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


FORM 10-Q


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

For the quarterly period ended March 31, 2005

or

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



Commission File Number 1-7297

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



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

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


Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in rule 12b-2 of the Exchange Act). Yes [X] No [ ].

Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. Common stock, par value
$2.50, outstanding at April 29, 2005, were 44,136,171 shares.





Nicor Inc. Page i
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Table of Contents

Glossary ii

Part I - Financial Information

Item 1. Financial Statements (Unaudited) ................................. 1

Consolidated Statements of Operations:
Three months ended
March 31, 2005 and 2004 ........................................ 2

Consolidated Statements of Cash Flows:
Three months ended
March 31, 2005 and 2004 ........................................ 3

Consolidated Balance Sheets:
March 31, 2005 and 2004, and
December 31, 2004 .............................................. 4

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

Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ..............................20

Item 3. Quantitative and Qualitative Disclosures About Market Risk .......33

Item 4. Controls and Procedures ..........................................33

Part II - Other Information

Item 1. Legal Proceedings ................................................33

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ......34

Item 6. Exhibits .........................................................34

Signature ........................................................36





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 5,830 degree days per year for
2005 and 6,000 degree days per year for 2004.

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 an interstate
regulated 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 residential and small
commercial customers energy-related products that provide for natural gas cost
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 - FINANCIAL INFORMATION

Item 1. Financial Statements
- ------- --------------------

The following condensed unaudited consolidated financial statements of Nicor
Inc. (Nicor) have been prepared by the company pursuant to the rules and
regulations of the United States Securities and Exchange Commission (SEC).
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States have been condensed or omitted pursuant to SEC rules and
regulations. The condensed financial statements should be read in conjunction
with the financial statements and the notes thereto included in the company's
2004 Annual Report on Form 10-K.

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





Nicor Inc. Page 2
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Consolidated Statements of Operations (Unaudited)
(millions, except per share data)
Three months ended
March 31
---------------------------
2005 2004
----------- -----------
Operating revenues
Gas distribution (includes revenue taxes
of $72.1 and $70.9, respectively) $ 1,078.8 $ 1,035.1
Shipping 90.5 67.7
Other energy ventures 46.7 51.7
Corporate and eliminations (36.2) (38.8)
----------- -----------
1,179.8 1,115.7
Operating expenses
Gas distribution
Cost of gas 836.8 792.2
Operating and maintenance 68.8 63.9
Depreciation 38.6 37.3
Taxes, other than income taxes 76.1 74.6
Mercury-related costs (recoveries), net .1 (.1)
Shipping 78.3 63.5
Other energy ventures 48.2 48.7
Litigation charges (recoveries), net (.5) 38.5
Other corporate expenses and eliminations (36.4) (37.2)
----------- -----------
1,110.0 1,081.4
----------- -----------

Operating income 69.8 34.3
Equity investment income (loss), net 2.1 1.2
Other income (expense), net 1.0 .5
Interest expense, net of amounts capitalized 12.2 11.3
----------- -----------

Income before income taxes 60.7 24.7
Income tax expense 17.0 5.1
----------- -----------

Net income 43.7 19.6
Dividends on preferred stock - -
----------- -----------

Earnings applicable to common stock $ 43.7 $ 19.6
=========== ===========

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

Earnings per average share of common stock
Basic $ .99 $ .44
Diluted .99 .44

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


The accompanying notes are an integral part of these statements.





Nicor Inc. Page 3
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Consolidated Statements of Cash Flows (Unaudited)
(millions)
Three months ended
March 31
--------------------------
2005 2004
----------- -----------
Operating activities
Net income $ 43.7 $ 19.6
Adjustments to reconcile net income
to net cash flow provided from
operating activities:
Depreciation 43.0 41.8
Deferred income tax (benefit) expense (.7) 9.6
Changes in assets and liabilities:
Receivables, less allowances (37.5) (19.8)
Gas in storage 187.8 205.6
Deferred/accrued gas costs 1.8 38.0
Other assets 10.0 (2.3)
Accounts payable (133.4) (87.7)
Temporary last-in, first-out
inventory liquidation 403.4 195.9
Other liabilities 2.4 37.8
Other items 3.6 .3
---------- -----------
Net cash flow provided from
operating activities 524.1 438.8
---------- -----------

Investing activities
Capital expenditures (39.6) (33.6)
Purchases of held-to-maturity securities (1.3) (2.4)
Proceeds from sales or maturities of
held-to-maturity securities .8 2.2
Net increase in other short-term investments (6.7) (4.1)
Other investing activities (.5) (.3)
---------- -----------
Net cash flow used for investing
activities (47.3) (38.2)
---------- -----------

Financing activities
Short-term repayments, net (455.4) (388.0)
Dividends paid (20.5) (20.5)
Repayment of loan against cash surrender
value of life insurance policies - (11.7)
Other financing activities 1.5 .9
---------- -----------
Net cash flow used for financing
activities (474.4) (419.3)
---------- -----------

Net increase (decrease) in cash and cash equivalents 2.4 (18.7)

Cash and cash equivalents, beginning of period 12.9 50.3
---------- -----------

Cash and cash equivalents, end of period $ 15.3 $ 31.6
========== ===========


The accompanying notes are an integral part of these statements.





