
million), leased equipment costs ($2.7 million) and vessel charter costs ($2.0
million). The increases are due primarily to higher volumes shipped.

Nicor Inc. Page 15
- -------------------------------------------------------------------------------

Shipping segment operating expenses rose $4.7 million in 2003 versus 2002 due
primarily to higher fuel costs ($3.1 million) and increased vessel charter
expenses ($0.6 million). Increased fuel costs reflect the impact of higher fuel
prices in 2003.

Operating expenses of other energy ventures. The $47.4 million increase in the
2004 operating expenses compared to 2003 was due mainly to higher expenses at
Nicor's energy-related products and services businesses ($48.2 million),
reflecting an increased average number of utility-bill management customers and
the higher average cost of gas.

The $38.1 million increase in the 2003 operating expenses compared to 2002 was
due primarily to increased operating expenses at Nicor's energy-related products
and services businesses ($48.6 million), associated largely with the addition of
new customers and products. This increase was partially offset by lower
operating expenses from the company's former energy system and design activities
($12.9 million).

Litigation charge. The 2004 litigation charge of $38.5 million relates to the
settlement of the securities class action lawsuit.

Other corporate expenses and eliminations. Other corporate operating expenses
were $5.5 million, $8.3 million and $6.4 million in 2004, 2003 and 2002,
respectively, which are primarily legal and business development costs.

Intercompany eliminations were $(88.4) million, $(58.5) million and $(14.5)
million in 2004, 2003 and 2002, respectively, and related primarily to
utility-bill management products.

Equity investment income (loss), net. Equity investment results for 2004
decreased by $9.0 million as compared to 2003 due primarily to the absence of a
$9.6 million cash recovery related to Nicor Energy that occurred in 2003. This
equity investment was previously written off and negatively impacted 2002
results ($9.2 million). Information related to this investment is more fully
described in the Notes to the Consolidated Financial Statements - Note 19
Contingencies - Nicor Energy. Equity investment results also include $6.5
million, $5.5 million and $4.1 million for 2004, 2003 and 2002, respectively,
for Nicor's share of income from Triton Container Investments LLC (Triton), a
cargo container leasing business.

Interest expense. Interest expense increased $3.9 million in 2004 over 2003 due
to the impact of higher effective interest rates on debt ($4.4 million) and
higher estimated interest on income tax matters ($1.8 million), partially offset
by the impact of lower average borrowing levels ($2.3 million). Interest expense
decreased $1.2 million in 2003 from 2002 due to lower average borrowing levels
and interest rates.

Income taxes. The decline in the effective income tax rate to 28.7 percent in
2004 from 35.2 percent in 2003 was primarily a result of lower pretax income
(which typically causes a lower effective income tax rate since permanent
differences and tax credits are a larger share of pretax income).

The company's effective income tax rate rose to 35.2 percent in 2003 as compared
to 31.0 percent in 2002 due principally to the effects of an increase in tax
expense in 2003 relating to adjustments of deferred income tax accounts.

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 16
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Gas Distribution Statistics

2004 2003 2002
--------- --------- ---------

Operating revenues (millions)
Sales
Residential $ 1,625.5 $ 1,611.9 $ 1,057.4
Commercial 349.9 351.7 209.4
Industrial 49.3 51.2 32.5
--------- --------- ---------
2,024.7 2,014.8 1,299.3
--------- --------- ---------
Transportation
Residential 23.6 22.7 16.3
Commercial 69.9 71.6 75.6
Industrial 39.9 41.7 45.8
Other 14.0 12.0 7.6
--------- --------- ---------
147.4 148.0 145.3
--------- --------- ---------
Other revenues
Revenue taxes 143.5 134.0 95.3
Environmental cost recovery 20.6 31.3 24.6
Chicago Hub 7.9 7.3 15.4
Performance-based rate plan (1.8) - (4.1)
Other 19.8 16.2 14.9
--------- --------- ---------
190.0 188.8 146.1
--------- --------- ---------
$ 2,362.1 $ 2,351.6 $ 1,590.7
========= ========= =========

Deliveries (Bcf)
Sales
Residential 204.8 214.9 212.9
Commercial 44.3 46.7 41.6
Industrial 6.4 7.0 6.9
--------- --------- ---------
255.5 268.6 261.4
--------- --------- ---------
Transportation
Residential 16.6 16.6 11.0
Commercial 84.1 87.8 97.5
Industrial 117.0 121.2 149.2
--------- --------- ---------
217.7 225.6 257.7
--------- --------- ---------
473.2 494.2 519.1
========= ========= =========

Year-end customers (thousands)
Sales
Residential 1,777.3 1,745.2 1,733.6
Commercial 116.5 114.5 108.9
Industrial 7.4 7.3 7.0
--------- --------- ---------
1,901.2 1,867.0 1,849.5
--------- --------- ---------
Transportation
Residential 147.9 145.1 126.8
Commercial 59.5 58.3 62.4
Industrial 6.0 6.2 6.7
--------- --------- ---------
213.4 209.6 195.9
--------- --------- ---------
2,114.6 2,076.6 2,045.4
========= ========= =========

Other statistics
Degree days (normal 6,000) 5,637 6,068 5,779
Colder (warmer) than normal (6)% 1% (4)%
Average gas cost per Mcf sold $ 6.56 $ 6.24 $ 3.67

Nicor Inc. Page 17
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Shipping Statistics
2004 2003 2002
-------- -------- --------

TEUs shipped (thousands) 198.0 177.1 175.1
Revenue per TEU $ 1,569 $ 1,525 $ 1,517
Ports served 24 25 24
Vessels operated at year-end 20 15 16

FINANCIAL CONDITION AND LIQUIDITY

The company believes it has access to adequate resources to meet its needs for
capital expenditures, debt redemptions, dividend payments and working capital.
These resources include net cash flow from operating activities, access to
capital markets, lines of credit and short-term investments.

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, storage and hedging
practices. The company relies on short-term financing to meet seasonal increases
in working capital needs. Cash requirements generally increase over the third
and fourth quarters due to increases in natural gas purchases, gas in storage
and accounts receivable. Over the first and second quarters, positive cash flow
generally results from the sale of gas in storage and the collection of accounts
receivable. This cash is typically used to significantly reduce short-term debt
during the second quarter.

Nicor Gas maintains margin accounts related to financial derivative
transactions. These margin accounts may cause large fluctuations in cash needs
or sources in a relatively short period of time due to daily settlements
resulting from changes in natural gas futures prices. The company manages these
fluctuations with short-term borrowings.

Net cash flow provided from (used for) operating activities was $317.7 million,
$(12.6) million and $268.3 million in 2004, 2003 and 2002, respectively. The
cash flows provided in 2004 and 2002 are at the levels traditionally experienced
by the company. Operating cash flow for 2003 was negative due primarily to
changes in working capital items in the gas distribution segment. Two decisions
in 2003 were the primary factors underlying the working capital changes. First,
the company significantly increased the quantity of owned gas in storage at
December 31, 2003 as compared to December 31, 2002. In addition, the company
chose to fund a significant portion of those purchases through short-term
borrowings (which are shown outside the operating section, in the financing
section, of the Consolidated Statements of Cash Flows) instead of through
accounts payable. As noted in the financing activities section of Management's
Discussion and Analysis, the company had increased its short-term debt borrowing
capacity in anticipation of these two and other factors (including higher gas
costs), to accommodate the funding of these decisions.

In 2003, Nicor received an income tax refund, which adjusted the deferred income
tax liability, of approximately $100 million attributable to a tax loss
carryback associated with a change in tax accounting methods, subject to
Internal Revenue Service review and approval as part of normal ongoing audits.
Decisions by taxing authorities may significantly impact the company's cash
flow.

Nicor Inc. Page 18
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Investing Activities. Net cash flow used for investing activities was $204.7
million, $186.0 million and $189.2 million in 2004, 2003 and 2002, respectively.
The increase in 2004 over 2003 was due primarily to an increase in capital
expenditures and other investing activities.

Capital expenditures. Capital expenditures by business segment are presented
below (in millions):

Estimated
2005 2004 2003 2002
--------- -------- -------- --------

Gas distribution $ 195 $ 175 $ 173 $ 170
Shipping 25 9 6 20
Other energy ventures 5 3 2 3
--------- -------- -------- --------
$ 225 $ 187 $ 181 $ 193
========= ======== ======== ========

Capital expenditures in the gas distribution segment were nearly unchanged for
2004 compared with 2003. Increased costs in 2004 for information technology
system improvements (about $8 million) were largely offset by adjustments
related to customer reimbursements (about $3 million), the absence of
expenditures related to a 2003 service outage (about $2 million) and reduced
storage system expenditures (about $2 million).

Capital expenditures in the gas distribution segment for 2003 versus 2002
remained relatively level. Increased costs in 2003 for gas distribution system
improvements (about $8 million) and higher capitalized pension costs (about $3
million) were partially offset by a decrease in storage and transmission system
expenditures (about $6 million) compared with 2002. Storage and transmission
system expenditures in 2002 included the acquisition of a compressor for a
storage facility.

Gas distribution segment capital expenditures are expected to increase by about
$20 million in 2005 over the 2004 level due primarily to planned storage
compressor and real estate expenditures.

Shipping segment capital expenditures for 2004 increased $3 million over 2003
due primarily to the purchase of freight handling equipment and facilities
renovations. Shipping segment capital expenditures were lower in 2003 as
compared with 2002 due primarily to the construction of two vessels completed in
early 2002.

Shipping segment capital expenditures are expected to increase in 2005 versus
2004 due primarily to the purchase of freight handling equipment and facilities
expenditures. The 2005 estimate does not include additions to the company's
fleet. Increased vessel requirements are normally met through the acquisition,
charter or leasing of additional vessels.

Capital expenditures are expected to be higher at our other energy ventures in
2005 versus 2004 as computer systems are upgraded and facilities expanded at the
retail energy-related products and services businesses.

Other investing activities. In 2004, Nicor Gas realized net proceeds of $7.6
million on the sale of land.

Nicor invested $10 million in each of 2003 and 2002 in Triton. No investment was
made in 2004. Nicor's equity investment in this business at December 31, 2004
was $87.1 million.

Nicor Inc. Page 19
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In 2002, Nicor invested $16.5 million for a 50-percent share of equity in
Horizon Pipeline. Nicor's equity investment in this business at December 31,
2004 was $18.7 million.

Nicor's equity investment in Nicor Energy was written off during the third
quarter of 2002. During 2003, Nicor recorded gains of $9.6 million upon the
receipt of cash from Nicor Energy. No cash activity occurred in 2004 and any
future cash receipts or payments are expected to be minimal. Additional
information about transactions with Nicor Energy is provided within the Nicor
Energy section of the Notes to the Consolidated Financial Statements - Note 19
Contingencies.

In 2003 and 2002, Nicor Services acquired existing operations and assets to
establish a heating, ventilation and air conditioning business. All purchases
were made with shares of Nicor common stock.

In 2002, Tropical Shipping purchased certain assets of Tecmarine Lines Inc. and
TMX Logistics Inc. for cash, expanding its network of Caribbean and South
American destinations.

Financing activities. Nicor Gas has credit ratings that are among the highest in
the gas distribution industry. As of the filing date of this report, the credit
ratings as assigned by Standard and Poor's Ratings Services (S&P), Moody's
Investors Service (Moody's) and Fitch Ratings (Fitch) are as follows:

S&P Moody's Fitch
--------- --------- ---------
Nicor Inc.
Commercial Paper A-1+ P-1 F-1
Unsecured Credit Facilities AA- n/a n/a
Senior Unsecured Debt AA n/a A

Nicor Gas
Commercial Paper A-1+ P-1 F-1+
First Mortgage Bonds AA Aa3 AA-
Unsecured Credit Facilities AA- n/a n/a
Senior Unsecured Debt AA A1 AA-

In June 2004, Fitch changed Nicor Inc.'s senior unsecured debt rating from A+ to
A, Nicor Gas' First Mortgage Bonds from AA to AA-, and affirmed Nicor Inc.'s and
Nicor Gas' commercial paper at F-1 and F-1+, respectively. Fitch also upgraded
the ratings outlook for the company to Stable from Negative. In December 2004,
S&P changed its outlook from Stable to Negative on both Nicor Inc. and Nicor
Gas.

Nicor's debt-related financial statistics at December 31 include:

2004 2003 2002
-------- -------- --------
Long-term debt, net of current maturities
as a percent of capitalization 39.9% 39.7% 35.1%
Times interest earned, before income taxes 3.5 5.5 5.7

Nicor Inc. Page 20
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Long-term debt. The company typically uses the net proceeds from long-term debt
for refinancing outstanding debt, for construction programs to the extent not
provided by internally generated funds, and for general corporate purposes.

At December 31, 2004, Nicor Gas had the capacity to issue approximately $365
million of First Mortgage Bonds under the terms of its indenture, of which $75
million was available for immediate issuance under a July 2001 shelf
registration filing. Nicor is in compliance with its debt covenants and believes
it will continue to remain so. Nicor's long-term debt agreements do not include
ratings triggers or material adverse change provisions.

In 2003, Nicor Gas issued the following First Mortgage Bonds: $50 million due in
2023 at 5.80%, $50 million due in 2032 at 5.90% and $50 million due in 2033 at
5.90%. Retirements of First Mortgage Bonds in 2003 were as follows: $50 million
due in 2003 at 5.75% and $50 million due in 2027 at 7.375%.

In April 2003, Nicor Gas refinanced $50 million of 3% unsecured notes due in
April 2003 with $50 million of 1.6% unsecured notes due and paid in October
2003.

Short-term debt. The company relies on short-term financing to meet temporary
operating cash flow needs resulting from seasonal changes in working capital. In
2004, Nicor Inc. and Nicor Gas established two new revolving credit facilities
with major domestic and foreign banks. These facilities, which serve as backup
for the issuance of commercial paper, consist of a $500 million, 3-year
revolver, expiring September 2007, available to Nicor Inc. and Nicor Gas, and a
$400 million, 210-day seasonal revolver, expiring in April 2005, available to
Nicor Gas.

Common stock. In 2001, Nicor announced a $50 million common stock repurchase
program. Purchases may be made as market conditions permit through open market
transactions and to the extent cash flow is available after other cash needs and
investment opportunities. The company purchased and retired 400,000 common
shares in 2002, at a cost of $18 million, under the stock repurchase program.
There were no purchases under the existing program in 2003 and 2004, and at
December 31, 2004, approximately $22 million remained authorized for the
repurchase of common stock.

Nicor maintained its quarterly common stock dividend rate during 2004 of $.465
per common share. The company paid dividends on its common stock of $82.0
million, $81.7 million, and $80.4 million in 2004, 2003, and 2002, respectively.
Nicor currently has no contractual or regulatory restrictions on the payment of
dividends.

Off-balance sheet arrangements. Nicor has certain guarantees, as further
described in the Notes to the Consolidated Financial Statements - Note 18
Guarantees and Indemnities. The company believes that it is not probable that
these guarantees will have a material effect on its financial condition.

Nicor Inc. Page 21
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Contractual obligations. As of December 31, 2004, Nicor had contractual
obligations with payments due as follows (in millions):

Payments due by period
-------------------------------------------------
Less More
than 1 1-3 3-5 than 5
year years years years Total
-------- -------- -------- -------- ---------

Purchase obligations $ 732.0 $ 424.8 $ 140.6 $ 24.9 $1,322.3
Long-term debt - 50.0 125.0 325.0 500.0
Fixed interest on
long-term debt 30.5 58.2 47.0 266.4 402.1
Operating leases 25.4 25.1 22.7 15.8 89.0
Other long-term
obligations 2.8 4.5 2.1 1.1 10.5
-------- -------- -------- -------- ---------
$ 790.7 $ 562.6 $ 337.4 $ 633.2 $2,323.9
======== ======== ======== ======== =========

Purchase obligations consist primarily of natural gas purchase agreements, and
natural gas transportation and storage contracts in the gas distribution and
wholesale natural gas marketing business segments. Natural gas purchase
agreements include obligations to purchase natural gas at future market prices,
calculated using December 31, 2004 New York Mercantile Exchange futures prices.

Operating leases are primarily for vessels, containers and equipment in the
shipping segment, and for office space and equipment in the gas distribution
segment. Rental expense under operating leases was $27.5 million, $23.7 million
and $23.0 million in 2004, 2003, and 2002, respectively.

Other. Restrictions imposed by regulatory agencies and loan agreements limiting
the amount of subsidiary net assets that can be transferred to Nicor are not
expected to have a material impact on the company's ability to meet its cash
obligations.

CRITICAL ACCOUNTING ESTIMATES

Nicor prepares its consolidated financial statements in accordance with
accounting principles generally accepted in the United States, which regularly
require Nicor's management to exercise judgment in the selection and application
of accounting methods. The application of accounting methods includes making
estimates using subjective assumptions and judgments about matters that are
inherently uncertain.

