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


                                    FORM 10-Q


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

           For the quarterly period ended September 30, 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 by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X].

      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 October 27, 2005, were 44,176,687 shares.



Nicor Inc.

Table of Contents
-----------------

Glossary ................................................................... ii

Part I - Financial Information

   Item 1. Financial Statements (Unaudited)

           Condensed Consolidated Statements of Operations:
             Three and nine months ended
             September 30, 2005 and 2004 ...................................  1

           Condensed Consolidated Statements of Cash Flows:
             Nine months ended
             September 30, 2005 and 2004 ...................................  2

           Condensed Consolidated Balance Sheets:
             September 30, 2005 and 2004, and
             December 31, 2004 .............................................  3

           Notes to the Condensed Consolidated Financial Statements.........  4

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

   Item 3. Quantitative and Qualitative Disclosures About Market Risk....... 36

   Item 4. Controls and Procedures ......................................... 36

Part II - Other Information

   Item 1. Legal Proceedings ............................................... 36

   Item 2. Unregistered Sales of Equity Securities and Use of Proceeds...... 37

   Item 6. Exhibits ........................................................ 37

   Signature ............................................................... 39



Nicor Inc.

Glossary
--------

Chicago Hub. A wholly owned venture of Northern Illinois Gas Company, doing
business as Nicor Gas Company ("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 customer relationship
management services to businesses and product warranty contracts, heating,
ventilation and air conditioning repair, maintenance and installation services
and equipment to retail markets, including residential and small commercial
customers.

Nicor Solutions. 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.



                                       ii



Glossary (concluded)
--------------------

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 Inc. has an investment.

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








                                       iii


Part I - FINANCIAL INFORMATION

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

Nicor Inc.
Condensed Consolidated Statements of Operations (Unaudited)
(millions, except per share data)
                                          Three months ended  Nine months ended
                                             September 30       September 30
                                          ------------------  -----------------
                                             2005     2004      2005     2004
                                          --------- --------  --------  -------

Operating revenues
   Gas distribution (includes revenue taxes
    of $12.8, $13.4, $112.4 and $109.5,
    respectively)                          $ 241.5  $ 225.1  $1,692.6  $1,598.6
   Shipping                                   91.9     73.2     274.7     213.3
   Other energy ventures                       9.2      9.7      89.7      94.9
   Corporate and eliminations                 (6.6)    (8.1)    (56.8)    (61.7)
                                           -------- --------  --------  -------
                                             336.0    299.9   2,000.2   1,845.1
Operating expenses
   Gas distribution
    Cost of gas                              134.9    118.4   1,202.3   1,111.1
    Operating and maintenance                 51.0     55.3     178.4     173.9
    Depreciation                              38.6     37.2     115.9     111.8
    Taxes, other than income taxes            16.6     17.1     124.0     120.8
    Mercury-related costs
     (recoveries), net                          .1      (.3)       .3       (.2)
    Property sale gains                        (.1)       -       (.2)     (5.5)
   Shipping                                   82.5     68.1     242.8     197.1
   Other energy ventures                      20.9     19.2      98.3      96.1
   Litigation charges (recoveries), net          -        -     (29.9)     38.5
   Other corporate expenses and
     eliminations                             (9.1)    (5.5)    (60.1)    (56.3)
                                           -------- --------  --------  -------
                                             335.4    309.5   1,871.8   1,787.3
                                           -------- --------  --------  -------
Operating income (loss)                         .6     (9.6)    128.4      57.8
Interest expense, net of amounts
  capitalized                                 10.6     10.8      32.8      30.3
Net equity investment income                   2.9      1.1       6.8       4.0
Net other income                               1.5       .7       4.7       2.0
                                           -------- --------  --------  -------
Income (loss) before income taxes             (5.6)   (18.6)    107.1      33.5
Income tax (benefit) expense                  (2.9)    (7.0)     32.7       6.0
                                           -------- --------  --------  -------
Net income (loss)                          $  (2.7) $ (11.6) $   74.4  $   27.5
                                           ======== ========  ========  =======

Average shares of common stock outstanding
   Basic                                      44.2     44.1      44.1      44.0
   Diluted                                    44.5     44.1      44.4      44.3

Earnings (loss) per average share
 of common stock
   Basic                                   $  (.06) $  (.26) $   1.69  $    .62
   Diluted                                    (.06)    (.26)     1.67       .62

Dividends declared per share of common
 stock                                     $  .465  $  .465  $  1.395  $  1.395


The accompanying notes are an integral part of these statements.

                                       1



Nicor Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(millions)
                                                            Nine months ended
                                                               September 30
                                                           -------------------
                                                             2005       2004
                                                           --------  ---------
Operating activities
   Net income                                              $  74.4   $    27.5
   Adjustments to reconcile net income to net cash flow
     provided from operating activities:
      Depreciation                                           129.3       125.2
      Deferred income tax (benefit) expense                  (46.9)       12.0
      Gain on sale of property, plant and equipment            (.1)       (5.5)
      Gain on whole-life insurance policy proceeds            (1.2)          -
      Changes in assets and liabilities:
        Receivables, less allowances                         291.0       241.4
        Gas in storage                                      (136.6)     (113.5)
        Deferred/accrued gas costs                           217.2        45.4
        Other assets                                         (92.0)      (53.7)
        Accounts payable                                     130.1        78.8
        Other liabilities                                      7.3         3.8
      Other items                                             24.9         6.8
                                                           --------  ---------
   Net cash flow provided from operating activities          597.4       368.2
                                                           --------  ---------

Investing activities
   Capital expenditures                                     (145.4)    (133.2)
   Purchases of available-for-sale securities                    -      (20.5)
   Proceeds from sales of available-for-sale securities          -        5.5
   Net (increase) decrease in other short-term 
     investments                                             (34.9)       5.5
   Net proceeds from sale of property, plant and
     equipment                                                  .4        7.5
   Other investing activities                                 (1.1)      (1.4)
                                                           --------  ---------
   Net cash flow used for investing activities              (181.0)    (136.6)
                                                           --------  ---------

Financing activities
   Commercial paper issuances with maturities 
     over 90 days                                                -       35.0
   Commercial paper repayments with maturities
     over 90 days                                                -     (575.0)
   Net issuances (repayments) of commercial paper with
     maturities of 90 days or less                          (346.0)     355.0
   Dividends paid                                            (61.6)     (61.5)
   Borrowings against cash surrender value of life
     insurance policies                                          -       26.1
   Repayment of loan against cash surrender value of 
     life insurance policies                                     -      (11.7)
   Other financing activities                                  1.7        1.5
                                                           --------  ---------
   Net cash flow used for financing activities              (405.9)    (230.6)
                                                           --------  ---------

Net increase in cash and cash equivalents                     10.5        1.0

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

Cash and cash equivalents, end of period                   $  23.4   $   51.3
                                                           ========  =========

Supplemental schedule of noncash investing and financing activities:

In the second quarter of 2004, one of Nicor's Directors and Officers insurance
carriers paid $29.0 million into an escrow account as described in Note 4.
Assets and liabilities were recorded as follows:

    Restricted short-term investments                                $   29.0
    Obligation related to restricted investments                         29.0

During the second quarter of 2005, the escrow arrangement was terminated and
the full amount of the escrow of $29.0 million plus the earnings thereon of
$0.4 million, was distributed to the company and recorded in income.  The
release of the amount from escrow and the change in the obligation related to
the restricted investment are netted in Investing activities above.


The accompanying notes are an integral part of these statements.

                                       2


Nicor Inc.
Condensed Consolidated Balance Sheets (Unaudited)
(millions)


                                        September 30  December 31  September 30
                                            2005         2004          2004
                                        ------------  -----------  ------------
            Assets
            ------
Current assets
   Cash and cash equivalents             $     23.4    $    12.9    $    51.3
   Restricted short-term investments              -         29.1         29.0
   Short-term investments, at cost which
     approximates market                       87.3         41.2         29.4
   Receivables, less allowances of $26.6,
     $21.9 and $24.4, respectively            292.2        583.2        220.3
   Gas in storage                             357.3        220.7        347.5
   Deferred income taxes                        4.6         72.3         76.8
   Other                                      163.7         61.5        110.1
                                           ---------    ---------    ---------
                                              928.5      1,020.9        864.4
                                           ---------    ---------    ---------
Property, plant and equipment, at cost
   Gas distribution                         3,933.2      3,831.6      3,791.8
   Shipping                                   304.0        300.8        300.0
   Other                                       12.4         11.2         10.2
                                           ---------    ---------    ---------
                                            4,249.6      4,143.6      4,102.0
   Less accumulated depreciation            1,650.4      1,593.8      1,575.6
                                           ---------    ---------    ---------
                                            2,599.2      2,549.8      2,526.4
                                           ---------    ---------    ---------
Prepaid pension costs                         186.1        181.5        180.4
Long-term investments                         132.1        137.6        138.3
Other assets                                   72.4         85.4         86.3
                                           ---------    ---------    ---------
                                          $ 3,918.3    $ 3,975.2    $ 3,795.8
                                           =========    =========    =========

