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                                                                      Nicor Inc.
                                                                       Form 10-K
                                                                   Exhibit 10.31

                           CHANGE-IN-CONTROL AGREEMENT

         THIS AGREEMENT dated as of November 25, 2002 (the "Agreement Date") is
made by and among Nicor Inc. (the "Company"), an Illinois corporation, and Paul
C. Gracey, Jr. (the "Executive").

                                    ARTICLE I
                                    PURPOSES

         The Board of Directors of the Company (the "Board") has determined that
it is in the best interests of the Company and its shareholders to assure that
the Company and Nicor Gas will have the continued services of the Executive,
despite the possibility or occurrence of a Change in Control of the Company. The
Board believes it is imperative to reduce the distraction of the Executive that
would result from the personal uncertainties caused by a pending or threatened
Change in Control, to encourage the Executive's full attention and dedication to
the Company and Nicor Gas, and to provide the Executive with compensation and
benefits arrangements upon a Change in Control which are competitive with those
of similarly-situated corporations. This Agreement is intended to accomplish
these objectives.

                                   ARTICLE II
                               CERTAIN DEFINITIONS

         When used in this Agreement, the terms specified below shall have the
following meanings:

         2.1      The "Agreement Term" shall begin on the Agreement Date and
shall continue through December 31, 2003. As of December 31, 2003, and on each
December 31 thereafter, the Agreement Term shall automatically be extended for
one additional year unless, not later than the preceding June 30, either party
shall have given notice that such party does not wish to extend the Agreement
Term. If a Change in Control shall have occurred during the Agreement Term (as
it may be extended from time to time), the Agreement Term shall continue for a
period ending on the two-year anniversary of the date of the Change in Control,
but if the Termination Date (as defined below) occurs during that two-year
period, then the Agreement Term shall continue until the end of the Severance
Period (as defined below). Unless the Termination Date occurs during the
two-year period after a Change in Control so that the Agreement Term is extended
to include the Severance Period, as provided in the immediately preceding
sentence, the Agreement Term shall not extend beyond the two-year anniversary of
the Change in Control.

         2.2      "Effective Date" means the first date during the Agreement
Term on which a Change in Control occurs.

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         2.3      "Change in Control" means:

                  2.3.1    The acquisition by any individual, entity or group
         (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities
         Exchange Act of 1934, as amended (the "Exchange Act") (a "Person") of
         beneficial ownership (within the meaning of Rule 13d-3 promulgated
         under the Exchange Act) of any shares of Common Stock of the Company or
         any voting securities of the Company entitled to vote generally in the
         election of directors if, as a result of such acquisition, such person
         owns 20% or more of either (i) the outstanding shares of common stock
         of the Company (the "Outstanding Company Common Stock"), or (ii) the
         combined voting power of the outstanding voting securities of the
         Company entitled to vote generally in the election of directors (the
         "Outstanding Company Voting Securities"); provided, however, that for
         purposes of this subsection 2.3.1, the following acquisitions shall not
         constitute a Change in Control: (A) any acquisition by the Company, (B)
         any acquisition by an employee benefit plan (or related trust)
         sponsored or maintained by the Company or any corporation controlled by
         the Company (a "Company Plan"), or (C) any acquisition by any
         corporation pursuant to a transaction which complies with subsections
         2.3.3.1, 2.3.3.2 and 2.3.3.3 of this definition; provided further, that
         for purposes of clause (A), if any Person (other than the Company or
         any Company Plan) shall become the beneficial owner of 20% or more of
         the Outstanding Company Common Stock or 20% or more of the Outstanding
         Company Voting Securities by reason of an acquisition by the Company,
         and such Person shall, after such acquisition by the Company, become
         the beneficial owner of any additional shares of the Outstanding
         Company Common Stock or any additional Outstanding Company Voting
         Securities (other than pursuant to any dividend reinvestment plan or
         arrangement maintained by the Company) and such beneficial ownership is
         publicly announced, such additional beneficial ownership shall
         constitute a Change in Control; or

                  2.3.2    Individuals who, as of the date hereof, constitute
         the Board of Directors of the Company (for purposes of this Section
         2.3, the "Incumbent Board") cease for any reason to constitute at least
         a majority of the Incumbent Board; provided, however, that any
         individual becoming a director subsequent to the date hereof whose
         election, or nomination for election by the Company shareholders, was
         approved by a vote of at least a majority of the directors then
         comprising the Incumbent Board shall be considered as though such
         individual were a member of the Incumbent Board, but excluding, for
         this purpose, any such individual whose initial assumption of office
         occurs as a result of an actual or publicly threatened election contest
         (as such terms are used in Rule 14a-11 promulgated under the Exchange
         Act) or other actual or publicly threatened solicitation of proxies or
         consents by or on behalf of a Person other than the Board of Directors
         of the Company; or

                  2.3.3    Consummation, including receipt of any necessary
         regulatory approval, of (i) a reorganization, merger, consolidation or
         other business combination involving the Company or (ii) the sale or
         other disposition of more than 50% of the operating assets of the
         Company (determined on a consolidated basis), other than in connection
         with a

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         sale-leaseback or other arrangement resulting in the continued
         utilization of such assets (or the operating products of such assets)
         by the Company (any transaction described in part (i) or (ii) being
         referred to as a "Corporate Transaction"); excluding, however, a
         Corporate Transaction pursuant to which:

                           2.3.3.1  all or substantially all of the individuals
                  and entities who are the beneficial owners, respectively, of
                  the Outstanding Company Common Stock and Outstanding Company
                  Voting Securities immediately prior to such Corporate
                  Transaction beneficially own, directly or indirectly, more
                  than 60% of, respectively, the then outstanding shares of
                  common stock and the combined voting power of the then
                  outstanding voting securities entitled to vote generally in
                  the election of directors, as the case may be, of the ultimate
                  parent entity resulting from such Corporate Transaction
                  (including, without limitation, an entity which, as a result
                  of such transaction, owns the Company or all or substantially
                  all of the assets of the Company either directly or through
                  one or more subsidiaries) in substantially the same
                  proportions as their ownership, immediately prior to such
                  Corporate Transaction of the Outstanding Company Common Stock
                  and Outstanding Company Voting Securities, as the case may be;

                           2.3.3.2  no Person (other than the Company, any
                  Company Plan or related trust, the corporation resulting from
                  such Corporate Transaction, and any Person which beneficially
                  owned, immediately prior to such Corporate Transaction,
                  directly or indirectly, 20% or more of the Outstanding Company
                  Common Stock or the Outstanding Company Voting Securities, as
                  the case may be) will beneficially own, directly or
                  indirectly, 20% or more of, respectively, the then outstanding
                  common stock of the ultimate parent entity resulting from such
                  Corporate Transaction or the combined voting power of the then
                  outstanding voting securities of such entity; and

                           2.3.3.3  individuals who were members of the
                  Incumbent Board will constitute at least a majority of the
                  members of the board of directors of the ultimate parent
                  entity resulting from such Corporate Transaction; or

                  2.3.4    A tender offer (for which a filing has been made with
         the Securities and Exchange Commission (the "SEC") which purports to
         comply with the requirements of Section 14(d) of the Exchange Act and
         the corresponding SEC rules) is made for the stock of the Company,
         which has not been negotiated and approved by the Board, provided that
         in case of a tender offer described in this subsection 2.3.4, the
         Change in Control will be deemed to have occurred at the first time
         during the offer period when the Person (as defined in subsection
         2.3.1, above) making the offer beneficially owns or has accepted for
         payment stock of the Company with 20% or more of the combined voting
         power of the then Outstanding Company Voting Securities; or

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                  2.3.5    Approval by the shareholders of the Company of a plan
         of complete liquidation or dissolution of the Company.

                  2.3.6    For purposes of this Section 2.3, (i) the term
         "Company" shall mean Nicor Inc. and shall include any Successor to
         Nicor Inc.; and (ii) the term "Successor to Nicor Inc." shall mean any
         corporation, partnership, joint venture or other entity that succeeds
         to the interests of Nicor Inc. by means of a merger, consolidation, or
         other restructuring that does not constitute a Change in Control under
         paragraphs 2.3.1, 2.3.3 or 2.3.4 above.