The use of estimates and the selection of accounting policies affect Nicor's
reported results and financial condition. The company has adopted several
significant accounting policies and is required to make significant accounting
estimates that are important to understanding its financial statements. These
significant policies and estimates are described throughout the Notes to the
Consolidated Financial Statements.

Although there are numerous areas in which Nicor's management makes significant
accounting estimates, it believes its critical estimates are those that require
management's most difficult and subjective or complex judgments. Nicor's
management has a practice of reviewing its critical accounting estimates and
policy decisions with the audit committee of its board of directors. Its
critical estimates typically involve legal contingencies, derivative
instruments, pension and other postretirement benefits, income taxes, credit
risk and unbilled revenues because they are estimates which could materially
impact Nicor's financial statements.

Nicor Inc. Page 22
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Loss contingencies. Nicor and its subsidiaries record contingent losses as
liabilities when a loss is both probable and the amount or range of loss,
including related legal defense costs, is reasonably estimable. When only a
range of potential loss is estimable, the company records a liability for the
minimum anticipated loss. Nicor and its subsidiaries and affiliates are involved
in various legal and regulatory proceedings and are exposed to various loss
contingencies. These loss contingencies are in some cases resolved in stages
over time, estimates may change significantly from period to period, and the
company's ultimate obligations may differ materially from its recorded amounts.
Of particular note is the PBR plan contingency at Nicor Gas and the United
States Securities and Exchange Commission (SEC) and U.S. Attorney inquiries
described in the Notes to the Consolidated Financial Statements - Note 19
Contingencies.

Derivative instruments. The rules for determining whether a contract meets the
definition of a derivative instrument or qualifies for hedge accounting
treatment are numerous and complex. The treatment of a single contract may vary
from period to period depending upon accounting elections, changes in
management's assessment of the likelihood of future hedged transactions or new
interpretations of accounting rules. As a result, management judgment is
required in the determination of the appropriate accounting treatment. In
addition, the estimated fair value of derivative instruments may change
significantly from period to period depending upon market projections, and
changes in hedge effectiveness may impact the accounting treatment. These
determinations and changes in estimates may have a material impact on reported
results.

Pension 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 assets, the
long-term rate of compensation increase and anticipated health care costs.
Changes in these assumptions typically do not have a significant impact on the
expenses recorded from year to year. However, actual experience in any one
period, particularly the 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
over the remaining service lives of employees covered by the plans
(approximately 11 to 14 years). Additional information is presented in the Notes
to the Consolidated Financial Statements - Note 9 Postretirement Benefits.

The company's estimated postretirement benefit cost included in operating income
was $9.1 million, $13.9 million and $1.4 million in 2004, 2003 and 2002,
respectively. Nicor Gas expects to record postretirement benefit cost for 2005
of $8.1 million. Actuarial assumptions affecting 2005 include an expected rate
of return on plan assets of 8.5 percent, consistent with the prior year, and a
discount rate of 5.75 percent compared with 6 percent a year earlier.

Income taxes. A deferred income tax liability is not recorded on undistributed
foreign earnings that are indefinitely reinvested offshore. Nicor has recorded a
$47 million deferred income tax liability associated with foreign earnings it
may repatriate, and it has not recorded deferred income taxes of $12 million on
approximately $35 million of cumulative undistributed foreign earnings it
believes to be indefinitely reinvested offshore. See Notes to the Consolidated
Financial Statements - Note 8 Income Taxes, for a discussion of potential
impacts from the American Jobs Creation Act of 2004. Changes in management's
investment or repatriation plans or circumstances could result in a different
deferred income tax liability.

Nicor Inc. Page 23
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Credit risk. Nicor's subsidiaries and affiliates are required to estimate credit
risk in establishing allowances for doubtful accounts and in estimating the fair
values of certain derivative instruments with counterparty credit risk being an
especially difficult and critical judgment. Actual credit losses could vary
materially from Nicor's estimates. Nicor's allowance for doubtful accounts at
December 31, 2004, 2003 and 2002 was $21.9 million, $21.2 million and $16.9
million, respectively, as presented on Schedule II in Item 15.

Unbilled revenues. Nicor Gas estimates revenues for gas deliveries not yet
billed to customers from the last billing date to month-end (unbilled revenues).
Unbilled revenue estimates are dependent upon a number of customer-usage factors
which require management judgment, including weather. These estimates are
adjusted when actual billings occur, and changes in estimates can be material.
Estimated unbilled revenues for Nicor Gas at December 31, 2004, 2003 and 2002
were $204.4 million, $139.0 million and $142.4 million, respectively.

OTHER FACTORS THAT MAY AFFECT BUSINESS PERFORMANCE

The following factors can impact year-to-year comparisons and may affect the
future performance of Nicor's businesses.

Gas distribution. Nicor Gas, a regulated natural gas distribution utility,
serves over 2.1 million customers in a service territory that encompasses most
of the northern third of Illinois, excluding the city of Chicago. The region's
economy is diverse and its customer base has grown steadily over the years,
providing Nicor Gas with a well-balanced mix of residential, commercial and
industrial customers. Residential customers typically account for approximately
45 to 50 percent of natural gas deliveries, while commercial and industrial
customers each typically account for about 25 to 30 percent.

Regulation. Nicor Gas is regulated by the ICC, which establishes the rules and
regulations governing utility rates and services in Illinois. Certain rates are
updated monthly and designed to recover specific past costs, such as gas supply
and environmental costs, subject to an annual prudence review. Base rates, on
the other hand, are designed to allow the company an opportunity to recover its
costs and to earn a fair return for its investors. Significant changes in the
regulations applicable to Nicor Gas or its affiliates, or the regulatory
environment in general, could affect the performance of Nicor Gas. Information
regarding certain ICC proceedings is presented within the Notes to the
Consolidated Financial Statements - Note 19 Contingencies - Performance-Based
Rate Plan.

Rate Proceeding. On November 4, 2004, Nicor Gas filed with the ICC for an
overall increase in rates of approximately $83 million (or about 16.5 percent of
base rates revenue). The company's filing provided for a rate of return on
original-cost rate base of 9.34 percent, which reflects an 11.37 percent cost of
common equity. The requested rate increase is needed to recover higher operating
costs and increased capital investments. Nicor Gas has not raised base rates
since 1996.

As part of the requested rate increase, Nicor Gas has proposed that all Chicago
Hub revenues, net of related administrative costs, and approximately two-thirds
of all bad debt expenses be passed directly through to customers, reducing the
earnings variability of both items. In addition, the company has proposed
setting rates assuming normal weather of 5,830 degree days beginning in 2005
versus the 6,000 degree days currently considered by the company as normal.

The ICC normally has 11 months to complete its review of the filing and to issue
an order. The proposed rate increase has been suspended pending the completion
of the ICC's review.

Nicor Inc. Page 24
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Item 7. Management's Discussion and Analysis of Financial Condition
- ------- -----------------------------------------------------------
and Results of Operations (continued)
-------------------------------------

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.

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. Since the
first quarter of 2003, external weather protection has not been purchased by
Nicor because it 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 upon the time of year, weather
patterns, the number of customers for these products and the market price for
natural gas. In 2004, the offsetting impact related to utility-bill management
products was about one-third of the gas distribution weather effect.

Demand and natural gas prices. In addition to the impact of weather, significant
changes in economic conditions or natural gas prices can impact customer gas
usage. Nicor Gas' large residential customer base provides relative stability
during weak economic periods, and the industrial and commercial customer base is
well diversified, lessening the impact of industry-specific economic swings.
However, management believes that declines since 2000 in natural gas deliveries
to industrial customers may be permanent. Management also believes that
deliveries for power generation, which have declined in recent years, will
remain relatively flat.

Changes in the price of natural gas have no direct impact on gas distribution
margin since gas costs are passed directly through to customers without markup,
subject to ICC review. However, high natural gas prices can have an adverse
effect on accounts receivable collections, customer demand, company-use gas
expenses, financing costs and customer service expenses.

Competition. Nicor Gas is a regulated monopoly and has no competition for
natural gas distribution, however, Nicor Gas does compete with alternative
energy suppliers based on such factors as price, service and reliability. The
company believes that it is well positioned to deal with the possibility of fuel
switching by customers because it has rates and services designed to compete
against alternative fuels. In addition, the company has a rate that allows
negotiation with potential bypass customers, and no customer has bypassed the
Nicor Gas system since the rate became effective in 1987. Nicor Gas also offers
commercial and industrial customers alternatives in rates and service,
increasing its ability to compete in these markets.

Storage and supply. Nicor Gas has a direct connection to eight interstate
pipelines and extensive underground storage capacity that provides the company
and its transportation customers with flexibility and alternatives for natural
gas supply procurement and storage services. In addition, in an effort to ensure
supply reliability, the company purchases gas from several different producing
regions under varied contract terms.

Customer choice of commodity supplier. Since March 2002, all Nicor Gas customers
have had a choice of natural gas suppliers. The choice of another natural gas
commodity supplier has no direct impact on gas distribution margin because
natural gas costs are passed directly through to customers without markup,
subject to ICC review. Nicor Gas continues to deliver the natural gas, maintain
its distribution system and respond to emergencies.

Nicor Inc. Page 25
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Customer credit risk. Nicor Gas has a diversified customer base, which limits
its exposure to concentrations of credit risk in any one industry or income
class. The company believes that it maintains prudent credit policies, subject
to ICC regulations. Customers also have options to help them 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. However, high
natural gas prices can increase the risk of customer nonpayment. Nicor Gas
experienced increasing bad debt expense in the past few years due in part to
high natural gas prices and an increasingly adverse credit experience consistent
with general economic conditions. It is expected that high natural gas prices
will continue in 2005. See also the Credit Risk section on page 28.

Other activities. Nicor Gas continues to pursue other activities, such as the
Chicago Hub, which provides natural gas transportation and storage services. 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. During 2004, 2003 and 2002, the Chicago Hub contributed
to operating income $7.9 million, $7.3 million and $15.4 million, respectively.
The lower income level in 2004 and 2003 compared with 2002 was attributable
primarily to lower Chicago Hub inventory levels and less flexibility. See also
the previous rate proceeding section for proposed changes in the rate treatment
of Chicago Hub activities.

Outlook. Due principally to higher operating and maintenance and depreciation
costs, gas distribution results for 2005 are expected to be lower than in 2004.
Also, the ICC's PBR plan review, the related purchased gas adjustment review,
the proposed rate increase (which would be effective in late 2005) and other
litigation could significantly affect 2005 results, but the outcomes are not
estimable.

Shipping. Tropical Shipping is one of the largest containerized cargo carriers
in the Bahamas and the Caribbean region. Tropical Shipping has a reputation for
providing quality, on-time delivery service - a reputation that has helped the
company establish a leading position in most of the markets it serves.

Tropical Shipping's financial results can be affected significantly by general
economic conditions in the United States, the Bahamas, the Caribbean region and
Canada. The marketplaces in the Bahamas and the Caribbean are very competitive,
with global carriers having established a presence in several markets that
Tropical Shipping serves. Unfavorable economic conditions in the Caribbean, the
Bahamas and the United States in 2003 and 2002 had a negative impact on tourism
and on construction projects in many of those markets. Tropical Shipping's
results also include amounts related to cargo insurance coverages sold to its
customers and other third parties.

Tropical Shipping is subject to the International Ship and Port-facility
Security ("ISPS") Code and is also subject to the United States Maritime
Transportation Security Act ("MTSA"), both of which require extensive security
assessments, plans and procedures. Tropical Shipping is also subject to the
regulations of both the Federal Maritime Commission (FMC), and the Surface
Transportation Board (STB), other Federal Agencies as well as local laws, where
applicable. The rules and regulations of these agencies can have an impact on
the results of operations of Tropical Shipping.

On October 22, 2004, the American Jobs Creation Act of 2004 (the Act) was
enacted. Certain provisions of the Act may impact income taxes related to the
earnings of foreign subsidiaries of Tropical Shipping. One provision provides
that a portion of a foreign subsidiary's income would no longer be subject to
federal taxation as shipping income, beginning in 2005, to the extent such
earnings are retained by the foreign subsidiary. Another provision of the Act
allows a portion of cumulative undistributed earnings of a foreign subsidiary to
be repatriated to the United States in 2004 or 2005 at an effective federal
income tax rate of 5.25 percent.

Nicor Inc. Page 26
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Presently Nicor has recorded a $47 million deferred income tax liability, based
on a federal income tax rate of 35 percent, associated with approximately $134
million of earnings of its foreign subsidiaries. Nicor has not provided deferred
income taxes of approximately $12 million on approximately $35 million of
cumulative undistributed earnings of its foreign subsidiaries through December
31, 2004 that are considered to be indefinitely invested in foreign operations.
Nicor is currently assessing the impact, if any, of the provisions of the Act on
the amount ultimately to be repatriated and is therefore unable to determine, at
this time, the impact of the Act on its financial statements. The amount of
cumulative undistributed tax basis earnings of its foreign subsidiaries
(approximately $170 million at December 31, 2004) that may ultimately be
repatriated in 2005, and therefore potentially subject to the 5.25 percent
effective tax rate discussed above, will be impacted by several factors,
including a determination of the maximum eligible repatriation amount under
provisions of the Act and other federal income tax rules and regulations, the
ongoing cash requirements of Tropical Shipping, and the extent of qualifying
investment uses, as defined in the Act, for amounts to be repatriated. The
extent to which Tropical Shipping's ongoing earnings will be subject to federal
taxation will be dependent upon several factors, including the amount of
distributions, if any, to its U.S. parent and the clarification of certain
provisions of the Act and its impact on other federal income tax rules and
regulations. Accordingly, these financial statements do not reflect any impact
of the Act.

Any future adjustments to income tax expense that may result from the Act will
depend on the amount, if any, of foreign earnings that are repatriated or
expected to be repatriated to the United States. Such adjustments could be
material to the results of operations in the period recorded. Nicor expects to
complete its evaluation of the Act by the end of the fourth quarter of 2005.

Outlook. Nicor anticipates 2005 results in the shipping segment to be higher
than 2004 due to growth in volumes shipped and increased average rates.

Other energy ventures. Nicor owns several energy-related businesses, including
two retail energy-related products and services companies, and a wholesale
natural gas marketing company. Nicor is also involved in several joint ventures,
including a natural gas pipeline, and is pursuing various other energy-related
ventures. The company has almost fully liquidated its investment in a former
retail energy marketing joint venture.

Nicor Services and Nicor Solutions provide energy-related products and services
for retail markets, including residential and small commercial users. The annual
results from both of these businesses are driven largely by the number of
customer contracts.

Nicor Enerchange engages in wholesale marketing of natural gas supply services
primarily in the Midwest. Nicor Enerchange also administers the Nicor Gas
Chicago Hub and manages Nicor Solutions' product risks. Economic results from
this business are driven largely by natural gas price volatility, which creates
economic opportunity from which it can benefit.

Nicor Enerchange purchases and holds natural gas in storage to earn a profit
margin from its ultimate sale. Nicor Enerchange uses derivatives to mitigate
commodity price risk in order to substantially lock-in the profit margin that
will ultimately be realized. However, gas stored in inventory is required to be
accounted for at the lower of weighted average cost or market, whereas the
derivatives used to reduce the risk associated with a change in the value of the
inventory are accounted for at fair value, with changes in fair value recorded
in operating results in the period of change. As a result, earnings are subject
to volatility as the market price of derivatives change, even when the
underlying hedged value of the inventory is unchanged. The volatility resulting
from this accounting can be significant from period to period.

Nicor Inc. Page 27
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Outlook. Nicor anticipates 2005 results in the other energy ventures to be
fairly consistent with 2004.

Market risks. 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. It is Nicor's
practice to manage these risks utilizing derivative instruments and other
methods, as deemed appropriate.

Commodity price risk. With regard to commodity price risk, the company has
established policies and procedures governing the management of such risks and
the use of derivative instruments to hedge its exposure to such risks. A risk
management committee oversees compliance with such policies and procedures. The
company utilizes various techniques to limit, measure and monitor market risk,
including limits based on volume, dollar amounts and duration, and in some cases
value at risk (VaR).

VaR is the potential loss for an instrument or portfolio from adverse changes in
market factors, for a specified time period and at a specified confidence level.
The company's risk management committee has established exposure limits at such
a level that material adverse economic results are not expected. The company's
commodity price risk policies and procedures continue to evolve with its
businesses and are subject to ongoing review and modification.

In accordance with SEC disclosure requirements, Nicor performs sensitivity
analyses to assess the potential loss in earnings based upon a hypothetical 10
percent adverse change in market prices. Management does not believe that
sensitivity analyses alone provide an accurate or reliable method for monitoring
and controlling risks and therefore also relies on the experience and judgment
of its management to revise strategies and adjust positions as deemed necessary.
Losses in excess of the amounts determined in sensitivity analyses could occur
if market prices exceed the 10 percent shift used for the analyses. Based on
Nicor's unhedged positions at December 31, 2004, a 10 percent decrease in
natural gas prices would have increased Nicor's earnings at December 31, 2004 by
about $0.2 million, which is not materially different than in the prior year.

