UNITED
        STATES
 SECURITIES
        AND EXCHANGE COMMISSION
 Washington,
        D.C. 20549
 **FORM
        10-K**
 [X
                  ]
              ANNUAL
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE
                  ACT OF 1934
 **For
        the fiscal year ended December 31, 2006**
 or
 [
                  ]
              TRANSITION
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
                  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.
                  EmployerIdentification
                  Number)**1844
                  Ferry Road****Naperville,
                  Illinois 60563-9600**
              
              **(630)
                  305-9500**(Address
                  of principal executive offices)
              
              (Registrant’s
                  telephone number)
 
 Securities
        registered pursuant to Section 12(b) of the Act:
 Title
                  of each class
              
              Name
                  of each exchange on which registeredCommon
                  Stock, par value $2.50 per share
              
              New
                  York Stock ExchangeChicago
                  Stock Exchange
 Securities
        registered pursuant to Section 12(g) of the Act: None
 
 Indicate
        by check mark if the registrant is a well-known seasoned issuer, as defined
        in
        Rule 405 of the Securities Act. Yes
        [X]
        No [ ]
 
 Indicate
        by check mark if the registrant is not required to file reports pursuant
        to
        Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
 
 Indicate
        by check mark whether the registrant (1) has filed all reports required to
        be
        filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
        the
        preceding 12 months and (2) has been subject to such filing requirements
        for the
        past 90 days. Yes [ X ] No [ ]
 
 Indicate
        by check mark if disclosure of delinquent filers pursuant to Item 405 of
        Regulation S-K is not contained herein, and will not be contained, to the
        best
        of registrant’s knowledge, in definitive proxy or information statements
        incorporated by reference in Part III of this Form 10-K or any amendment
        to this
        Form 10-K. [ ]
 
 Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, or a non-accelerated filer. See definition of “accelerated
        filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
        one):
 
 Large
                  accelerated filer [X]
              Accelerated
                  filer [ ]
              Non-accelerated
                  filer [ ]
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Act). Yes [ ] No [X]
 
 The
        aggregate market value of common stock (based on the June 30, 2006 closing
        price
        of $41.50) held by non-affiliates of the registrant was approximately $1.8
        billion. As of February 16, 2007, there were 44,911,933 shares of common
        stock
        outstanding.
  DOCUMENTS
        INCORPORATED BY REFERENCE
 
 Portions
        of the company’s 2007 Annual Meeting Definitive Proxy Statement, to be filed on
        or about March 14, 2007, are incorporated by reference into Part
        III.
 
 
 **Nicor
        Inc.**
 
 **Table
                  of Contents****Item
                  No.**
              **Description**
              **Page
                  No.****Glossary**
              ii**Part
                  I**1.
              Business
              11A.
              Risk
                  Factors
              61B.
              Unresolved
                  Staff
                  Comments
              102.
              Properties
              103.
              Legal
                  Proceedings
              104.
              Submission
                  of Matters to a Vote of
                  Security Holders
              10Executive
                  Officers of the Registrant
              11**Part
                  II**5.
              Market
                  for Registrant’s Common
                  Equity, Related Stockholder Matters and Issuer Purchases of Equity
                  Securities
              126.
              Selected
                  Financial Data
              147.
              Management’s
                  Discussion and Analysis of Financial
                  Condition and Results
                  of Operations
              157A.
              Quantitative
                  and Qualitative Disclosures about Market
                  Risk
              348.
              Financial
                  Statements and Supplementary
                  Data
              369.
              Changes
                  in and Disagreements with
                  Accountants on Accounting and Financial Disclosure
              719A.
              Controls
                  and Procedures
              719B.
              Other
                  Information
              72**Part
                  III**10.
              Directors
                  and Executive Officers of the
                  Registrant
              7311.
              Executive
                  Compensation
              7312.
              Security
                  Ownership of Certain Beneficial Owners
                  and Management and Related Stockholder Matters
              7313.
              Certain
                  Relationships and Related
                  Transactions
              7414.
              Principal
                  Accountant Fees and Services
              74**Part
                  IV**15.
              Exhibits
                  and Financial Statement Schedules
              75Signatures
              77Exhibit
                  Index
              78
 
   i
 
 Table
            of Contents
 **Nicor
        Inc.**
 
 **Glossary**
 
 **ARO.** Asset
        retirement obligation.
 
 **Chicago
        Hub.** A
        venture of Nicor Gas, which provides natural gas storage and
        transmission-related services to marketers and other gas distribution
        companies.
 