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

March 31 December 31 March 31
2005 2004 2004
---------- ----------- ----------

Assets
------

Current assets
Cash and cash equivalents $ 15.3 $ 12.9 $ 31.6
Restricted short-term investments 29.2 29.1 -
Short-term investments, at cost
which approximates market 49.0 41.2 37.2
Receivables, less allowances of
$31.0, $21.9 and $29.7,
respectively 620.7 583.2 496.6
Gas in storage 32.9 220.7 30.4
Deferred income taxes 71.0 72.3 66.2
Other 59.8 61.5 54.6
----------- ----------- ----------
877.9 1,020.9 716.6
----------- ----------- ----------
Property, plant and equipment,
at cost
Gas distribution 3,856.5 3,831.6 3,719.2
Shipping 301.8 300.8 296.7
Other 12.0 11.2 8.2
----------- ----------- ----------
4,170.3 4,143.6 4,024.1
Less accumulated depreciation 1,612.9 1,593.8 1,537.4
----------- ----------- ----------
2,557.4 2,549.8 2,486.7
----------- ----------- ----------
Prepaid pension costs 183.0 181.5 178.2
Long-term investments 139.3 137.6 150.5
Other assets 75.4 85.4 76.5
----------- ----------- ----------
$ 3,833.0 $ 3,975.2 $ 3,608.5
=========== =========== ==========

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

Current liabilities
Short-term borrowings $ 34.6 $ 490.0 $ 187.0
Accounts payable 369.5 502.9 297.7
Temporary last-in, first-out
inventory liquidation 403.4 - 195.9
Accrued gas costs 70.1 68.3 85.0
Obligations related to restricted
investments 29.2 29.1 -
Dividends payable 20.5 20.5 20.5
Other 62.1 60.4 79.7
Long-term obligations
due within one year - .2 -
----------- ----------- ----------
989.4 1,171.4 865.8
----------- ----------- ----------

Deferred credits and other liabilities
Accrued future removal costs 718.3 706.4 682.0
Deferred income taxes 593.8 593.4 567.8
Regulatory income tax liability 44.0 44.8 47.5
Unamortized investment tax credits 33.3 33.8 34.9
Other 180.8 179.4 159.2
----------- ----------- ----------
1,570.2 1,557.8 1,491.4
----------- ----------- ----------

Capitalization
Long-term obligations
Long-term bonds and notes 495.4 495.3 494.9
Mandatorily redeemable
preferred stock 1.6 1.6 1.8
----------- ----------- ----------
497.0 496.9 496.7
----------- ----------- ----------

Common equity
Common stock 110.3 110.2 110.1
Paid-in capital 7.2 5.6 4.4
Retained earnings 663.5 640.3 646.2
Unearned compensation (.2) (.2) (.2)
Accumulated other comprehensive
loss, net (4.4) (6.8) (5.9)
----------- ----------- ----------
776.4 749.1 754.6
----------- ----------- ----------
1,273.4 1,246.0 1,251.3
----------- ----------- ----------
$ 3,833.0 $ 3,975.2 $ 3,608.5
=========== =========== ==========

The accompanying notes are an integral part of these statements.





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

The following notes should be read in conjunction with the consolidated
financial statement notes included in the Nicor Inc. (Nicor) 2004 Annual Report
on Form 10-K. Results for the interim periods presented are not necessarily
indicative of the results to be expected for the full fiscal year due to
seasonal and other factors.

1. ACCOUNTING POLICIES

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

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

March 31 December 31 March 31
2005 2004 2004
---------- ----------- ----------
Regulatory assets
Deferred environmental costs $ 23.5 $ 35.4 $ 31.8
Unamortized losses on reacquired
debt 19.5 19.9 20.7
Deferred rate case costs 3.6 2.9 .2
---------- ----------- ----------
$ 46.6 $ 58.2 $ 52.7
========== =========== ==========

Regulatory liabilities
Accrued future removal costs -
current $ 12.0 $ 11.6 $ -
Accrued future removal costs -
noncurrent 718.3 706.4 682.0
Accrued gas costs 70.1 68.3 85.0
Regulatory income tax liability 44.0 44.8 47.5
Other noncurrent regulatory
liabilities 5.2 .7 -
---------- ----------- ----------
$ 849.6 $ 831.8 $ 814.5
========== =========== ==========

All regulatory assets noted above are classified in noncurrent other assets. The
current portion of the accrued future removal costs obligation is classified in
other current liabilities.

Revenue taxes. Nicor Gas classifies revenue taxes billed to customers as
operating revenues and related taxes incurred as operating expenses. Revenue
taxes included in operating expense for the quarters ended March 31, 2005 and
2004 were $70.6 million and $69.5 million, respectively.

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





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

2. NEW ACCOUNTING PRONOUNCEMENTS

Accounting for Conditional Asset Retirement Obligations. In March 2005, the
Financial Accounting Standards Board (FASB) issued Interpretation No. 47,
Accounting for Conditional Asset Retirement Obligations (FIN 47). FIN 47
indicates that an entity is required to recognize the fair value of a liability
for an asset retirement obligation in the period in which the unconditional
legal obligation is incurred, even if the nature of the timing or method of
settlement is conditional on some future event that may or may not be within the
control of the company. The interpretation is effective for Nicor no later than
December 31, 2005 and may be adopted either retrospectively or prospectively.
The company is evaluating the interpretation and has not yet determined the
impact of adopting its provisions.

Share-Based Payment. 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. On April 14, 2005 the United States Securities and
Exchange Commission (SEC) delayed the effective date of SFAS 123R. The
provisions of SFAS 123R are now effective for Nicor beginning January 1, 2006.
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,
results of operations or cash flows.

At March 31, 2005, 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):

Three months ended
March 31
--------------------
2005 2004
--------- ---------
Net income
As reported $ 43.7 $ 19.6
Less: Total stock-based employee compensation
expense determined under the fair value
method for all awards, net of tax .3 .2
--------- ---------
Pro forma $ 43.4 $ 19.4
========= =========

Earnings per share
Basic - As reported $ .99 $ .44
Basic - Pro forma .98 .44
Diluted - As reported .99 .44
Diluted - Pro forma .98 .44





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

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 4 Income Taxes for more information.