                  2.3.7    By entering into this Agreement, the Executive
         irrevocably consents to the modification of the definition of "Change
         in Control" (including "change in control") in all Employee Benefit
         Arrangements (as defined below), by substituting for such definition in
         each such Employee Benefit Arrangement the definition of "Change in
         Control" set forth above, with such substitution to be effective on the
         first date this Agreement has been signed by both the Company and the
         Executive. For purposes of the preceding sentence, the term "Employee
         Benefit Arrangement" shall mean each agreement with the Executive to
         which the Company or any Subsidiary is a party, and each plan or
         arrangement maintained by the Company or any Subsidiary, and including
         any awards outstanding under any such agreement, plan, or arrangement,
         to the extent that such award, agreement, plan, or arrangement contains
         a definition of "Change in Control." However, to the extent that the
         Employee Benefit Arrangement provides for an award based on common
         stock of the Company (including, without limitation, an award of stock
         options or shares of restricted stock), and such Employee Benefit
         Arrangement provides that vesting or exercisability of such award will
         occur at the time of the Change in Control (rather than the occurrence
         of a subsequent event, such as termination of employment), the
         definition of "Change in Control" that is substituted for the
         definition in such Employee Benefit Arrangement shall be the definition
         of "Change in Control" set forth above, except that Section 2.3.4 shall
         be modified by adding, at the end of such Section, immediately prior to
         the word "or," the following: "provided, however, that the Change in
         Control shall occur three (3) business days before such tender offer is
         to terminate, unless the offer is withdrawn first, if the Person making
         the offer could own, by the terms of the offer plus any shares
         beneficially owned by that Person, stock with 50% or more of the
         combined voting power of the then Outstanding Company Voting Securities
         when the offer (and any subsequent offering period) terminates;"

                  2.3.8    By entering into this Agreement, the Executive
         irrevocably consents to the amendment of the Nicor Inc. Stock Deferral
         Plan to provide for distribution, as soon as practicable following a
         Change in Control, of any amounts which may then be deferred for the
         Executive under such plan.

         2.4      "Code" means the Internal Revenue Code of 1986, as amended.

         2.5      "Employment Period" means the period commencing on the
Effective Date and ending on the two-year anniversary of that date.

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         2.6      "Incentive Plan" shall have the meaning set forth in Section
3.2.2.

         2.7      "Notice of Termination" means a written notice given in
accordance with Section 11.8 which sets forth (a) the specific termination
provision in this Agreement relied upon by the party giving such notice, (b) in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of the Executive's employment under such termination provision, and
(c) if the Termination Date is other than the date of receipt of such Notice of
Termination, the Termination Date.

         2.8      "Plans" shall have the meaning set forth in Section 3.2.3.

         2.9      A "Potential Change in Control" shall exist during any period
in which the circumstances described in Sections 2.9.1, 2.9.2, or 2.9.3 exist
(provided, however, that a Potential Change in Control shall cease to exist not
later than the occurrence of a Change in Control):

                  2.9.1    The Company enters into an agreement, the
         consummation of which would result in the occurrence of a Change in
         Control, provided that a Potential Change in Control described in this
         Section 2.9.1 shall cease to exist upon the expiration or other
         termination of all such agreements.

                  2.9.2    Any person (including the Company) publicly announces
         an intention to take or to consider taking actions the consummation of
         which would constitute a Change in Control; provided that a Potential
         Change in Control described in this Section 2.9.2 shall cease to exist
         upon the withdrawal of such intention, or upon a reasonable
         determination by the Board that there is no reasonable chance that such
         actions would be consummated.

                  2.9.3    The Board adopts a resolution to the effect that, for
         purposes of this Agreement, a Potential Change in Control exists;
         provided that a Potential Change in Control described in this Section
         2.9.3 shall cease to exist upon a reasonable determination by the Board
         that the reasons that gave rise to the resolution providing for the
         existence of a Potential Change in Control have expired or no longer
         exist.

         2.10     "Severance Incentive" means the greater of (i) the target
annual incentive under an Incentive Plan applicable to the Executive for the
Performance Period in which the Termination Date occurs, or (ii) the average of
the actual annual incentives paid (or payable, to the extent not previously
paid) to the Executive under the applicable Incentive Plan for each of the two
calendar years preceding the calendar year in which the Termination Date occurs.

         2.11     "Severance Period" means the period beginning on the
Executive's Termination Date and ending on the second anniversary thereof;
provided, however, that no Severance Period will occur unless the Executive's
Termination Date occurs under circumstances described in

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Section 5.1 (relating to termination by the Executive for Good Reason or by the
Company and Nicor Gas other than for Cause or Permanent Disability).

         2.12     "Subsidiary" shall mean any corporation, partnership, joint
venture or other entity during any period in which at least a fifty percent
interest in such entity is owned, directly or indirectly, by the Company (or a
successor to the Company).

         2.13     "Termination Date" means the first day on or after which the
Executive is not employed by the Company or Nicor Gas; provided, however, that
(a) if the Company and Nicor Gas terminate the Executive's employment other than
for Cause or Disability (as defined in Section 4.1.2), then the Termination Date
shall be the date of receipt of the Notice of Termination and (b) if the
Executive's employment is terminated by reason of death or Disability, then the
Termination Date shall be the date of death of the Executive or the Disability
Effective Date (as defined in Section 4.1.1), as the case may be.

         2.14     "Welfare Plans" shall have the meaning set forth in Section
3.2.4.

                                   ARTICLE III
                               TERMS OF EMPLOYMENT

         3.1      Position and Duties.

                  3.1.1    The Company hereby agrees to cause the Company and/or
         Nicor Gas to continue the Executive's employment during the Employment
         Period and, subject to Article IV of this Agreement, the Executive
         agrees to remain in the employ of the Company and Nicor Gas, as
         applicable, subject to the terms and conditions hereof. During the
         Employment Period, (i) the Executive's position (including status,
         offices, titles and reporting requirements), authority, duties and
         responsibilities shall be at least commensurate in all material
         respects with the most significant of those held, exercised and
         assigned to the Executive at any time during the 90-day period
         immediately preceding the Effective Date, and (ii) the Executive's
         services shall be performed at the location where the Executive was
         employed immediately preceding the Effective Date or any office or
         location less than 25 miles from such location.

                  3.1.2    During the Employment Period, and excluding any
         periods of vacation and sick leave to which the Executive is entitled,
         the Executive agrees to devote reasonable attention and time during
         normal business hours to the business and affairs of the Company and
         Nicor Gas, as applicable, and, to the extent necessary to discharge the
         responsibilities assigned to the Executive hereunder, to use the
         Executive's reasonable best efforts to perform faithfully and
         efficiently such responsibilities. During the Employment Period it
         shall not be a violation of this Agreement for the Executive (i) to
         serve on corporate, civic or charitable boards or committees, (ii) to
         deliver lectures, fulfill speaking engagements or teach at educational
         institutions and (iii) to manage personal investments, to the extent
         that such other activities do not, in the reasonable judgment of

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         the Chief Executive Officer of the Company (the "CEO"), inhibit or
         prohibit the performance of the Executive's duties under this
         Agreement, or conflict in any material way with the business of the
         Company or any Subsidiary; provided, however, that the Executive shall
         not serve on the board of any business, or hold any other position with
         any business, without the consent of the CEO.