 **Degree
        day.** The
        extent to which the daily average temperature falls below 65 degrees Fahrenheit.
 Normal
        weather for Nicor Gas’ service territory, for purposes of this report, is
        considered to be 5,830 degree days per year for 2006 and 2005, and 6,000
        degree
        days per year for 2004.
 
 **EN
        Engineering.** EN
        Engineering, L.L.C., a 50-percent-owned joint venture that provides engineering
        and consulting services.
 
 **FASB.** Financial
        Accounting Standards Board.
 
 **FERC.** Federal
        Energy Regulatory Commission, the agency that regulates the interstate
        transportation of
 natural
        gas, oil and electricity.
 
 **FSP.** FASB
        Staff Position.
 
 **Horizon
        Pipeline.** Horizon
        Pipeline Company, L.L.C., 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.
  **ICC.** Illinois
        Commerce Commission, the agency that establishes the rules and regulations
        governing
 utility
        rates and services in Illinois.
 
 **IRS.** Internal
        Revenue Service.
 
 **Jobs
        Act.** American
        Jobs Creation Act of 2004.
 
 **LIBOR.** London
        Inter-bank Offered Rate.
 
 **LIFO.** Last in,
        first out.
 
 **Mcf,
        MMcf, Bcf.** Thousand
        cubic feet, million cubic feet, billion cubic feet.
 
 **MMBtus.** Million
        British thermal units.
 
 **Nicor
        Advanced Energy.** Prairie
        Point Energy, L.L.C. (doing business as Nicor Advanced Energy), a wholly
        owned
        business that provides natural gas and related services on an unregulated
        basis
        to residential and small commercial customers.
 
 **Nicor
        Enerchange.** Nicor
        Enerchange, L.L.C., 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’ and Nicor Advanced Energy’s
        product risks, including the purchase of natural gas supplies.
 
 **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.
   ii
 
 Table
            of Contents
 **Nicor.** Nicor
        Inc., or the registrant.
 
 **Nicor
        Services.** Nicor
        Energy Services Company, 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.** Nicor
        Solutions, L.L.C., 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.
 
 **PGA.** Nicor
        Gas’ Purchased Gas Adjustment.
 
 **SEC.** The
        United States Securities and Exchange Commission.
 
 **SFAS.** Statement
        of Financial Accounting Standard.
 
 **TEU.** Twenty-foot
        equivalent unit, a measure of volume in containerized shipping equal to one
        20-foot-
 long
        container.
 
 **Triton.** Triton
        Container Investments L.L.C., a cargo container leasing company in which
        Nicor
        Inc. has an investment.
 
 **Tropical
        Shipping.** A
        wholly
        owned business and a carrier of containerized freight in the Bahamas and
        the
        Caribbean region.
 
  
 
 
  iii
 
 Table
            of Contents
 **PART
        I**
  Item
        1. **Business**
  Nicor,
        an
        Illinois corporation formed in 1976, is a holding company. Gas distribution
        is
        Nicor’s primary business. Nicor’s subsidiaries include Nicor Gas, one of the
        nation’s largest distributors of natural gas, and Tropical Shipping, a leading
        transporter of containerized freight in the Bahamas and the Caribbean region.
        Nicor also owns several energy-related ventures, including Nicor Services,
        Nicor
        Solutions and Nicor Advanced Energy, which provide energy-related products
        and
        services to retail markets, and Nicor Enerchange, a wholesale natural gas
        marketing company. As a consolidated group, Nicor had approximately 3,900
        employees at year-end 2006.
 
 Summary
        financial information for Nicor’s major business segments is included in Item 8
        - Notes to the Consolidated Financial Statements - Note 15 - Business Segment
        and Geographic Information. The following sections describe Nicor’s larger
        businesses. Certain terms used herein are defined in the glossary on pages
        ii
        and iii.
 
 **GAS
        DISTRIBUTION**
 
 **General**
 
 Nicor
        Gas, a regulated natural gas distribution utility, serves nearly 2.2 million
        customers in a service territory that encompasses most of the northern third
        of
        Illinois, excluding the city of Chicago. The company’s service territory is
        diverse and its customer base has grown steadily over the years, providing
        the
        company with a well-balanced mix of residential, commercial and industrial
        customers. Residential customers typically account for 45 to 50 percent of
        natural gas deliveries, while commercial and industrial customers each typically
        account for 25 to 30 percent. See Gas Distribution Statistics on page 23
        for
        operating revenues, deliveries and number of customers by customer
        classification. Nicor Gas had approximately 2,100 employees at year-end
        2006.
 
 Nicor
        Gas
        maintains franchise agreements with most of the communities it serves, allowing
        it to construct, operate and maintain distribution facilities in those
        communities. Franchise agreement terms range up to 50 years. Currently, about
        20
        percent of the agreements will expire within five years.
 