3. SHORT-TERM DEBT

During 2004, Nicor Inc. and Nicor Gas established two revolving credit
facilities totaling $900 million with major domestic and foreign banks. These
facilities 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 available to Nicor Gas which expired in April 2005. The company had
$34.6 million, $490.0 million and $187.0 million of commercial paper borrowings
outstanding at March 31, 2005, December 31, 2004 and March 31, 2004,
respectively. The company is in compliance with the covenants relating to its
credit facilities at March 31, 2005.

4. INCOME AND OTHER TAXES

The company's effective income tax rate was 28.0 percent for the quarter ended
March 31, 2005 and 20.7 percent for the corresponding prior-year period. The
lower effective tax rate in the 2004 quarter reflects the income tax benefit
recorded on the $38.5 million litigation charge at Nicor's marginal income tax
rate of approximately 40 percent.

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 March 31, 2005, December 31, 2004 and
March 31, 2004, the company had accrued approximately $8.3 million, $6.3 million
and $4.0 million, respectively, for such uncertainties.

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.

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
undistributed 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 current federal taxation because of its status 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 by the end of 2005 at an effective federal income tax rate of 5.25
percent.

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 undistributed earnings retained by its foreign subsidiaries. Nicor
has not provided deferred income taxes of approximately $14 million on
approximately $39 million of cumulative undistributed earnings of its foreign
subsidiaries through March 31, 2005 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





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

cumulative undistributed tax basis earnings of its foreign subsidiaries is
approximately $180 million at March 31, 2005. The amount of earnings 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.
These factors include a determination of the maximum eligible repatriation
amount under provisions of the Act and other federal income tax rules and
regulations, as well as the ongoing cash requirements of Tropical Shipping, the
amount of such earnings previously taxed, 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 no later than December 31, 2005.

5. ACCRUED UNBILLED REVENUES

Receivables included accrued unbilled revenues of $127.1 million, $205.0 million
and $96.1 million at March 31, 2005, December 31, 2004 and March 31, 2004,
respectively, related primarily to gas distribution operations. Nicor Gas
accrues revenues for estimated deliveries to customers from the date of their
last bill until the balance sheet date.

6. 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 March 31, 2005, December 31, 2004 and March 31, 2004 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 $528 million, $530 million and $546 million at March 31, 2005,
December 31, 2004 and March 31, 2004, respectively.

Derivative financial instruments are recorded by various Nicor subsidiaries at
fair value as determined primarily from actively quoted prices. These
instruments had gross asset (liability) fair values of $18.8 million and $(2.8)
million, respectively, at March 31, 2005, $5.8 million and $(2.3) million,
respectively, at December 31, 2004 and $4.7 million and $(2.4) million,
respectively, at March 31, 2004. The derivative financial instruments held by
Nicor Gas are for the purpose of hedging natural gas purchases, and their
settlement is passed directly through to customers without markup, subject to
ICC review. The fair value of derivative financial instruments held on March 31,
2005 relates primarily to Nicor Gas.





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

7. 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.

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

Pension Health care and
benefits other benefits
--------------- ----------------
2005 2004 2005 2004
------- ------- ------- --------

Three months ended March 31
Service cost $ 2.3 $ 2.2 $ .7 $ .6
Interest cost 3.9 4.0 2.6 2.5
Expected return on plan assets (8.3) (8.0) (.2) (.2)
Recognized net actuarial loss .4 .5 1.1 1.2
Amortization of prior service cost .2 .2 - -
------- ------- ------- --------
Net periodic benefit cost (credit) $ (1.5) $ (1.1) $ 4.2 $ 4.1
======= ======= ======= ========

The company reflected its best estimate of the potential subsidy it may receive
under the Medicare Prescription Drug, Improvement and Modernization Act of 2003
in its October 1, 2004 measurement of the postretirement health care obligation.
The potential subsidy reduced the benefit obligation by $19.4 million. Beginning
in 2005, the company has also reflected its best estimate of the potential
subsidy in its measurement of net periodic postretirement health care costs. The
estimated subsidy reduced such costs by $0.6 million for the three months ended
March 31, 2005. This reduction was offset by general cost increases.

8. EQUITY INVESTMENT INCOME (LOSS), NET

Equity investment income (loss), net totaled $2.1 million and $1.2 million for
the quarters ended March 31, 2005 and 2004, respectively. These amounts include
investment income from Triton, a cargo container leasing company, of $1.8
million and $1.5 million, respectively.

Nicor received cash dividends from equity investees of $1.1 million and $0.9
million, respectively, for the first quarter of 2005 and 2004.





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

9. COMPREHENSIVE INCOME

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

Three months ended
March 31
--------------------
2005 2004
--------- ---------

Net income $ 43.7 $ 19.6
Other comprehensive income, after tax 2.4 .1
--------- ---------
Total comprehensive income $ 46.1 $ 19.7
========= =========

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

10. BUSINESS SEGMENT INFORMATION

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



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



Three months ended March 31, 2005
Operating revenues
External customers $ 1,047.8 $ 90.5 $ 41.5 $ - $ 1,179.8
Intersegment 31.0 - 5.2 (36.2) -
------------ ---------- --------- ------------- ------------
$ 1,078.8 $ 90.5 $ 46.7 $ (36.2) $ 1,179.8
============ ========== ========= ============= ============

Operating income (loss) $ 58.4 $ 12.2 $ (1.5) $ .7 $ 69.8
============ ========== ========= ============= ============

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

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


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





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

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

The $0.7 million operating income and the $40.1 million operating loss in the
"Corporate and eliminations" column for the three months ended March 31, 2005
and 2004, respectively, include a $0.5 million net recovery and a $38.5 million
litigation charge, respectively, related to shareholder derivative lawsuits and
securities class action lawsuits as described in Note 14 Contingencies -
Shareholder Derivative Lawsuits and Securities Class Actions. Corporate
operating expenses also include unallocated legal and business development
costs.

11. 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 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 previously
considered by the company as normal.