                  3.2      Compensation.

                  3.2.1    Base Salary. During the Employment Period, the
         Executive shall receive an annual base salary ("Annual Base Salary"),
         which shall be paid at an annual rate at least equal to twelve times
         the highest monthly base salary paid or payable, including any base
         salary which has been earned but deferred, to the Executive by the
         Company in respect of the twelve-month period immediately preceding the
         month in which the Effective Date occurs. During the Employment Period,
         the Annual Base Salary shall be reviewed no more than twelve months
         after the last salary increase awarded to the Executive prior to the
         Effective Date and, thereafter, at least annually, and shall be
         increased at any time and from time to time as shall be substantially
         consistent with increases in base salary awarded to other senior
         executives of the Company. Annual Base Salary shall not be reduced
         after any such increase unless such reduction is part of a policy,
         program or arrangement applicable to senior executives of the Company
         and of any successor entity, and the term Annual Base Salary as used in
         this Agreement shall refer to Annual Base Salary as so increased. Any
         increase in Annual Base Salary shall not limit or reduce any other
         obligation of the Company to the Executive under this Agreement.

                  3.2.2    Annual Incentive. In addition to Annual Base Salary,
         the Company shall pay or cause to be paid to the Executive an incentive
         award (the "Annual Incentive") for each Performance Period or portion
         thereof which falls within the Employment Period. "Performance Period"
         means each period of time designated in accordance with any annual
         incentive award arrangement ("Incentive Plan") which is based upon
         performance and approved by the Board or any committee of the Board, or
         in the absence of any Incentive Plan or any such designated period of
         time, Performance Period shall mean each calendar year. The Executive's
         target and maximum Annual Incentive with respect to any Performance
         Period shall not be less than the target and maximum annual incentive
         award payable with respect to the Executive under the Company's annual
         incentive program as in effect immediately preceding the Effective
         Date.

                  3.2.3    Incentive, Savings and Retirement Plans. During the
         Employment Period, the Executive shall be entitled to participate in
         all incentive, savings and retirement plans, practices, policies and
         programs ("Plans") applicable generally to other senior executives of
         the Company, but in no event shall such Plans provide the Executive
         with incentive opportunities (measured with respect to long-term and
         special incentives, to the extent, if any, that such distinctions are
         applicable) or savings and retirement benefits which are less
         favorable, in the aggregate, than the greater of (i) those provided by
         the Company for

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         the Executive under such Plans as in effect at any time during the
         90-day period immediately preceding the Effective Date, or (ii) those
         provided generally at any time after the Effective Date to other senior
         executives of the Company.

                  3.2.4    Welfare Benefit Plans. During the Employment Period,
         the Executive and/or the Executive's family, as the case may be, shall
         be eligible for participation in and shall receive all benefits under
         welfare benefit plans, practices, policies and programs ("Welfare
         Plans") provided by the Company (including, without limitation,
         medical, prescription, dental, disability, salary continuance, employee
         life, group life, accidental death and travel accident insurance
         benefits), but in no event shall such Welfare Plans provide the
         Executive with benefits which are less favorable, in the aggregate,
         than the greater of (i) those provided by the Company for the Executive
         under such Welfare Plans as were in effect at any time during the
         90-day period immediately preceding the Effective Date, or (ii) those
         provided generally at any time after the Effective Date to other senior
         executives of the Company.

                  3.2.5    Other Employee Benefits. During the Employment
         Period, the Executive shall be entitled to other employee benefits and
         perquisites in accordance with the most favorable plans, practices,
         programs and policies of the Company, as in effect with respect to the
         Executive at any time during the 90-day period immediately preceding
         the Effective Date, or if more favorable, as in effect generally with
         respect to other senior executives of the Company.

                  3.2.6    Expenses. During the Employment Period, the Executive
         shall be entitled to receive prompt reimbursement for all reasonable
         expenses incurred by the Executive in accordance with the policies,
         practices and procedures of the Company as in effect with respect to
         the Executive at any time during the 90-day period immediately
         preceding the Effective Date, or if more favorable, as in effect
         generally with respect to other senior executives of the Company.

                  3.2.7    Office and Support Staff. During the Employment
         Period, the Executive shall be entitled to an office or offices of a
         size and with furnishings and other appointments, and to exclusive
         personal secretarial and other assistance, as in effect with respect to
         the Executive at any time during the 90-day period immediately
         preceding the Effective Date, or if more favorable, as provided
         generally with respect to other senior executives of the Company.

                  3.2.8    Paid Time Off. During the Employment Period, the
         Executive shall be entitled to paid time off in accordance with the
         plans, policies, programs and practices of the Company as in effect
         with respect to the Executive at any time during the 90-day period
         immediately preceding the Effective Date, or if more favorable, as
         provided generally with respect to other senior executives of the
         Company.

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                  3.2.9    Subsidiaries. To the extent that immediately prior to
         the Effective Date, the Executive has been on the payroll of, and
         participated in the incentive or employee benefit plans of, a
         Subsidiary of the Company, the references to the Company contained in
         Sections 3.2.1 through 3.2.8 and the other sections of this Agreement
         referring to benefits to which the Executive may be entitled shall be
         read to refer to such Subsidiary.

                                   ARTICLE IV
                            TERMINATION OF EMPLOYMENT

         4.1      Disability.

                  4.1.1    During the Agreement Term, the Company and Nicor Gas
         may terminate the Executive's employment upon the Executive's Permanent
         Disability (as defined in Section 4.1.2) by giving the Executive or his
         legal representative, as applicable, (1) written notice in accordance
         with Section 11.8 of the Company's or Nicor Gas', as applicable,
         intention to terminate the Executive's employment pursuant to this
         section, and (2) a certification of the Executive's Permanent
         Disability by a physician selected by the Company or Nicor Gas or its
         insurers and reasonably acceptable to the Executive or the Executive's
         legal representative. The Executive's employment shall terminate
         effective on the 30th day (the "Permanent Disability Effective Date")
         after the Executive's receipt of such notice unless, before the
         Permanent Disability Effective Date, the Executive shall have resumed
         the full-time performance of the Executive's duties. During the period
         in which the Executive has a Disability, the Company or Nicor Gas, as
         applicable, may appoint a temporary replacement to assume the
         Executive's responsibilities.

                  4.1.2    The Executive shall be considered to have a
         "Permanent Disability" during any period in which he has a Disability
         (as defined below); provided, however, that the Executive shall not be
         considered to have "Permanent Disability" until (i) for a period of 180
         consecutive days, the Executive, as a result of a Disability, is
         incapable, after reasonable accommodation, of performing his duties
         under this Agreement on a full-time basis; (ii) such Disability is
         reasonably expected to continue for at least another 90 days; and (iii)
         at the Executive's Termination Date, he is eligible for income
         replacement benefits under the Company's or Nicor Gas' long-term
         disability plan. The Executive shall be considered to have a
         "Disability" during any period in which he has a physical or mental
         disability which renders him incapable, after reasonable accommodation,
         of performing his duties under this Agreement.

         4.2      Death. The Executive's employment shall terminate
automatically upon the Executive's death during the Agreement Term.

         4.3      Cause. The Company or Nicor Gas, as applicable, may terminate
the Executive's employment during the Employment Period for Cause. For purposes
of this Agreement, "Cause" means:

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                  4.3.1    the Executive's willful commission of acts or
         omissions which have, have had, or are likely to have a material
         adverse effect on the business, operations, financial condition or
         reputation of the Company or Nicor Gas;

                  4.3.2    the Executive's conviction (including a plea of
         guilty or nolo contendere) of a felony or any crime of fraud, theft,
         dishonesty or moral turpitude; or

                  4.3.3    the Executive's material violation of any statutory
         or common law duty of loyalty to the Company or Nicor Gas.

         For purposes of this Agreement, no act, or failure to act, on the part
         of the Executive shall be considered "willful" unless it is done, or
         omitted to be done, by the Executive in bad faith or without reasonable
         belief that the Executive's action or omission was in the best
         interests of the Company or Nicor Gas. Any act, or failure to act,
         pursuant to direction provided by the person to whom the Executive
         reports, or provided by a resolution duly adopted by the Board, or
         pursuant to advice of counsel for the Company or Nicor Gas, shall be
         conclusively presumed to be done, or omitted to be done, by the
         Executive in good faith and in the best interests of the Company or
         Nicor Gas.