Nicor's regulated utility, Nicor Gas, is not directly exposed to market risk
caused by changes in commodity prices because of Illinois rate regulation
allowing for the recovery of prudently incurred natural gas supply costs from
customers. However, substantial increases in natural gas prices may indirectly
impact Nicor Gas' earnings by increasing the cost of gas used by the company,
bad debt expense, and other operating and financing expenses. Higher natural gas
prices may also lead to lower customer gas consumption and margin. The company
is mitigating these risks through the use of fixed-price purchase agreements,
futures contracts, option contracts and swap agreements.

Nicor's other energy businesses are subject to natural gas commodity price risk,
arising primarily from fixed-price purchase and sale agreements and natural gas
inventories. Derivative instruments such as futures, options, forwards and swaps
may be used to hedge these risks. Management believes it has taken appropriate
steps to mitigate the other risks associated with its utility-bill management
arrangements, including the use of futures and swaps to partially hedge the
price risk.

Nicor Inc. Page 28
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At December 31, 2004, Nicor Enerchange, Nicor's wholesale natural gas marketing
business, held derivative contracts with the following asset (liability) fair
values, net (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 $ .4 $ .3 $ .1 $ -
Prices based on pricing models .2 .1 .1 -
---------- -------- ------- -------
Total $ .6 $ .4 $ .2 $ -
========== ======== ======= =======

Credit risk. The company is 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 risk, the company
has established procedures to determine and monitor the creditworthiness of
counterparties, to require guarantees or collateral back-up, and to limit its
exposure to any one counterparty. Nicor also, in some instances, enters into
netting arrangements to mitigate counterparty credit risk.

Interest rate risk. Nicor is exposed to changes in interest rates. The company
manages its interest rate risk by issuing long-term fixed-rate debt with varying
maturities, refinancing certain debt and periodically hedging the interest rate
on anticipated short-term borrowings. If market rates were to hypothetically
increase by 10 percent from Nicor's weighted average floating interest rate,
interest expense would have increased causing Nicor's earnings to decrease by
approximately $0.3 million in 2004. For further information about debt
securities, interest rates and fair values, see the Financial Statements -
Consolidated Statements of Capitalization, and the Notes to the Consolidated
Financial Statements - Note 7 Fair Value of Financial Instruments and Note 6
Short-Term and Long-Term Debt.

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 29
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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. A copy of the report is available at the Nicor website and has
been previously produced to all parties in the ICC Proceedings.

In response, the Nicor Board of Directors directed the company's management to,
among other things, make appropriate adjustments to account for, and fully
address, the adverse consequences to ratepayers of the items noted in the
Report, and conduct a detailed study of the adequacy of internal accounting and
regulatory controls. The adjustments were made in prior years' financial
statements resulting in a $24.8 million liability. Included in such $24.8
million liability is a $4.1 million loss contingency. A $1.8 million adjustment
to the previously recorded liability, which is discussed below, was made in the
third quarter of 2004 increasing the recorded liability to $26.6 million. 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 $1.0 million
reimbursement the company is seeking as of December 31, 2004, pending resolution
of the proceedings discussed below. By the end of 2003 the company completed
steps to correct the weaknesses and deficiencies identified in the detailed
study of the adequacy of internal controls.

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

On February 5, 2003, 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.

Nicor Inc. Page 30
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Report. Nicor Gas seeks a reimbursement of approximately $1.0 million as
referenced above. 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 from Entergy-Koch Trading, LP (EKT), a natural gas, storage and
transportation trader and consultant with whom Nicor did business under the PBR
plan.

During the course of the SEC investigation discussed below, the company became
aware of additional information relating to the activities of individuals
affecting the PBR plan for the period from 1999 through 2002, including
information consisting of third party documents and recordings of telephone
conversations from EKT. The company continues to obtain access to and review
this information. Review of additional information completed in the third
quarter of 2004 resulted in the $1.8 million adjustment to the previously
recorded liability referenced above.

Although the Report of the special committee's counsel did not find that there
was criminal activity or fraud, a review of this additional information (which
was not available to the independent counsel who prepared the Report) and
re-interviews of certain Nicor Gas personnel indicates that certain former Nicor
Gas personnel may have engaged in potentially fraudulent conduct regarding the
PBR plan in violation of company policy, and in possible violation of SEC rules
and applicable law. Further, certain former Nicor Gas personnel also may have
attempted to conceal their conduct in connection with an ICC review of the PBR
plan. The company continues to cooperate with the SEC, the U.S. Attorney's
office and the ICC on this matter and to review and produce additional documents
as requested by these agencies. The company has reviewed all third party
information it has obtained and will continue to review any additional third
party information the company may obtain. The company terminated four employees
in connection with this matter in the third quarter of 2004.

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
December 31, 2004.

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 19 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 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.

Nicor Inc. Page 31
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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. In June 2004, Nicor filed its Wells Submission with the SEC. In
addition, in connection with the SEC's invitation to the company to make a Wells
Submission, the SEC informed the company of additional sources of information
relating to activities affecting the PBR plan, the status of which is addressed
in detail in the Performance-Based Rate (PBR) Plan section set forth above. In
August 2004, Nicor withdrew its Wells Submission in light of its continuing
review of the additional sources of newly available information referenced
above. Nicor continues in its efforts to resolve this matter with the SEC and
has requested that the SEC allow Nicor to file an updated Wells Submission if
necessary. 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. Nicor and certain of its executives were defendants in
a consolidated class action lawsuit. Information about the settlement of this
action is presented within the Notes to the Consolidated Financial Statements -
Note 19 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. The
parties have reached a preliminary agreement to settle the action. No amounts
have been reflected in the financial statements for this preliminary agreement.
Further information about this lawsuit is presented within the Notes to the
Consolidated Financial Statements - Note 19 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 19 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 19 Contingencies - Manufactured Gas
Plant Sites.

Fixed Bill Service. Nicor Energy Services Company is a defendant in a purported
class action. Information about this lawsuit is presented within the Notes to
the Consolidated Financial Statements - Note 19 Contingencies - Fixed Bill
Service.

Horizon Pipeline Lien. Horizon Pipeline, LLC was a party to a lien action
relating to the construction of the Horizon Pipeline. Information about the
settlement of this action is presented within the Notes to the Consolidated
Financial Statements - Note 19 Contigencies - Horizon Pipeline Lien.

FERC Stipulation. Nicor Gas entered into a settlement with the Federal Energy
Regulatory Commission (FERC). Further information about this settlement is
presented within the Notes to the Consolidated Financial Statements - Note 19
Contingencies - FERC Stipulation.

Nicor Inc. Page 32
- -------------------------------------------------------------------------------

Other contingencies. The company is involved in legal or administrative
proceedings before various courts and agencies with respect to general claims,
rates, taxes, environmental, gas costs prudence reviews and other matters. See
the Notes to the Consolidated Financial Statements - Note 8 Income Taxes and
Note 19 Contingencies.

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, the shareholder derivative lawsuit described above
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 excess 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.

Upon final court approval of the derivative settlement set forth above, the
escrow would be terminated and Nicor would receive approximately $25.5 million,
which is the original escrow amount of $29 million reduced by the $3.5 million
payment of derivative plaintiff's attorney fees and expenses. In connection with
the derivative settlement referenced above, Nicor has also entered into a
settlement agreement with its excess insurance carrier, pursuant to which the
excess insurance carrier has agreed to pay Nicor $4 million upon final court
approval of the settlement of the shareholder derivative action. Amounts related
to the agreement to settle the shareholder derivative action, the amounts held
in escrow and the settlement with the excess insurance carrier will be reflected
in the company's financial statements if, and when the derivative settlement
becomes final.

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; inventory valuation; health care costs; insurance costs
or recoveries; legal costs; borrowing needs; interest rates; credit conditions;
economic and market conditions; tourism and construction in the Bahamas and the
Caribbean region; 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 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 33
- -------------------------------------------------------------------------------

Item 7A. Quantitative and Qualitative Disclosures about Market Risk
- -------- ----------------------------------------------------------

For disclosures about market risk, see Management's Discussion and Analysis of
Financial Condition and Results of Operations - Market Risks, which is
incorporated herein by reference.

Nicor Inc. Page 34
- -------------------------------------------------------------------------------

Item 8. Financial Statements and Supplementary Data
- ------- -------------------------------------------
Page
----

Report of Independent Registered Public Accounting Firm......................35

Financial Statements:

Consolidated Statements of Operations.....................................37

Consolidated Statements of Cash Flows.....................................38

Consolidated Balance Sheets...............................................39

Consolidated Statements of Capitalization.................................40

Consolidated Statements of Common Equity..................................41

Consolidated Statements of Comprehensive Income...........................41

Notes to the Consolidated Financial Statements............................42

Nicor Inc. Page 35
- -------------------------------------------------------------------------------

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Nicor Inc.

We have audited the accompanying consolidated balance sheets and statements of
capitalization of Nicor Inc. and subsidiaries (the "Company") as of December 31,
2004 and 2003, and the related consolidated statements of operations, common
equity, comprehensive income and cash flows for each of the three years in the
period ended December 31, 2004. Our audits also included the financial statement
schedule listed in the Index at Item 15(a)(2). We also have audited management's
assessment, included in the accompanying Management's Report on Internal Control
Over Financial Reporting, that the Company maintained effective internal control
over financial reporting as of December 31, 2004, 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 statement schedule,
for maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on these financial statements and
financial statement schedule, an opinion on management's assessment, and an
opinion on the effectiveness of the Company's internal control over financial
reporting 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 and whether effective internal
control over financial reporting was maintained in all material respects. Our
audits of financial statements included 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. Our audit of internal
control over financial reporting included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our
opinions.

A company's internal control over financial reporting is a process designed by,
or under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.

Nicor Inc. Page 36
- -------------------------------------------------------------------------------

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (concluded)

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 2004 and 2003, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2004, in conformity
with accounting principles generally accepted in the United States of America.
Also, in our opinion, such financial schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly,
in all material respects, the information set forth therin. Also in our
opinion, management's assessment that the Company maintained effective internal
control over financial reporting as of December 31, 2004, is fairly stated, in
all material respects, based on the criteria established in Internal Control--
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Furthermore, in our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2004, based on the criteria established in Internal Control--
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.

As discussed in Note 2 to the consolidated financial statements, in 2003, the
Company changed its method of accounting for energy trading activities and gas
inventories.

DELOITTE & TOUCHE LLP
Chicago, Illinois
February 28, 2005

Nicor Inc. Page 37
- -------------------------------------------------------------------------------

Consolidated Statements of Operations
(millions, except per share data)

Year ended December 31
-------------------------------
2004 2003 2002
--------- --------- ---------

Operating revenues
Gas distribution (includes revenue taxes of
$143.5, $134.0,and $95.3,respectively) $2,362.1 $2,351.6 $1,590.7
Shipping 310.7 272.2 266.0
Other energy ventures 155.3 96.5 56.9
Corporate and eliminations (88.4) (57.6) (16.2)
--------- --------- ---------
2,739.7 2,662.7 1,897.4
Operating expenses
Gas distribution
Cost of gas 1,695.0 1,692.7 970.1
Operating and maintenance 234.9 220.1 199.6
Depreciation 148.8 143.5 137.6
Taxes, other than income taxes 158.5 147.3 109.5
Mercury-related costs (recoveries), net - (17.8) (29.0)
Property sale gains (5.9) (.4) (4.1)
Shipping 279.1 249.5 244.8
Other energy ventures 136.0 88.6 50.5
Litigation charge 38.5 - -
Other corporate and eliminations (82.9) (50.2) (8.1)
--------- --------- ---------
2,602.0 2,473.3 1,670.9
--------- --------- ---------
Operating income 137.7 189.4 226.5
Equity investment income (loss), net 6.3 15.3 (5.8)
Other income (expense), net 2.5 2.0 3.4
Interest expense, net of amounts capitalized 41.2 37.3 38.5
--------- --------- ---------
Income before income taxes and cumulative
effect of accounting change 105.3 169.4 185.6
Income tax expense 30.2 59.6 57.6
--------- --------- ---------
Income before cumulative effect of
accounting change 75.1 109.8 128.0
Cumulative effect of accounting change, net
of $3.0 income tax benefit - (4.5) -
--------- --------- ---------
Net income 75.1 105.3 128.0

Dividends on preferred stock - .1 .2
--------- --------- ---------

Earnings applicable to common stock $ 75.1 $ 105.2 $ 127.8
========= ========= =========

Average shares of common stock outstanding
Basic 44.1 44.0 44.1
Diluted 44.3 44.2 44.3

Earnings per average share of common stock
Basic
Before cumulative effect of
accounting change $ 1.71 $ 2.49 $ 2.90
Cumulative effect of accounting change,
net of tax - (.10) -
--------- --------- ---------
$ 1.71 $ 2.39 $ 2.90
========= ========= =========
Diluted
Before cumulative effect of
accounting change $ 1.70 $ 2.48 $ 2.88
Cumulative effect of accounting change,
net of tax - (.10) -
--------- --------- ---------
$ 1.70 $ 2.38 $ 2.88
========= ========= =========

The accompanying notes are an integral part of these statements.

Nicor Inc. Page 38
- -------------------------------------------------------------------------------
Consolidated Statements of Cash Flows
(millions)

Year ended December 31
---------------------------
2004 2003 2002
-------- -------- -------
Operating activities
Net income $ 75.1 $ 105.3 $ 128.0
Adjustments to reconcile net income to net cash
flow provided from operating activities:
Depreciation 166.6 161.7 155.0
Deferred income tax expense 27.3 132.6 68.1
Cumulative effect of accounting change - 4.5 -
Gain on sale of fixed assets (5.8) (1.9) (5.4)
Other noncash items 2.4 (12.3) 7.6
Changes in assets and liabilities:
Receivables, less allowances (121.5) (4.1) (111.4)
Gas in storage 13.3 (195.6) (8.9)
Deferred/accrued gas costs 21.3 (20.3) (40.9)
Prepaid pension costs (4.4) - (12.8)
Other assets (.9) 13.7 (82.0)
Accounts payable 124.1 (166.0) 97.9
Other liabilities 20.2 (30.2) 73.1
-------- -------- -------
Net cash flow provided from (used for)
operating activities 317.7 (12.6) 268.3
-------- -------- -------
Investing activities
Capital expenditures (190.4) (181.3) (192.5)
Purchase of equity investments (2.6) (12.7) (12.7)
Purchases of available-for-sale securities (21.8) - -
Purchases of held-to-maturity securites (2.9) (2.5) (1.5)
Proceeds from sales or maturities of available-
for-sale securities 6.9 - -
Proceeds from sales or maturities of held-to-
maturity securities 2.8 1.9 1.2
Net (increase) decrease in other short-term
investments (4.7) (6.6) 8.8
Loans to joint ventures - - (64.4)
Repayments from joint ventures - 8.3 87.4
Investments in joint ventures - - (16.5)
Business acquisitions - (.4) (10.2)
Net proceeds from sale of fixed assets 8.0 3.5 8.8
Other investing activities - 3.8 2.4
-------- -------- -------
Net cash flow used for investing activities (204.7) (186.0) (189.2)
-------- -------- -------

Financing activities
Net proceeds from issuing long-term debt - 147.8 49.9
Disbursements to retire long-term debt - (152.5) -
Short-term borrowings (repayments), net (85.0) 260.0 38.0
Dividends paid (82.0) (81.8) (80.7)
Borrowing against cash surrender value of
life insurance policies 26.1 - -
Repayment of loan against cash surrender
value of life insurance policies (11.7) - -
Disbursements to reacquire stock - (2.3) (26.5)
Other financing activities 2.2 2.5 1.4
-------- -------- -------
Net cash flow provided from (used for)
financing activities (150.4) 173.7 (17.9)
-------- -------- -------

Net (decrease) increase in cash and cash equivalents (37.4) (24.9) 61.2

Cash and cash equivalents, beginning of year 50.3 75.2 14.0
-------- -------- -------
Cash and cash equivalents, end of year $ 12.9 $ 50.3 $ 75.2
======== ======== =======
Supplemental information
Income taxes paid (refunded), net $ 10.4 $ (73.3) $ 2.4
Interest paid, net of amounts capitalized 37.9 41.1 34.6

Suppplemental schedule of noncash investing and financing activities:

In 2004, one of Nicor's Directors and Officers insurance carriers paid $29
million into an escrow account as described in Note 4. Assets and liabilities,
including investment returns, were recorded as follows:

Restricted short-term investments $ 29.1
Obligation related to restricted investments 29.1

The accompanying notes are an integral part of these statements.