    Liabilities and Capitalization
    ------------------------------
Current liabilities
   Short-term borrowings                  $   144.0    $   490.0    $   390.0
   Accounts payable                           633.0        502.9        457.6
   Accrued gas costs                          285.5         68.3         92.4
   Dividends payable                           20.5         20.5         20.5
   Deferred income taxes                        7.6            -            -
   Obligations related to restricted
     investments                                  -         29.1         29.0
   Other                                       71.0         60.6         56.2
                                           ---------    ---------    ---------
                                            1,161.6      1,171.4      1,045.7
                                           ---------    ---------    ---------
Deferred credits and other liabilities
   Accrued future removal costs               742.8        706.4        694.4
   Deferred income taxes                      484.7        593.4        584.5
   Regulatory income tax liability             42.3         44.8         46.6
   Unamortized investment tax credits          32.2         33.8         34.1
   Other liabilities                          177.5        179.4        167.5
                                           ---------    ---------    ---------
                                            1,479.5      1,557.8      1,527.1
                                           ---------    ---------    ---------
Capitalization
  Long-term obligations
    Long-term bonds and notes, net of 
      unamortized discount                    495.7        495.3        495.1
    Mandatorily redeemable preferred stock       .6          1.6          1.6
                                           ---------    ---------    ---------
                                              496.3        496.9        496.7
                                           ---------    ---------    ---------
   Common equity
    Common stock                              110.5        110.2        110.2
    Paid-in capital                             7.9          5.6          5.0
    Retained earnings                         653.0        640.3        613.1
    Unearned compensation                       (.1)         (.2)         (.1)
    Accumulated other comprehensive
      income (loss), net                        9.6         (6.8)        (1.9)
                                           ---------    ---------    ---------
                                              780.9        749.1        726.3
                                           ---------    ---------    ---------
                                            1,277.2      1,246.0      1,223.0
                                           ---------    ---------    ---------
                                          $ 3,918.3    $ 3,975.2    $ 3,795.8
                                           =========    =========    =========


The accompanying notes are an integral part of these statements.

                                       3


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

1.   BASIS OF PRESENTATION

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 note disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States have been condensed or omitted pursuant to SEC rules and
regulations. The condensed financial statements and notes 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.

2.   ACCOUNTING POLICIES

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

                                        September 30  December 31  September 30
                                            2005         2004          2004
                                        ------------  -----------  ------------
   Regulatory assets
   Deferred environmental costs          $    20.0     $    35.4    $    34.3
   Unamortized losses on reacquired debt      19.0          19.9         20.1
   Deferred rate case costs                    3.6           2.9          2.4
   Other                                        .4             -            -
                                        ------------  -----------  ------------
                                         $    43.0     $    58.2    $    56.8
                                        ============  ===========  ============
                                 
   Regulatory liabilities
   Accrued future removal costs -
     current                             $    12.1     $    11.6     $   11.6
   Accrued future removal costs -
     noncurrent                              742.8         706.4        694.4
   Accrued gas costs                         285.5          68.3         92.4
   Regulatory income tax liability            42.3          44.8         46.6
   Other                                       7.7            .7          3.4
                                        ------------  -----------  ------------
                                         $ 1,090.4     $   831.8    $   848.4
                                        ============  ===========  ============

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



                                        4



Revenue taxes. Nicor Gas classifies revenue taxes billed to customers as
operating revenues and related taxes incurred as operating expenses. Revenue
taxes included in operating expense for the three and nine months ended
September 30, 2005 were $11.9 million and $109.2 million, respectively, and
$12.6 million and $106.6 million, respectively, for the same periods ending
September 30, 2004.

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

3.  NEW ACCOUNTING PRONOUNCEMENTS

Accounting Changes and Error Corrections. In May 2005, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standard
("SFAS") No. 154, Accounting Changes and Error Corrections - a replacement of
APB Opinion No. 20 and FASB Statement No. 3. The statement requires
retrospective application of voluntary changes in accounting principle and error
corrections. Retrospective application is also required for mandatory changes in
accounting principle if the transition method is not prescribed. The statement
is effective for the company beginning January 1, 2006 and will be adopted
prospectively at that time.

Accounting for Conditional Asset Retirement Obligations. In March 2005, the 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 will be adopted prospectively at
that time. 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 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 will 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, such as stock
appreciation rights, 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, which will require the entire discount to be charged to
expense. The provisions of SFAS 123R are effective for Nicor beginning January
1, 2006 and will be adopted on a modified prospective basis at that time. The
company has substantially completed its evaluation of SFAS 123R and the
implementation of this standard is not expected to have a material impact on the
company's cash flow, financial position or results of operations.

At September 30, 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):



                                        5



                                    Three months ended      Nine months ended
                                       September 30            September 30
                                    ------------------     ------------------
                                      2005      2004         2005      2004
                                    --------  --------     --------  --------

 Net income (loss)
   As reported                      $  (2.7)  $ (11.6)     $  74.4    $ 27.5
   Less: Total stock-based
         employee compensation
         expense determined under
         the fair value method for
         all awards, net of tax          .3        .2           .9        .7
                                    --------  --------     --------  --------
   Pro forma                        $  (3.0)  $ (11.8)     $  73.5   $  26.8
                                    ========  ========     ========  ========


 Earnings (loss) per share
     Basic - As reported            $  (.06)  $  (.26)     $  1.69   $   .62
     Basic - Pro forma                 (.07)     (.27)        1.66       .61
     Diluted - As reported             (.06)     (.26)        1.67       .62
     Diluted - Pro forma               (.07)     (.27)        1.65       .60


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 (the "Jobs Act") ("FSP 109-2"). FSP 109-2 provides additional time and
guidance for companies to determine the Jobs Act's effects on their plans for
reinvestment or repatriation. The company's repatriation strategy and the
related income tax benefit, if any, will be finalized and recognized in the
fourth quarter. (See Note 7 Income and Other Taxes).

4.  RESTRICTED SHORT-TERM INVESTMENTS

At September 30, 2004, Nicor had $29.0 million of restricted short-term
investments held in an escrow fund and a corresponding $29.0 million current
liability. The escrow fund was established through a $29.0 million deposit by
one of Nicor's Directors and Officers insurance carriers to be used to satisfy
Nicor's directors' and officers' liabilities and expenses associated with claims
asserted against them, with any remaining balance to be paid to Nicor. On May
17, 2005 the restriction on this fund ceased, and the funds were released to the
company. As of September 30, 2005 no restricted short-term investments remained.
(See also Note 17 Contingencies.)

5.  SHORT-TERM DEBT

In September 2005, Nicor and Nicor Gas established two revolving credit
facilities totaling $1 billion with major domestic and foreign banks, which
replace the $500 million, three-year revolver, which was to expire in September
2007 and the $400 million, 210-day seasonal revolver, which expired in April
2005. In connection with this replacement, the company charged to interest
expense $0.8 million of unamortized costs on the $500 million revolver.

The new replacement facilities, which serve as backup for the issuance of
commercial paper, consist of a $600 million, 5-year revolver, expiring September
2010, available to Nicor Inc. and Nicor Gas, and a $400 million, 210-day
seasonal revolver, expiring in April 2006, available to Nicor Gas. The company
had $144.0 million, $490.0 million and $390.0 million of commercial paper
borrowings outstanding at September 30, 2005, December 31, 2004 and September
30, 2004, respectively. The company believes it is in compliance with all debt
covenants at September 30, 2005.



                                        6



6.  MANDATORILY REDEEMABLE PREFERRED STOCK

During September 2005, Nicor's Board of Directors approved the redemption of the
company's remaining outstanding shares of 5% Series Mandatorily Redeemable
Preferred Stock, (approximately 20,000 shares) $50 par value. The per share
redemption price is $51 plus accrued and unpaid dividends of $0.225 up to the
redemption date of November 3, 2005. As of September 30, 2005, the company
reported the outstanding obligation as a $1.0 million current other liability.

7.  INCOME AND OTHER TAXES

Effective Income Tax Rate. The overall effective income tax rate for the nine
months ended September 30, 2005 increased over the corresponding prior-year rate
to 30.6 percent from 17.9 percent. These rates reflect recording income taxes on
the 2004 net litigation charge ($38.5 million) and the related 2005 net
recoveries and earnings thereon ($29.9 million) at Nicor's marginal income tax
rate of approximately 40 percent as well as miscellaneous third quarter 2005
income tax benefits ($1.5 million). Without giving effect to these transactions,
Nicor's 2005 and 2004 year-to-date effective tax rates were 29.0 percent and
29.6 percent, respectively.