         4.4      Good Reason. During the Employment Period, the Executive's
employment may be terminated by the Executive for Good Reason. For purposes of
this Agreement, "Good Reason" means any material breach of this Agreement by the
Company or Nicor Gas, including:

                  4.4.1    the failure to maintain the Executive in the office
         or position, or in a substantially equivalent office or position, held
         by the Executive immediately prior to the Change in Control;

                  4.4.2    a material adverse alteration in the nature or scope
         of the Executive's position, duties, functions, responsibilities or
         authority;

                  4.4.3    a material reduction of the Executive's salary,
         incentive compensation or benefits;

                  4.4.4    the failure of any successor to the Company to assume
         this Agreement, or a material breach of the Agreement by the Company or
         its successor;

                  4.4.5    a relocation of more than 25 miles of (i) the
         Executive's principal workplace, or (ii) the principal offices of the
         Company or Nicor Gas, as applicable, (if such offices are the
         Executive's principal workplace), in each case without the consent of
         the Executive;

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                  4.4.6    the Company or Nicor Gas, as applicable, requiring
         the Executive to engage in travel that is materially greater than the
         Executive's travel obligations during the one-year period immediately
         prior to the Change in Control; or

                  4.4.7    any failure by the Company or Nicor Gas, as
         applicable, to comply with any of the provisions of Section 3.2 of this
         Agreement, other than an isolated, insubstantial and inadvertent
         failure not occurring in bad faith and which is remedied by the Company
         or Nicor Gas, as applicable, promptly after receipt of notice thereof
         given by the Executive;

provided, however, that an act or omission of the Company or Nicor Gas, as
applicable, shall not constitute Good Reason: (i) unless the Executive gives the
Company or Nicor Gas, as applicable, written notice of such act or omission and
the Company or Nicor Gas, as applicable, fails to cure such act or omission
within the 30-day period after such notice, or (ii) if the Executive first
acquired knowledge of such act or omission more than 6 months before the
Executive gives the Company or Nicor Gas, as applicable, such notice, or (iii)
if the Executive has consented in writing to such act or omission in a document
that makes specific reference to this Section 4.4.

         4.5      Without Cause During a Potential Change in Control. If the
Executive's employment is terminated by the Company and Nicor Gas, as
applicable, without Cause during a Potential Change in Control, and such date of
termination occurs not more than 180 days prior to the occurrence of a Change in
Control and the Executive establishes by reasonable evidence that such
termination of employment was materially connected with and in anticipation of
the Change in Control, then the Executive shall be entitled to receive the
benefits that would have been provided under Section 5.1, determined as though:

                  4.5.1    the Executive were rehired by the Company and Nicor
         Gas, as applicable, immediately prior to the Change in Control at the
         salary rate equal to the Executive's highest salary rate during the
         one-year period prior to the date of the Change in Control, and with
         other Company and Nicor Gas compensation and benefit arrangements
         comparable to those provided to comparable executives of the Company
         and Nicor Gas;

                  4.5.2    the Executive's employment were terminated by the
         Company and Nicor Gas without Cause immediately after the Change in
         Control; and

                  4.5.3    this Agreement were in full force and effect at the
         time of the Change in Control, and at the time of the Executive's
         deemed termination of employment.

         4.6      Right of Resignation and Termination. This Agreement does not
constitute a guarantee of continued employment at any time, but instead provides
for certain rights and benefits for the Executive during his employment
following the occurrence of a Change in Control, and in the event his employment
with the Company and Nicor Gas, as applicable, terminates under the
circumstances described herein. The Company and Nicor Gas, as applicable, may
terminate the employment of the Executive at any time for any reason, without

                                       11
<PAGE>

breach of this Agreement, subject to its obligations set forth in Article V and
elsewhere in this Agreement. The Executive may resign from the Company and Nicor
Gas, as applicable, for Good Reason, or for any other reason, without breach of
this Agreement, subject to the Executive's obligations set forth in this
Agreement; provided that, in the event of a resignation without Good Reason, the
Executive shall provide at least four weeks advance notice of such resignation
to the Company and Nicor Gas, as applicable. Notwithstanding the foregoing
provisions in this Section 4.6, the Company and Nicor Gas, as applicable, may
suspend the Executive from performing his duties under this Agreement following
the delivery of a Notice of Termination by the Executive without Good Reason;
provided, however, that during the period of suspension (which shall end on the
Termination Date), the Executive shall continue to be treated as employed by the
Company and Nicor Gas, as applicable, for other purposes, and his rights to
compensation or benefits shall not be reduced by reason of the suspension.

                                    ARTICLE V
                   OBLIGATIONS OF THE COMPANY UPON TERMINATION

         5.1      If by the Executive for Good Reason or by the Company and
Nicor Gas, as Applicable, Other Than for Cause or Permanent Disability. If,
during the Employment Period, the Company and Nicor Gas, as applicable, shall
terminate the Executive's employment other than for Cause or Permanent
Disability, or if the Executive shall terminate employment for Good Reason, the
Company's and Nicor Gas' obligations to the Executive shall be as set forth in
this Section 5.1. As a precondition to fulfilling such obligations, the Company
shall require the Executive to execute and deliver a release prepared by the
Company and providing for the Executive's release of any and all claims against
the Company and its Subsidiaries (and those acting on behalf of them) that may
have arisen on or before the date of the release, which release shall contain
such other reasonable and customary terms as are specified by the Company.
Notwithstanding any other provision of this section to the contrary, to the
extent any portion of such release is subject to the seven-day revocation period
prescribed by the Age Discrimination in Employment Act, as amended, or to any
similar revocation period in effect on the Termination Date, no payment shall be
due under this Section 5.1 until such revocation period has expired without such
revocation occurring.

                  5.1.1    The Company shall, within five business days of such
         termination of employment, pay the Executive a cash payment equal to
         the sum of the following amounts:

                           5.1.1.1  to the extent not previously paid, the
                  Annual Base Salary and any accrued paid time off through the
                  Termination Date;

                           5.1.1.2  an amount equal to the product of (i) the
                  Annual Incentive (as defined in Section 3.2.2) at target for
                  any Performance Period in which the Termination Date occurs
                  multiplied by (ii) a fraction, the numerator of which is the
                  number of days the Executive was actually employed by the
                  Company during such Performance Period, and the denominator of
                  which is the number of days in

                                       12
<PAGE>

                  the Performance Period; or, if greater, the amount of any
                  Annual Incentive otherwise payable to the Executive with
                  respect to a Performance Period in which the Termination Date
                  occurs, which payment shall be in full settlement of Annual
                  Incentive amounts due with respect to any such Performance
                  Period; and

                           5.1.1.3  all amounts previously deferred by or
                  accrued to the benefit of the Executive under any nonqualified
                  deferred compensation plan sponsored by the Company
                  (including, without limitation, any vested amounts deferred
                  under incentive plans), together with any accrued earnings
                  thereon, and not yet paid by the Company; and

                           5.1.1.4  an amount equal to the product of (A) two
                  (2) multiplied by (B) the sum of (i) the Executive's Annual
                  Base Salary, and (ii) the Severance Incentive.

                  5.1.2    For purposes of each of the Executive's stock options
         granted under the Company's Long Term Incentive Plan (the "LTIP"), any
         successor plan, or otherwise, that is or becomes exercisable on the
         Termination Date, the Executive's termination of employment shall be
         disregarded, and each such option shall continue to be exercisable as
         though the Executive's employment had continued through the last day on
         which such option would be exercisable in the absence of such
         employment termination (such earlier date being referred to herein as
         the "Applicable Expiration Date"). This Section 5.1.2 shall be
         applicable notwithstanding any term of any plan, arrangement, or
         agreement providing for early expiration of the option because of the
         Executive's termination of employment, except for an amendment adopted
         in accordance with Section 11.7 of this Agreement and that by its
         specific terms amends this Agreement.