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

On April 5, 2005, Nicor Gas filed rebuttal testimony with the ICC, in response
to the direct testimony of the ICC staff and intervenors in the proceeding, and
revised its proposed rate increase of approximately $83 million to approximately
$78 million. The revised proposal reflects a 10.82 percent cost of common equity
resulting in a rate of return on original-cost rate base of 9.03 percent.

12. COMMITMENTS

During the first quarter of 2005, the company entered into additional property,
plant and equipment purchase obligations totaling $3.6 million, related
primarily to Tropical Shipping's acquisition of a crane. Total commitments for
property, plant and equipment at March 31, 2005 were $35.8 million. These
commitments are mostly related to computer system upgrades, a storage compressor
and additional freight handling equipment.

In the first quarter of 2005, Tropical Shipping entered into additional
operating leases totaling $51 million due primarily to extensions to vessel
charter agreements. As of March 31, 2005, the company's operating lease
commitments totaled $34.1 million for 2005, $27.1 million for 2006, $25.0
million for 2007, $24.7 million for 2008, $15.7 million for 2009 and $15.8
million after 2009.





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

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

13. 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 March 31,
2005 Nicor had guaranteed the payment of $0.8 million of lease obligations
extending through February 2007 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 March 31, 2005. 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 $1.1 million and $0.7 million were incurred for the
three months ended March 31, 2005 and March 31, 2004 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 14 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 and 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. There is generally no limitation as to the amount. Expenses associated
with these indemnifications were insignificant in the periods ended March 31,
2005 and 2004. As of March 31, 2005, the company had recorded a remaining
estimated liability of $0.6 million in connection with these indemnifications.
The company does not expect to incur significant additional costs under these
indemnifications.





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

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

14. 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 ICC review.

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

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

In response, the Nicor Board of Directors directed the company's management to,
among other things, make appropriate adjustments to account for, and fully
address, the adverse consequences to ratepayers of the items noted in the
Report, and conduct a detailed study of the adequacy of internal accounting and
regulatory controls. The adjustments were made in 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 March 31, 2005, 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.





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

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

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

On February 5, 2003, the CCSAO and CUB filed a motion for $27 million in
sanctions against the company in the ICC Proceedings. In that motion, CCSAO and
CUB alleged that Nicor Gas' responses to certain CUB data requests were false.
Also on February 5, 2003, CUB stated in a press release that, in addition to $27
million in sanctions, it would seek additional refunds to consumers. On March 5,
2003, the ICC staff filed a response brief in support of CUB's motion for
sanctions. On May 1, 2003, the Administrative Law Judges issued a ruling denying
CUB and CCSAO's motion for sanctions. CUB has filed an appeal of the motion for
sanctions with the ICC, and the ICC has indicated that it will not rule on the
appeal until the final disposition of the ICC Proceedings. It is not possible to
determine how the ICC will resolve the claims of CCSAO, CUB or other parties to
the ICC Proceedings.

In November 2003, the ICC staff, CUB, CCSAO and the Illinois Attorney General's
Office (IAGO) filed their respective direct testimony in the ICC Proceedings.
The ICC staff is seeking refunds to customers of approximately $108 million and
CUB and CCSAO were jointly seeking refunds to customers of approximately $143
million. The IAGO direct testimony alleges adjustments in a range from $145
million to $190 million. The IAGO testimony as filed is presently unclear as to
the amount which IAGO seeks to have refunded to customers. On February 27, 2004
the above referenced intervenors filed their rebuttal testimony in the ICC
Proceedings. In such rebuttal testimony, CUB and CCSAO amended the alleged
amount to be refunded to customers from approximately $143 million to $190
million. Nicor Gas filed rebuttal testimony in January 2004, which is consistent
with the findings of the special committee Report. 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 Inc. Page 15
- -------------------------------------------------------------------------------

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

Nicor is unable to predict the outcome of any of the foregoing reviews or the
company's potential exposure thereunder. Because the PBR plan and historical gas
costs are still under ICC review, the final outcome could be materially
different than the amounts reflected in the company's financial statements as of
March 31, 2005.

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 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 or in the first quarter of 2005, and any future gains or losses are
not expected to be material.

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.

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 16
- -------------------------------------------------------------------------------

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

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, certain current and former officers of Nicor and Arthur
Andersen LLP, the company's former independent auditor. The actions were brought
in the United States District Court for the Northern District of Illinois,
Eastern Division, and were consolidated. The plaintiffs alleged that the
defendants violated Section 10(b) and Section 20(a) of the Securities Exchange
Act of 1934 and Rule 10b-5 thereunder. 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.

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 former CEO), Kathleen
Halloran (former Executive Vice President Finance and Administration and former
Executive Vice President and Chief Risk Officer) and all of the then members of
Nicor's Board of Directors (the "individual defendants"). Nicor was named as a
nominal defendant in all three suits, which were 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 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 Directors and Officers (D&O) insurance proceeds described
below. The court granted final approval of the settlement and entered an Order
of Dismissal on March 29, 2005, subject to an appeal process. In connection with
the derivative settlement, Nicor's excess insurance carrier has paid $4 million
to Nicor to settle certain claims Nicor had asserted arising out of the
securities and derivative class action litigation. Pursuant to the terms of the
settlement, Nicor will pay $3.5 million of that $4 million to plaintiffs'
attorneys to reimburse them for the fees and costs expended in pursuing the
derivative action. The $0.5 million net of these payments has been reflected in
the Consolidated Statement of Operations. The $3.5 million payment is subject to
recoupment in the event there is an appeal and the settlement is overturned on
appeal.

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.