The overall effective income tax rate for the three months ended September 30,
2005, increased to 51.3 percent from the corresponding prior period rate of 37.9
percent. Without giving effect to miscellaneous income tax benefits ($1.5
million) recorded during the quarter ended September 30, 2005, the effective
income tax rate for the quarter was 24.5 percent compared to 37.9 percent for
the 2004 quarter. These quarterly effective income tax rates reflect changes to
forecasted annual income in the third quarter of each year. Such changes are not
significant for the year-to-date periods, but they can have a disproportionate
impact on the third quarter effective income tax rate as the income before
income taxes is relatively low.

Tax Uncertainties. The company accrues income and other taxes 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 September 30,
2005, December 31, 2004 and September 30, 2004, the company had accrued
approximately $8.1 million, $6.3 million and $6.5 million, respectively, for
such uncertainties.

In 2003, Nicor received an income tax refund of approximately $100 million
attributable to a tax loss carryback associated with a change in tax accounting
method, (which increased its deferred income tax liability), subject to Internal
Revenue Service ("IRS") review and approval as part of normal ongoing audits.
Through December 31, 2004, the total current tax benefits previously recorded
under this accounting method approximate $135 million (amounts recorded were
offset by increases to the deferred tax liability with no net effect on reported
net federal income tax expense). In the third quarter of 2005, the IRS revised
the regulations pertaining to the aforementioned tax accounting method. The new
regulations require repayment in 2005 and 2006 of amounts previously taken as
current tax deductions. As a result of this revision, the company reclassified
from deferred to current income tax expense approximately $50 million,
reflecting the amount repaid during the third quarter 2005. The company expects
to repay the remaining amounts during the fourth quarter of 2005 and in 2006.
The anticipated repayment is expected to have no direct impact on earnings and
no material impact on the company's financial condition.

American Jobs Creation Act. On October 22, 2004, the Jobs Act of 2004 was
enacted. Certain provisions of the Jobs Act may impact income taxes related to
the earnings of foreign subsidiaries of Tropical Shipping. One provision
provides that a portion of a foreign subsidiary's income would no longer be
subject to current federal taxation because of its status as shipping income,
beginning in 2005,



                                        7



to the extent such earnings are retained by the foreign subsidiary. Another
provision of the Jobs 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 $17 million on approximately $47 million
of cumulative undistributed earnings of its foreign subsidiaries through
September 30, 2005 that were considered to be indefinitely invested in foreign
operations.

The company is continuing to evaluate the amounts to ultimately be repatriated
from its foreign subsidiaries. The company currently estimates amounts
repatriated will range from $80 million to $210 million. The related federal
income tax benefit that would result from repatriation ranges from zero to $34
million. Amounts in excess of $80 million would require obtaining
outside funds at the foreign subsidiaries' level. Financial statements for the
period ended September 30, 2005 have no benefit reflected related to
repatriation. The amount ultimately repatriated and the ultimate federal income
tax benefit recognized are subject to several factors, including, without
limitation, a determination of the maximum eligible repatriation amount under
provisions of the Jobs Act and other federal income tax rules and regulations,
the cost, terms and availability of financing to 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. Nicor is currently
assessing the impact on its financial statements of any repatriation and will
complete its assessment in the fourth quarter of 2005. Nicor is unable to
determine the income tax benefit, if any, of such repatriation. However, the
effect could be material to financial statements for the fourth quarter of 2005,
and for the calendar year 2005.

The extent to which Tropical Shipping's ongoing earnings will be subject to
federal taxation will be dependent upon several factors, including, without
limitation, the amount of distributions, if any, to its United States parent and
the clarification of certain provisions of the Jobs Act and its impact on other
federal income tax rules and regulations.

8.   ACCRUED UNBILLED REVENUES

Receivables include accrued unbilled revenues of $52.9 million, $205.0 million
and $44.5 million at September 30, 2005, December 31, 2004 and September 30,
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.

9.   FAIR VALUE OF FINANCIAL INSTRUMENTS

The recorded amount of short-term investments and short-term borrowings
approximates fair value because of the short maturity of the instruments.
Long-term debt outstanding, including current maturities, is recorded at the
principal balance outstanding, net of unamortized discount and issuance costs.
The principal balance of Nicor Gas' First Mortgage Bonds outstanding at
September 30, 2005, December 31, 2004 and September 30, 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 $531
million, $530 million and $534 million at September 30, 2005, December 31, 2004
and September 30, 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 $104.3 million and
$(13.5) million, respectively, at September 30, 2005, $5.8 million and $(2.3)
million,



                                        8



respectively, at December 31, 2004 and $20.5 million and $(3.5) million,
respectively, at September 30, 2004, excluding the value of exchange traded
daily settled contracts. As of September 30, 2005, $100.2 million of the $104.3
million gross asset fair value was classified as current other assets. The fair
value of derivative financial instruments held on September 30, 2005 relates
primarily to Nicor Gas. The majority of 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.

10.   POSTRETIREMENT BENEFITS

Nicor Gas maintains a noncontributory defined benefit pension plan covering
substantially all employees hired prior to 1998. Pension benefits are based on
years of service and highest average salary for management employees and job
level for unionized employees. The benefit obligation related to collectively
bargained benefits considers the company's past practice of regular benefit
increases to reflect current wages. Nicor Gas also provides health care and life
insurance benefits to eligible retired employees under a plan that includes a
limit on the company's share of cost for 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 September 30
   Service cost                           $  2.3  $  2.2    $   .7   $   .6
   Interest cost                             3.9     3.9       2.6      2.5
   Expected return on plan assets           (8.3)   (7.9)      (.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
                                          ======= =======   =======  =======

 Nine months ended September 30
   Service cost                           $  7.0  $  6.7    $  2.0   $  1.8
   Interest cost                            11.7    11.8       7.7      7.6
   Expected return on plan assets          (24.9)  (23.8)      (.7)     (.7)
   Recognized net actuarial loss             1.1     1.5       3.8      3.4
   Amortization of prior service cost         .5      .5       (.1)      .1
                                          ------- -------   -------  -------
   Net periodic benefit cost (credit)     $ (4.6) $ (3.3)   $ 12.7   $ 12.2
                                          ======= =======   =======  =======

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 and $1.8 million for the
three and nine month periods ended September 30, 2005, respectively. This
reduction was offset by general medical cost increases.



                                        9



11.   NET EQUITY INVESTMENT INCOME

Net equity investment income totaled $2.9 million and $6.8 million,
respectively, for the three and nine-month periods ended September 30, 2005 and
$1.1 million and $4.0 million, respectively, for the same periods ended
September 30, 2004. These amounts include investment income from Triton
Container Investments LLC ("Triton"), a cargo container leasing company, of $1.7
million and $5.3 million, respectively, for the three and nine-month periods
ended September 30, 2005 and $1.5 million and $4.5 million, respectively, for
the periods ended September 30, 2004. Nicor received cash distributions from
equity investees for the three and nine-month periods ended September 30, 2005
of $1.0 million and $3.5 million, respectively, and $0.2 million and $3.0
million, for the same periods ended September 30, 2004, respectively.

12.   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   Nine months ended
                                           September 30        September 30
                                        ------------------   -----------------
                                          2005      2004       2005     2004
                                        --------  --------   -------  --------

Net income (loss)                       $  (2.7)  $ (11.6)   $ 74.4   $ 27.5
Other comprehensive income, after tax      13.8       3.6      16.4      4.1
                                        --------  --------   -------  --------
Total comprehensive income (loss)       $  11.1   $  (8.0)   $ 90.8   $ 31.6
                                        ========  ========   =======  ========

Net other comprehensive income in the nine-month period ended September 30, 2005
consists primarily of net unrealized gains 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.

13.   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 September 30, 2005
   Operating revenues
    External customers                $     235.7   $    91.9   $    8.4   $          -   $     336.0
    Intersegment                              5.8           -         .8           (6.6)            -
                                      ------------  ----------  ---------  -------------  ------------
                                      $     241.5   $    91.9   $    9.2   $       (6.6)  $     336.0
                                      ============  ==========  =========  =============  ============

   Operating income (loss)            $        .4   $     9.4   $  (11.7)  $        2.5   $        .6

  Three months ended September 30, 2004
   Operating revenues
    External customers                $     217.7   $    73.2   $    9.0   $          -   $     299.9
    Intersegment                              7.4           -         .7           (8.1)            -
                                      ------------  ----------  ---------  -------------  ------------
                                      $     225.1   $    73.2   $    9.7   $       (8.1)  $     299.9
                                      ============  ==========  =========  =============  ============

   Operating income (loss)            $      (2.6)  $     5.1   $   (9.5)  $       (2.6)  $      (9.6)




                                       10





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

                                                                           

  Nine months ended September 30, 2005
   Operating revenues
    External customers                $   1,641.5   $   274.7   $   84.0   $          -   $   2,000.2
    Intersegment                             51.1           -        5.7          (56.8)            -
                                      ------------  ----------  ---------  -------------  ------------
                                      $   1,692.6   $   274.7   $   89.7   $      (56.8)  $   2,000.2
                                      ============  ==========  =========  =============  ============

   Operating income (loss)            $      71.9   $    31.9   $   (8.6)  $       33.2   $     128.4

  Nine months ended September 30, 2004
   Operating revenues
    External customers                $   1,541.6   $   213.3   $   90.2   $          -   $   1,845.1
    Intersegment                             57.0           -        4.7          (61.7)            -
                                      ------------  ----------  ---------  -------------  ------------
                                      $   1,598.6   $   213.3   $   94.9   $      (61.7)  $   1,845.1
                                      ============  ==========  =========  =============  ============

   Operating income (loss)            $      86.7   $    16.2   $   (1.2)  $      (43.9)  $      57.8



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.