 Customers
        have the option of purchasing their own gas supplies, with delivery of the
        gas
        by Nicor Gas. The larger of these transportation customers also have options
        that include the use of Nicor Gas’ storage system and the ability to choose
        varying supply backup levels. The choice of transportation service as compared
        to gas sales service results in less revenue for Nicor Gas but has no direct
        impact on net operating results. Nicor Gas continues to deliver the natural
        gas,
        maintain its distribution system and respond to emergencies.
 
 Nicor
        Gas
        also operates the Chicago Hub, which provides natural gas storage and
        transmission-related services to marketers and other gas distribution companies.
        The Chicago area is a major market hub for natural gas, and demand exists
        for
        storage and transmission-related services by marketers, other gas distribution
        companies and electric power-generation facilities. Nicor Gas’ Chicago Hub
        addresses that demand. Effective in the fourth quarter of 2005, the rate
        order
        received by Nicor Gas provides that Chicago Hub revenues be passed directly
        through to customers as a credit to Nicor Gas’ PGA rider.
 
 **Sources
        of Natural Gas Supply**
 
 Nicor
        Gas
        purchases natural gas supplies in the open market by contracting with producers
        and marketers. It also purchases transportation and storage services from
        the
        interstate pipelines that are regulated by the FERC. When firm pipeline services
        are temporarily not needed, Nicor Gas may release the services in
  1
 
 Table
            of Contents
 the
        secondary market under FERC-mandated capacity release provisions, with proceeds
        reducing the cost of gas charged to customers.
 
 Peak-use
        requirements are met through utilization of company-owned storage facilities,
        pipeline transportation capacity, purchased storage services and other supply
        sources, arranged by either Nicor Gas or its transportation customers. Nicor
        Gas
        has been able to obtain sufficient supplies of natural gas to meet customer
        requirements. The company believes natural gas supply and pipeline capacity
        will
        be sufficiently available to meet market demands in the foreseeable
        future.
 
 **Natural
        gas supply.** Nicor
        Gas maintains a diversified portfolio of natural gas supply contracts. Supply
        purchases are diversified by supplier, producing region, quantity, credit
        limits
        and available transportation. Gas supply pricing is generally tied to published
        price indices so as to approximate current market prices. These supply contracts
        also may require the payment of fixed demand charges to ensure the availability
        of supplies on any given day.
 
 The
        company also purchases gas supplies on the spot market to fulfill its supply
        requirements or to take advantage of favorable short-term pricing. Spot gas
        purchases accounted for about 40 percent of the company’s total gas purchases in
        the last three years. The majority of such spot purchases are made during
        the
        summer months and are directed toward satisfying storage injection
        requirements.
 
 As
        part
        of its purchasing practices, Nicor Gas maintains a price risk hedging strategy
        to reduce the risk of short-term price volatility. A disciplined approach
        is
        used to systematically forward hedge a predetermined portion of forecasted
        monthly volumes.
 
 As
        noted
        previously, transportation customers purchase their own gas supplies. About
        one-half of the gas that the company delivers is purchased by transportation
        customers directly from producers and marketers.
 
 **Pipeline
        transportation.** Nicor
        Gas
        is directly connected to eight interstate pipelines, providing access to
        most of
        the major natural gas producing regions in North America. The company’s primary
        long-term transportation contracts are as follows (daily availability in
        MMBtus):
 
 Availability
              
              Contract
                  ExpirationNatural
                  Gas Pipeline Company (NGPL)
              
              968,000
              
              Various
                  dates through March 2012Horizon
                  Pipeline
              
              300,000
              
              May
                  2012Tennessee
                  Gas Pipeline Company (TGPC)
              
              253,000
              
              October
                  2009Midwestern
                  Gas Transmission Company
              
              297,000
              
              Various
                  dates through October 2009Northern
                  Natural Gas Company
              
              206,000
              
              October
                  2008ANR
                  Pipeline
              
              100,000
              
              Various
                  dates through March 2010Texas
                  Gas
              
              47,000
              
              March
                  2009
 
 The
        company has rights of first refusal for contract extensions except for the
        TGPC
        contract. In addition to the above contracts, Nicor Gas enters into short-term
        winter only transportation contracts and contracts that enhance Nicor Gas’
operational flexibility. The availability numbers shown above represent maximums
        during the winter heating season. In some cases, the contract levels are
        lower
        during the summer period.
 