Nicor Inc. Page 17
- -------------------------------------------------------------------------------

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

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 Court
of Cook County, Illinois, seeking 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 March 31, 2005, Nicor Gas had remaining an estimated liability of $19.7
million, representing management's best estimate of future costs, including
potential liabilities relating to remaining lawsuits, based on an evaluation of
currently available information. Actual costs may vary from this estimate. The
company will continue to reassess its estimated obligation and will record any
necessary adjustment, which could be material to operating results in the period
recorded.

Nicor Gas continues to pursue recovery from insurers and independent contractors
that had performed work for the company. 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 March 31, 2005 the
company had recorded a liability of $32.8 million. In accordance with ICC
authorization, the company is and has been recovering these costs from its
customers, subject to annual prudence reviews.





Nicor Inc. Page 18
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Notes to the Consolidated Financial Statements (Unaudited) (continued)
- ----------------------------------------------------------------------

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.

Other. In an 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 April 27, 2004 one of Nicor's 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. Under
the terms of the derivative settlement, once verification has been made that the
settlement is final (because no appeal has been filed or all appeal rights have
been exhausted), the escrow will be terminated and the $29 million, plus
interest, held by the escrow agent will be paid to Nicor. If and when that event
occurs, the $29 million plus interest will be reflected in the Consolidated
Statement of Operations. Nicor also continues to seek reimbursement for other
expenses from its excess insurance carrier 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.





Nicor Inc. Page 19
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Notes to the Consolidated Financial Statements (Unaudited) (concluded)
- ----------------------------------------------------------------------

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 20
- -------------------------------------------------------------------------------

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

The following discussion should be read in conjunction with the Management's
Discussion and Analysis section of the Nicor Inc. (Nicor) 2004 Annual Report on
Form 10-K. Results for the interim periods presented are not necessarily
indicative of the results to be expected for the full fiscal year due to
seasonal and other factors.

SUMMARY

Nicor Inc. 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,
Nicor's second largest business, is a containerized shipping business serving
the Bahamas and the Caribbean region. Nicor also owns or has equity interests in
several energy-related businesses.

Net income and diluted earnings per common share are presented below for the
first quarter 2005 and 2004 (in millions, except per share data):

Three months ended
March 31
--------------------
2005 2004
--------- ---------

Net income $ 43.7 $ 19.6

Diluted earnings per average share of common stock $ .99 $ .44

Net income and diluted earnings per share for the first quarter of 2005 versus
the corresponding period in the prior year were impacted significantly by the
absence of last year's securities class action settlement charge ($38.5 million
pretax). For more information, see the Notes to the Consolidated Financial
Statements - Note 14 Contingencies - Securities Class Actions.

First-quarter 2005 earnings also reflect lower operating results in the
company's gas distribution business and other energy-related businesses, offset
in part by higher operating results in the company's shipping business.

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

Three months ended
March 31
--------------------
2005 2004
--------- ---------

Gas distribution $ 58.4 $ 67.2
Shipping 12.2 4.2
Other energy ventures (1.5) 3.0
Corporate and eliminations .7 (40.1)
--------- ---------
$ 69.8 $ 34.3
========= =========





Nicor Inc. Page 21
- -------------------------------------------------------------------------------

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

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

o The decrease of $8.8 million in gas distribution operating income to $58.4
million in the first quarter of 2005 from $67.2 million in the 2004 first
quarter, was due primarily to higher operating and maintenance expenses
($4.9 million), lower gas distribution margin ($2.0 million) and higher
depreciation expense ($1.3 million) in 2005.

o Shipping operating income increased $8.0 million in the quarter ended
March 31, 2005 compared to the year-earlier period due to increased
revenues ($22.8 million), driven by the impact of higher volumes shipped
and higher average rates. This increase was partially offset by increased
operating expenses ($14.8 million), due primarily to higher voyage, inland
transportation, vessel charter, fuel, payroll-related, leased equipment
and port costs.

o Operating results from Nicor's other energy ventures decreased $4.5
million in the first quarter of 2005 compared to the prior-year period
due to lower operating results at Nicor Enerchange ($7.3 million) due in
part to unfavorable fair value adjustments related to derivative
instruments used to hedge future sales of natural gas inventory. The
decrease in results at Nicor Enerchange was partially offset by improved
operating results at Nicor's energy-related products and services
businesses ($2.9 million). Nicor Enerchange purchases and holds gas in
storage to earn a profit margin from its ultimate sale in the future.
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 accounted for at the
lower of average cost or market; 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.

o The $40.8 million increase in first quarter 2005 operating income
attributed to corporate and eliminations is due primarily to the absence
of last years' securities class action settlement charge ($38.5 million).
For more information, see the Notes to the Consolidated Financial
Statements - Note 14 Contingencies - Securities Class Actions.

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):

Three months ended
March 31
--------------------
2005 2004
--------- ---------

Gas distribution $ 1,078.8 $ 1,035.1
Shipping 90.5 67.7
Other energy ventures 46.7 51.7
Corporate and eliminations (36.2) (38.8)
--------- ---------
$ 1,179.8 $ 1,115.7
========= =========





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and Results of Operations (continued)
-------------------------------------

Gas distribution revenues are impacted by changes in natural gas costs, which
are passed directly through to customers without markup, subject to Illinois
Commerce Commission (ICC) review. For the first quarter of 2005 compared with a
year ago, revenues increased $43.7 million due primarily to higher natural gas
costs ($71.7 million), partially offset by the impact of warmer weather
(approximately $30 million) and lower demand unrelated to weather (approximately
$10 million).

First-quarter 2005 shipping revenues rose $22.8 million compared to the
prior-year period due to a 17 percent increase in volumes shipped ($11.8
million) and higher average rates ($11.0 million). Higher volumes reflect
economic investment, increased tourism and post-hurricane construction activity
in the Caribbean region and the Bahamas. Rates were higher due to general rate
increases across several markets and higher cost-recovery surcharges for fuel
and security.