                  5.1.3    On the Termination Date (i) the Executive shall
         become fully vested in, and may thereupon and until the Applicable
         Expiration Date of such stock incentive awards exercise in whole or in
         part, any and all stock incentive awards granted to the Executive under
         the LTIP, any successor plan or otherwise which have not become
         exercisable as of the Termination Date; (ii) all performance units
         previously awarded to the Executive shall become fully vested, and a
         prorated calculation of the target value of all such units shall be
         done as of the Termination Date and full payment of such prorated
         target value shall be made by the Company within 30 days after the
         Termination Date; and (iii) the Executive shall become fully vested at
         the prorated target level in any other cash incentive awards granted
         for the performance period in which the Termination Date occurs under
         the LTIP, a successor plan or otherwise which have not, as of the
         Termination Date, become fully vested.

                  5.1.4    All forfeiture conditions that as of the Termination
         Date are applicable to any deferred stock unit, restricted stock or
         restricted share units awarded to the Executive by the Company pursuant
         to the LTIP, a successor plan or otherwise shall lapse

                                       13
<PAGE>

         immediately (to the extent such awards are outstanding immediately
         prior to the Termination Date).

                  5.1.5    During the Severance Period (or until such later date
         as any Welfare Plan of the Company may specify), the Company shall
         continue to provide to the Executive and the Executive's family welfare
         benefits (including, without limitation, medical, prescription, dental,
         disability, individual life and group life insurance benefits) which
         are at least as favorable as those provided under the most favorable
         Welfare Plans of the Company applicable (i) with respect to the
         Executive and his family during the 90-day period immediately preceding
         the Termination Date, or (ii) with respect to other senior executives
         and their families during the Severance Period. In determining benefits
         under such Welfare Plans, the Executive's annual compensation
         attributable to base salary and incentives for any plan year or
         calendar year, as applicable, shall be deemed to be not less than the
         Executive's Annual Base Salary and Target Annual Incentive. The cost of
         the welfare benefits provided under this Section 5.1.5 shall not exceed
         the cost of such benefits to the Executive immediately before the
         Termination Date or, if less, the Effective Date. Notwithstanding the
         foregoing, if the Executive obtains comparable coverage under any
         Welfare Plans sponsored by another employer, then the amount of
         coverage required to be provided by the Company hereunder shall be
         reduced by the amount of coverage provided by such other employer's
         Welfare Plans. The Executive's rights under this Section shall be in
         addition to and not in lieu of any post-termination continuation
         coverage or conversion rights the Executive may have pursuant to
         applicable law, including, without limitation, continuation coverage
         required by Section 4980B of the Code. For purposes of determining
         eligibility for (but not the time of commencement of) retiree benefits
         under any Welfare Plans of the Company, the Executive shall be
         considered (i) to have remained employed until the last day of the
         Severance Period and to have retired on the last day of such period,
         and (ii) to have attained the age the Executive would have attained on
         the last day of the Severance Period.

                  5.1.6    If the Executive participates in the Company's
         nonqualified supplemental executive retirement plan ("SERP"), the
         amount payable under subsection 5.1.1.4 of this Agreement shall be
         taken into account for purposes of determining the amount of benefits
         to which the Executive is entitled under the SERP; provided that such
         amount shall be taken into account as though it was earned equally over
         the Severance Period, and further provided that the Executive shall be
         deemed to have attained the age he or she would have attained as of the
         last day of the Severance Period, and completed the number of years of
         service he or she would have completed as of the last day of the
         Severance Period. The Severance Period shall be taken into account for
         purposes of determining the amount of and eligibility to begin to
         receive benefits under the SERP. If the Executive participates in the
         Company's nonqualified Supplemental Senior Officer Retirement Plan
         ("SSORP"), on the Termination Date (i) the Executive shall become fully
         vested in all contributions (and in any earnings applied to such
         contributions) made by the Company on behalf of the Executive under the
         SSORP or any successor plan, if applicable, and (ii) the Company shall
         immediately make an additional contribution to the SSORP of an

                                       14
<PAGE>

         amount equal to the product of (x) the Annual Deferral Percentage (as
         defined in the SSORP) used for the most recently completed SSORP Plan
         Year, times (y) the amount payable under subsection 5.1.1.4 of this
         Agreement.

                  5.1.7    On the Termination Date (i) the Executive shall
         become fully vested in all contributions made by the Company on behalf
         of the Executive under the Company's Savings Investment Plan (the
         "SIP") or any supplemental or successor plan, if applicable, and (ii)
         the Company shall immediately make an additional contribution to the
         SIP (or, if such contribution is not permitted under the terms of the
         SIP, to a non-qualified plan providing benefits comparable to the
         benefits provided under the SIP) or any supplemental or successor plan,
         if applicable, equal to the aggregate maximum matching contributions
         which the Company would have made on behalf of the Executive to the SIP
         or any supplemental or successor plan, if applicable, for the Severance
         Period, calculated as if the amount payable under subsection 5.1.1.4 of
         this Agreement had been earned equally over the Severance Period and
         the Executive had made the maximum allowable voluntary contributions to
         the SIP or any supplemental or successor plan, if applicable. In
         addition, if the Executive is not eligible to participate in the
         Company's defined benefit retirement plan, the Company shall also
         contribute to the SIP or any supplemental or successor plan, if
         applicable, on the Termination Date an amount equal to the aggregate
         additional "retirement growth" contributions which the Company would
         have made on behalf of the Executive for the Severance Period if the
         amount payable under subsection 5.1.1.4 of this Agreement had been
         earned equally over the Severance Period.

                  5.1.8    The Company shall, at its sole expense, as incurred,
         pay on behalf of Executive all fees and costs charged by a nationally
         recognized outplacement firm selected by the Company (subject to
         approval by the Executive, which shall not be withheld unreasonably) to
         provide outplacement service.

         5.2      If by the Company and Nicor Gas for Cause. If the Company and
Nicor Gas, as applicable, terminates the Executive's employment for Cause during
the Employment Period, this Agreement shall terminate without further obligation
by the Company and Nicor Gas, as applicable, to the Executive, other than the
obligation immediately to pay the Executive in cash the Executive's Annual Base
Salary through the Termination Date, plus any accrued paid time off, in each
case to the extent not previously paid.

         5.3      If by the Executive Other Than for Good Reason. If the
Executive terminates employment during the Employment Period other than for Good
Reason (including, but not by way of limitation, voluntary retirement other than
for Good Reason), and other than for Disability or death, this Agreement shall
terminate without further obligation by the Executive or by the Company, other
than the obligation of the Company immediately to pay the Executive in cash the
Executive's Annual Base Salary through the Termination Date, plus any accrued
paid time off, in each case to the extent not previously paid.

                                       15
<PAGE>

         5.4      If by the Company and Nicor Gas, as applicable, for Permanent
Disability. If the Company and Nicor Gas, as applicable, and Nicor Gas, as
applicable, terminates the Executive's employment by reason of the Executive's
Permanent Disability during the Employment Period, this Agreement shall
terminate without further obligation to the Executive, other than:

                  5.4.1    the Company's obligation immediately to pay the
         Executive in cash all amounts specified in Sections 5.1.1.1, 5.1.1.2
         and 5.1.1.3, in each case, to the extent unpaid as of the Termination
         Date (such amounts collectively, the "Accrued Obligations"), and

                  5.4.2    the Executive's right after the Permanent Disability
         Effective Date to receive disability and other benefits at least equal
         to the greater of (i) those provided under the most favorable
         disability Plans applicable to disabled senior executives of the
         Company in effect immediately before the Termination Date, or (ii)
         those provided under the most favorable disability Plans of the Company
         in effect at any time during the 90-day period immediately before the
         Effective Date.

         5.5      If upon Death. If the Executive's employment is terminated by
reason of the Executive's death during the Employment Period, this Agreement
shall terminate without further obligation to the Executive's legal
representatives under this Agreement, other than the obligation immediately to
pay the Executive's estate or beneficiary in cash all Accrued Obligations.
Notwithstanding anything in this Agreement to the contrary, the Executive's
family shall be entitled to receive benefits at least equal to the most
favorable benefits provided under Plans of the Company to the surviving families
of senior executives of the Company, but in no event shall such Plans provide
benefits which in each case are less favorable, in the aggregate, than the most
favorable of those provided by the Company to the Executive under such Plans in
effect at any time during the 90-day period immediately before the Effective
Date.