 **Storage.** Nicor
        Gas owns and operates eight underground natural gas storage facilities. This
        storage system is one of the largest in the gas distribution industry. With
        about 150 Bcf of annual storage capacity, the system is designed to meet
        about
        50 percent of the company’s estimated peak-day deliveries and approximately 30
        percent of its normal winter deliveries. In addition to company-owned
        facilities, Nicor Gas has about 40 Bcf of purchased storage services under
        contracts with NGPL that expire in 2009, 2010 and 2012. This level of storage
        capability provides Nicor Gas with supply flexibility, improves the reliability
        of deliveries, and can mitigate the risk associated with seasonal price
        movements.
  2
 
 Table
            of Contents
 **Competition/Demand**
 
 Nicor
        Gas
        is the largest natural gas distributor in Illinois and, as a regulated monopoly,
        has the exclusive right to distribute natural gas in its service territory.
        Substantially all single-family homes in Nicor Gas’ service territory are heated
        with natural gas. In the commercial and industrial markets, the company’s
        natural gas services compete with other forms of energy, such as electricity,
        coal, propane and oil, based on such factors as price, service, reliability
        and
        environmental impact. In addition, the company has a rate that allows
        negotiation with potential bypass customers, and no such customer has bypassed
        the Nicor Gas system since the rate became effective in 1987. Nicor Gas also
        offers commercial and industrial customers alternatives in rates and service,
        increasing its ability to compete in these markets. Other significant factors
        that impact demand for natural gas include weather and economic conditions.
 
 Natural
        gas deliveries are temperature-sensitive and seasonal since about one-half
        of
        all deliveries are used for space heating. Typically, about three-quarters
        of
        the 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 (5,830 degree days annually) would impact Nicor Gas’ net income by
        approximately $1.6 million.
 
 The
        effect of weather variations on Nicor Gas’ results is mitigated, in part, due to
        weather risks within the consolidated Nicor group that are expected to be
        partially offsetting with the utility-bill management products marketed by
        Nicor
        Solutions and Nicor Advanced Energy. The amount of this offset will vary
        depending upon the time of year, weather patterns, the number of customers
        for
        these products and the market price for natural gas. In 2006 and 2004, the
        offsetting impact related to utility-bill management products was about one-half
        and one-third, respectively, of the gas distribution weather effect. In 2005,
        weather was near normal.
 
 Nicor
        Gas’ large residential customer base provides for a relatively stable level of
        natural gas deliveries during weak economic conditions. The company’s industrial
        and commercial customer base is well diversified, lessening the impact of
        industry-specific economic swings. However, management believes that declines
        since 2000 in natural gas deliveries to industrial customers may be permanent.
        In addition, during periods of high natural gas prices, deliveries of natural
        gas can be negatively affected by conservation and the use of alternative
        energy
        sources.
 
 **Regulation**
 
 Nicor
        Gas
        is regulated by the ICC, which establishes the rules and regulations governing
        utility rates and services in Illinois. Those rules or regulations that may
        significantly affect business performance include the following:
 
 **·**
              Base
                  rates, which are set by the ICC, are designed to allow the company
                  an
                  opportunity to recover its costs and earn a fair return for investors.
                  In
                  the fourth quarter of 2005, the company received approval from
                  the ICC for
                  a base rate increase. For additional information about the rate
                  order, see
                  Item 7 - Management’s Discussion and Analysis of Financial Condition and
                  Results of Operations and Item 8 - Notes to the Consolidated Financial
                  Statements - Note 19 - Rate
                  proceeding.
 
 ·
              The
                  company’s ICC-approved tariffs provide that the cost of natural gas
                  purchased for customers will be fully charged to customers without
                  markup.
                  Therefore, the company does not profit from the sale of natural
                  gas.
                  Rather, the company earns income from fixed monthly charges and
                  from
                  variable transportation charges for delivering natural gas to customer
                  premises. Annually, the ICC initiates a review of the company’s natural
                  gas purchasing practices for prudence, and may disallow the pass-through
                  of costs considered imprudent.
 
  3
 
 Table
            of Contents
  ·
              As
                  with the cost of natural gas, the company has a tariff that provides
                  for
                  the pass-through of prudently incurred environmental costs related
                  to
                  former manufactured gas plant sites. This pass-through is also
                  subject to
                  annual ICC review.
  The
        ICC
        also has other rules that impact the company’s operations. Changes in these
        rules can impact operating and capital costs.
 
 A
        PBR
        plan for natural gas costs went into effect in 2000 and was terminated by
        the
        company effective January 1, 2003. Under the PBR plan, Nicor Gas’ total gas
        supply costs were compared to a market-sensitive benchmark. Savings and losses
        relative to the benchmark were determined annually and shared equally with
        sales
        customers. The results of the PBR plan are currently under ICC review.
        Additional information on the plan and the ICC review are presented in Item
        8 -
        Notes to the Consolidated Financial Statements - Note 21 - Contingencies
        -
        Performance-Based Rate Plan.
 