Revenues in the first quarter of 2005 for other energy ventures decreased $5.0
million due primarily to lower revenues at Nicor Enerchange ($8.2 million)
resulting in part from the aforementioned fair value adjustments related to
derivative contracts. This decrease was partially offset by higher revenues at
Nicor's energy-related products and services businesses ($3.1 million).

Corporate and eliminations reflects primarily the elimination of gas
distribution revenues against Nicor Solutions' expenses for customers purchasing
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):

Three months ended
March 31
--------------------
2005 2004
--------- ---------

Gas distribution revenues $ 1,078.8 $ 1,035.1
Cost of gas (836.8) (792.2)
Revenue tax expense (70.6) (69.5)
--------- ---------
Gas distribution margin $ 171.4 $ 173.4
========= =========

Gas distribution margin decreased $2.0 million in the first quarter of 2005
compared with the corresponding prior-year period due primarily to the impacts
of warmer weather (approximately $2 million) and lower demand unrelated to
weather (approximately $1 million), partially offset by higher average rates
realized during the period ($0.9 million).





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and Results of Operations (continued)
-------------------------------------

Gas distribution operating and maintenance expense. Gas distribution operating
and maintenance expense increased $4.9 million to $68.8 million in the first
quarter of 2005 from $63.9 million in the prior-year period due primarily to
higher general claims ($2.2 million), bad debt expense ($1.7 million), payroll
costs ($1.0 million), employee benefit costs ($0.7 million) and municipal
franchise costs ($0.4 million). These negative factors were partially offset by
lower legal expenses related to the Performance Based Rate (PBR) plan ($2.5
million). For information about the Performance-Based Rate (PBR) plan, see the
Notes to the Consolidated Financial Statements - Note 14 Contingencies.

Shipping operating expenses. Shipping segment operating expenses rose $14.8
million in the first quarter of 2005 as compared with the corresponding
prior-year period. The increase was due primarily to higher voyage, inland
transportation, fuel, leased equipment and port costs ($9.2 million), vessel
charter costs ($2.4 million) and payroll and related costs ($2.0 million). These
increases were due primarily to higher volumes shipped.

Litigation charges (recoveries), net. The $0.5 million net recovery in the first
quarter of 2005 included a shareholder derivative action settlement ($3.5
million) and a related Directors and Officers insurance recovery ($4.0 million).
For more information, see the Notes to the Consolidated Financial Statements -
Note 14 Contingencies - Shareholder Derivative Lawsuits. The first-quarter 2004
charge of $38.5 million reflects the aforementioned securities class action
settlement.

Interest expense. Interest expense of $12.2 million in the first quarter of 2005
increased $0.9 million over the corresponding 2004 period due to the impact of
higher effective interest rates on debt ($2.0 million), offset by the impact of
lower average borrowing levels ($1.1 million).

Income taxes. The company's effective income tax rate was 28.0 percent for the
quarter ended March 31, 2005 and 20.7 percent for the corresponding prior-year
period. The lower effective tax rate in the 2004 quarter reflects the income tax
benefit recorded on the $38.5 million litigation charge at Nicor's marginal
income tax rate of approximately 40 percent.





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and Results of Operations (continued)
-------------------------------------

Gas Distribution Statistics


Three months ended
March 31
------------------------------
2005 2004
------------- ------------
Operating revenues (millions)
Sales
Residential $ 748.6 $ 720.0
Commercial 166.1 158.0
Industrial 23.9 22.7
------------- ------------
938.6 900.7
------------- ------------
Transportation
Residential 8.2 8.1
Commercial 24.7 25.2
Industrial 10.3 10.9
Other 5.1 5.1
------------- ------------
48.3 49.3
------------- ------------
Other revenues
Revenue taxes 72.1 70.9
Environmental cost recovery 11.9 6.6
Chicago Hub 1.9 1.4
Other 6.0 6.2
------------- ------------
91.9 85.1
------------- ------------
$ 1,078.8 $ 1,035.1
============= ============
Deliveries (Bcf)
Sales
Residential 96.3 99.9
Commercial 21.1 21.6
Industrial 3.1 3.2
------------- ------------
120.5 124.7
------------- ------------
Transportation
Residential 8.6 8.8
Commercial 38.9 37.4
Industrial 33.8 36.9
------------- ------------
81.3 83.1
------------- ------------
201.8 207.8
============= ============
Customers at end of period (thousands)
Sales
Residential 1,781.2 1,759.0
Commercial 118.1 115.8
Industrial 7.4 7.4
------------- ------------
1,906.7 1,882.2
------------- ------------
Transportation
Residential 154.6 144.4
Commercial 59.1 58.6
Industrial 6.0 6.2
------------- ------------
219.7 209.2
------------- ------------
2,126.4 2,091.4
============= ============

Other statistics
Degree days 2,966 3,030
Colder (warmer) than normal* (1)% (2)%
Average gas cost per Mcf sold $ 6.90 $ 6.30


*Normal weather for Nicor Gas' service territory, for purposes of this report,
is considered to be about 5,830 degree days per year for 2005 and 6,000 degree
days per year for 2004. On a 6,000 degree day basis, the first quarter of
2005 is 4% warmer than normal.





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and Results of Operations (continued)
-------------------------------------

Shipping Statistics

Three months ended
March 31
--------------------
2005 2004
--------- ---------

TEUs shipped (thousands) 53.6 45.7
Revenue per TEU $ 1,689 $ 1,484
Ports served 25 25
Vessels operated 19 16

FINANCIAL CONDITION AND LIQUIDITY

Operating cash flows. The gas distribution business is highly seasonal and
operating cash flow may fluctuate significantly during the year and from
year-to-year due to factors such as weather, natural gas prices, the timing of
collections from customers, and natural gas purchasing, 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 substantially reduce short-term debt
during the first half of the year. Net cash flow provided from operating
activities increased $85.3 million to $524.1 million in the 2005 first quarter
from $438.8 million in the prior-year period.