                                   ARTICLE VI
                   CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY

         6.1      Gross-up for Certain Taxes.

                  6.1.1    If it is determined by the Company's independent
         auditors that any benefit received or deemed received by the Executive
         from the Company pursuant to this Agreement or otherwise, whether or
         not in connection with a Change in Control (such monetary or other
         benefits collectively, the "Potential Parachute Payments") is or will
         become subject to any excise tax under Section 4999 of the Code or any
         similar tax payable under any United States federal, state, local or
         other law (such excise tax and all such similar taxes collectively,
         "Excise Taxes"), then the Company shall, subject to Sections 6.6 and
         6.7, within five business days after such determination, pay the
         Executive an amount (the "Gross-up Payment") equal to the product of:

                           (a)      the amount of such Excise Taxes multiplied
                                    by

                                       16
<PAGE>

                           (b)      the Gross-up Multiple (as defined in Section
                                    6.4). The Gross-up Payment is intended to
                                    compensate the Executive for all Excise
                                    Taxes payable by the Executive with respect
                                    to the Potential Parachute Payments and any
                                    federal, state, local or other income or
                                    other taxes or Excise Taxes payable by the
                                    Executive with respect to the Gross-up
                                    Payment.

                  6.1.2    The determination of the Company's independent
         auditors described in Section 6.1.1, including the detailed
         calculations of the amounts of the Potential Parachute Payments, Excise
         Taxes and Gross-Up Payment and the assumptions relating thereto, shall
         be set forth in a written certificate of such auditors (the "Company
         Certificate") delivered to the Executive. The Executive or the Company
         may at any time request the preparation and delivery to the Executive
         of a Company Certificate. The Company shall cause the Company
         Certificate to be delivered to the Executive as soon as reasonably
         possible after such request.

         6.2      Determination by the Executive.

                  6.2.1    If (i) the Company shall fail to deliver a Company
         Certificate to the Executive within 30 days after its receipt of his
         written request therefor, or (ii) at any time after the Executive's
         receipt of a Company Certificate, the Executive disputes either (x) the
         amount of the Gross-Up Payment set forth therein, or (y) the
         determination set forth therein to the effect that no Gross-Up Payment
         is due (whether by reason of Section 6.7 or otherwise), then the
         Executive may elect to require the Company to pay a Gross-Up Payment in
         the amount determined by the Executive as set forth in an Executive
         Counsel Opinion (as defined in Section 6.5). Any such demand by the
         Executive shall be made by delivery to the Company of a written notice
         which specifies the Gross-Up Payment determined by the Executive
         (together with the detailed calculations of the amounts of Potential
         Parachute Payments, Excise Taxes and Gross-Up Payment and the
         assumptions relating thereto) and an Executive Counsel Opinion
         regarding such Gross-Up Payment (such written notice and opinion
         collectively, the "Executive's Determination"). Within 30 days after
         delivery of an Executive's Determination to the Company, the Company
         shall either (i) pay the Executive the Gross-Up Payment set forth in
         Executive's Determination (less the portion thereof, if any, previously
         paid to Executive by the Company) or (ii) deliver to the Executive a
         Company Certificate and a Company Counsel Opinion (as defined in
         Section 6.5), and pay the Executive the Gross-Up Payment specified in
         such Company Certificate. If for any reason the Company fails to comply
         with the preceding sentence, the Gross-Up Payment specified in the
         Executive's Determination shall be controlling for all purposes.

                  6.2.2    If the Executive does not request a Company
         Certificate, and the Company does not deliver a Company Certificate to
         the Executive, then (i) the Company shall, for purposes of Section 6.7,
         be deemed to have determined that no Gross-up Payment is due,

                                       17
<PAGE>

         and (ii) the Executive shall not pay any Excise Taxes in respect of
         Potential Parachute Payments, except in accordance with Sections 6.6.1
         or 6.6.4.

         6.3      Additional Gross-up Amounts. If for any reason it is later
determined (whether pursuant to the subsequently-enacted provisions of the Code,
final regulations or published rulings of the IRS, a final judgment of a court
of competent jurisdiction, a determination of the Company's independent auditors
set forth in a Company Certificate or, subject to the last two sentences of
Section 6.2.1, an Executive's Determination) that the amount of Excise Taxes
payable by the Executive is greater than the amount determined by the Company or
the Executive pursuant to Section 6.1 or 6.2, as applicable, then the Company
shall, subject to Sections 6.6 and 6.7, pay the Executive an amount (which shall
also be deemed a Gross-up Payment) equal to the product of:

                  (a)      the sum of (1) such additional Excise Taxes and (2)
                           any interest, fines, penalties, expenses or other
                           costs incurred by the Executive as a result of having
                           taken a position in accordance with determination
                           made pursuant to Section 6.1 or 6.2, as applicable,

                           multiplied by

                  (b)      the Gross-up Multiple.

         6.4      Gross-up Multiple. The Gross-up Multiple shall equal a
fraction, the numerator of which is one (1.0), and the denominator of which is
one (1.0) minus the lesser of (i) the sum, expressed as a decimal fraction, of
the effective marginal tax rates of all federal, state, local and other income
and other taxes and any Excise Taxes applicable to the Gross-up Payment; or (ii)
0.80, it being intended that the Gross-up Multiple shall in no event exceed five
(5.0). (If different rates of tax are applicable to various portions of a
Gross-up Payment, the weighted average of such rates shall be used.)

         6.5      Opinion of Counsel. "Executive Counsel Opinion" means an
opinion of nationally-recognized executive compensation counsel to the effect
(i) that the amount of the Gross-Up Payment determined by the Executive pursuant
to Section 6.2 is the amount that a court of competent jurisdiction, based on a
final judgment not subject to further appeal, is most likely to decide to have
been calculated in accordance with this Article and applicable law and (ii) if
the Company has previously delivered a Company Certificate to the Executive,
that there is no reasonable basis or no substantial authority for the
calculation of the Gross-Up Payment set forth in the Company Certificate.
"Company Counsel Opinion" means an opinion of nationally-recognized executive
compensation counsel to the effect that (i) the amount of the Gross-Up Payment
set forth in the Company Certificate is the amount that a court of competent
jurisdiction, based on a final judgment not subject to further appeal, is most
likely to decide to have been calculated in accordance with this Article and
applicable law and (ii) for purposes of Section 6662 of the Code, the Executive
has substantial authority to report on his federal income tax return the amount
of Excise Taxes set forth in the Company Certificate.

                                       18
<PAGE>

6.6      Amount Increased or Contested.

                  6.6.1    The Executive shall notify the Company in writing (an
         "Executive's Notice") of any claim by the IRS or other taxing authority
         (an "IRS Claim") that, if successful, would require the payment by the
         Executive of Excise Taxes in respect of Potential Parachute Payments in
         an amount in excess of the amount of such Excise Taxes determined in
         accordance with Section 6.1 or 6.2, as applicable. Such Executive's
         Notice shall include the nature and amount of such IRS Claim, the date
         on which such IRS Claim is due to be paid (the "IRS Claim Deadline"),
         and a copy of all notices and other documents or correspondence
         received by the Executive in respect of such IRS Claim. The Executive
         shall give the Executive's Notice as soon as practicable, but no later
         than the earlier of (i) 10 business days after the Executive first
         obtains actual knowledge of such IRS Claim or (ii) five business days
         after the IRS Claim Deadline; provided, however, that the Executive's
         failure to give such notice shall affect the Company's obligations
         under this Article only to the extent that the Company is actually
         prejudiced by such failure. If at least one business day before the IRS
         Claim Deadline the Company shall:

                           6.6.1.1  deliver to the Executive a Company
                  Certificate to the effect that the IRS Claim has been reviewed
                  by the Company's independent auditors and, notwithstanding the
                  IRS Claim, the amount of Excise Taxes, interest and penalties
                  payable by the Executive is either zero or an amount less than
                  the amount specified in the IRS Claim,

                           6.6.1.2  pay to the Executive an amount (which shall
                  also be deemed a Gross-Up Payment) equal to the positive
                  difference between (x) the product of the amount of Excise
                  Taxes, interest and penalties specified in the Company
                  Certificate, if any, multiplied by the Gross-Up Multiple, and
                  (y) the portion of such product, if any, previously paid to
                  the Executive by the Company, and

                           6.6.1.3  direct the Executive pursuant to Section
                  6.6.4 to contest the balance of the IRS Claim, then the
                  Executive shall pay only the amount, if any, of Excise Taxes,
                  interest and penalties specified in the Company Certificate.
                  In no event shall the Executive pay an IRS Claim earlier than
                  30 days after having given an Executive's Notice to the
                  Company (or, if sooner, the IRS Claim Deadline).