Nicor Inc. Page 39
- -------------------------------------------------------------------------------

Consolidated Balance Sheets
(millions)

December 31
-------------------------
2004 2003
----------- ------------
Assets
------
Current assets
Cash and cash equivalents $ 12.9 $ 50.3
Restricted short-term investments 29.1 -
Short-term investments, at cost which
approximates market 41.2 32.9
Receivables, less allowances of $21.9 and
$21.2, respectively 583.2 461.7
Gas in storage 220.7 236.0
Deferred income taxes 72.3 66.8
Other 61.5 68.2
---------- ----------
1,020.9 915.9
---------- ----------
Property, plant and equipment, at cost
Gas distribution 3,831.6 3,694.8
Shipping 300.8 296.6
Other 11.2 8.1
---------- ----------
4,143.6 3,999.5
Less accumulated depreciation 1,593.8 1,515.3
---------- ----------
2,549.8 2,484.2
---------- ----------
Prepaid pension costs 181.5 177.1
Long-term investments 137.6 136.7
Other assets 85.4 83.3
---------- ----------
$ 3,975.2 $ 3,797.2
========== ==========

Liabilities and Capitalization
------------------------------

Current liabilities
Long-term obligations due within one year $ .2 $ -
Short-term borrowings 490.0 575.0
Accounts payable 502.9 378.8
Accrued gas costs 68.3 47.0
Dividends payable 20.5 20.5
Obligations related to restricted investments 29.1 -
Other 60.4 47.4
---------- ----------
1,171.4 1,068.7
---------- ----------
Deferred credits and other liabilities
Accrued future removal costs 706.4 670.0
Deferred income taxes 593.4 561.4
Regulatory income tax liability 44.8 48.4
Unamortized investment tax credits 33.8 35.6
Other 179.4 161.6
---------- ----------
1,557.8 1,477.0
---------- ----------
Capitalization
Long-term obligations
Long-term bonds and notes 495.3 495.1
Mandatorily redeemable preferred stock 1.6 1.8
---------- ----------
496.9 496.9
Common equity 749.1 754.6
---------- ----------
1,246.0 1,251.5
---------- ----------
$ 3,975.2 $ 3,797.2
========== ==========

The accompanying notes are an integral part of these statements.

Nicor Inc. Page 40
- -------------------------------------------------------------------------------

Consolidated Statements of Capitalization
(millions, except share data)

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

First Mortgage Bonds
5.55% Series due 2006 $ 50.0 $ 50.0
5.875% Series due 2008 75.0 75.0
5.37% Series due 2009 50.0 50.0
6.625% Series due 2011 75.0 75.0
7.20% Series due 2016 50.0 50.0
5.80% Series due 2023 50.0 50.0
6.58% Series due 2028 50.0 50.0
5.90% Series due 2032 50.0 50.0
5.90% Series due 2033 50.0 50.0
-------- --------
500.0 500.0
Less: Unamortized debt discount,
net of premium 4.7 4.9
-------- --------
495.3 39.8% 495.1 39.6%
-------- --------

Mandatorily redeemable preferred and
preferance stock
Cumulative, $50 par value, 1,600,000
preferred shares authorized; and
cumulative, without par value,
20,000,000 preference shares
authorized (35,444 and 35,944 shares
of redeemable preferred stock,
4.48% and 5.00% series,
outstanding, respectively) 1.8 1.8
Less: Amount due within one year .2 -
-------- --------
1.6 .1 1.8 .1
-------- --------

Common equity
Common stock, $2.50 par value,
160,000,000 shares authorized,
(2,568,646 and 2,628,961 shares
reserved for conversion and other
purposes, and 44,102,118 and
44,040,390 share outstanding,
respectively) 110.2 110.1
Paid-in capital 5.6 3.6
Retained earnings 640.3 647.1
Unearned compensation (.2) (.2)
Accumulated other comprehensive
income (loss)
Cash flow hedges (5.7) (4.3)
Minimum pension liability (1.5) (1.5)
Foreign currency translation
adjustment .4 (.2)
-------- --------
(6.8) (6.0)
-------- --------
749.1 60.1 754.6 60.3
-------- ------ -------- ------
$1,246.0 100.0% $1,251.5 100.0%
======== ====== ======== ======

The accompanying notes are an integral part of these statements.

Nicor Inc. Page 41
- -------------------------------------------------------------------------------

Consolidated Statements of Common Equity
(millions, except per share data)

Year ended December 31
-------------------------------
2004 2003 2002
--------- --------- ---------
Common stock
Balance at beginning of year $ 110.1 $ 110.0 $ 111.0
Issued and converted stock .1 .1 .5
Reacquired and cancelled stock - - (1.5)
--------- --------- ---------
Balance at end of year 110.2 110.1 110.0
--------- --------- ---------

Paid-in capital
Balance at beginning of year 3.6 1.2 -
Issued and converted stock 2.4 2.3 6.8
Reacquired and cancelled stock (.4) .1 (5.6)
--------- --------- ---------
Balance at end of year 5.6 3.6 1.2
--------- --------- ---------

Retained earnings
Balance at beginning of year 647.1 623.8 593.5
Net income 75.1 105.3 128.0
Dividends on common stock ($1.86, $1.86
and $1.84 per share, respectively) (81.9) (81.9) (81.1)
Dividends on preferred stock - (.1) (.2)
Reacquired and cancelled stock - - (16.4)
--------- --------- ---------
Balance at end of year 640.3 647.1 623.8
--------- --------- ---------

Unearned compensation
Balance at beginning of year (.2) (.3) -
Issued restricted stock - - (.4)
Restricted stock amortization - .1 .1
--------- --------- ---------
Balance at end of year (.2) (.2) (.3)
--------- --------- ---------

Accumulated other comprehensive income (loss)
Balance at beginning of year (6.0) (6.3) (.3)
Other comprehensive income (loss) (.8) .3 (6.0)
--------- --------- ---------
Balance at end of year (6.8) (6.0) (6.3)
--------- --------- ---------
$ 749.1 $ 754.6 $ 728.4
========= ========= =========

Consolidated Statements of Comprehensive Income
(millions)

Year ended December 31
-------------------------------
2004 2003 2002
--------- --------- ---------

Net income $ 75.1 $ 105.3 $ 128.0
Other comprehensive income (loss),
before tax
Gain (loss) on cash flow hedges 1.6 (17.4) (8.5)
Loss on available-for-sale securities (.1) - -
Reclassifications of hedge (gains) losses
to net income (3.9) 18.3 (.9)
Increase to minimum pension liability - (.1) (.6)
Foreign currency translation adjustment .6 (.2) -
--------- --------- ---------
(1.8) .6 (10.0)
Related income tax benefit (expense) 1.0 (.3) 4.0
--------- --------- ---------
Other comprehensive income (loss),
net of tax (.8) .3 (6.0)
--------- --------- ---------
Comprehensive income $ 74.3 $ 105.6 $ 122.0
========= ========= =========

The accompanying notes are an integral part of these statements.

Nicor Inc. Page 42
- -------------------------------------------------------------------------------

Notes to the Consolidated Financial Statements
- ----------------------------------------------

1. ACCOUNTING POLICIES

Consolidation. The consolidated financial statements include the accounts of
Nicor Inc. (Nicor) and all majority-owned subsidiaries. Nicor's key subsidiaries
are described in Note 12 Business Segment and Geographic Information. All
significant intercompany balances and transactions have been eliminated.

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 accruals for legal,
regulatory, environmental and tax loss contingencies, unbilled revenues,
postretirement benefit assets and liabilities, income tax assets and
liabilities, the allowance for doubtful accounts receivable, the identification
and valuation of derivative instruments, and potential asset impairments.

Reclassifications. Certain reclassifications have been made to conform the prior
years' financial statements to the current year's presentation.

Cash and cash equivalents. The company considers investments of domestic
subsidiaries purchased with an initial maturity of three months or less to be
cash equivalents.

Regulatory assets and liabilities. 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 and liabilities at December 31 as follows (in
millions):

2004 2003
---------- ----------
Regulatory assets
Deferred environmental costs $ 35.4 $ 37.0
Unamortized losses on reacquired debt 19.9 20.9
Deferred rate case costs 2.9 -
---------- ----------
$ 58.2 $ 57.9
========== ==========

Regulatory liabilities
Accrued future removal costs - current $ 11.6 $ -
Accrued future removal costs - noncurrent 706.4 670.0
Accrued gas costs 68.3 47.0
Regulatory income tax liability 44.8 48.4
Other noncurrent regulatory liabilities .7 -

---------- ----------
$ 831.8 $ 765.4
========== ==========

All regulatory assets noted above are classified in noncurrent other assets. The
current portion of the asset retirement obligation is classified in other
current liabilities.

Investments. The company classifies money market funds held by its non-U.S.
subsidiaries as short-term investments. The company's investments in marketable
securities are classified at the date of acquisition into either
held-to-maturity or available-for-sale categories. Securities are classified as
held-to-maturity when the company has the positive intent and ability to hold
the securities to maturity. The company carries held-to-maturity securities at
amortized cost, which approximates fair value. Securities classified

Nicor Inc. Page 43
- -------------------------------------------------------------------------------

Notes to the Consolidated Financial Statements (continued)
- ----------------------------------------------------------

as available-for-sale are carried at fair value, with unrealized gains and
losses, net of tax, reported in common equity as a component of accumulated
other comprehensive income. The specific identification method is used to
determine realized gains or losses on the sale of marketable securities. These
money market funds and marketable securities are included in either short-term
or long-term investments based upon contractual maturity date.

Equity investments. The company invests in several partnerships and limited
liability companies that are accounted for under the equity method. Related
investment balances classified as long-term investments at December 31, 2004 and
2003 were $112.3 million and $108.9 million, respectively, and include $87.1
million and $83.2 million at December 31, 2004 and 2003, respectively, related
to Triton Container Investments LLC (Triton), a cargo container leasing company.

Goodwill. Goodwill is the excess cost of an acquired business over the amounts
assigned to assets acquired and liabilities assumed in a business combination.
Tropical Shipping had goodwill of $15.6 million at December 31, 2004 and 2003,
and Nicor Services had goodwill of $3.4 million and $2.9 million at December 31,
2004 and 2003, respectively. Goodwill is classified in noncurrent other assets
and is tested for impairment annually.

Asset retirement obligations. The obligation of retiring gas distribution,
transmission, storage and certain general plant assets at Nicor Gas meets the
definition of a legal obligation. However, the company has determined that due
to the indefinite life of such assets a fair value liability is generally not
measurable. On December 31, 2004 and 2003, Nicor Gas had recorded an asset
retirement obligation of $0.9 million and $1.9 million, respectively, for the
expected replacement of inside mercury regulators. Certain costs associated with
the retirement of other items, including polychlorinated biphenyls, aboveground
and underground storage tanks, oil seals and asbestos abatement, are determined
to be immaterial or cannot be measured at this time.

Nicor Gas continues its practice of accruing for future removal costs through
depreciation, subject to cost-of-service utility rate regulation, even when a
legal asset retirement obligation does not exist or its fair value cannot be
measured.

Derivative instruments. At Nicor Gas, derivative instruments, such as futures
contracts, options and swap agreements, are utilized primarily in the
procurement of natural gas for customers. These derivative instruments are
reflected on the balance sheet at fair value. Realized gains or losses on such
instruments are included in the cost of gas delivered and are passed directly
through to customers, subject to ICC review, having no direct impact on
earnings. Unrealized changes in the fair value of these derivative instruments
are deferred as regulatory assets or liabilities and classified on the balance
sheet as deferred or accrued gas costs, respectively.

At times, Nicor Gas enters into futures contracts or fixed-price purchase
agreements to reduce the earnings impact of certain forecasted operating costs
arising from fluctuations in natural gas prices. These derivative instruments
are carried at fair value, unless they qualify for the normal purchases and
normal sales exception, in which case they are carried at cost. For those
instruments carried at fair value, cash flow hedge accounting is generally
elected.

Through early 2003, Nicor Gas held weather-related swap agreements to limit the
earnings impact of weather fluctuations. The benefits or losses on these
agreements were recorded in operating revenues.

Derivative instruments, such as futures contracts, options, forward contracts,
swap agreements and other energy-related contracts, are used by Nicor's
wholesale natural gas marketing business, Nicor

Nicor Inc. Page 44
- -------------------------------------------------------------------------------

Notes to the Consolidated Financial Statements (continued)
- ----------------------------------------------------------

Enerchange, to economically hedge price risk associated with energy trading
activities involving inventories of natural gas and fixed-price purchase and
sale agreements. Through 2002, this business had recorded substantially all of
its portfolio of derivative instruments, other energy-related contracts and
physical inventories at fair value. As noted in Note 2 Cumulative Effect of
Change in Accounting, effective January 1, 2003, Nicor Enerchange records only
its derivative instruments at fair value and generally can not elect hedge
accounting. As a result, changes in derivative fair values may have a material
impact on Nicor's financial statements.

Nicor Enerchange also enters into futures contracts, options and swap agreements
to hedge price and weather risks related to Nicor Solutions' utility-bill
management products. These instruments are carried at fair value and cash flow
hedging is generally elected.

Nicor periodically utilizes derivative instruments to reduce interest rate risk
associated with the anticipated issuance of debt. Changes in the fair value of
these derivative instruments are reported as a component of accumulated other
comprehensive income. Upon the issuance of the debt, the amount deferred in
accumulated other comprehensive income is amortized to interest expense over the
life of the debt instrument. At December 31, 2004, the cash flow hedges
component of accumulated other comprehensive loss of $5.7 million, reported net
of $3.7 million of related income tax benefits, represented mostly losses on
financial derivatives designated as hedges of interest payments on 30-year bonds
issued by Nicor Gas in December 2003. These losses are being amortized to
interest expense on a straight-line basis over the life of the bonds.

Fair values are determined from quoted market prices and other external sources,
where available, or are estimated using internal models. Estimates from internal
models were not material to Nicor's financial statements. Cash flow hedge
accounting may be elected only for highly effective hedges, based upon an
assessment, performed at least quarterly, of the historical and probable future
correlation of changes in the fair value of the derivative instrument to changes
in the expected future cash flows of the hedged item.

To the extent cash flow hedge accounting is applied, the effective portion of
any unrealized changes in the fair value of the derivative instruments is
reported as a component of accumulated other comprehensive income or loss
(AOCI). Ineffectiveness, if any, is immediately recognized in operating income.
Such ineffectiveness was immaterial for the three years ended December 31, 2004.
The amount in AOCI is reclassified to earnings when the forecasted costs are
incurred, even if the derivative instrument is sold, extinguished or terminated
prior to incurring the cost. If the forecasted costs are no longer expected to
be incurred, the amount in AOCI is immediately reclassified to earnings.

Derivative instruments are classified as current or noncurrent other assets or
liabilities as appropriate. Cash flows, gains and losses from derivative
instruments are recogized in the consolidated statements of cash flows and the
consolidated statements of operations in the same categories as the
underlying transactions.

Credit risk. Nicor's major subsidiaries have diversified customer bases and
prudent credit policies which mitigate customer receivable and derivative
counterparty credit risk. In some instances, Nicor enters into netting
agreements to mitigate counterparty credit risk. Credit losses are accrued as
liabilities when probable and reasonably estimable.

Operating revenues and gas costs. Gas distribution revenues are recognized when
natural gas is delivered to customers. In accordance with ICC regulations, the
cost of gas delivered is charged to customers without markup, although the
timing of cost recovery can vary, and is subject to ICC review.

Nicor Inc. Page 45
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Notes to the Consolidated Financial Statements (continued)
- ----------------------------------------------------------

Temporary undercollections and overcollections of gas costs are deferred or
accrued as a regulatory asset or liability with a corresponding decrease or
increase to cost of gas, respectively. Nicor Gas accrues revenues and related
gas costs for estimated deliveries to customers from the date of their last bill
until the balance sheet date.

In the shipping segment, revenues and related delivery costs are recognized at
the time vessels depart from port. While alternative methods of recognizing
shipping revenue and related costs exist, the difference between those methods
and the company's policy does not have a material impact on financial results.

For Nicor Solutions, revenue is recognized on its 12-month utility-bill
management contracts as the lesser of cumulative earned or cumulative billed
amounts. Nicor Services recognizes revenue for warranty and repair contracts on
a straight-line basis over the contract term. Revenue for maintenance services
is recognized at the time such services are performed. Nicor Enerchange presents
revenue for natural gas sales, cost of sales, and related hedging activities on
a net basis as required for an energy trading business.

At December 31, 2004 and 2003, receivables include accrued unbilled revenues of
$205 million and $140 million, respectively, related almost entirely to gas
distribution operations.

Repair and maintenance expense. Nicor records expense for repair and maintenance
costs as incurred, with one exception - Tropical Shipping uses the
accrue-in-advance method for planned major maintenance related to dry-docking
and major repairs of its owned vessels. These costs are typically accrued over a
period of about three years.

Legal defense costs. The company accrues estimated legal defense costs
associated with loss contingencies in the period in which it determines that
such costs are probable of being incurred and are reasonably estimable.