 **Gas
        distribution, transmission and storage system, and other
        properties**
 
 The
        gas
        distribution, transmission and storage system includes approximately 34,000
        miles of steel, plastic and cast iron main; approximately 2.0 million steel,
        plastic/aluminum composite, plastic and copper services connecting the mains
        to
        customers’ premises; and eight underground storage fields. Other properties
        include buildings, land, motor vehicles, meters, regulators, compressors,
        construction equipment, tools, communication and computer equipment, software
        and office equipment.
 
 Most
        of
        the company’s distribution and transmission property, and underground storage
        fields are located on property owned by others and used by the company through
        easements, permits or licenses. The company owns most of the buildings housing
        its administrative offices and the land on which they sit.
 
 Substantially
        all gas distribution properties are subject to the lien of the indenture
        securing Nicor Gas’ First Mortgage Bonds.
 
 Additional
        information about Nicor Gas’ business is presented in Item 1A - Risk Factors,
        Item 7 - Management’s Discussion and Analysis of Financial Condition and Results
        of Operations and Item 8 - Notes to the Consolidated Financial
        Statements.
 
 **SHIPPING**
 
 Tropical
        Shipping is one of the largest containerized cargo carriers in the Bahamas
        and
        the Caribbean, a region characterized by modest market growth and intense
        competition. The company is a major carrier of exports from the east coast
        of
        the United States and Canada to these regions. The company’s shipments consist
        primarily of southbound cargo such as building materials, food and other
        necessities for developers, manufacturers and residents in the Caribbean
        and the
        Bahamas, as well as tourist-related shipments intended for use in hotels
        and
        resorts, and on cruise ships. The balance of Tropical Shipping’s cargo consists
        primarily of northbound shipments of apparel and agricultural products, and
        inter-island shipments. Other related services such as inland transportation
        and
        cargo insurance are also provided by Tropical Shipping or other Nicor
        subsidiaries.
 
 At
        December 31, 2006, Tropical Shipping’s operating fleet consisted of 10 owned
        vessels and 8 chartered vessels with a container capacity totaling approximately
        5,800 TEUs. In addition to the vessels, the company owns and/or leases
        containers, container-handling equipment, chassis and other equipment. Real
        property, more than half of which is leased, includes office buildings, cargo
        handling facilities and warehouses located in the United States, Canada and
        some
        of the ports served.
 
 Additional
        information about Tropical Shipping’s business is presented in Item 1A - Risk
        Factors, Item 7 - Management’s Discussion and Analysis of Financial Condition
        and Results of Operations and Item 8 - Notes to the Consolidated Financial
        Statements.
  4
 
 Table
            of Contents
 **OTHER
        ENERGY VENTURES**
 
 Nicor
        owns several energy-related ventures, including three companies marketing
        energy-related products and services, and a wholesale natural gas marketing
        company. Nicor also has equity interests in joint ventures including a
        FERC-regulated natural gas pipeline.
 
 Nicor
        Services, Nicor Solutions and Nicor Advanced Energy are businesses that provide
        energy-related products and services to retail markets, including residential
        and small commercial customers. Nicor Services operates primarily in northern
        Illinois and provides warranty and maintenance contracts, as well as repair
        and
        installation services of  heating,
        air conditioning and indoor air-quality equipment, and customer and prospect
        management services. Nicor Solutions offers its residential and small commercial
        customers in the Nicor Gas service territory energy-related products that
        provide for natural gas price stability and management of their utility bill.
        These products mitigate and/or eliminate the risks to customers of colder
        than
        normal weather and/or changes in natural gas prices. Nicor Advanced Energy
        is
        certified by the ICC as an Alternate Gas Supplier, authorizing it to be a
        non-utility marketer of natural gas for residential and small commercial
        customers. Nicor Advanced Energy presently operates in northern Illinois,
        offering customers an alternative to the utility as its natural gas
        supplier.
 
 Nicor
        Enerchange is a business that engages in wholesale marketing of natural gas
        supply services primarily in the Midwest, administers the Chicago Hub for
        Nicor
        Gas, and manages Nicor Solutions’ and Nicor Advanced Energy’s product risks,
        including the purchase of natural gas supplies.
 
 Horizon
        Pipeline, a 50-percent-owned joint venture with NGPL, operates a natural
        gas
        pipeline of approximately 70 miles, stretching from Joliet, Illinois to near
        the
        Wisconsin/Illinois border. Nicor Gas has contracted for approximately 80
        percent
        of Horizon Pipeline’s capacity under a 10-year agreement at rates that have been
        accepted by FERC.
 