                  6.6.2    At any time after the payment by the Executive of any
         amount of Excise Taxes or related interest or penalties in respect of
         Potential Parachute Payments (whether or not such amount was based upon
         a Company Certificate or an Executive's Determination), the Company may
         in its discretion require the Executive to pursue a claim for a refund
         ("Refund Claim") of all or any portion of such Excise Taxes, interest
         or penalties as the Company may specify by written notice to the
         Executive.

                                       19
<PAGE>

                  6.6.3    If the Company notifies the Executive in writing that
         the Company desires the Executive to contest an IRS Claim or to pursue
         a Refund Claim, the Executive shall:

                           6.6.3.1  give the Company all information that it
                  reasonably requests in writing from time to time relating to
                  such IRS Claim or Refund Claim, as applicable,

                           6.6.3.2  take such action in connection with such IRS
                  Claim or Refund Claim (as applicable) as the Company
                  reasonably requests in writing from time to time, including
                  accepting legal representation with respect thereto by an
                  attorney selected by the Company, subject to the approval of
                  the Executive (which approval shall not be unreasonably
                  withheld or delayed),

                           6.6.3.3  cooperate with the Company in good faith to
                  contest such IRS Claim or pursue such Refund Claim, as
                  applicable,

                           6.6.3.4  permit the Company to participate in any
                  proceedings relating to such IRS Claim or Refund Claim, as
                  applicable, and

                           6.6.3.5  contest such IRS Claim or prosecute such
                  Refund Claim (as applicable) to a determination before any
                  administrative tribunal, in a court of initial jurisdiction
                  and in one or more appellate courts, as the Company may from
                  time to time determine in its discretion.

                  The Company shall control all proceedings in connection with
                  such IRS Claim or Refund Claim (as applicable) and in its
                  discretion may cause the Executive to pursue or forego any and
                  all administrative appeals, proceedings, hearings and
                  conferences with the IRS or other taxing authority in respect
                  of such IRS Claim or Refund Claim (as applicable); provided
                  that (i) any extension of the statute of limitations relating
                  to payment of taxes for the taxable year of the Executive
                  relating to the IRS Claim is limited solely to such IRS Claim,
                  (ii) the Company's control of the IRS Claim or Refund Claim
                  (as applicable) shall be limited to issues with respect to
                  which a Gross-Up Payment would be payable, and (iii) the
                  Executive shall be entitled to settle or contest, as the case
                  may be, any other issue raised by the IRS or other taxing
                  authority.

                  6.6.4    The Company may at any time in its discretion direct
         the Executive to (i) contest the IRS Claim in any lawful manner or (ii)
         pay the amount specified in an IRS Claim and pursue a Refund Claim;
         provided, however, that if the Company directs the Executive to pay an
         IRS Claim and pursue a Refund Claim, the Company shall advance the
         amount of such payment to the Executive on an interest-free basis and
         shall indemnify the Executive, on an after-tax basis, for any income or
         other applicable taxes or Excise Tax, and any related interest or
         penalties imposed with respect to such advance.

                                       20
<PAGE>

                  6.6.5    The Company shall pay directly all legal, accounting
         and other costs and expenses (including additional interest and
         penalties) incurred by the Company or the Executive in connection with
         any IRS Claim or Refund Claim, as applicable, and shall indemnify the
         Executive, on an after-tax basis, for any income or other applicable
         taxes, Excise Tax and related interest and penalties imposed on the
         Executive as a result of such payment of costs and expenses.

         6.7      Refunds. If, after the receipt by the Executive of any payment
or advance of Excise Taxes advanced by the Company pursuant to Section 6.6, the
Executive receives any refund with respect to such claim, the Executive shall
(subject to the Company's complying with the requirements of Section 6.6)
promptly pay the Company the amount of such refund (together with any interest
paid or credited thereon after taxes applicable thereto). If, after the receipt
by the Executive of an amount advanced by the Company pursuant to Section 6.6, a
determination is made that the Executive shall not be entitled to any refund
with respect to such claim and the Company does not notify the Executive in
writing of its intent to contest such determination within 30 days after the
Company receives written notice of such determination, then such advance shall
be forgiven and shall not be required to be repaid and the amount of such
advance shall offset, to the extent thereof, the amount of Gross-up Payment
required to be paid. Any contest of a denial of refund shall be controlled by
Section 6.6.

                                   ARTICLE VII
                              EXPENSES AND INTEREST

         7.1      Legal Fees and Other Expenses.

                  7.1.1    If the Executive incurs legal fees or other expenses
         in an effort to secure, preserve, establish entitlement to, or obtain
         benefits under this Agreement (including, without limitation, the fees
         and other expenses of the Executive's legal counsel in connection with
         the delivery of the Executive Counsel opinion referred to in Section
         6.5), the Company shall, regardless of the outcome of such effort,
         promptly reimburse the Executive on a current basis for such fees and
         expenses following the Executive's written submission of a request for
         reimbursement together with evidence that such fees and expenses were
         incurred.

                  7.1.2    If the Executive does not prevail (after exhaustion
         of all available judicial remedies) in respect of a claim by the
         Executive or by the Company hereunder, and the Company establishes
         before a court of competent jurisdiction, by clear and convincing
         evidence, that the Executive had no reasonable basis for his claim
         hereunder, or for his response to the Company's claim hereunder, and
         acted in bad faith, no further reimbursement for legal fees and
         expenses shall be due to the Executive in respect of such claim and the
         Executive shall refund any amounts previously reimbursed hereunder with
         respect to such claim.

                                       21
<PAGE>

         7.2      Interest. If the Company and Nicor Gas, as applicable, does
not pay any amount due to the Executive under this Agreement within three days
after such amount became due and owing, interest shall accrue on such amount
from the date it became due and owing until the date of payment at an annual
rate equal to 200 basis points above the base commercial lending rate published
in The Wall Street Journal in effect from time to time during the period of such
nonpayment.

                                  ARTICLE VIII
                            NO SET-OFF OR MITIGATION

         8.1      No Set-off by Company. The Executive's right to receive when
due the payments and other benefits provided for under this Agreement is
absolute, unconditional and subject to no set-off, counterclaim or legal or
equitable defense. Any claim which the Company may have against the Executive,
whether for a breach of this Agreement or otherwise, shall be brought in a
separate action or proceeding and not as part of any action or proceeding
brought by the Executive to enforce any rights against the Company under this
Agreement.

         8.2      No Mitigation. The Executive shall not have any duty to
mitigate the amounts payable by the Company and Nicor Gas, as applicable, under
this Agreement by seeking new employment following termination. Except as
specifically otherwise provided in this Agreement, all amounts payable pursuant
to this Agreement shall be paid without reduction regardless of any amounts of
salary, compensation or other amounts which may be paid or payable to the
Executive as the result of the Executive's employment by another employer.