Depreciation. Property, plant and equipment are depreciated over estimated
useful lives on a straight-line basis. The gas distribution composite
depreciation rate is 4.1 percent, which includes estimated future removal costs.
The estimated useful lives of shipping-segment vessels range from 20 to 25
years.

Revenue taxes. Nicor Gas classifies revenue taxes billed to customers as
operating revenues and related taxes incurred as operating expenses. Revenue
taxes included in operating expense for 2004, 2003 and 2002 were $139.4 million,
$130.9 million and $92.5 million, respectively.

Income taxes. Deferred income taxes are provided at the current statutory income
tax rate for temporary differences between the tax basis of an asset or
liability and its reported amount in the financial statements. In the gas
distribution segment, investment tax credits and regulatory income tax
liabilities for excess deferred taxes are amortized to income over the lives of
related properties.

In the shipping segment, the company has recorded a $47 million deferred income
tax liability associated with foreign earnings it may repatriate. An income tax
liability of $12 million has not been provided on approximately $35 million of
cumulative undistributed foreign earnings through December 31, 2004, which are
considered by management to be indefinitely invested in foreign operations. See
Note 8 Income Taxes for information on The American Jobs Creation Act of 2004.

Nicor Inc. Page 46
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Notes to the Consolidated Financial Statements (continued)
- ----------------------------------------------------------

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 $3.0 million in income tax benefits. Pro
forma results for the year ended December 31, 2002 had the new method been
applied could not be reasonably determined and are therefore not presented.

3. NEW ACCOUNTING PRONOUNCEMENTS

Consolidation of Variable Interest Entities. In December 2003, the Financial
Accounting Standards Board (FASB) issued Interpretation No. 46(R), Consolidation
of Variable Interest Entities (FIN 46R). FIN 46R addresses the application of
Accounting Research Bulletin No. 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.

Share-based Payments. In December 2004, the FASB issued Statement of Financial
Accounting Standards (SFAS) No. 123 (revised 2004), Share-based Payment (SFAS
123R). SFAS 123R requires entities to adopt the fair value method of accounting
for stock-based compensation plans. The fair value method would require the
amortization of the fair value of stock-based compensation as determined at the
date of grant over the related vesting period. SFAS 123R also requires certain
share-based liabilities to be recorded at fair value, and most employee stock
purchase plans that offer a discount of greater than five percent will be
considered compensatory. The provisions of SFAS 123R are effective for Nicor
beginning July 1, 2005. The company is currently evaluating SFAS 123R and has
not yet determined the impact of adopting its provisions. However, the
implementation of this standard is not expected to have a material impact on the
company's financial position or results of operations.

At December 31, 2004, Nicor continues to apply the intrinsic value method of
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, for awards granted under its stock-based compensation plans. The
intrinsic value method does not require compensation expense to be recognized
based on Nicor's current option terms. If compensation expense for stock options
had been recognized based upon the fair value method, the impact on the
company's net income and earnings per share would have been as follows (in
millions, except per share data):

2004 2003 2002
-------- -------- --------
Net income
As reported $ 75.1 $105.3 $128.0
Less: Total stock-based employee compensation
expense determined under the fair value
method for all awards, net of tax 1.2 .7 .6
-------- -------- --------
Pro forma $ 73.9 $104.6 $127.4
======== ======== ========

Nicor Inc. Page 47
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Notes to the Consolidated Financial Statements (continued)
- ----------------------------------------------------------

2004 2003 2002
-------- -------- --------
Earnings per share
Basic - As reported $ 1.71 $ 2.39 $ 2.90
Basic - Pro forma 1.68 2.38 2.88
Diluted - As reported 1.70 2.38 2.88
Diluted - Pro forma 1.67 2.37 2.87

The American Jobs Creation Act of 2004. In December 2004, the FASB issued FASB
Staff Position SFAS No. 109-2, Accounting and Disclosure Guidance for the
Foreign Earnings Repatriation Provision within the American Jobs Creation Act of
2004 (FSP 109-2). FSP 109-2 provides additional time and guidance for companies
to determine the Act's effects on their plans for reinvestment or repatriation.
Accordingly, these financial statements do not reflect any impact of the Act.
See Note 8 Income Taxes for more information.

4. INVESTMENTS

The following is a summary of the carrying values, which approximate fair value,
of marketable securities at December 31, 2004 (in millions):

2004 2003
---------- ----------
Available for sale
U.S. government agency securities $ 7.7 $ -
U.S. Treasury securities 1.7 -
Corporate bonds 4.8 -
Other .9 .2
---------- ----------
15.1 .2
---------- ----------
Held-to-maturity
Corporate bonds 7.3 7.2
Certificates of deposit .3 .3
---------- ----------
7.6 7.5
---------- ----------
$ 22.7 $ 7.7
========== ==========

Short-term investments are comprised of $35.6 million and $30.9 million of money
market funds held by the company's non-U.S. subsidiaries at December 31, 2004
and 2003, respectively, and the short-term portion of available-for-sale and
held-to-maturity securities. The remaining marketable securities are included in
long-term investments.

During 2004, $1.3 million of securities were sold that had originally been
classified as held-to-maturity after the issuer's creditworthiness declined thus
becoming non-compliant with the company's investment policy. There was no gain
or loss realized on the sale of these securities. Proceeds from the sale of
available-for-sale securities were $6.9 million in 2004 and zero in 2003 and
2002. There were no realized gains or losses from the sale of available-for-sale
securities in 2004, 2003 or 2002.

Nicor Inc. Page 48
- -------------------------------------------------------------------------------

Notes to the Consolidated Financial Statements (continued)
- ----------------------------------------------------------

The contractual maturities of available-for-sale and held-to-maturity marketable
securities at December 31, 2004 were as follows (in millions):

Years to maturity
--------------------------------------------
Less More
than 1 1-5 5-10 than 10
year years years years Total
------- ------- ------- -------- -------

Available-for-sale $ 4.0 $ 9.5 $ 1.4 $ .2 $ 15.1
Held-to-maturity 1.6 6.0 - - 7.6
------- ------- ------- -------- -------
$ 5.6 $ 15.5 $ 1.4 $ .2 $ 22.7
======= ======= ======= ======== =======

At December 31, 2004, Nicor had $29.1 million of restricted short-term
investments and a corresponding $29.1 million current liability related to an
escrow fund that was established through an initial $29.0 million deposit by one
of Nicor's Directors and Officers insurance carriers. The fund is to be used to
satisfy Nicor directors' and officers' liabilities and expenses associated with
claims asserted against them, with any remaining balance paid to Nicor. (See
also Note 19 Contingencies).

5. GAS IN STORAGE

Gas in storage at December 31 included natural gas inventory of the following
subsidiaries (in millions):

2004 2003
---------- ---------

Nicor Gas $ 189.0 $ 209.1
Nicor Enerchange 31.7 26.9
---------- ---------
$ 220.7 $ 236.0
========== =========

Gas distribution segment inventory is carried at cost on a last-in, first-out
(LIFO) basis. Nicor Enerchange inventory is carried at the lower of
weighted-average cost or market.

Based on the average cost of gas purchased in December 2004 and 2003, the
estimated replacement cost of Nicor Gas' inventory at December 31, 2004 and 2003
exceeded the LIFO cost by $434.2 million and $314.0 million, respectively.

During 2004 and 2002, Nicor Gas liquidated LIFO layers at an average cost per
Mcf of $5.81 and $1.32, respectively. For gas purchased in 2004 and 2002, the
company's average cost per Mcf was $0.24 and $2.01 higher, respectively, than
the average LIFO liquidation rate. Applying LIFO cost in valuing the
liquidations, as opposed to using the average gas purchase cost, had the effect
of decreasing the cost of gas in 2004 and 2002 by $0.7 million and $20.2
million, respectively. However, since the cost of gas, including inventory
costs, is charged to customers without markup, these amounts had no impact on
net income. There was no liquidation of any LIFO layers during 2003.

6. SHORT-TERM AND LONG-TERM DEBT

In 2004, Nicor Inc. and Nicor Gas established two new revolving credit
facilities with major domestic and foreign banks. These facilities, which serve
as backup for the issuance of commercial paper, consist of a $500 million,
3-year revolver, expiring September 2007, available to Nicor Inc. and Nicor Gas,
and a $400 million, 210-day seasonal revolver, expiring in April 2005, available
to Nicor Gas. Commitment

Nicor Inc. Page 49
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Notes to the Consolidated Financial Statements (continued)
- ----------------------------------------------------------

fees paid in advance totaling $2.2 million are being amortized over the
respective terms of the agreements as interest expense. The company is in
compliance with all covenants at December 31, 2004.

The company had $490 million and $575 million of commercial paper outstanding
with a weighted average interest rate of 2.3% and 1.1% at December 31, 2004 and
2003, respectively.

Bank cash balances averaged about $6 million during 2004, which partially
compensated for the cost of maintaining accounts and other banking services.
Such demand balances may be withdrawn at any time.

In December 2003, Nicor Gas issued the following First Mortgage Bonds: $50
million due in 2023 at 5.80%, $50 million due in 2032 at 5.90%, and $50 million
due in 2033 at 5.90%. Additionally, in December 2003, Nicor Gas redeemed $50
million of 7.375% First Mortgage Bonds due in 2027. In June 2003, Nicor Gas
retired $50 million of 5.75% First Mortgage Bonds due in 2003. First Mortgage
Bonds are secured by liens on substantially all gas distribution property.

In April 2003, Nicor Gas refinanced $50 million of 3% unsecured notes due in
April 2003 with $50 million of 1.6% unsecured notes due and paid in October
2003.

The company incurred total interest expense of $41.6 million, $37.6 million and
$39.0 million in 2004, 2003 and 2002, respectively. Interest expense is reported
net of amounts capitalized. Interest expense capitalized for the years ended
December 31, 2004, 2003 and 2002 was $0.4 million, $0.3 million and $0.5
million, respectively.

7. FAIR VALUE OF FINANCIAL INSTRUMENTS

The recorded amount of short-term investments, restricted 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, net of unamortized discount and
issuance costs. The principal balance of Nicor Gas' First Mortgage Bonds
outstanding at December 31, 2004 and 2003 was $500 million. Based on quoted
market interest rates, the fair value of the company's First Mortgage Bonds
outstanding, including current maturities, was approximately $530 million at
December 31, 2004 and 2003.

Derivative financial instruments are recorded at fair value as determined
primarily from actively quoted prices. These instruments had gross asset
(liability) fair values of $5.8 million and $(2.3) million, respectively, at
December 31, 2004, and $6.5 million and $(2.0) million, respectively, at
December 31, 2003. Most of these financial instruments relate to Nicor Gas
hedging of natural gas purchases, and their settlement is passed directly
through to customers without markup, subject to ICC review.

Nicor Inc. Page 50
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Notes to the Consolidated Financial Statements (continued)
- ----------------------------------------------------------

8. INCOME TAXES

The components of income tax expense (benefit) are presented below (in
millions):

2004 2003 2002
--------- --------- ---------
Current
Federal $ 9.3 $ (55.0) $ (6.2)
State (5.0) (16.4) (3.1)
--------- --------- ---------
4.3 (71.4) (9.3)
--------- --------- ---------
Deferred
Federal 17.0 99.8 61.8
State 10.3 32.8 6.3
--------- --------- ---------
27.3 132.6 68.1
--------- --------- ---------

Amortization of investment tax credits, net (1.8) (2.0) (1.4)
Foreign taxes .4 .4 .2
--------- --------- ---------
Income tax expense, net $ 30.2 $ 59.6 $ 57.6
========= ========= =========

The temporary differences which gave rise to the net deferred tax liability at
December 31, 2004 and 2003, were as follows (in millions):

2004 2003
-------- --------
Deferred tax liabilities
Property, plant and equipment $ 432.2 $ 403.6
Investment in partnerships 138.0 121.2
Investment in foreign subsidiaries 47.1 46.9
Employee benefits 15.3 22.1
Other 22.1 13.6
-------- --------
654.7 607.4
-------- --------
Deferred tax assets
Alternative minimum tax 41.8 35.7
Unamortized investment tax credits 22.3 22.8
Other 69.5 54.3
-------- --------
133.6 112.8
-------- --------
Net deferred tax liability $ 521.1 $ 494.6
======== ========

Differences between the federal statutory rate and the effective combined
federal and state income tax rate are shown below:

2004 2003 2002
-------- -------- --------

Federal statutory rate 35.0% 35.0% 35.0%
State income taxes, net 3.7 3.9 .6
Tax credits (5.3) (2.7) (2.4)
Amortization of regulatory tax liability (1.8) (1.2) (1.0)
Undistributed foreign earnings (3.0) (1.5) (1.3)
Other, net .1 1.7 .1
-------- -------- --------
Effective combined federal and state
income tax rate 28.7% 35.2% 31.0%
======== ======== ========

Nicor Inc. Page 51
- -------------------------------------------------------------------------------

Notes to the Consolidated Financial Statements (continued)
- ----------------------------------------------------------

The decline in the effective income tax rate to 28.7 percent in 2004 from 35.2
percent in 2003 was primarily a result of lower pretax income (which typically
causes a lower effective income tax rate since permanent differences and tax
credits are a larger share of pretax income).

The company had available at December 31, 2004, federal alternative minimum tax
(AMT) credit carryforwards of approximately $48 million, which may be used
indefinitely to reduce federal income taxes. The company had available at
December 31, 2004, Illinois net operating loss (NOL) carryforwards of
approximately $130 million, which expire in 2022, and credit carryforwards for
tax purposes of approximately $11 million, which expire during the years 2005
through 2024. The company believes it is more likely than not that all of its
AMT, NOL and credit carryforwards will be realized.

The company accrues tax and interest related to tax uncertainties. Tax
uncertainties arise due to actual or potential disagreements about the tax
treatment of specific items between the company and the governmental agency
reviewing the company's tax returns. At December 31, 2004 and December 31,
2003, the company had accrued approximately $6.3 million and $2.7 million,
respectively, for such uncertainties.

Nicor Inc. Page 52
- -------------------------------------------------------------------------------

Notes to the Consolidated Financial Statements (continued)
- ----------------------------------------------------------

9. POSTRETIREMENT BENEFITS

Nicor Gas maintains a noncontributory defined benefit pension plan covering
substantially all employees hired prior to 1998. Pension benefits are based on
years of service and highest average salary for management employees and job
level for 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 employees hired after 1982. The
company's postretirement benefit costs have historically been considered in rate
proceedings in the period they are accrued.

The following table sets forth the changes in the plans' benefit obligations and
assets, and reconciles the October 1 funded status of the plans to the prepaid
(accrued) benefit cost recorded on the balance sheet at December 31
(in millions):

Health care and
Pension benefits other benefits
------------------ ------------------
2004 2003 2004 2003
-------- -------- -------- --------

Change in benefit obligation
Benefit obligation at beginning
of period $ 273.1 $ 252.0 $ 173.6 $ 169.3
Service cost 9.0 7.4 2.4 2.0
Interest cost 15.7 16.3 10.1 11.1
Actuarial loss 10.6 21.3 8.2 27.7
Participant contributions - - .9 .7
Plan amendments - - (1.9) (26.7)
Benefits paid (25.8) (23.9) (8.6) (10.5)
-------- -------- -------- --------
Benefit obligation at end of period 282.6 273.1 184.7 173.6
-------- -------- -------- --------

Change in plan assets
Fair value of plan assets at beginning
of period 383.6 337.9 11.7 13.1
Actual return on plan assets 44.2 69.6 1.2 2.2
Employer contributions - - 5.4 6.2
Participant contributions - - .9 .7
Benefits paid (25.8) (23.9) (8.6) (10.5)
-------- -------- -------- --------
Fair value of plan assets at end
of period 402.0 383.6 10.6 11.7
-------- -------- -------- --------

Funded status 119.4 110.5 (174.1) (161.9)
Unrecognized net actuarial loss 58.4 62.3 88.6 84.4
Unrecognized prior service costs 3.7 4.3 (.8) -
Unrecognized transition obligation - - - 1.2
Other - - (2.7) (1.5)
-------- -------- -------- --------
Recognized prepaid (accrued) benefit
cost $ 181.5 $ 177.1 $ (89.0) $ (77.8)
======== ======== ======== ========

Nicor Inc. Page 53
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Notes to the Consolidated Financial Statements (continued)
- ----------------------------------------------------------

The accumulated benefit obligation for pension benefits, a measure which
excludes the effect of salary and wage increases, was $238.8 million and $233.1
million at October 1, 2004 and 2003, respectively. The accrued benefit cost for
health care and life insurance benefits is classified as an noncurrent other
liability.

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.
In 2004, further cost-sharing amendments, effective January 1, 2006, were made
to the plan for all employees.