 EN
        Engineering, a 50-percent-owned joint venture between Nicor and A. Epstein
&
Sons International, is an engineering and consulting firm that specializes
        in
        the design, installation and maintenance of natural gas, petroleum and liquid
        pipeline facilities.
 
 Additional
        information about Nicor’s other energy ventures is presented in Item 1A - Risk
        Factors, Item 7 - Management’s Discussion and Analysis of Financial Condition
        and Results of Operations and Item 8 - Notes to the Consolidated Financial
        Statements.
 
 **CORPORATE**
 
 Nicor
        has
        various equity investments, the largest of which is Triton Container Investments
        L.L.C., a cargo container leasing business.
 
 **AVAILABLE
        INFORMATION**
 
 Nicor
        files various reports with the SEC. These reports include the annual reports
        on
        Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
        amendments to those reports filed or furnished pursuant to Section 13 (a)
        of the
        Securities Exchange Act of 1934. Nicor makes all of these reports available
        without charge to the public on the investor relations section of the company’s
        Internet site at www.nicor.com as soon
        as reasonably practicable after Nicor files them with, or furnishes them
        to, the
        SEC.
  5
 
 Table
            of Contents
 **Item
        1A.****Risk
        Factors**
 
 The
        following factors are the most significant factors that can impact year-to-year
        comparisons and may affect the future performance of the company’s businesses.
        New risks may emerge and management cannot predict those risks or estimate
        the
        extent to which they may affect the company’s financial performance.
 
 ***Regulation
        of Nicor Gas, including changes in the regulatory environment in general,
        may
        adversely affect the company’s results of operations, cash flows and financial
        condition.***
 
 Nicor
        Gas
        is regulated by the ICC, which has general regulatory power over practically
        all
        phases of the public utility business in Illinois, including rates and charges,
        issuance of securities, services and facilities, system of accounts,
        investments, safety standards and transactions with affiliated interests
        and
        other matters.
 
 Nicor
        Gas
        is permitted by the ICC’s PGA regulation to adjust the charge to its sales
        customers on a monthly basis to recover the company’s prudently incurred actual
        costs to acquire the natural gas it delivers to them. The company’s gas costs
        are subject to subsequent prudence reviews by the ICC for which the company
        makes annual filings. The annual prudence reviews for calendar years 1999-2006
        are open for review and any disallowance of costs in those proceedings could
        adversely affect Nicor Gas’ results of operations, cash flows and financial
        condition. See Item 7 - Management’s Discussion and Analysis of Financial
        Condition and Results of Operations for further discussion of annual prudence
        reviews.
 
 Most
        of
        Nicor Gas’ other charges are changed only through a rate case proceeding with
        the ICC. The charges established in a rate case proceeding are based on an
        approved level of operating costs and investment in utility property and
        are
        designed to allow the company an opportunity to recover those costs and to
        earn
        a fair return on that investment. To the extent Nicor Gas’ actual costs to
        provide utility service are higher than the levels approved by the ICC, Nicor
        Gas’ results of operations, cash flows and financial condition could be
        adversely affected until such time as it files for and obtains ICC approval
        for
        new charges through a rate case proceeding.
  Nicor
        Gas
        is also subject to rules and regulations pertaining to the integrity of its
        distribution system and environmental compliance. The company’s results of
        operations, cash flows and financial condition could be adversely affected
        by
        any additional laws or regulations that are enacted that require significant
        increases in the amount of expenditures for system integrity and environmental
        compliance.
 
 ***A
        change in the ICC’s approved rate mechanisms for recovery of environmental
        remediation costs at former manufactured gas sites, or adverse decisions
        with
        respect to the prudence of costs actually incurred, could adversely affect
        the
        company’s results of operations, cash flows and financial
        condition.***
 
 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. As of December 31, 2006,
        the
        company had recorded a liability of $19.9 million associated with certain
        remediation efforts. Management believes that any such costs that are not
        recoverable from other entities or from insurance carriers are recoverable
        through rates for utility services under ICC-approved mechanisms for the
        recovery of prudently incurred costs. A change in these rate recovery
        mechanisms, however, or a decision by the ICC that some or all of these costs
        were not prudently incurred, could adversely affect the company’s results of
        operations, cash flows and financial condition. See Item 7 - Management’s
        Discussion and Analysis of Financial Condition and Results of Operations
        for
        further discussion.
  6
 
 Table
            of Contents
 ***An
        adverse decision in the proceedings concerning Nicor Gas’ PBR Plan could result
        in a refund obligation which could adversely affect the company’s results of
        operations, cash flows and financial condition.***
 
 In
        2000,
        Nicor Gas instituted a PBR plan for natural gas costs. 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 was terminated effective January
        1,
        2003. There are allegations that Nicor Gas acted improperly in connection
        with
        the PBR plan, and the ICC and SEC are reviewing these allegations in pending
        proceedings. An adverse decision or decisions in these proceedings could
        result
        in a refund or other obligations which could adversely affect the company’s
        results of operations, cash flows and financial condition. See Item 7 -
        Management’s Discussion and Analysis of Financial Condition and Results of
        Operations for further discussion of the PBR proceeding and related
        matters.
 