The $33.2 million operating income in the "Corporate and eliminations" column
for the nine months ended September 30, 2005 includes $29.9 million of net
insurance recoveries of litigation settlements in the first and second quarters
of 2005. The $43.9 million operating loss in the "Corporate and eliminations"
column for the nine months ended September 30, 2004 includes a $38.5 million
litigation charge recorded in the first quarter of 2004. Both the 2005 net
recoveries and the 2004 litigation charge relate to shareholder derivative
lawsuits and securities class action lawsuits. See Note 17 Contingencies -
Securities Class Actions, Shareholder Derivative Lawsuits, and Other. Also
included in operating income in the "Corporate and eliminations" column for the
three and nine months ended September 30, 2005 is $2.6 million in insurance
recoveries related to previously incurred legal expenses associated with the
securities class action and shareholder derivative lawsuit settlements.
Corporate operating expenses also include unallocated legal and business
development costs.

14.   RATE PROCEEDING

Nicor Gas filed a request with the ICC for an overall increase in rates on
November 4, 2004. On September 30, 2005, the company announced that its gas
distribution business, Nicor Gas, received approval from the ICC for a $54.2
million base rate increase. On the same day, Nicor Gas filed tariffs that it
believed complied with the ICC's order. However, the Chief Clerk of the ICC
purported to reject those tariff sheets as not in compliance with the rate
order. On October 4, 2005, Nicor Gas filed revised tariffs that were accepted by
the Chief Clerk of the ICC. On October 5, 2005, Nicor Gas filed a motion
requesting a ruling from the ICC that the original tariffs filed on September
30, 2005, complied with the ICC's rate order.

On October 18, 2005 Nicor Gas filed an application for rehearing of the final
order of the rate case with the ICC. The ICC on November 2, 2005, granted in
part and denied in part Nicor Gas' Application for



                                       11




Rehearing in its general rate case.  The ICC granted rehearing with respect to:
the effect of updated gas prices on a portion of uncollectible expense, the
allocation of therms to Nicor Gas' general residential rate, and the need to
remove certain storage charges so as to preserve the balance between bundled
rates and transportation rates available to Nicor Gas' large customers. The ICC
denied rehearing as to the remaining issues raised in Nicor Gas' Application. In
addition, four intervening parties to the case also filed applications for
rehearing. It is expected that the ICC shall accept or deny these applications
in November 2005.

The revised tariffs filed with the ICC on October 4, 2005 were designed to
result in a base rate increase of approximately $48.8 million and were based on
an allowed rate of return on original-cost rate base of 8.85 percent, which
reflects a 10.51 percent cost of common equity.  The order also included the
authorization to pass all Chicago Hub revenues directly through to customers as
a credit to Nicor Gas' purchase gas adjustment ("PGA") rider and the shifting of
certain storage-related costs from the PGA rider to base rates. In addition,
rates were established using a 10-year average for weather as opposed to the
previous use of a 30-year average.

15. COMMITMENTS

During the nine months ended September 30, 2005, property, plant and equipment
purchase obligations decreased $12.0 million to $20.2 million. These commitments
are mostly related to computer system upgrades.

In the first nine months of 2005, Tropical Shipping's operating lease
commitments increased $22.9 million (net of 2005 year-to-date rental payments
made) due primarily to the extension of vessel charter agreements. Tropical
Shipping has certain equipment operating leases which include early termination
options, purchase options, and renewal options, at fair market rental amounts at
the time of renewal. Total rent expense during the three and nine-month periods
ended September 30, 2005 was $9.0 million and $26.6 million, respectively,
compared to $6.8 million and $18.9 million for the corresponding prior-year
periods.

Nicor has operating lease commitments with payments due during each calendar
year as follows (in millions):

                     Remainder                                  After
                      of 2005    2006    2007    2008    2009    2009    Total
                     ---------  ------  ------  ------  ------  ------  --------
  
Operating leases       $  9.8   $ 28.7  $ 24.5  $ 21.6  $ 10.2  $ 18.2  $ 113.0

16. 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 Condensed Consolidated Balance Sheet,
while the obligations of its unconsolidated equity investments are not. As of
September 30, 2005, Nicor had guaranteed the payment of $0.7 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. Nicor believes the likelihood of payment under this
guarantee is remote.



                                       12



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 approximately $6
million at September 30, 2005. Nicor believes the likelihood of any such payment
by TEL is either remote, or the fair value of the guarantee is immaterial, and
no liability has been recorded 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 $1.2 million and $3.3 million were incurred in the
three and nine months ended September 30, 2005, respectively, and $0.6 million
and $1.9 million, respectively, for the same periods last year.

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 17 Contingencies - Manufactured Gas Plant Sites,
Nicor believes the likelihood of payment under these indemnifications is either
remote, or the fair value of the indemnification is 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 three and nine-month
periods ended September 30, 2005 and 2004, and the company does not expect to
incur significant additional costs under these indemnifications.

17. 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



                                       13



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
("IAGO") has also intervened in this matter. In addition, the IAGO issued Civil
Investigation Demands ("CIDs") to CUB and the ICC staff. The CIDs ordered that
CUB and the ICC staff produce all documents relating to any claims that Nicor
Gas may have presented, or caused to be presented, false information related to
its PBR plan. 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 September 30, 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 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 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. 



                                       14



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 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 United States Securities and Exchange Commission
("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. 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
September 30, 2005.

Nicor Energy. Nicor Energy, a retail energy marketing joint venture owned 50
percent by Nicor and 50 percent by Dynegy Marketing and Trade, has been
dissolved and in October 2005 filed to cancel its certificate of formation.

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 liquidated all assets and resolved all 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 upon the receipt of cash from Nicor
Energy. No recoveries occurred during 2004 and recoveries received in 2005 have
been immaterial, 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



                                       15



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 cash flow, 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 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.

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. In the first quarter of
2004, the company recorded a litigation charge of $38.5 million related to this
agreement. On July 13, 2004 the court granted final approval of the settlement.
All appeal rights expired on August 12, 2004.

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 (former 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 alleged that the individual
defendants breached their fiduciary duties to Nicor by allegedly causing or
allowing Nicor to disseminate



                                       16



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 contended that two of the defendants
(Mr. Fisher and Mr. Birdsall) engaged in improper insider selling of Nicor
stock at inflated prices. The plaintiffs sought compensatory and punitive
damages, attorneys' fees and costs, and other relief against the individual
defendants on behalf of Nicor but did 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 would be dismissed without
any finding or admission of wrongdoing or liability. The settlement obligated
Nicor to adopt certain new corporate governance policies and required 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. The settlement became final in the second
quarter of 2005, when all appeal rights expired. In connection with the
derivative settlement, in the first quarter of 2005, Nicor's excess insurance
carrier paid $4 million to Nicor to settle certain claims Nicor had asserted
against it arising out of the derivative action and related class action
securities litigation. Pursuant to the terms of the derivative settlement, Nicor
paid $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 was reflected as "Litigation charges (recoveries),
net" in the Condensed Consolidated Statement of Operations in the first quarter
of 2005.

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 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 sought compensatory damages, prejudgment and postjudgment interest,
punitive damages, attorneys' fees and injunctive relief on behalf of a proposed
class consisting of all purchasers of the fixed bill service from February 1,
2002 through December 31, 2002. On October 7, 2005, the Circuit Court denied
plaintiffs' motion to certify the proposed class. As a result, if the case
proceeds in the Circuit Court, it will be as an individual action on behalf of
the named plaintiff alone. The class certification decision remains subject to
appeal. 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.

Gas Line ComfortGuard Service. On May 5, 2005, a consumer class action was filed
in the Circuit Court of Cook County, Illinois entitled Rivera v. Nicor Inc.,
Nicor Gas and Nicor Services. Nicor, Nicor Gas and Nicor Services are defendants
in the case. The plaintiff alleges deceptive practices relating to the marketing
and sale of the Gas Line ComfortGuard service offered by Nicor Services. The
plaintiff also alleges violations of the Illinois Consumer Fraud and Deceptive
Business Practices Act and unjust enrichment. The plaintiff is seeking damages
in an amount equal to the total Gas Line ComfortGuard charges paid by the
plaintiff and the putative class members, punitive damages, and attorney's fees
and costs. In the third quarter of 2005, the case was transferred to the Circuit
Court of Dupage County, Illinois. Nicor is unable to predict the likely outcome
of this litigation or the named defendants' potential exposure related thereto.