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):

Health care and
Pension benefits other benefits
---------------------- ----------------------
2004 2003 2002 2004 2003 2002
------ ------ ------ ------ ------ ------

Service cost $ 9.0 $ 7.4 $ 7.2 $ 2.4 $ 2.0 $ 1.5
Interest cost 15.7 16.3 16.5 10.1 11.1 9.9
Expected return on plan assets (31.7) (28.7) (36.0) (1.0) (1.2) (1.8)
Recognized net actuarial (gain)
loss 2.0 4.3 - 4.6 2.9 1.0
Amortization of unrecognized
transition (asset) obligation - - (1.0) .1 3.1 3.1
Amortization of prior service
cost .6 .7 .5 - - -
------ ------ ------ ------ ------ ------
Net periodic benefit cost
(credit) $ (4.4) $ - $(12.8) $ 16.2 $ 17.9 $ 13.7
====== ====== ====== ====== ====== ======

Assumptions used to determine benefit obligations at October 1 included the
following:

Health care and
Pension benefits other benefits
------------------ ------------------
2004 2003 2004 2003
-------- -------- -------- --------

Discount rate 5.75% 6.00% 5.75% 6.00%
Rate of compensation increase 4.00 4.00 4.00 4.00

Assumptions used to determine net periodic benefit cost for the years ended
December 31 included the following:

Health care and
Pension benefits other benefits
---------------------- ----------------------
2004 2003 2002 2004 2003 2002
------ ------ ------ ------ ------ ------

Discount rate 6.00% 6.75% 7.25% 6.00% 6.75% 7.25%
Expected return on assets 8.50 8.75 9.25 8.50 8.75 9.25
Rate of compensation increase 4.00 4.00 4.00 4.00 4.00 4.00

Nicor Gas establishes its expected long-term return-on-asset assumption by
considering historical and projected returns for each investment asset category.
Projected returns are calculated with the assistance of an independent firm via
a probability-based model. The company has elected to apply this assumption

Nicor Inc. Page 54
- -------------------------------------------------------------------------------

Notes to the Consolidated Financial Statements (continued)
- ----------------------------------------------------------

to the fair value of plan assets, rather than to a rolling-average fair value,
in calculating the expected return on plan assets component of net periodic
benefit cost.

Other assumptions used to determine health care benefit obligations at October 1
were as follows:

2004 2003
-------- --------

Health care cost trend rate 9.5% 9.5%
Rate to which the cost trend rate is assumed to decline
(the ultimate rate) 5.0% 5.0%
Years to reach ultimate rate 4 4

Other assumptions used to determine health care benefit cost for the years ended
December 31 were as follows:

2004 2003 2002
------ ------ ------

Health care cost trend rate - Pre-65 9.5% 11.0% 10.0%
Health care cost trend rate - Post-65 9.5% 11.0% 7.5%
Rate to which the cost trend rate is assumed to
to decline (the ultimate rate) 5.0% 5.0% 5.0%
Years to reach ultimate rate 4 4 4

Assumed health care cost trend rates can have a significant effect on the
amounts reported for the health care plans. A one-percentage-point change in the
assumed health care cost trend rates would have the following effects (in
millions):

One-percent
--------- ---------
Increase Decrease
--------- ---------

Effect on total of service and interest cost components $ 1.3 $ (1.1)
Effect on benefit obligation 18.7 (15.7)

In 2004, the FASB issued FASB Staff Position No. FAS 106-2, Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003 (FSP SFAS 106-2). The Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (the Act) provides a prescription drug
benefit as well as a potential federal subsidy to sponsors of certain retiree
health care benefit plans. FSP SFAS 106-2 provides guidance on accounting for
the effects of the Act, including the potential subsidy, and required public
companies to reflect the impact by the third quarter of 2004, if determinable
and significant. The company's 2004 net periodic postretirement health care
costs do not reflect the effects of the Act because the company's actuaries
estimated that the impact in 2004 would be minimal. Rather, the company has, as
required, reflected its best estimate of the potential subsidy in the October 1,
2004 measurement of the benefit obligation. The potential subsidy reduced the
October 1, 2004 benefit obligation by $19.4 million, creating an actuarial gain
that will be amortized over the remaining service lives of plan participants.

The company's investment objective relating to pension plan assets is to have a
high probability of meeting its obligations without additional cash
contributions. The company's investment strategy is to maintain an asset mix
near its target asset allocation and to rebalance the portfolio monthly if the
actual

Nicor Inc. Page 55
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Notes to the Consolidated Financial Statements (continued)
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allocation deviates from the target by two or more percentage points. The
following table sets forth the target allocation and actual percentage of plan
assets by asset category:

Target Percentage of plan assets
allocation at October 1
---------- -------------------------
Asset Category 2004 2003
------------------- ----------- -----------

Equity securities 69% 69% 70%
Debt securities 31 30 29
Real estate and other - 1 1
---------- ----------- -----------
100% 100% 100%
========== =========== ===========

The company does not expect to contribute to its pension plan in 2005 and
expects to contribute about $11 million to its other postretirement benefit plan
in 2005. The following table sets forth the benefit payments from the plans
expected over the next 10 years (in millions):

Health care Expected
Twelve months Pension and other Medicare
ended October 1 benefits benefits subsidy
--------------- ----------- ----------- -----------

2005 $ 21.7 $ 11.0 $ -
2006 35.6 11.5 (1.0)
2007 16.6 12.0 (1.1)
2008 16.7 12.2 (1.1)
2009 18.0 12.6 (1.2)
2010-2014 117.2 67.6 (6.5)

Higher projected pension benefit payments in 2006 reflect an expected increase
in retirements due to the health care cost-sharing amendments.

Nicor also has a separate unfunded supplemental retirement plan and provides
unfunded postretirement health care and life insurance benefits to about 75
employees of discontinued businesses. These plans are noncontributory with
defined benefits. Plan expenses were $1.9 million, $1.4 million and $0.9 million
in 2004, 2003 and 2002, respectively. The projected benefit obligation
associated with these plans was $12.7 million and $11.9 million at December 31,
2004 and 2003, respectively.

The company also sponsors defined contribution plans covering substantially all
domestic employees. These plans provide for employer matching contributions. The
total cost of these plans was $6.2 million, $6.0 million and $5.8 million in
2004, 2003 and 2002, respectively.

10. STOCK-BASED COMPENSATION

Nicor has a long-term incentive compensation plan that permits the granting of
stock options, restricted stock and alternate stock rights to key executives and
managerial employees, as well as a stock deferral plan and an employee stock
purchase plan.

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Notes to the Consolidated Financial Statements (continued)
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Long-term incentive compensation plan. The company may grant options for up to
3.5 million common shares and has granted options on 3.0 million shares through
December 31, 2004. The stock option exercise price equals the stock's market
price on the date of grant. Options vest after one year, generally become
exercisable after three years, and expire after ten years.

Following is a summary of stock option activity:

Weighted
Number of average
shares exercise price
------------ --------------
Options outstanding at:
December 31, 2001 864,300 $ 34.15
Granted 181,500 45.05
Exercised (144,800) 30.25
Cancelled (18,400) 40.43
------------
December 31, 2002 882,600 36.90
Granted 349,600 27.17
Exercised - -
Cancelled (74,900) 36.95
------------
December 31, 2003 1,157,300 33.96
Granted 333,600 36.35
Exercised (19,400) 31.37
Cancelled (182,900) 34.31
------------
December 31, 2004 1,288,600 34.57
============

Options exercisable at:
December 31, 2002 334,400 $ 35.66
December 31, 2003 513,000 34.47
December 31, 2004 549,800 35.23

Exercise price ranges for stock options outstanding at December 31, 2004 are as
follows:

Weighted average
Weighted average remaining
Range of exercise price Number of shares exercise price contractual life
- ----------------------- ---------------- ---------------- ----------------

$24.63 - $34.10 546,900 $ 29.03 7.2
36.34 - 45.05 741,700 38.65 7.8

The weighted-average fair value of options granted in 2004, 2003 and 2002 was
$6.98, $4.32 and $6.65, respectively. The fair value of each option was
estimated as of the date of grant using the Black-Scholes option-pricing model
with the following assumptions:

2004 2003 2002
-------- -------- --------

Expected volatility 35.5% 34.7% 21.1%
Dividend yield 5.1% 6.9% 4.1%
Risk-free interest rate 2.4% 2.7% 4.7%
Expected period outstanding (years) 4 4 4

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Notes to the Consolidated Financial Statements (continued)
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The computation of Nicor's diluted earnings per share includes the potentially
dilutive effect of issuing additional shares due to employees exercising stock
options. However, when option exercise prices are above the stock prices, those
options are not considered in the earnings per share computation, as to do so
would be anti-dilutive. As a result, Nicor's earnings per share computation
excludes the potentially dilutive effect related to about 306,500 options,
508,800 options and 371,500 options in 2004, 2003 and 2002, respectively.

There were 9,000 shares of restricted stock and no alternate stock rights
outstanding at December 31, 2004.

Stock deferral plan. Officers may elect to defer up to 50 percent of their
annual bonus or long-term incentive award in exchange for Nicor common stock to
be received at a future date. No additional compensation expense is recorded
since the number of shares to be provided is determined based upon market value
on the deferral date. As of December 31, 2004 and 2003, Nicor had commitments to
distribute about 94,900 common shares and 88,500 common shares, respectively, to
participants of the plan.

Employee stock purchase plan. Under the employee stock purchase plan, the
company may sell up to 1.5 million shares of common stock to its employees and
has sold about 1.1 million shares through December 31, 2004. Under the terms of
this plan, eligible employees may purchase shares at 90 percent of the stock's
market price. The company sold about 28,700 shares, 30,900 shares and 28,100
shares to employees in 2004, 2003 and 2002, respectively. The weighted-average
market value of shares sold in 2004, 2003 and 2002 was $34.65, $32.30 and
$34.82, respectively.

11. COMMON AND PREFERRED STOCK

Voting. Each share of common and preferred stock, regardless of class, entitles
the holder to one vote as to matters considered at the company's annual meeting
of shareholders.

Shareholder rights plan. On November 23, 2004, Nicor announced the immediate
termination of a shareholder rights plan.

Changes in common shares. Changes in common shares outstanding are below (in
millions):

2004 2003 2002
-------- -------- --------

Beginning of year 44.0 44.0 44.4
Issued .1 - .2
Reacquired and cancelled - - (.6)
-------- -------- --------
End of year 44.1 44.0 44.0
======== ======== ========

Through a common stock repurchase program, Nicor purchased and retired 0.4
million shares in 2002. There were no purchases under the program in 2004 and
2003.

Dividend and other restrictions. Nicor has no contractual or regulatory
restrictions on the payment of dividends. Nicor Gas is restricted by regulation
in the amount it can dividend or loan to affiliates. Dividends are allowed only
to the extent of Nicor Gas' retained earnings balance. The balance of cash
advances from Nicor Gas to an affiliate at any time may 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.

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Notes to the Consolidated Financial Statements (continued)
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12. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION

Nicor is a holding company that operates primarily in two separately managed
reportable business segments: gas distribution and shipping. The gas
distribution segment, Nicor's principal business, serves over 2.1 million
customers in a service territory that encompasses most of the northern third of
Illinois, excluding the city of Chicago. The shipping segment transports
containerized freight between Florida, the eastern coast of Canada, the Bahamas
and the Caribbean region via Tropical Shipping. The shipping segment also
includes amounts related to cargo insurance coverages sold to its customers and
other third parties.

Gas distribution revenues are comprised of natural gas sales bundled with
delivery, delivery-only (transportation) services and revenue taxes, as follows
(in millions):

2004 2003 2002
---------- ---------- ----------

Bundled sales $ 2,024.7 $ 2,014.8 $ 1,299.3
Transportation 147.4 148.0 145.3
Revenue taxes 143.5 134.0 95.3
Other 46.5 54.8 50.8
---------- ---------- ----------
$ 2,362.1 $ 2,351.6 $ 1,590.7
========== ========== ==========

Tropical Shipping's vessels are under foreign registry, and its containers are
considered instruments of international trade. Although the majority of its
long-lived assets are foreign owned and its revenues are derived from foreign
operations, the functional currency is generally the U.S. dollar.

Nicor's other business segments operate primarily in northern Illinois and
include businesses that market energy-related products and services at retail to
residential and small business consumers through Nicor Services and Nicor
Solutions, and natural gas at the wholesale level through Nicor Enerchange. They
also include a 50-percent-owned natural gas pipeline joint venture with Natural
Gas Pipeline Company of America (Horizon Pipeline), and a 50-percent-owned
retail energy marketing joint venture (Nicor Energy) whose operations were
terminated in 2003. Financial information about these other business segments is
combined under the heading "Other energy ventures" on the chart that follows.

Nicor management evaluates segment performance based on operating income.
Intercompany billing for goods and services exchanged between segments is based
generally upon direct and indirect costs incurred, but in some instances is
based upon the prevailing tariffed or market-based price of the provider.

The majority of intersegment revenues represent gas distribution revenues
related to customers entering into utility-bill management contracts with one of
Nicor's retail affiliates. Under the utility-bill management contracts, the
affiliate bills a fixed amount to a customer and in exchange pays the customer's
utility bills from Nicor Gas, regardless of changes in natural gas prices or
weather. Intersegment revenues have been eliminated in the consolidated
financial statements.

Corporate operating expenses include unallocated legal and business development
costs, and corporate equity investment income includes results from investments
in Triton and low income housing partnerships. The 2004 operating loss of $44.0
million in the "Corporate and eliminations" column also includes a $38.5 million
litigation charge related to an agreement to settle securities class action
lawsuits.

Financial data by business segment is as follows (in millions):

Nicor Inc. Page 59
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Notes to the Consolidated Financial Statements (continued)

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

Operating revenues
2004
External customers $ 2,282.2 $ 310.7 $ 146.8 $ - $ 2,739.7
Intersegment 79.9 - 8.5 (88.4) -
------------ ---------- --------- ------------- ------------
2,362.1 310.7 155.3 (88.4) 2,739.7

2003
External customers 2,300.7 272.2 89.8 - 2,662.7
Intersegment 50.9 - 6.7 (57.6) -
------------ ---------- --------- ------------- ------------
2,351.6 272.2 96.5 (57.6) 2,662.7

2002
External customers 1,576.8 266.0 54.6 - 1,897.4
Intersegment 13.9 - 2.3 (16.2) -
------------ ---------- --------- ------------- ------------
1,590.7 266.0 56.9 (16.2) 1,897.4

Operating income (loss)
2004 $ 130.8 $ 31.6 $ 19.3 $ (44.0) $ 137.7
2003 166.2 22.7 7.9 (7.4) 189.4
2002 207.0 21.2 6.4 (8.1) 226.5

Equity investment income (loss)
2004 $ (.1) $ - $ 2.2 $ 4.2 $ 6.3
2003 (.1) - 11.5 3.9 15.3
2002 (.1) - (7.2) 1.5 (5.8)

Other income (expense),net
2004 $ 1.7 $ .7 $ .4 $ (.3) $ 2.5
2003 2.2 .8 .6 (1.6) 2.0
2002 3.4 1.2 .5 (1.7) 3.4

Interest expense, net of
amounts capitalized
2004 $ 37.2 $ .7 $ .5 $ 2.8 $ 41.2
2003 36.8 .5 .4 (.4) 37.3
2002 36.3 .5 .9 .8 38.5

Income taxes
2004 $ 33.1 $ 8.1 $ 8.7 $ (19.7) $ 30.2
2003 48.0 6.0 7.9 (2.3) 59.6
2002 64.3 5.3 (.3) (11.7) 57.6

Cumulative effect of accounting
change, net of tax
2004 $ - $ - $ - $ - $ -
2003 - - (4.5) - (4.5)
2002 - - - - -

Property, plant and
equipment, net
2004 $ 2,416.4 $ 125.9 $ 7.6 $ (.1) $ 2,549.8
2003 2,345.2 133.3 5.7 - 2,484.2
2002 2,273.0 144.4 4.4 - 2,421.8

Capital expenditures
2004 $ 175.1 $ 9.0 $ 3.2 $ - $ 187.3
2003 172.9 5.9 2.5 - 181.3
2002 169.5 19.6 3.4 - 192.5

Depreciation
2004 $ 148.8 $ 16.4 $ 1.4 $ - $ 166.6
2003 143.5 16.9 1.3 - 161.7
2002 137.6 16.9 .5 - 155.0

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Notes to the Consolidated Financial Statements (continued)
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13. EQUITY INVESTMENT INCOME (LOSS)

Equity investment income (loss) included the following (in millions):

2004 2003 2002
-------- -------- --------

Triton $ 6.5 $ 5.5 $ 4.1
Nicor Energy - 9.6 (9.2)
Affordable housing investments (2.4) (1.6) (2.7)
Horizon Pipeline 1.6 1.5 1.3
All other .6 .3 .7
-------- -------- --------
$ 6.3 $ 15.3 $ (5.8)
======== ======== ========

In 2004, 2003 and 2002, Nicor received dividends from equity investees of $5.6
million, $2.3 million and $1.7 million, respectively.