 ***Nicor
        Gas relies on direct connections to eight interstate pipelines and extensive
        underground storage capacity. If these pipelines or storage facilities were
        unable to deliver natural gas for any reason it could impair Nicor Gas’ ability
        to meet its customers’ full requirements.***
 
 Nicor
        Gas
        meets its customers’ peak day, seasonal and annual gas requirements through
        deliveries of gas transported on interstate pipelines with which it or its
        gas
        suppliers have contracts and through withdrawals of gas from storage fields
        it
        owns or leases. Nicor Gas contracts with multiple pipelines for transportation
        services. If a pipeline were to fail to perform transportation or storage
        service, including as
        a
        result of war, acts or threats of terrorism or natural disaster ,
        on a
        peak day or other day with high volume gas requirements, Nicor Gas’ ability to
        meet all its customers’ gas requirements may be impaired unless or until
        alternative arrangements for delivery of supply were put in place. Likewise,
        if
        a storage field owned by Nicor Gas, or a principal Nicor Gas-owned transmission
        or distribution pipeline used to deliver gas to the market, were to be out
        of
        service for any reason, including as a result of war, acts or threats of
        terrorism or natural disaster, this could impair Nicor Gas’ ability to meet its
        customers’ full requirements.
 
 ***Fluctuations
        in weather have the potential to adversely affect the company’s results of
        operations, cash flows and financial condition.***
 
 When
        weather conditions are milder than normal, Nicor’s gas distribution segment has
        historically delivered less natural gas, and consequently may earn less income.
        Nicor Gas’ natural gas deliveries are temperature-sensitive and seasonal since
        about one-half of all deliveries are used for space heating. Typically, about
        three-quarters of the deliveries and revenues occur from October through
        March.
        Mild weather in the future could adversely affect the company’s results of
        operations, cash flows and financial condition.
 
 Conversely,
        results from products sold by Nicor Solutions and Nicor Advanced Energy
        generally benefit from milder than normal weather. Nicor Solutions and Nicor
        Advanced Energy offer utility-bill management products that mitigate and/or
        eliminate the risks to customers of variations in weather. Benefits or costs
        related to these products resulting from variances from normal weather are
        recorded primarily at the corporate level as a result of an agreement between
        the parent company and certain of its subsidiaries. To the extent weather
        is
        colder than normal in the future, the company’s results of operations, cash
        flows and financial condition could be adversely affected.
 
 ***Natural
        gas commodity price changes may affect the operating costs and competitive
        positions of the company’s businesses which could adversely affect its results
        of operations, cash flows and financial condition.***
 
 Nicor’s
        energy-related businesses are sensitive to changes in natural gas prices.
        Natural gas prices historically have been volatile and may continue to be
        volatile in the future. The prices for natural gas are
  7
 
 Table
            of Contents
 subject
        to a variety of factors that are beyond Nicor’s control. These factors include,
        but are not limited to, the level of consumer demand for, and the supply
        of,
        natural gas, processing, gathering and transportation availability, the level
        of
        imports of, and the price of foreign natural gas, the price and availability
        of
        alternative fuel sources, weather conditions, political conditions or
        hostilities in natural gas producing regions.
 
 Any
        changes in natural gas prices could affect the prices Nicor’s energy-related
        businesses charge, operating costs and the competitive position of products
        and
        services. In accordance with the ICC’s PGA regulations, Nicor Gas adjusts its
        gas cost charges to sales customers on a monthly basis to account for changes
        in
        the price of natural gas. However, changes in natural gas prices can also
        impact
        certain operating expenses such as bad debt expense, company use gas and
        storage-related gas expenses, financing costs and customer service expenses,
        and
        these changes can only be reflected in Nicor Gas’ charges to customers if
        approved by the ICC in a rate case. Increases in natural gas prices can also
        have an adverse effect on natural gas distribution margin because such increases
        can result in lower customer demand.
 
 Nicor’s
        other energy businesses are also subject to natural gas commodity price risk,
        arising primarily from fixed-price purchase and sale agreements, natural
        gas
        inventories and utility-bill management arrangements. Derivative instruments
        such as futures, options, forwards and swaps may be used to hedge these risks.
 