In 2003, Nicor received an income tax refund, which adjusted the deferred income
tax liability, of approximately $100 million. The refund was attributable to a
tax loss carryback associated with a change in tax accounting method, and it
remains subject to Internal Revenue Service review and approval as part of
normal ongoing audits.

Investing activities. Net cash flow used for investing activities increased $9.1
million to $47.3 million in the 2005 first quarter from $38.2 million in the
prior-year period due primarily to higher capital spending.

Financing activities. Nicor Inc. and Nicor Gas established two revolving credit
facilities totaling $900 million with major domestic and foreign banks in 2004.
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
available to Nicor Gas, which expired in April 2005. The company had $34.6
million, $490.0 million and $187.0 million of commercial paper borrowings
outstanding at March 31, 2005, December 31, 2004 and March 31, 2004,
respectively. The company is in compliance with the covenants relating to its
short-term line of credit agreements at March 31, 2005. The company expects that
funding from commercial paper and related backup line of credit agreements will
continue to be available in the foreseeable future and sufficient to meet
estimated cash requirements.

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.





Nicor Inc. Page 26
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- ------- -----------------------------------------------------------
and Results of Operations (continued)
-------------------------------------

On March 17, 2005 and on April 21, 2005, Nicor announced a quarterly dividend on
common stock of 46.5 cents per share payable May 1, 2005 and August 1, 2005,
respectively. The dividend declared in March 2005 was accrued as a liability at
March 31, 2005.

Contractual obligations. See Management's Discussion and Analysis of Financial
Condition and Results of Operations in the 2004 Annual Report on Form 10-K for a
discussion of the company's contractual obligations.

In the first quarter of 2005, Tropical Shipping entered into additional
operating leases totaling $51 million due primarily to extensions to vessel
charter agreements. As of March 31, 2005 the company's operating lease
commitments totaled $34.1 million for 2005, $27.1 million for 2006, $25.0
million for 2007, $24.7 million for 2008, $15.7 million for 2009 and $15.8
million after 2009.

OTHER FACTORS THAT MAY AFFECT BUSINESS PERFORMANCE

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 14 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 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 previously
considered by the company as normal.

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

On April 5, 2005, Nicor Gas filed rebuttal testimony with the ICC, in response
to the direct testimony of the ICC staff and intervenors in the proceeding, and
revised its proposed rate increase of approximately $83 million to approximately
$78 million. The revised proposal reflects a 10.82 percent cost of common equity
resulting in a rate of return on original-cost rate base of 9.03 percent.

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.





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and Results of Operations (continued)
-------------------------------------

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. External
weather protection has not been purchased by the company 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 the first quarter of
2005 and 2004, the offsetting impact related to utility-bill management products
was roughly one-third of the gas distribution weather effect.

American Jobs Creation Act. 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 undistributed 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 current federal taxation because of its status 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 by the end of 2005 at an effective federal income tax rate of
5.25 percent.

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 retained by its foreign subsidiaries. Nicor has not provided
deferred income taxes of approximately $14 million on approximately $39 million
of cumulative undistributed earnings of its foreign subsidiaries through March
31, 2005 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 is
approximately $180 million at March 31, 2005. The amount of earnings 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.
These factors include a determination of the maximum eligible repatriation
amount under provisions of the Act and other federal income tax rules and
regulations, as well as the ongoing cash requirements of Tropical Shipping, the
amount of such earnings previously taxed, 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 no later than December 31, 2005.

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.





Nicor Inc. Page 28
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- ------- -----------------------------------------------------------
and Results of Operations (continued)
-------------------------------------

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 ICC review.

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

In response to these allegations, on July 18, 2002, the Nicor Board of Directors
appointed a special committee of independent, non-management directors to
conduct an inquiry into issues surrounding natural gas purchases, sales,
transportation, storage and such other matters as may come to the attention of
the special committee in the course of its investigation. The special committee
presented the report of its counsel (Report) to Nicor's Board of Directors on
October 28, 2002. 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 March 31, 2005, 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





Nicor Inc. Page 29
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- ------- -----------------------------------------------------------
and Results of Operations (continued)
-------------------------------------

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

In November 2003, the ICC staff, CUB, CCSAO and the Illinois Attorney General's
Office (IAGO) filed their respective direct testimony in the ICC Proceedings.
The ICC staff is seeking refunds to customers of approximately $108 million and
CUB and CCSAO were jointly seeking refunds to customers of approximately $143
million. The IAGO direct testimony alleges adjustments in a range from $145
million to $190 million. The IAGO testimony as filed is presently unclear as to
the amount which IAGO seeks to have refunded to customers. On February 27, 2004
the above referenced intervenors filed their rebuttal testimony in the ICC
Proceedings. In such rebuttal testimony, CUB and CCSAO amended the alleged
amount to be refunded to customers from approximately $143 million to $190
million. Nicor Gas filed rebuttal testimony in January 2004, which is consistent
with the findings of the special committee Report. 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
March 31, 2005.

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 14 Contingencies - Nicor Energy.





Nicor Inc. Page 30
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and Results of Operations (continued)
-------------------------------------

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

SEC and U.S. Attorney Inquiries. In 2002, the staff of the SEC informed Nicor
and Nicor Energy that the SEC is conducting a formal inquiry regarding both the
PBR plan and Nicor Energy. A representative of the Office of the United States
Attorney for the Northern District of Illinois has notified Nicor that that
office is conducting an inquiry on the same matters that the SEC is
investigating, and a grand jury is also reviewing these matters. In April 2004,
Nicor was advised by the SEC Division of Enforcement that it intended to
recommend to the SEC that it bring a civil injunctive action against Nicor,
alleging that Nicor violated Sections 17(a) of the Securities Act of 1933 and
Sections 10(b) and 13(a) of the Securities Exchange Act of 1934 and Rules 10b-5,
12b-20, 13a-1 and 13a-13 thereunder. The SEC may also seek injunctive relief,
disgorgement and civil penalties. The SEC staff invited Nicor to make a formal
response (known as a Wells Submission) with respect to the proposed
recommendation. 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 14 Contingencies - Securities Class Actions.