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.



                                       17



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 2007, 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 2006. 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 27 households.

As of September 30, 2005, Nicor Gas had remaining an estimated liability of
$18.2 million, representing management's best estimate of future costs,
including potential liabilities relating to remaining lawsuits, based on an
evaluation of currently available information. Actual costs may vary from this
estimate. The company will continue to reassess its estimated obligation and
will record any necessary adjustment, which could be material to operating
results in the period recorded.

Nicor 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 and 2005 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 insurers have
filed an appeal of 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 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 September 30, 2005 the company had
recorded a liability of $22.3 million. In accordance with ICC authorization, the
company is and has been recovering these costs from its customers, subject to
annual prudence reviews.

In December 2001, a purported class action lawsuit was filed against Exelon
Corporation, Commonwealth Edison Company and Nicor Gas in the Circuit Court of
Cook County alleging, among other things, that the ongoing cleanup of a former
manufactured gas plant site in Oak Park, Illinois was 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.



                                       18



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. The company has
reached a settlement in the above referenced proceeding, which did not 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,
if any, of the Illinois Supreme Court decision.

On April 27, 2004 one of Nicor's D&O insurance carriers agreed to pay $29.0
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 the settlement became final
(because all appeal rights had expired), the escrow was terminated and the $29.0
million, plus earnings, held by the escrow agent was paid to Nicor in the second
quarter of 2005. The above referenced amount has been reflected in "Litigation
charges (recoveries), net" in the Condensed Consolidated Statement of
Operations for the quarter ending September 30, 2005. In October 2005, Nicor
received $2.6 million of additional insurance proceeds related to legal defense
costs. These recoveries have been accrued in the financial statements as of
September 30, 2005. 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.

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.



                                       19



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 is a holding company with two principal business segments - gas
distribution and shipping. Northern Illinois Gas Company ("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 (loss) and diluted earnings (loss) per common share are presented
below for the three-month and nine-month periods ended September 30, 2005 and
2004 (in millions, except per share data):

                                        Three months ended  Nine months ended
                                           September 30        September 30
                                        ------------------  -----------------
                                          2005      2004      2005      2004
                                        --------  --------  --------  -------

Net income (loss)                       $  (2.7)  $ (11.6)  $  74.4   $ 27.5
Diluted earnings (loss) per average
share of common stock                   $  (.06)  $  (.26)  $  1.67   $  .62

Net income and diluted earnings per share for the nine months ended September
30, 2005 versus the corresponding period in the prior year were impacted
significantly by the absence of last year's first-quarter securities class
action settlement charge ($38.5 million pretax or $0.52 per share) coupled with
net 2005 year-to-date insurance recoveries and earnings thereon ($29.9 million
pretax or $0.41 per share) related to the securities class action and derivative
lawsuit settlements. For more information, see the Notes to the Condensed
Consolidated Financial Statements - Note 17 Contingencies - Securities Class
Actions, Shareholder Derivative Lawsuits and Other, and Note 7 Income and Other
Taxes.

Earnings for the nine-months ended September 30, 2005 also reflect lower
operating results in the company's gas distribution business and other
energy-related businesses, more than offset by higher operating results in the
company's shipping business and lower corporate expenses.

Earnings for the 2005 quarterly period reflect higher operating results in
Nicor's shipping and gas distribution businesses, lower operating corporate
expenses and higher income from equity investments, partially offset by lower
operating results in Nicor's other energy-related businesses.



                                       20



Operating income (loss) by major business segment is presented below (in
millions):
                                        Three months ended  Nine months ended
                                           September 30        September 30
                                        ------------------  -----------------
                                          2005      2004      2005      2004
                                        --------  --------  --------  -------
   
   Gas distribution                     $    .4   $  (2.6)  $  71.9   $  86.7
   Shipping                                 9.4       5.1      31.9      16.2
   Other energy ventures                  (11.7)     (9.5)     (8.6)     (1.2)
   Corporate and eliminations               2.5      (2.6)     33.2     (43.9)
                                        --------  --------  --------  -------
                                        $    .6   $  (9.6)  $ 128.4   $  57.8
                                        ========  ========  ========  =======


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

o     Gas distribution operating income (loss) increased $3.0 million to $0.4
      million in the third quarter of 2005, compared to ($2.6) million for the
      year-earlier period, due primarily to lower operating and maintenance
      expenses ($4.3 million decrease), partially offset by higher depreciation
      ($1.4 million increase).

      The $14.8 million decrease in operating income for the nine-month period
      ended September 30, 2005 compared to the year-earlier period was due
      primarily to lower gains on property sales ($5.3 million decrease), higher
      operating and maintenance expenses ($4.5 million increase) and higher
      depreciation ($4.1 million increase).

o     Shipping operating income increased $4.3 million for the three-month
      period ended September 30, 2005 as compared with the year-earlier period
      due primarily to an increase in revenue ($18.7 million increase) driven
      by higher average rates and increased volumes shipped across
      substantially all ports, partially offset by increased operating
      expenses of $14.4 million resulting from higher fuel, inland freight,
      voyage and transportation, charter expense, payroll and benefits, legal
      fees and port costs.

      For the nine-month period ended, operating income increased $15.7 million
      compared with the year-earlier period, due primarily to an increase in
      revenue ($61.4 million increase) driven by increased volumes shipped and
      higher average rates across substantially all ports, partially offset by
      increased operating expenses of $45.7 million resulting from higher inland
      freight, fuel, voyage and transportation, charter expense, payroll and
      benefits, port costs and legal fees.

o     Operating results from Nicor's other energy ventures decreased $2.2
      million for the three-month period as compared with the year-earlier
      period reflecting primarily lower operating results at Nicor's wholesale
      natural gas marketing business, Nicor Enerchange ($1.4 million decrease)
      and Nicor's energy-related products and services businesses ($0.7
      million decrease).  The $7.4 million decrease in other energy venture
      operating results for the year-to-date period reflects primarily lower
      operating results at Nicor Enerchange ($8.8 million decrease), partially
      offset by higher operating results at Nicor's energy-related products
      and services businesses ($1.5 million increase).  Lower Nicor Enerchange
      results in both periods reflect unfavorable fair value adjustments
      related to derivative instruments used to hedge future sales of natural
      gas inventory.  Nicor Enerchange purchases and holds gas in storage to
      earn a profit margin from its ultimate sale in the future.  Nicor
      Enerchange uses derivative instruments to mitigate commodity price risk
      in



                                       21



      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 earnings volatility resulting
      from this accounting can be significant from period to period.

o     For the third quarter of 2005, operating income attributed to "Corporate
      and eliminations" increased $5.1 million as compared with the prior-year
      period due primarily to a $2.6 million insurance recovery of legal costs
      in partial satisfaction of an insurance claim for reimbursement of
      defense costs related to the securities class action and derivative
      lawsuit settlements, and lower legal costs ($1.3 million decrease).  For
      more information, see other corporate expenses and eliminations
      discussion below.

      The $77.1 million increase in operating income for the nine-month period
      ended September 30, 2005 attributed to "Corporate and eliminations" is due
      primarily to 2005 net recoveries of litigation settlement costs ($29.9
      million), the absence of last years' securities class action settlement
      charge ($38.5 million), the $2.6 million insurance recovery noted above
      and lower legal costs ($1.9 million decrease). For more information, see
      other corporate expenses and eliminations discussion below and the Notes
      to the Condensed Consolidated Financial Statements - Note 17 Contingencies
      - Securities Class Actions, Shareholder Derivative Lawsuits and Other.

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   Nine months ended
                                           September 30         September 30
                                        ------------------  ------------------
                                          2005      2004      2005      2004
                                        --------  --------  --------  --------

   Gas distribution                     $ 241.5   $ 225.1   $1,692.6  $1,598.6
   Shipping                                91.9      73.2      274.7     213.3
   Other energy ventures                    9.2       9.7       89.7      94.9
   Corporate and eliminations              (6.6)     (8.1)     (56.8)    (61.7)
                                        --------  --------  --------  --------
                                        $ 336.0   $ 299.9   $2,000.2  $1,845.1
                                        ========  ========  ========  ========

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 2005 third quarter compared with a
year ago, revenues increased $16.4 million due primarily to higher natural gas
costs ($28.5 million increase), partially offset by lower demand unrelated to
weather (approximately $10 million decrease) and the impact of warmer weather
(approximately $5 million decrease). For the 2005 nine-month period compared
with a year ago, revenues increased $94.0 million due primarily to higher
natural gas costs ($151.7 million increase), partially offset by lower demand
unrelated to weather (approximately $40 million decrease) and the impact of
warmer weather (approximately $35 million decrease). These results do not
reflect the impact of the rate order tariffs, which became effective on October
4, 2005, and is expected to increase fourth quarter revenues by approximately
$12 million, assuming normal weather.