                                   ARTICLE IX
                            NON-EXCLUSIVITY OF RIGHTS

         9.1      Waiver of Other Severance Rights. Except as may be otherwise
specifically provided in an amendment of this Section 9.1 adopted in accordance
with Section 11.7 of this Agreement, the Executive's rights under Section 5.1 of
this Agreement shall be in lieu of any benefits that may be otherwise payable to
or on behalf of the Executive pursuant to the terms of any severance pay
arrangement of the Company or any Subsidiary or any other, similar arrangement
of the Company or any Subsidiary providing benefits upon involuntary termination
of employment and shall also be in lieu of any benefits under the Nicor Inc.
Executive/Key Employee Severance Benefits Program (notwithstanding any provision
of that program to the contrary); provided, however, that this Section 9.1 shall
not affect the Executive's rights to receive any benefits with respect to a
termination of employment that occurs outside of the Employment Period.

         9.2      Other Rights. Except as provided in Section 9.1, this
Agreement shall not prevent or limit the Executive's continuing or future
participation in any benefit, bonus, incentive or other plans provided by the
Company or any of its Subsidiaries and for which the Executive may qualify, nor
shall this Agreement limit or otherwise affect such rights as the Executive may
have under any other agreements with the Company or any of its Subsidiaries.
Amounts which are

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<PAGE>

vested benefits or which the Executive is otherwise entitled to receive under
any plan of the Company or any of its Subsidiaries and any other payment or
benefit required by law at or after the Termination Date shall be payable in
accordance with such Plan or applicable law except as expressly modified by this
Agreement.

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<PAGE>

                                    ARTICLE X
                                 CONFIDENTIALITY

         10.1     Confidentiality. The Executive acknowledges that it is the
policy of the Company and its Subsidiaries to maintain as secret and
confidential all valuable and unique information and techniques acquired,
developed or used by the Company and its Subsidiaries relating to their
business, operations, employees and customers, which gives the Company and its
Subsidiaries a competitive advantage in the transmission, distribution,
marketing, or sale of natural gas or in the energy services industry and other
businesses in which the Company and its Subsidiaries are engaged ("Confidential
Information"). The Executive recognizes that all such Confidential Information
is the sole and exclusive property of the Company and its Subsidiaries, and that
disclosure of Confidential Information would cause damage to the Company and its
Subsidiaries. The Executive agrees that, except as required by the duties of his
employment with the Company or its Subsidiaries and except in connection with
enforcing the Executive's rights under this Agreement or if compelled by a court
or governmental agency, he will not, without the consent of the Company,
disseminate or otherwise disclose any Confidential Information obtained during
his employment with the Company or its Subsidiaries until such time as such
information has been disclosed publicly by the Company or one of its
Subsidiaries, or with its consent, or is otherwise a matter of public knowledge
(unless the Executive has reason to know that such information became a matter
of public knowledge through an unauthorized disclosure).

         10.2     Remedy. The Executive and the Company specifically agree that,
in the event that the Executive shall breach his obligations under this Article
X, the Company and its Subsidiaries will suffer irreparable injury and shall be
entitled to injunctive relief therefor, and shall not be precluded from pursuing
any and all remedies it may have at law or in equity for breach of such
obligations; provided, however, that such breach shall not in any manner or
degree whatsoever limit, reduce or otherwise affect the obligations of the
Company or Nicor Gas, as applicable, under this Agreement, and in no event shall
an asserted breach of the Executive's obligations under this Article X
constitute a basis for deferring or withholding any amounts otherwise payable to
the Executive under this Agreement.

                                   ARTICLE XI
                                  MISCELLANEOUS

         11.1     No Assignability. This Agreement is personal to the Executive
and without the prior written consent of the Company shall not be assignable by
the Executive otherwise than by will or the laws of descent and distribution.
This Agreement shall inure to the benefit of and be enforceable by the
Executive's legal representatives.

         11.2     Successors. Before or upon the consummation of any Change in
Control, the Company shall obtain from each individual, group or entity, if any,
that becomes a successor of the Company by reason of the Change in Control, the
unconditional written agreement of such

                                       24
<PAGE>

individual, group or entity to assume this Agreement and to perform all of the
obligations of the Company hereunder.

         11.3     Payments to Beneficiary. If the Executive dies before
receiving amounts to which the Executive is entitled under this Agreement, such
amounts shall be paid in a lump sum to the beneficiary designated in writing by
the Executive, or if none is so designated, to the Executive's estate.

         11.4     Nonalienation of Benefits. Benefits payable under this
Agreement shall not be subject in any manner to anticipation, alienation, sale,
transfer, assignment, pledge, encumbrance, charge, garnishment, execution or
levy of any kind, either voluntary or involuntary, before actually being
received by the Executive, and any such attempt to dispose of any right to
benefits payable under this Agreement shall be void.

         11.5     Severability. If any one or more articles, sections or other
portions of this Agreement are declared by any court or governmental authority
to be unlawful or invalid, such unlawfulness or invalidity shall not serve to
invalidate any article, section or other portion not so declared to be unlawful
or invalid. Any article, section or other portion so declared to be unlawful or
invalid shall be construed so as to effectuate the terms of such article,
section or other portion to the fullest extent possible while remaining lawful
and valid.

         11.6     Arbitration. Any and all disputes between the parties hereto
arising out of this Agreement (other than disputes related to Article VI or to
an alleged breach of the covenant contained in Article X) shall be settled by
arbitration before an impartial arbitrator pursuant to the rules and regulations
of the American Arbitration Association (AAA) pertaining to the arbitration of
commercial disputes. Either party may invoke the right to arbitration. The
arbitrator shall be selected by means of the parties striking alternatively from
a panel of seven arbitrators supplied by the Chicago office of AAA. The
Arbitrator shall have the authority to interpret and apply the provisions of
this Agreement, consistent with Section 11.10 below. The decision of the
arbitrator shall be final and binding upon the parties. Judgment may be entered
on the award in any court of competent jurisdiction. The arbitrator's fees and
expenses shall be borne by the Company.

         11.7     Amendments. This Agreement shall not be altered, amended or
modified except by written instrument executed by the Company and the Executive.

         11.8     Notices. All notices and other communications under this
Agreement shall be in writing and delivered by hand, by a nationally-recognized
commercial delivery service, or by first-class registered or certified mail,
return receipt requested, postage prepaid, addressed as follows:

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<PAGE>

                                    If to the Executive:

                                    Paul C. Gracey, Jr.
                                    1721 Shire Court
                                    Wheaton, IL  60187

                                    If to the Company:

                                    Nicor Inc.
                                    1844 Ferry Road
                                    Naperville, Illinois 60563-9600
                                    Attn: Claudia J. Colalillo

or to such other address as either party shall have furnished to the other in
writing. Notice and communications shall be effective when actually received by
the addressee.

         11.9     Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.

         11.10    Governing Law. This Agreement is intended to be interpreted
and construed in accordance with the laws of the State of Illinois, without
regard to its choice of law principles.

         11.11    Captions. The captions of this Agreement are not a part of the
provisions hereof and shall have no force or effect.

         11.12    Number and Gender. Wherever from the context it appears
appropriate, each term stated in either the singular or plural shall include the
singular and the plural, and pronouns stated in either the masculine, the
feminine or the neuter gender shall include the masculine, feminine and neuter
genders.

         11.13    Tax Withholding. The Company or Nicor Gas, as applicable, may
withhold from any amounts payable under this Agreement any federal, state or
local taxes that are required to be withheld pursuant to any applicable law or
regulation.

         11.14    No Waiver. A waiver of any provision of this Agreement shall
not be deemed a waiver of any other provision, and any waiver of any default as
to any such provision shall not be deemed a waiver of any later default as to
that or any other provision.

         11.15    Entire Agreement. This Agreement contains the entire
understanding of the Company, Nicor Gas and the Executive with respect to its
subject matter.

                                       26
<PAGE>

         IN WITNESS WHEREOF, the Executive and the Company have executed this
Agreement as of the date first above written.

                                                   /s/ PAUL C. GRACEY, JR.
                                                   -----------------------------
                                                   Paul C. Gracey, Jr.

                                                   Nicor Inc.

                                                   By: /s/ THOMAS L. FISHER
                                                       -------------------------
                                                       Chairman and CEO

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