Nicor's investment in Nicor Energy was written off during 2002. In 2003, Nicor
Energy ceased operations and Nicor recorded gains of $9.6 million upon the
receipt of cash from Nicor Energy. No recoveries occurred in 2004, and any
future gains or losses are expected to be immaterial.

14. OTHER INCOME (EXPENSE), NET

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

2004 2003 2002
-------- -------- --------

Interest income $ 2.3 $ 1.9 $ 2.5
Other income 1.0 1.2 1.8
Other expense (.8) (1.1) (.9)
-------- -------- --------
$ 2.5 $ 2.0 $ 3.4
======== ======== ========

15. RELATED PARTY TRANSACTIONS

In May 2002 Horizon Pipeline repaid all construction loans outstanding from
Nicor. Horizon Pipeline charged Nicor Gas $10.4 million, $10.4 million and $6.6
million in 2004, 2003 and 2002, respectively, for natural gas transportation
under rates that have been accepted by FERC.

EN Engineering, a 50-percent-owned joint venture of Nicor, charged Nicor
Technologies, a wholly owned subsidiary of Nicor, $4.0 million, $4.4 million and
$4.6 million for engineering and corrosion services rendered for 2004, 2003 and
2002, respectively.

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

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Notes to the Consolidated Financial Statements (continued)
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16. COMMITMENTS

As of December 31, 2004, Nicor had purchase commitments with payments due as
follows (in millions):

Other
Purchase Operating long-term
obligations leases obligations
----------- --------- -----------

2005 $ 10.4 $ 25.4 $ 2.8
2006 10.4 12.6 2.8
2007 10.4 12.5 1.7
2008 10.4 12.1 1.4
2009 10.4 10.6 .7
After 2009 24.4 15.8 1.1
----------- --------- ------------
$ 76.4 $ 89.0 $ 10.5
=========== ========= ============

Purchase obligations consist of natural gas transportation agreements.
Operating leases are primarily for vessels, containers and equipment in the
shipping segment, and for office space and equipment in the gas distribution
segment. Rental expense under operating leases was $27.5 million, $23.7 million
and $23.0 million in 2004, 2003 and 2002, respectively. Other long-term
obligations consist primarily of equity fund commitments.

17. RATE PROCEEDING

On November 4, 2004, Nicor Gas filed with the ICC for an overall increase in
rates of approximately $83 million (or about 16.5 percent of base rates
revenue). The company's filing provided for a rate of return on original-cost
rate base of 9.34 percent, which reflects an 11.37 percent cost of common
equity. The requested rate increase is needed to recover higher operating costs
and increased capital investments. Nicor Gas has not raised base rates since
1996.

The ICC normally has 11 months to complete its review of the filing and to issue
an order. The proposed rate increase has been suspended pending the completion
of the ICC's review.

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18. 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 guarantees of affiliate obligations
to vendors and other third parties, requiring Nicor to repay the obligations
should its affiliates default. The obligations of the company's wholly owned
subsidiaries are reflected in Nicor's consolidated balance sheet, while the
obligations of its unconsolidated equity investments are not. As of December 31,
2004 Nicor had guaranteed the payment of approximately $1 million of lease
obligations in support of one of its unconsolidated equity investee's
operations and no liability has been recorded for this guarantee.

Tropic Equipment Leasing Inc. (TEL), an indirectly wholly owned subsidiary of
Nicor, holds the company's interests in Triton. 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 $5 million
at December 31, 2004. Nicor believes the likelihood of any such payment by TEL
is remote and has recorded no liability for this contingency.

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 related repair costs are charged to expense as
incurred. Repair expenses of $2.9 million, $3.4 million and $2.6 million were
incurred in 2004, 2003 and 2002, 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, generally with no limitation as
to the amount. Aside from liabilities recorded in connection with coal tar
cleanup, as discussed in Note 19 Contingencies - Manufactured Gas Plant Sites,
Nicor believes that the likelihood of payment under these indemnifications is
either remote or that the amount would be immaterial. No liability has been
recorded for these indemnifications.

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 litigation they are a party to by reason of their association with the
company, subject to certain limitations. The company recorded expense of $2.2
million and $2.6 million for 2003 and 2002, respectively, in connection with
this indemnification. No additional expense was recorded in 2004. As of December
31, 2004, the company had a remaining estimated liability of $0.7 million in
connection with this indemnification. While the company does not expect to incur
significant additional costs under these indemnifications, it is not possible to
estimate the maximum potential payments.

Nicor Inc. Page 63
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Notes to the Consolidated Financial Statements (continued)
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19. 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.

Nicor Inc. Page 64
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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. Nicor Gas seeks a
reimbursement of approximately $1.0 million as referenced above. 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 from Entergy-Koch
Trading, LP (EKT), a natural gas, storage and transportation trader and
consultant with whom Nicor did business under the PBR plan.

Nicor Inc. Page 65
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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
during 2004, and any future gains or losses are not expected to be material.

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. In June 2004, Nicor filed its Wells Submission with the SEC. In
addition, in connection with the SEC's invitation to the company to make a Wells
Submission, the SEC informed the company of additional sources of information
relating to activities affecting the PBR plan, the status of which is addressed
in detail in the Performance-Based Rate (PBR) Plan section set forth above. In
August 2004, Nicor withdrew its Wells Submission in light of its continuing
review of the newly available additional sources of information referenced
above. Nicor continues in its efforts to resolve this matter with the SEC and
has requested that the SEC allow Nicor to file an updated Wells Submission if
necessary. 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.

Nicor Inc. Page 66
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- ----------------------------------------------------------

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 former 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 and Treasurer),
Philip Cali (former Executive Vice President of Operations) and Arthur Andersen
LLP, the company's former independent auditor. The plaintiffs sought 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 alleged that the defendants violated Section
10(b) and Section 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5
thereunder. Plaintiffs alleged 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 sought 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 have been dismissed without any finding or
admission of wrongdoing or liability, for a payment of $38.5 million. On July
13, 2004 the court granted final approval of the settlement. All appeal rights
expired on August 12, 2004. In the first quarter of 2004, the company recorded a
litigation charge of $38.5 million related to this agreement. In the third
quarter of 2004, the $38.5 million previously placed in escrow was released to
the plaintiff's representatives.

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 former
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.
On January 25, 2005, Nicor announced that its Board of Directors had approved a
preliminary agreement to settle the above referenced action. Under the terms of
the settlement, all claims against the defendants will be dismissed without any
finding or admission of wrongdoing or liability. The settlement obligates Nicor
to adopt certain new corporate governance policies and requires the payment of
$3.5 million in attorneys' fees and expenses to plaintiffs' counsel out of the
D&O insurance proceeds described below. The final settlement is contingent upon
approval by the court and entry of final judgment by the court, and therefore no
amount is reflected in the financial statements. The court granted preliminary
approval of the settlement on February 18, 2005, and set a fairness hearing for
March 29, 2005.

Nicor Inc. Page 67
- -------------------------------------------------------------------------------

Notes to the Consolidated Financial Statements (continued)
- ----------------------------------------------------------

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. On June 25, 2004 the parties to the above referenced actions
entered into a final settlement agreement. In consideration for a payment of
$6.8 million by Horizon to the general contractor, which was capitalized by
Horizon as a construction cost, all claims by the parties have been dismissed
with prejudice and all recorded liens have been released.

FERC Stipulation. On August 2, 2004, Nicor Gas entered into a settlement with
the Federal Energy Regulatory Commission (FERC) that resolves an investigation
by the Office of Market Oversight and Investigations involving the sharing of
confidential storage information with one of Nicor Gas' interstate storage
customers in violation of FERC's regulations. FERC's regulations prohibit the
provision of undue preferences among customers. There was no evidence that Nicor
Gas profited either directly or indirectly by communicating its storage
information to its customer. Under the settlement, Nicor Gas paid a civil
penalty in the amount of $600,000, and has implemented a compliance plan to
prevent similar violations in the future.

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 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 28 households.

As of December 31, 2004, Nicor Gas had remaining an estimated liability of $20.2
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 Inc. Page 68
- -------------------------------------------------------------------------------

Notes to the Consolidated Financial Statements (continued)
- ----------------------------------------------------------

Nicor Gas continues to pursue recovery from insurers and independent contractors
that had performed work for the company. 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. Amounts recovered during 2004 were immaterial. On October
25, 2004 the Circuit Court of Cook County, Illinois entered judgment in favor of
Nicor and against various insurers in the amount of $10.2 million with respect
to one of Nicor's mercury-related insurance claims. The judgment is subject to
appeal, and the insurers have indicated their intention to appeal the judgment.
Accordingly, the company has not reflected the $10.2 million in its financial
statements.

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. As of December 31,
2004 the company had recorded a liability of $36.8 million. 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.

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.

Nicor Inc. Page 69
- -------------------------------------------------------------------------------

Notes to the Consolidated Financial Statements (continued)
- ----------------------------------------------------------

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.

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, the related shareholder derivative lawsuit
described above and related matters, with any remaining balance to be paid to
Nicor. Nicor's financial statements do not reflect any benefit related to such
potential future payment because the amount of funds held in escrow ultimately
attributable to Nicor, if any, is not presently determinable. Nicor also
continues to seek coverage from its excess insurance carrier for additional
coverage in connection with the same matters but is unable to predict the
outcome of this matter and therefore no additional potential insurance
recoveries have been reflected in the financial statements.

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, gas costs prudence reviews and
other matters. Although unable to determine the ultimate outcome of these other
contingencies, management believes that these amounts are appropriately
reflected in the financial statements, including the recording of appropriate
liabilities when reasonably estimable.

Nicor Inc. Page 70
- -------------------------------------------------------------------------------

Notes to the Consolidated Financial Statements (concluded)
- ----------------------------------------------------------

20. QUARTERLY RESULTS (UNAUDITED)

Summarized quarterly financial data is presented below (in millions, except per
share data).

Quarter ended
----------------------------------------------
Mar. 31 June 30 Sept. 30 Dec. 31
---------- ---------- ---------- ----------

2004
Operating revenues $ 1,115.7 $ 429.5 $ 299.9 $ 894.6
Operating income (loss) 34.3 33.1 (9.6) 79.9
Net income (loss) 19.6 19.5 (11.6) 47.7
Earnings (loss) per common share
Basic .44 .44 (.26) 1.08
Diluted .44 .44 (.26) 1.08

2003
Operating revenues $ 1,171.3 $ 452.8 $ 294.8 $ 743.9
Operating income 81.3 38.9 4.2 65.0
Income before cumulative effect
of accounting change 50.4 23.8 .5 35.1
Net income 45.9 23.8 .5 35.1
Earnings per common share
Basic
Before cumulative effect of
accounting change 1.14 .54 .01 .80
Basic earnings per share 1.04 .54 .01 .80
Diluted
Before cumulative effect of
accounting change 1.14 .54 .01 .79
Diluted earnings per share 1.04 .54 .01 .79

The fourth quarter of 2004 included operating income from Nicor Enerchange of
approximately $15 million, compared to less than $1 million in the fourth
quarter of 2003 and an operating loss of about $13 million in the third quarter
of 2004. This volatility is related primarily to the effect of changing natural
gas prices. Nicor Enerchange purchases and holds natural gas in storage to earn
a profit margin from its ultimate sale. Nicor Enerchange uses derivatives to
mitigate commodity price risk in order to substantially lock-in the profit
margin that will ultimately be realized. However, gas stored in inventory is
required to be accounted for at the lower of weighted average cost or market,
whereas the derivatives used to reduce the risk associated with a change in the
value of inventory are accounted for at fair value, with changes in fair value
recorded in operating results in the period of change. As a result, earnings are
subject to volatility as the market price of derivatives change, even when the
underlying hedged value of the inventory is unchanged.

The first quarter of 2004 included a $38.5 million litigation charge to
operating expenses relating to an agreement to settle the securities class
action lawsuit.

The fourth quarter of 2003 included the impact of a new hedge accounting
interpretation that reduced the operating income of Nicor Enerchange by $4
million. The fourth quarter of 2003 also included the impact of a higher
effective income tax rate relating to adjustments of deferred tax accounts.

Nicor Inc. Page 71
- -------------------------------------------------------------------------------

Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------- -------------------------------------------------------------------
Financial Disclosure
--------------------

None.

Item 9A. Controls and Procedures
- ------- -----------------------

Evaluation of Disclosure Controls and Procedures

The company carried out an evaluation under the supervision and with the
participation of the company's management, including its Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of
the company's disclosure controls and procedures as of the end of the most
recent fiscal quarter of the period covered by this Annual Report on Form 10-K
(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 most recent fiscal quarter covered by this
Annual Report on Form 10-K, were effective at the reasonable assurance level to
ensure that information required to be disclosed by the company in reports that
it files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in United
States Securities and Exchange Commission rules and forms.

Nicor Inc. Page 72
- -------------------------------------------------------------------------------

Item 9A. Controls and Procedures (concluded)
- -------- -----------------------------------

Management's Report on Internal Control Over Financial Reporting

Internal control over financial reporting refers to the process designed by, or
under the supervision of, the company's Chief Executive Officer and Chief
Financial Officer, and effected by the company's board of directors, management
and other personnel, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles, and
includes those policies and procedures that:

1. Pertain to the maintenance of records that in reasonable detail accurately
and fairly reflect the transactions and dispositions of the assets of the
company;

2. Provide reasonable assurance that transactions are recorded as necessary
to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company, and;

3. Provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the company's assets that
could have a material effect on the financial statements.

Internal control over financial reporting cannot provide absolute assurance of
achieving financial reporting objectives because of its inherent limitations.
Internal control over financial reporting is a process that involves human
diligence and compliance and is subject to lapses in judgment and breakdowns
resulting from human failures. Internal control over financial reporting also
can be circumvented by collusion or improper management override. Because of
such limitations, there is a risk that material misstatements may not be
prevented or detected on a timely basis by internal control over financial
reporting. However, these inherent limitations are known features of the
financial reporting process. Therefore, it is possible to design into the
process safeguards to reduce, though not eliminate, this risk. Management is
responsible for establishing and maintaining adequate internal control over
financial reporting for the company.

Management has used the framework set forth in the report entitled "Internal
Control--Integrated Framework" published by the Committee of Sponsoring
Organizations of the Treadway Commission to evaluate the effectiveness of the
company's internal control over financial reporting. Management has concluded
that the company's internal control over financial reporting was effective as of
December 31, 2004. Deloitte & Touche LLP, an independent registered accounting
firm, has issued an attestation report on management's assessment of the
company's internal control over financial reporting.

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.

Item 9B. Other Information
- -------- -----------------

None.

Nicor Inc. Page 73
- -------------------------------------------------------------------------------

PART III

Item 10. Directors and Executive Officers of the Registrant
- -------- --------------------------------------------------

Information on directors is contained under the Election of Directors and
Section 16(a) Beneficial Ownership Reporting Compliance sections in Nicor's
Definitive Proxy Statement to be filed on or about March 11, 2005, and is
incorporated herein by reference.

Information about the audit committee financial expert is contained under the
Audit Committee Report section in Nicor's Definitive Proxy Statement to be filed
on or about March 11, 2005, and is incorporated herein by reference.

Information about executive officers is included in Part I of this Form 10-K,
Executive Officers of the Registrant, and is incorporated herein by reference.
Executive officers of the company are elected annually by the Board of
Directors.

In addition, information about executive officers is contained under the Section
16(a) Beneficial Ownership Reporting Compliance section in Nicor's Definitive
Proxy Statement to be filed on or about March 11, 2005, and is incorporated
herein by reference.

The company has adopted a Code of Ethics that applies to the company's
directors, officers and employees, including its principal executive officer,
principal financial officer, principal accounting officer or controller or
persons performing similar functions. We intend to satisfy the disclosure
requirements under Item 5.05 of Form 8-K regarding an amendment to or waiver
from a provision of such Code of Ethics as it applies to our principal executive
officer, principal financial officer, principal accounting officer or controller
or persons performing similar functions and that relates to certain topics, by
posting such information on the company's internet site at www.nicor.com.

The company has disclosed its Code of Ethics, Audit Committee Charter, Corporate
Governance Committee Charter, Compensation Committee Charter, and Corporate
Governance Guidelines on the company's internet site at www.nicor.com. Any
shareholder may request this information in print form from the company's
Investor Relations department.

Item 11. Executive Compensation
- -------- ----------------------

Information on executive compensation is contained under the Compensation
Committee Report and Executive Compensation sections in Nicor's Definitive Proxy
Statement to be filed on or about March 11, 2005, and is incorporated herein by
reference.

Nicor Inc. Page 74
- -------------------------------------------------------------------------------

Item 12. Security Ownership of Certain Beneficial Owners and Management
- -------- --------------------------------------------------------------
and Related Stockholder Matters
-------------------------------

Information on security ownership of certain beneficial owners and management is
contained under the Security Ownership of Management and Beneficial Ownership of
Common Stock sections in Nicor's Definitive Proxy Statement to be filed on or
about March 11, 2005, and is incorporated herein by reference.