                                       22



Third quarter and year-to-date 2005 shipping revenues increased $18.7 million
and $61.4 million, respectively, compared with the year-earlier revenues due
primarily to increased volumes shipped and higher average rates. The volume
increases were recognized across substantially all ports, reflecting
improvements in the economy, significant increases in Caribbean investment, and
rebuilding efforts following the 2004 hurricanes. Rates were higher due to
general rate increases across most markets and higher cost-recovery surcharges
for fuel and security.

Third quarter and year-to-date 2005 revenues for other energy ventures decreased
compared with the year-earlier periods as a result of lower revenues at Nicor
Enerchange ($1.1 million decrease and $9.5 million decrease, respectively) due
primarily to unfavorable fair value adjustments related to the aforementioned
Enerchange contracts. These reductions were partially offset by improved
revenues at Nicor's energy-related products and services businesses ($0.7
million increase and $4.4 million increase, respectively).

"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.

For the third quarter and the nine-month periods, gas distribution margin was
relatively flat compared to the prior-year periods. A reconciliation of gas
distribution revenues and margin follows (in millions):

                                        Three months ended   Nine months ended
                                           September 30         September 30
                                        ------------------  ------------------
                                          2005      2004      2005      2004
                                        --------  --------  --------  --------

   Gas distribution revenues            $ 241.5   $ 225.1   $1,692.6  $1,598.6
   Cost of gas                           (134.9)   (118.4)  (1,202.3) (1,111.1)
   Revenue tax expense                    (11.9)    (12.6)    (109.2)   (106.6)
                                        --------  --------  --------  --------
   Gas distribution margin              $  94.7   $  94.1   $  381.1  $  380.9
                                        ========  ========  ========  ========

Gas distribution operating and maintenance expense. For the three months ended
September 30, 2005, operating and maintenance expense decreased $4.3 million
compared with the prior-year period due primarily to lower legal expenses ($2.5
million decrease) and the absence of a 2004 adjustment related to customer
reimbursements ($1.1 million decrease). The $4.5 million increase in the
nine-month period was due primarily to higher bad debt expenses ($3.7 million
increase), labor and employee benefit-related costs ($2.2 million increase),
natural gas and fuel costs to operate company equipment and facilities ($1.7
million increase) and information technology-related costs ($1.2 million
increase), partially offset by lower net legal and claims expenses ($4.2 million
decrease), and the absence of a 2004 adjustment related to customer
reimbursements ($1.8 million decrease).

Shipping operating expenses. Third quarter 2005 Shipping segment operating
expenses increased $14.4 million due primarily to higher fuel prices, inland
freight, voyage and transportation, and port costs ($8.8 million increase),
charter expense ($1.6 million increase), and payroll and benefits costs ($1.3
million increase), driven largely by higher volumes shipped, and higher legal
fees ($1.2 million increase).



                                       23



Year-to-date 2005 Shipping segment operating expenses increased $45.7 million
due primarily to higher inland freight, fuel prices, voyage and transportation,
and port costs ($26.0 million increase), charter expense ($6.1 million
increase), and payroll and benefits costs ($6.0 million increase), driven
largely by higher volumes shipped, and higher legal fees ($2.0 million
increase).

Litigation charges (recoveries), net. During the first two quarters of 2005, the
company recorded $29.9 million of net insurance recoveries related to settlement
costs incurred by Nicor in connection with a securities class action and a
related shareholder derivative action. During the first quarter of 2004, the
company recorded a $38.5 million pretax litigation charge related to an
agreement to settle the securities class actions. For more information, see the
Notes to the Condensed Consolidated Financial Statements - Note 17 Contingencies
- Securities Class Actions, Shareholder Derivative Lawsuits and Other.

Other corporate expenses and eliminations. Operating expenses attributable to
corporate activities and eliminations for the three and nine months ended
September 30, 2005 declined $3.6 million and $3.8 million, respectively, over
the year-earlier periods due primarily to the $2.6 million insurance recovery of
legal costs noted earlier.

Interest expense, net of amounts capitalized. Interest expense for the quarter
ended September 30, 2005 remained relatively flat as compared with the
year-earlier period due to offsetting factors. The impact of higher average
interest rates ($1.7 million increase) and a charge for unamortized costs
associated with the early replacement of a credit facility ($0.8 million
increase) were mostly offset by the impact of lower average borrowing levels
($2.4 million decrease).

Interest expense for the nine-month period ended September 30, 2005 increased
$2.5 million over the year-earlier period. This increase reflects the impact of
higher average interest rates ($4.8 million increase), a $2.1 million increase
to interest on tax deficiencies related mostly to the absence in the current
year of a favorable Internal Revenue Service ("IRS") settlement in 2004, and a
charge for unamortized costs associated with the early replacement of a credit
facility ($0.8 million increase), partially offset by the impact of lower
average borrowing levels ($5.1 million decrease).

Net equity investment income. Equity investment income increased $1.8 million
and $2.8 million, respectively, for the three-month and nine-month periods ended
September 30, 2005 compared with a year ago due primarily to higher results
related to low income housing investments ($1.3 million increase and $1.2
million increase, respectively) and higher income from Triton Container
Investments LLC, a cargo container leasing business ($0.2 million increase and
$0.8 million increase, respectively).

Net other income. Other income increased $0.8 million and $2.7 million,
respectively, for the three and nine-month periods ended September 30, 2005,
compared with a year ago, reflecting increased interest income ($1.1 million
increase and $2.5 million increase, respectively) due primarily to higher
average investment balances.

Income taxes. The overall effective income tax rate for the nine months ended
September 30, 2005 increased over the corresponding prior-year rate to 30.6
percent from 17.9 percent. These rates reflect recording income taxes on the
2004 net litigation charge ($38.5 million) and the related 2005 net recoveries
and earnings thereon ($29.9 million) at Nicor's marginal income tax rate of
approximately 40 percent as well as miscellaneous third quarter 2005 income tax
benefits ($1.5 million). Without giving effect to these transactions, Nicor's
2005 and 2004 year-to-date effective tax rates would have been 29.0 percent and
29.6 percent, respectively.



                                       24



The overall effective income tax rate for the three months ended September 30,
2005, increased to 51.3 percent from the corresponding prior period rate of 37.9
percent. Without giving effect to miscellaneous income tax benefits ($1.5
million) recorded during the quarter ended September 30, 2005, the effective
income tax rate for the quarter would have been 24.5 percent compared to 37.9
percent for the 2004 quarter. These quarterly effective income tax rates reflect
changes to forecasted annual income in the third quarter of each year. Such
changes are not significant for the year-to-date periods, but they can have a
disproportionate impact on the third quarter effective income tax rate as the
income before income taxes is relatively low.



                                       25



Nicor Inc.
Gas Distribution Statistics


                                   Three months ended     Nine months ended
                                      September 30           September 30
                                   ------------------   --------------------
                                     2005      2004        2005      2004
                                   --------  --------   ---------  ---------
Operating revenues (millions)
   Sales
    Residential                    $  152.4  $  143.0   $ 1,140.7  $ 1,079.2
    Commercial                         36.0      30.6       255.0      236.9
    Industrial                          4.3       3.6        34.9       32.1
                                   --------  --------   ---------  ---------
                                      192.7     177.2     1,430.6    1,348.2
                                   --------  --------   ---------  ---------
   Transportation
    Residential                         4.8       4.1        19.1       17.2
    Commercial                         11.5      11.8        51.0       50.7
    Industrial                         10.4      10.9        29.4       31.2
    Other                               1.0       1.8         8.6        9.2
                                   --------  --------   ---------  ---------
                                       27.7      28.6       108.1      108.3
                                   --------  --------   ---------  ---------

   Other revenues
    Revenue taxes                      12.8      13.4       112.4      109.5
    Environmental cost recovery         1.4       2.1        15.9       11.9
    Chicago Hub                         2.4       1.7         7.5        5.8
    Other                               4.5       2.1        18.1       14.9
                                   --------  --------   ---------  ---------
                                       21.1      19.3       153.9      142.1
                                   --------  --------   ---------  ---------
                                   $  241.5  $  225.1   $ 1,692.6  $ 1,598.6
                                   ========  ========   =========  =========

Deliveries (Bcf)
   Sales
    Residential                        12.0      13.4       131.2      138.2
    Commercial                          3.1       3.1        29.5       30.5
    Industrial                           .4        .3         4.1        4.3
                                   --------  --------   ---------   --------
                                       15.5      16.8       164.8      173.0
                                   --------  --------   ---------   --------
   Transportation
    Residential                         1.1       1.0        12.7       11.9
    Commercial                          8.8       9.2        60.9       58.9
    Industrial                         25.1      25.2        84.7       88.3
                                   --------  --------   ---------   --------
                                       35.0      35.4       158.3      159.1
                                   --------  --------   ---------   --------
                                       50.5      52.2       323.1      332.1
                                   ========  ========   =========   ========

Customers at end of period (thousands)
   Sales
    Residential                     1,771.2   1,765.6
    Commercial                        117.9     114.3
    Industrial                          7.3       7.2
                                   --------  --------
                                    1,896.4   1,887.1
                                   --------  --------
   Transportation
    Residential                       160.0     134.3
    Commercial                         57.6      58.4
    Industrial                          5.9       6.0
                                   --------  --------
                                      223.5     198.7
                                   --------  --------
                                    2,119.9   2,085.8
                                   ========  ========

Other statistics
   Degree days                           26        51       3,572      3,672
   Colder (warmer) than normal*       (63)%     (28)%        (5)%       (4)%
   Average gas cost per Mcf sold     $ 8.53    $ 6.87      $ 7.22     $ 6.35

   *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 for 2004.  On a 6,000 degree day basis, the three and nine month
    periods ended September 30, 2005, would have been 63% and 7% warmer than
    normal, respectively.