Shareholder Derivative Lawsuits. Certain Nicor executives and members of its
Board of Directors are defendants in a consolidated derivative lawsuit. The
parties have reached an agreement to settle the action which was approved by the
court presiding over the matter on March 29, 2005, subject to an appeal process.
In connection with the derivative settlement, Nicor's excess insurance carrier
has paid $4 million to Nicor to settle certain claims Nicor had asserted arising
out of the securities and derivative class action litigation. Pursuant to the
terms of the settlement, Nicor will pay $3.5 million of that $4 million to
plaintiff's attorneys to reimburse them for the fees and costs expended in
pursuing the derivative action. The $0.5 million net of these payments has been
reflected in the Consolidated Statement of Operations. The $3.5 million payment
is subject to recoupment in the event there is an appeal and the settlement is
overturned on appeal. Further information about this lawsuit is presented
within the Notes to the Consolidated Financial Statements - Note 14
Contingencies - Shareholder Derivative Lawsuits. See also the "Other
contingencies" section for information on additional insurance recoveries.





Nicor Inc. Page 31
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- ------- -----------------------------------------------------------
and Results of Operations (continued)
-------------------------------------

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 14 Contingencies - Mercury.

Manufactured gas plant sites. The company is conducting environmental
investigations and remedial activities at former manufactured gas plant sites.
Additional information about these sites is presented in the Notes to the
Consolidated Financial Statements - Note 14 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 14 Contingencies - Fixed Bill
Service.

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 4 Income Taxes and
Note 14 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. Under the
terms of the derivative settlement, once verification has been made that the
settlement is final (because no appeal has been filed or all appeal rights have
been exhausted), the escrow will be terminated and the $29 million, plus
interest, held by the escrow agent will be paid to Nicor. If and when that event
occurs, the $29 million plus interest will be reflected in the Consolidated
Statement of Operations. Nicor also continues to seek reimbursement for other
expenses from its excess insurance carrier 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.

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.

There has been no material change in the company's exposure to market risk since
the filing of the 2004 Annual Report on Form 10-K.

Energy trading activities. At March 31, 2005, Nicor Enerchange 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 $ (1.0) $ (1.0) $ - $ -
Prices based on pricing models .3 .1 .2 -
---------- --------- -------- --------
Total $ (.7) $ (.9) $ .2 $ -
========== ========= ======== ========





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

Item 2. Management's Discussion and Analysis of Financial Condition
- ------- -----------------------------------------------------------
and Results of Operations (concluded)
-------------------------------------

See Management's Discussion and Analysis of Financial Condition and Results of
Operations - Other Factors That May Affect Business Performance in the 2004
Annual Report on Form 10-K for a detailed discussion of additional factors that
may affect the company's business performance.

CRITICAL ACCOUNTING ESTIMATES

See Management's Discussion and Analysis of Financial Condition and Results of
Operations - Critical Accounting Estimates in the 2004 Annual Report on Form
10-K for a discussion of the company's critical accounting estimates.

NEW ACCOUNTING PRONOUNCEMENTS

The Financial Accounting Standards Board (FASB) has issued three new
pronouncements that have not yet been adopted by Nicor as of March 31, 2005. In
March 2005, the FASB issued Interpretation No. 47, Accounting for Conditional
Asset Retirement Obligations (FIN 47). In December 2004, the FASB issued
Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004),
Share-Based Payment (SFAS 123R) and 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). For more information, see the
Notes to the Consolidated Financial Statements - Note 2 New Accounting
Pronouncements.

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
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 3. 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.

Item 4. Controls and Procedures
- ------- -----------------------

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

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

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

PART II - OTHER INFORMATION

Item 1. Legal Proceedings
- ------- -----------------

See Management's Discussion and Analysis of Financial Condition and Results of
Operations - Contingencies and the Notes to the Consolidated Financial
Statements - Note 11 Rate Proceeding and Note 14 Contingencies, which are
incorporated herein by reference.





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

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
- ------- -----------------------------------------------------------

(c) Issuer Purchases of Equity Securities.


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

January 1 to 31, 2005 - $ - $ - $ 21,513,176
February 1 to 28, 2005 - - - 21,513,176
March 1 to 31, 2005 - - - 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 have been no
repurchases under this program during the first quarter of 2005.

Item 6. Exhibits
- ------- --------

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.)





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

Item 6. Exhibits (concluded)
- ------- --------------------

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

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

10.02 * Non-Qualified Stock Option Agreement Form. (File No. 1-7297, Form
8-K for March 17, 2005, Nicor Inc., Exhibit 10.01.)

10.03 * Performance Cash Unit Agreement Form. (File No. 1-7297, Form 8-K
for March 17, 2005, Nicor Inc., Exhibit 10.02.)

10.04 * 2005 Long-Term Incentive Program. (File No. 1-7297, Form 8-K for
March 17, 2005, Nicor Inc., Exhibit 10.03.)

10.05 2005 Incentive Compensation Plan.

10.06 Stipulation and Agreement of Settlement of Shareholder Derivative
Litigation dated as of February 16, 2005.

10.07 Final Judgment and Order of Dismissal dated as of March 29, 2005.

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.





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

Signature
- ---------

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




Nicor Inc.

May 3, 2005 /s/ RICHARD L. HAWLEY
------------- --------------------------
(Date) Richard L. Hawley
Executive Vice President and
Chief Financial Officer