EQUITY COMPENSATION PLAN INFORMATION
- -------------------------------------------------------------------------------

(a) (b) (c)
Number of securities
Number of remaining available
securities to for future issuance
be issued upon Weighted-average under equity
exercise of exercise price compensation plans
outstanding of outstanding (excluding
options, warrants, options, warrants, securities reflected
Plan category and rights and rights in column (a))
- -------------------------------------------------------------------------------
Equity compensation
plans approved by
security holders 1,383,483 $ 34.57 1,151,220 (1)
- --------------------------------------------------------------------------------
Equity compensation
plans not approved
by security holders - - -
- --------------------------------------------------------------------------------
Total 1,383,483 $ 34.57 1,151,220
- --------------------------------------------------------------------------------

(1) This number includes 668,051 shares issuable under the 1997 Long-Term
Incentive Plan, as amended. These shares can be used for stock options,
alternative stock rights, restricted stock and performance award units,
including awards under the Stock Deferral Plan, which allows eligible key
executives and managerial employees to convert up to 50% of their cash
awards from annual and long-term incentive plans into Nicor common stock,
the receipt of which is deferred.

Item 13. Certain Relationships and Related Transactions
- -------- ----------------------------------------------

Information about certain relationships and related transactions is contained
under the Certain Relationships and Related Transactions section in Nicor's
Definitive Proxy Statement to be filed on or about March 11, 2005, and is
incorporated herein by reference.

Item 14. Principal Accountant Fees and Services
- -------- --------------------------------------

Information on principal accountant fees and services is contained under the
Principal Accountant Fees and Services section in Nicor's Definitive Proxy
Statement to be filed on or about March 11, 2005, and is incorporated herein by
reference.

Nicor Inc. Page 75
- -------------------------------------------------------------------------------

PART IV

Item 15. Exhibits and Financial Statement Schedules
- -------- ------------------------------------------

1) Financial Statements:

See Item 8, Financial Statements and Supplementary Data, filed herewith,
for a list of financial statements.

2) Financial Statement Schedules:

Schedule
Number Page
-------- ----

Report of Independent Registered Public Accounting Firm 35
II Valuation and Qualifying Accounts 76

Schedules other than those listed are omitted because they are not
applicable.

3) Exhibits Filed:

See Exhibit Index filed herewith.

Nicor Inc. Page 76
- -------------------------------------------------------------------------------

Schedule II

VALUATION AND QUALIFYING ACCOUNTS
(millions)

Additions
---------------------
Balance at Charged to Charged to Balance
beginning costs and other at end
Description of period expenses accounts Deductions of period
- ---------------------- ---------- ---------- ---------- ---------- ---------

2004
----
Allowance for doubtful
accounts receivable $ 21.2 $ 36.0 $ - $ 35.3 (a) $ 21.9

Accrued mercury-related
costs 21.9 - - 1.7 (b) 20.2

Accrued manufactured
gas plant environmental
costs 33.2 - 18.8 (d) 15.2 (b) 36.8

2003
----
Allowance for doubtful
accounts receivable $ 16.9 $ 30.9 $ - $ 26.6 (a) $ 21.2

Accrued mercury-related
costs 23.4 - - 1.5 (b) 21.9

Accrued manufactured
gas plant environmental
costs 61.9 - 14.2 (d) 42.9 (b) 33.2

2002
----
Allowance for doubtful
accounts receivable $ 12.3 $ 27.4 $ - $ 22.8 (a) $ 16.9

Accrued mercury-related
costs 37.0 - - 13.6 (c) 23.4

Accrued manufactured
gas plant environmental
costs 3.5 - 79.1 (d) 20.7 (b) 61.9

(a) Accounts receivable written off, net of recoveries.
(b) Expenditures, other adjustments.
(c) Expenditures and reserve reduction to reflect new estimate.

Nicor Inc. Page 77
- -------------------------------------------------------------------------------

Signatures
- ----------

Pursuant to the requirements of Section 13 or 15(d) 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.

Date February 28, 2005 /s/ RICHARD L. HAWLEY
----------------- ----------------------------
Richard L. Hawley
Executive Vice President and
Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on February 28, 2005.

Signature Title
- -------------------------------- -------------------------------

/s/ THOMAS L. FISHER
--------------------
Thomas L. Fisher Chairman and
(Principal Executive Officer) Chief Executive Officer

/s/ RICHARD L. HAWLEY
---------------------
Richard L. Hawley Executive Vice President and
(Principal Financial Officer Chief Financial Officer
and Principal Accounting
Officer)

ROBERT M. BEAVERS, JR.* Director

BRUCE P. BICKNER* Director

JOHN H. BIRDSALL, III* Director

THOMAS A. DONAHOE* Director

R. EDEN MARTIN* Director

JOHN E. JONES* Director

DENNIS J. KELLER* Director

WILLIAM A. OSBORN* Director

JOHN RAU* Director

JOHN F. RIORDAN* Director

RUSS M. STROBEL* Director

PATRICIA A. WIER* Director

* By /s/ RICHARD L. HAWLEY
---------------------
Richard L. Hawley
(Attorney-in-fact)

Nicor Inc. Page 78
- -------------------------------------------------------------------------------

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.)

4.01 * Indenture of Commonwealth Edison Company to Continental Illinois
National Bank and Trust Company of Chicago, Trustee, dated as of
January 1, 1954. (File No. 1-7296, Form 10-K for 1995, Nicor Gas,
Exhibit 4.01.)

4.02 * Indenture of Adoption of Nicor Gas to Continental Illinois
National Bank and Trust Company of Chicago, Trustee, dated February
9, 1954. (File No. 1-7296, Form 10-K for 1995, Nicor Gas, Exhibit
4.02.)

4.03 * Supplemental Indenture, dated February 15, 1998, of Nicor Gas to
Harris Trust and Savings Bank, Trustee, under Indenture dated as of
January 1, 1954. (File No. 1-7296, Form 10-K for 1997, Nicor Gas,
Exhibit 4.19.)

Nicor Inc. Page 79
- -------------------------------------------------------------------------------

Exhibit Index (continued)
- -------------------------

Exhibit
Number Description of Document
- ------- -------------------------------------------------------------------
4.04 * Supplemental Indenture, dated February 1, 1999, of Nicor Gas to
Harris Trust and Savings Bank, Trustee, under Indenture dated as of
January 1, 1954. (File No. 1-7296, Form 10-K for 1998, Nicor Gas,
Exhibit 4.19.)

4.05 * Supplemental Indenture, dated February 1, 2001, of Nicor Gas to BNY
Midwest Trust Company, Trustee, under Indenture dated as of January
1, 1954. (File No. 1-7296, Form 10-K for 2000, Nicor Gas, Exhibit
4.17.)

4.06 * Supplemental Indenture, dated May 15, 2001, of Nicor Gas to BNY
Midwest Trust Company, Trustee, under Indenture dated as of January
1, 1954. (File No. 1-7296, Form 10-Q for June 2001, Nicor Gas,
Exhibit 4.01.)

4.07 * Supplemental Indenture, dated August 15, 2001, of Nicor Gas to BNY
Midwest Trust Company, Trustee, under Indenture dated as of January
1, 1954. (File No. 1-7296, Form 10-Q for September 2001, Nicor Gas,
Exhibit 4.01.)

4.08 * Supplemental Indenture, dated December 15, 2001, of Nicor Gas to
BNY Midwest Trust Company, Trustee, under Indenture dated as of
January 1, 1954. (File No. 1-7296, Form 10-K for 2001, Nicor Gas,
Exhibit 4.20.)

4.09 * Supplemental Indenture, dated December 1, 2003, of Nicor Gas
to BNY Midwest Trust Company, Trustee, under Indenture dated as of
January 1, 1954. (File No. 1-7297, Form 10-K for 2003, Nicor Inc.,
Exhibit 4.10.)

4.10 * Supplemental Indenture, dated December 1, 2003, of Nicor Gas
to BNY Midwest Trust Company, Trustee, under Indenture dated as of
January 1, 1954. (File No. 1-7297, Form 10-K for 2003, Nicor Inc.,
Exhibit 4.11.)

4.11 * Supplemental Indenture, dated December 1, 2003, of Nicor Gas
to BNY Midwest Trust Company, Trustee, under Indenture dated as of
January 1, 1954. (File No. 1-7297, Form 10-K for 2003, Nicor Inc.,
Exhibit 4.12.)

10.01 * 1984 Nicor Officers' Capital Accumulation Plan Participation
Agreement. (File No. 1-7297, Form 10-K for 1988, Nicor Inc.,
Exhibit 10-10.)

10.01(a) * 1985 Nicor Officers' Capital Accumulation Plan Participation
Agreement. (File No. 1-7297, Form 10-K for 1988, Nicor Inc.,
Exhibit 10-10(a).)

10.02 * 1984 Nicor Directors' Capital Accumulation Plan Participation
Agreement. (File No. 1-7297, Form 10-K for 1983, Nicor Inc.,
Exhibit 10-13.)

10.02(a) * 1985 Nicor Directors' Capital Accumulation Plan Participation
Agreement. (File No. 1-7297, Form 10-K for 1984, Nicor Inc.,
Exhibit 10-13(a).)

10.03 * Directors' Deferred Compensation Plan. (File No. 1-7297, Form 10-K
for 1983, Nicor Inc., Exhibit 10-16.)

Nicor Inc. Page 80
- -------------------------------------------------------------------------------

Exhibit Index (continued)
- -------------------------

Exhibit
Number Description of Document
- ------- -------------------------------------------------------------------

10.04 * Directors' Pension Plan. (File No. 1-7297, Form 10-K for 1985,
Nicor Inc., Exhibit 10-18.)

10.05 * Flexible Spending Account for Executives. (File No. 1-7297, Form
10-K for 1986, Nicor Inc., Exhibit 10-20.)

10.06 * Amendment and Restatement of the Nicor Gas Incentive Compensation
Plan. (File No. 1-7297, Form 10-K for 1986, Nicor Inc., Exhibit
10-21.)

10.07 * Nicor Inc. 1989 Long-Term Incentive Plan. (Filed with Nicor Inc.
Proxy Statement, dated April 20, 1989, Exhibit A.)

10.08 * Nicor Inc. Stock Deferral Plan. (File No. 1-7297, Form 10-Q for
September 1996, Nicor Inc., Exhibit 10.01.)

10.09 * Amendment to Nicor Inc. Stock Deferral Plan. (File No. 1-7297,
Form 10-K for 1997, Nicor Inc., Exhibit 10.22.)

10.10 * Nicor Inc. 1995 Directors' Stock Plan. (File No. 1-7297, Form 10-Q
for September 1996, Nicor Inc., Exhibit 10.02.)

10.11 * Nicor Inc. 1997 Long-Term Incentive Plan. (Filed as appendix to
the Nicor Inc. Proxy Statement, dated March 6, 1997.)

10.12 * Security Payment Plan. (File No. 1-7297, Form 10-K for 1999,
Nicor Inc., Exhibit 10.24.)

10.13 * Amendment and Restatement of Nicor Gas Supplementary Retirement
Plan. (File No. 1-7297, Form 10-Q for March 2000, Nicor Inc.,
Exhibit 10.01.)

10.14 * Amendment and Restatement of Nicor Gas Supplementary Savings Plan.
(File No. 1-7297, Form 10-Q for March 2000, Nicor Inc.,
Exhibit 10.02.)

10.15 * First Amendment to Agreements Restating 1984 and 1985 Nicor Capital
Accumulation Plan Participation Agreements for Officers and
Directors. (File No. 1-7297, Form 10-Q for March 2000, Nicor Inc.,
Exhibit 10.04.)

10.16 * First Amendment to Nicor 1989 Long-Term Incentive Plan. (File No.
1-7297, Form 10-Q for March 2000, Nicor Inc., Exhibit 10.05.)

10.17 * First Amendment to Nicor 1997 Long-Term Incentive Plan. (File No.
1-7297, Form 10-Q for March 2000, Nicor Inc., Exhibit 10.06.)

Nicor Inc. Page 81
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Exhibit Index (continued)
- -------------------------

Exhibit
Number Description of Document
- ------- -------------------------------------------------------------------

10.18 * Second Amendment to Nicor Stock Deferral Plan. (File No. 1-7297,
Form 10-Q for March 2000, Nicor Inc., Exhibit 10.07.)

10.19 * Change-in-Control Agreement, dated June 2, 2000, between Nicor Inc.
and Mr. Fisher. (File No. 1-7297, Form 10-K for 2000, Nicor Inc.,
Exhibit 10.28.)

10.20 * Change-in-Control Agreement, dated December 20, 2000, between Nicor
Inc. and Mr. Strobel. (File No. 1-7297, Form 10-K for 2001, Nicor
Inc., Exhibit 10.31.)

10.21 * 2002 Long-Term Incentive Program. (File No. 1-7297, Form 10-Q for
March 2002, Nicor Inc., Exhibit 10.01.)

10.22 * Second Amendment and Restatement to Nicor Salary Deferral Plan.
(File No. 1-7297, Form 10-Q for September 30, 2002, Nicor Inc.,
Exhibit 10.01.)

10.23 * First Amendment to the Change-in-Control Agreement, dated November
22, 2002, between Nicor Inc. and Mr. Strobel. (File No. 1-7297,
Form 10-K for 2002, Nicor Inc., Exhibit 10.26.)

10.24 * Supplemental Retirement Benefit Agreement between Nicor Inc. and
Mr. Strobel. (File No. 1-7297, Form 10-K for 2001, Nicor Inc.,
Exhibit 10.32.)

10.25 * Nicor Inc. Supplemental Senior Officer Retirement Plan. (File No.
1-7297, Form 10-K for 2002, Nicor Inc., Exhibit 10.28.)

10.26 * 2003 Long-Term Incentive Program. (File No. 1-7297, Form 10-Q for
March 2003, Nicor Inc., Exhibit 10.01.)

10.27 * Change-in-Control Agreement, dated November 22, 2002, between Nicor
Inc. and Mr. Dodge. (File No. 1-7297, Form 10-K for 2003, Nicor
Inc., Exhibit 10.30.)

10.28 * Change-in-Control Agreement, dated November 25, 2002, between Nicor
Inc. and Mr. Gracey. (File No. 1-7297, Form 10-K for 2003, Nicor
Inc., Exhibit 10.31.)

10.29 * Change-in-Control Agreement, dated December 8, 2003, between Nicor
Inc. and Mr. Hawley. (File No. 1-7297, Form 10-K for 2003, Nicor
Inc., Exhibit 10.32.)

10.30 * 2004 Long-Term Incentive Program. (File No. 1-7297, Form 10-Q for
March 2004, Nicor Inc., Exhibit 10.01.)

10.31 * 2004 Incentive Compensation Plan. (File No. 1-7297, Form 10-Q for
March 2004, Nicor Inc., Exhibit 10.02.)

Nicor Inc. Page 82
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Exhibit Index (concluded)
- -------------------------

Exhibit
Number Description of Document
- ------- -------------------------------------------------------------------

10.32 * First Amendment to Nicor Inc. 1995 Directors' Stock Plan. (File
No. 1-7297, Form 10-Q for March 2004, Nicor Inc., Exhibit 10.03.)

10.33 * Agreement, dated July 30, 2004, between Nicor Inc. and Ms. Halloran.
(File No. 1-7297, Form 10-Q for September 30, 2004, Nicor Inc.,
Exhibit 10.03.)

10.34 * Nicor Inc. Stock Deferral Plan Election Form. (File No. 1-7297,
Form 8-K for December 17, 2004, Nicor Inc., Exhibit 99.1.)

10.35 * Nicor Inc. Salary Deferral Plan Election Form. (File No. 1-7297,
Form 8-K for December 17, 2004, Nicor Inc., Exhibit 99.2.)

10.36 * Nicor Inc. Directors' Deferred Compensation Plan Election Form.
(File No. 1-7297, Form 8-K for December 17, 2004, Nicor Inc.,
Exhibit 99.3.)

10.37 * Nicor Gas Supplementary Savings Plan Enrollment Form. (File No.
1-7297, Form 8-K for December 27, 2004, Nicor Inc., Exhibit 99.1.)

10.38 * Nicor Inc. Stock Payment Election Stock Deferral Plan Form. (File
No. 1-7297, Form 8-K for February 15, 2005, Nicor Inc.,
Exhibit 99.1.)

Exhibits 10.01 through 10.38 constitute management contracts and
compensatory plans and arrangements required to be filed as exhibits
to this Form 10-K pursuant to Item 14(c) of Form 10-K.

21.01 * Subsidiaries. (File No. 69-228, Form U-3A-2 for 2004, Nicor Inc.,
Item 1.)

23.01 Consent of Independent Registered Public Accounting Firm.

24.01 Powers of Attorney.

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.

* 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.