                                       26


Shipping Statistics

                                        Three months ended   Nine months ended
                                           September 30         September 30
                                        ------------------  ------------------
                                          2005      2004      2005      2004
                                        --------  --------  --------  --------

  TEUs shipped (thousands)                 51.7      46.7     159.6     139.2
  Revenue per TEU                       $ 1,765   $ 1,567   $ 1,718   $ 1,533

  At end of period
    Ports served                             25       25
    Vessels operated                         19       17

FINANCIAL CONDITION AND LIQUIDITY

Operating activities. 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, natural gas purchasing, and storage and hedging
practices. The company relies on short-term financing to meet seasonal increases
in working capital needs. Cash requirements generally increase over the last
half of the year due to increases in natural gas purchases, gas in storage or
accounts receivable. Over the first half of the year, positive cash flow
generally results from the sale of gas in storage and the collection of accounts
receivable. This cash is typically used to substantially reduce short-term debt
during the first half of the year. Net cash flow provided from operating
activities increased $229.2 million to $597.4 million for 2005 year-to-date from
$368.2 million in the prior-year period. The increase in operating cash flow
over 2004 occurred despite higher natural gas prices due to positive impacts
from the company's economic hedging instruments.

In 2003, Nicor received an income tax refund of approximately $100 million
attributable to a tax loss carryback associated with a change in tax accounting
method, (which increased its deferred income tax liability), subject to IRS
review and approval as part of normal ongoing audits. Through December 31, 2004,
the total current tax benefits previously recorded under this accounting method
approximate $135 million (amounts recorded were offset by increases to the
deferred tax liability with no net effect on reported net federal income tax
expense). In the third quarter of 2005, the IRS revised the regulations
pertaining to the aforementioned tax accounting method. The new regulations
require repayment in 2005 and 2006 of amounts previously taken as current tax
deductions. As a result of this revision, the company reclassified from deferred
to current income tax expense approximately $50 million, reflecting the amount
repaid during the third quarter 2005. The company expects to repay the remaining
amounts during the fourth quarter of 2005 and in 2006. The anticipated repayment
is expected to have no direct impact on earnings and no material impact on the
company's financial condition.

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

Investing activities. For the nine-month periods ended September 30, 2005 and
2004, cash used for investing activities rose to $181.0 million from $136.6
million, reflecting a higher level of short-term investing activity by the
shipping segment. As of September 30, 2005, the company expects 2005 shipping
segment capital expenditures to total approximately $15 million, a $10 million
decrease from the amount expected as of December 31, 2004, reflecting leasing
rather than purchasing of freight handling equipment, cancellation of facility
improvements and the postponement of certain software purchases.


                                       27



Financing activities. In September 2005, Nicor and Nicor Gas established two
revolving credit facilities totaling $1 billion with major domestic and foreign
banks, which replace the $500 million, three-year revolver, which was to expire
in September 2007 and the $400 million, 210-day seasonal revolver, which expired
in April 2005. The new replacement facilities, which serve as backup for the
issuance of commercial paper, consist of a $600 million, 5-year revolver,
expiring September 2010, available to Nicor Inc. and Nicor Gas, and a $400
million, 210-day seasonal revolver, expiring in April 2006, available to Nicor
Gas. The company had $144.0 million, $490.0 million and $390.0 million of
commercial paper borrowings outstanding at September 30, 2005, December 31, 2004
and September 30, 2004, respectively. The company expects that funding from
commercial paper and related backup line-of-credit agreements will continue to
be available in the foreseeable future and sufficient to meet estimated cash
requirements. The company believes it is in compliance with all debt covenants
at September 30, 2005.

As of September 30, 2005, the amount being considered for repatriation ranges
from approximately $80 million to $210 million. The amount that may ultimately
be repatriated in 2005 and method of financing the repatriation, if any, will be
impacted by several factors as discussed in the Other Factors that may affect
Business Performance - American Jobs Creation Act below.

On July 21, 2005, Nicor announced a quarterly dividend on common stock of 46.5
cents per share that was paid on November 1, 2005. The common dividend declared
in July 2005 was accrued as a liability as of September 30, 2005 ($20.5
million).

Contractual obligations. Nicor Gas' natural gas purchase obligations increased
approximately $1 billion from year-end due to the execution of additional
natural gas purchase agreements and expected higher future natural gas prices
partially offset by payments made in connection with natural gas purchases
completed under such agreements. The company contracts for its winter purchase
requirements several months preceding the heating season. Pricing for these
agreements is generally based on future market prices. See Management's
Discussion and Analysis of Financial Condition and Results of Operations in the
2004 Annual Report on Form 10-K for further discussion of the company's
contractual obligations.

In the first nine months of 2005, Tropical Shipping's operating lease
commitments increased $22.9 million (net of 2005 year-to-date rental payments
made) due primarily to the extension of vessel charter agreements. Tropical
Shipping has certain equipment operating leases which include early termination
options, purchase options, and renewal options, at fair market rental amounts at
the time of renewal. Total rent expense during the three and nine-month periods
ended September 30, 2005 was $9.0 million and $26.6 million, respectively,
compared to $6.8 million and $18.9 million for the corresponding prior-year
periods.

Nicor has operating lease commitments with payments due during each calendar
year as follows (in millions):

                     Remainder                                  After
                      of 2005    2006    2007    2008    2009    2009    Total
                     ---------  ------  ------  ------  ------  ------  --------
  
Operating leases       $  9.8   $ 28.7  $ 24.5  $ 21.6  $ 10.2  $ 18.2  $ 113.0

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,


                                       28



on the other hand, are changed only through a rate case proceeding with the ICC
and 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 below and within the Notes to the Condensed
Consolidated Financial Statements - Note 17 Contingencies - Performance-Based
Rate Plan.

Rate proceeding. Nicor Gas filed a request with the ICC for an overall increase
in rates on November 4, 2004. On September 30, 2005, the company announced that
its gas distribution business, Nicor Gas, received approval from the ICC for a
$54.2 million base rate increase. On the same day, Nicor Gas filed tariffs that
it believed complied with the ICC's order. However, the Chief Clerk of the ICC
purported to reject those tariff sheets as not in compliance with the rate
order. On October 4, 2005, Nicor Gas filed revised tariffs that were accepted by
the Chief Clerk of the ICC. On October 5, 2005, Nicor Gas filed a motion
requesting a ruling from the ICC that the original tariffs filed on September
30, 2005, complied with the ICC's rate order.

On October 18, 2005 Nicor Gas filed an application for rehearing of the final
order of the rate case with the ICC. The ICC on November 2, 2005, granted in
part and denied in part Nicor Gas' Application for Rehearing in it general rate
case. The ICC granted rehearing with respect to: the effect of updated gas
prices on a portion of uncollectible expense, the allocation of therms to Nicor
Gas' general residential rate, and the need to remove certain storage charges so
as to preserve the balance between bundled rates and transportation rates
available to Nicor Gas' large customers. The ICC denied rehearing as to the
remaining issues raised in Nicor Gas' Application. In addition, four intervening
parties to the case also filed applications for rehearing. It is expected that
the ICC shall accept or deny these applications in November 2005.

The revised tariffs filed with the ICC on October 4, 2005 were designed to
result in a base rate increase of approximately $48.8 million and were based on
an allowed rate of return on original-cost rate base of 8.85 percent, which
reflects a 10.51 percent cost of common equity.  The order also included the
authorization to pass all Chicago Hub revenues directly through to customers as
a credit to Nicor Gas' purchase gas adjustment ("PGA") rider and the shifting of
certain storage-related costs from the PGA rider to base rates. In addition,
rates were established using a 10-year average for weather as opposed to the
previous use of a 30-year average.  Because the order shifts certain revenues
and credits between base rates and Nicor Gas' PGA rider, the company estimates
that the actual annual net revenue increase will be about $29.3 million under
the tariffs that have been placed into effect, and $34.7 million if Nicor Gas'
motion is granted.

Weather. Natural gas deliveries are temperature-sensitive and seasonal since
about one-half of all deliveries are used for space heating. Typically, about 70
percent of deliveries and revenues occur from October through March.
Fluctuations in weather have the potential to significantly impact year-to-year
comparisons of operating income and cash flow.

It is estimated that a 100-degree day variation from normal weather would affect
Nicor's gas distribution earnings by about 3 cents per share under the new rate
order. This variation is partially offset by 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. For the
nine months ended September 30, 2005 and September 30, 2004, the offset was
about 40 percent and 17 percent, respectively.



                                       29



American Jobs Creation Act. On October 22, 2004, the Jobs Act of 2004 was
enacted. Certain provisions of the Jobs Act may impact income taxes related to
the earnings of foreign subsidiaries of Tropical Shipping. One provision
provides that a portion of a foreign subsidiary's income would no longer be
subject to 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 Jobs 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 $17 million on approximately $47 million
of cumulative undistributed earnings of its foreign subsidiaries through
September 30, 2005 that were considered to be indefinitely invested in foreign
operations.

The company is continuing to evaluate the amounts to ultimately be repatriated
from its foreign subsidiaries. The company currently estimates amounts
repatriated will range from $80 million to $210 million. The related federal
income tax benefit that would result from repatriation ranges from zero to $34
million. Amounts in excess of $80 million would require obtaining
outside funds at the foreign subsidiaries' level. Financial statements for the
period ended September 30, 2005 have no benefit reflected related to
repatriation. The amount ultimately repatriated and the ultimate federal income
tax benefit recognized are subject to several factors, including, without
limitation, a determination of the maximum eligible repatriation amount under
provisions of the Jobs Act and other federal income tax rules and regulations,
the cost, terms and availability of financing to 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. Nicor is currently
assessing the impact on its financial statements of any repatriation and will
complete its assessment in the fourth quarter of 2005. Nicor is unable to
determine the income tax benefit, if any, of such repatriation. However, the
effect could be material to financial statements for the fourth quarter of 2005,
and for the calendar year 2005.

The extent to which Tropical Shipping's ongoing earnings will be subject to
federal taxation will be dependent upon several factors, including, without
limitation, the amount of distributions, if any, to its United States parent and
the clarification of certain provisions of the Jobs Act and its impact on other
federal income tax rules and regulations.

Gas distribution outlook. Although Nicor Gas has been granted rate relief,
exposure to natural gas prices, as discussed below, and other cost increases
could continue to impact gas distribution operating results.

Demand and natural gas prices. Changes in the price of natural gas have no
direct impact on gas distribution margin since gas costs are passed directly
through to customers without markup, subject to ICC review. However, increases
in natural gas prices can have an indirect adverse effect on gas distribution
margin if it results in lower customer demand and an adverse effect on operating
expenses related to accounts receivable collections, company-use gas expenses,
financing costs and customer service expenses. Pursuant to the rate order, which
became effective on October 4, 2005, certain storage related costs will now be
charged to operating and maintenance expense rather than passed directly through
to customers as part of the PGA rider. As a result, Nicor Gas now bears the risk
of changes in natural gas prices associated with these storage costs along with
its existing risk related to other company gas usage.



                                       30



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.

Energy trading activities. At September 30, 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                  $   (9.4)   $  (8.0)   $ (1.4)  $    -
Prices based on pricing models                .6         .6         -        -
                                        ----------  ---------  -------  -------
Total                                   $   (8.8)   $  (7.4)   $ (1.4)  $    -
                                        ==========  =========  =======  =======

Other. 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.

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 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 ("IAGO") has also
intervened in this matter. In addition, the IAGO issued Civil Investigation
Demands ("CIDs") to CUB and the ICC staff. The CIDs ordered that CUB and the ICC
staff produce all documents relating to any claims that Nicor Gas may have
presented, or caused to be presented, false information related to its PBR plan.
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.



                                       31



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 September 30, 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 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 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
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 United States Securities and Exchange Commission
("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. 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.



                                       32



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
September 30, 2005.

Nicor Energy. Significant events occurred in 2002 and 2003 relating to Nicor's
50 percent interest in Nicor Energy. Nicor Energy, a retail energy marketing
joint venture owned 50 percent by Nicor and 50 percent by Dynegy Marketing and
Trade, has been dissolved and in October 2005 filed to cancel its certificate of
formation. Information about these events is presented within the Notes to the
Condensed Consolidated Financial Statements - Note 17 Contingencies - Nicor
Energy.

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



                                       33



PBR 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 Condensed Consolidated Financial
Statements - Note 17 Contingencies - Securities Class Actions.

Shareholder Derivative Lawsuits. Certain former Nicor executives and members of
its Board of Directors were defendants in a consolidated derivative lawsuit. The
parties reached an agreement to settle the action which was approved by the
court presiding over the matter on March 29, 2005. The settlement became final
in the second quarter of 2005, when all appeal rights expired. In connection
with the derivative settlement, in the first quarter of 2005, Nicor's excess
insurance carrier paid $4 million to Nicor to settle certain claims Nicor had
asserted against it arising out of the derivative action and related class
action securities litigation. Pursuant to the terms of the derivative
settlement, Nicor paid $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 was reflected in the Condensed
Consolidated Statement of Operations in the first quarter of 2005. Further
information about this lawsuit is presented within the Notes to the Condensed
Consolidated Financial Statements - Note 17 Contingencies - Shareholder
Derivative Lawsuits. See also the "Other contingencies" section for information
on additional insurance recoveries.

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
Condensed Consolidated Financial Statements - Note 17 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
Condensed Consolidated Financial Statements - Note 17 Contingencies -
Manufactured Gas Plant Sites.

Fixed Bill Service. Nicor Services was a defendant in a purported class action.
On October 7, 2005, the Circuit Court denied plaintiffs' motion to certify the
proposed class. Information about this lawsuit is presented within the Notes to
the Condensed Consolidated Financial Statements - Note 17 Contingencies - Fixed
Bill Service.

Gas Line ComfortGuard Service. Nicor, Nicor Gas and Nicor Services are
defendants in a purported class action. Information about this lawsuit is
presented within the Notes to the Condensed Consolidated Financial Statements -
Note 17 Contingencies - Gas Line ComfortGuard 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 Condensed Consolidated Financial Statements - Note 6 Income and
Other Taxes and Note 17 Contingencies.



                                       34



On April 27, 2004 one of Nicor's Directors and Officers ("D&O") insurance
carriers agreed to pay $29.0 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 the settlement
became final (because all appeal rights had expired), the escrow was terminated
and the $29.0 million, plus earnings, held by the escrow agent was paid to Nicor
in the second quarter of 2005. The above referenced amount has been reflected in
"Litigation charges (recoveries), net" in the Condensed Consolidated Statement
of Operations for the quarter ending September 30, 2005. In October 2005, Nicor
received $2.6 million of additional insurance proceeds related to legal defense
costs. These recoveries have been accrued in the financial statements as of
September 30, 2005. 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.

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 the following new
pronouncements that have not yet been adopted by Nicor as of September 30, 2005.

In May 2005, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 154, Accounting Changes and Error Corrections - a replacement of
APB Opinion No. 20 and FASB Statement No. 3. In March 2005, the FASB issued
Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based
Payment 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. These pronouncements are currently under review by the company. For
more information, see the Notes to the Condensed Consolidated Financial
Statements - Note 3 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," "ultimate," or similar phrases. Actual results
may differ materially from those indicated in the company's forward-looking
statements due to the direct or indirect effects of legal contingencies
(including litigation) and the resolution of those issues, including the effects
of an ICC review and SEC and U.S.Attorney inquiries, and undue reliance should
not be placed on such statements.



                                       35



Other factors that could cause materially different results include, but are not
limited to, weather conditions; natural disasters; 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.

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 SEC rules and
forms.

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

PART II - OTHER INFORMATION

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

See Results of Operations - Contingencies and the Notes to the Condensed
Consolidated Financial Statements - Note 14 Rate Proceeding and Note 17
Contingencies, which are incorporated herein by reference.



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

(c)  Issuer Purchases of Equity Securities

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 2005 or 2004. As of September 30, 2005,
$21.5 million remained authorized for the repurchase of common stock.

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.)

    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   * Directors Compensation.  (File No. 1-7297, Form 8-K for September
             21, 2005, Nicor Inc.)

   10.02     210-Day Credit Agreement dated as of September 13, 2005.

   10.03     5-Year Credit Agreement dated as of September 13, 2005.



                                       37



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

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

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

   32.01     Section 1350 Certification.

   32.02     Section 1350 Certification.

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

 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.




                                       38



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.

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






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