 Nicor
        is
        subject to margin requirements in connection with the use of derivative
        financial instruments and these requirements could escalate if prices move
        adversely.
 
 ***Nicor’s
        use of derivative instruments could adversely affect the company’s results of
        operations.***
  Nicor
        uses derivative instruments, including futures, options, forwards and swaps,
        either traded on exchanges or executed over-the-counter with natural gas
        merchants as well as financial institutions, to hedge natural gas price risk.
        Fluctuating natural gas prices cause earnings and financing costs of Nicor
        to be
        impacted. The use of derivative instruments that are not perfectly matched
        to
        the exposure could adversely affect the company’s results of operations, cash
        flows and financial condition. Also, when Nicor’s derivative instruments and
        hedging transactions fail to qualify for hedge accounting under SFAS
        No. 133, *Accounting
        for Derivative Instruments and Hedging Activities* ,
        the
        company’s results of operations could be adversely affected.
 
 ***Adverse
        decisions in lawsuits seeking a variety of damages allegedly caused by mercury
        spillage could adversely affect the company’s results of operations, cash flows
        and financial condition.***
 
 Nicor
        Gas
        has incurred, and expects to continue to incur, costs related to its historical
        use of mercury in various kinds of equipment. Nicor Gas is a defendant in
        several private lawsuits, all in the Circuit Court of Cook County, Illinois,
        seeking a variety of damages (including bodily injury, property and punitive
        damages) allegedly caused by mercury spillage resulting from the removal
        of
        mercury-containing regulators. Adverse decisions regarding these claims or
        other
        mercury-related claims, to the extent they require the company to make payments
        in excess of amounts provided for in its financial statements, could adversely
        affect the company’s results of operations, cash flows and financial
        condition.
 
 ***Transporting
        and storing natural gas involve numerous risks that may result in accidents
        and
        other operating risks and costs that could adversely affect the company’s
        results of operations, cash flows and financial
        condition.***
 
 Nicor
        Gas’ gas distribution activities involve a variety of inherent hazards and
        operating risks, such as leaks, accidents and mechanical problems, which
        could
        cause substantial financial losses. In addition, these risks could result
        in
        loss of human life, significant damage to property, environmental pollution
        and
  8
 
 Table
            of Contents
 impairment
        of Nicor’s operations, which in turn could lead to substantial losses. In
        accordance with customary industry practice, Nicor maintains insurance against
        some, but not all, of these risks and losses. The
        location of pipelines and storage facilities near populated areas, including
        residential areas, commercial business centers and industrial sites, could
        increase the level of damages resulting from these risks. The occurrence
        of any
        of these events if not fully covered by insurance could adversely affect
        Nicor’s
        results of operations, cash flows and financial condition.
 
 ***An
        inability to access financial markets could affect the execution of Nicor’s
        business plan and could adversely affect the company’s results of operations,
        cash flows and financial condition.***
  Nicor
        relies on access both to short-term money markets and longer-term capital
        markets as a significant source of liquidity for capital and operating
        requirements not satisfied by the cash flows from its operations. Management
        believes that Nicor and its subsidiaries will maintain sufficient access
        to
        these financial markets based upon current credit ratings. However, certain
        disruptions outside of Nicor’s control or events of default under its debt
        agreements may increase its cost of borrowing or restrict its ability to
        access
        one or more financial markets. Such disruptions could include an economic
        downturn, the bankruptcy of an unrelated energy company or downgrades to
        Nicor’s
        credit ratings. Restrictions on Nicor’s ability to access financial markets may
        affect its ability to execute its business plan as scheduled and could adversely
        affect the company’s results of operations, cash flows and financial condition.
 
 ***Changes
        in the rules and regulations of certain regulatory agencies could adversely
        affect the results of operations, cash flows and financial condition of Tropical
        Shipping.***
 
 Tropical
        Shipping is subject to the International Ship and Port-facility Security
        Code
        and is also subject to the United States Maritime Transportation Security
        Act,
        both of which require extensive security assessments, plans and procedures.
        Tropical Shipping is also subject to the regulations of both the Federal
        Maritime Commission, and the Surface Transportation Board, other Federal
        Agencies as well as local laws, where applicable. Additional costs that could
        result from changes in the rules and regulations of these regulatory agencies
        would adversely affect the results of operations, cash flows and financial
        condition of Tropical Shipping.
  ***Tropical
        Shipping’s business is dependent on general economic conditions and could be
        adversely affected by downturns in the economy.***
  Tropical
        Shipping’s business consists primarily of the shipment of building materials,
        food and other necessities for developers, manufacturers and residents in
        the
        Bahamas and the Caribbean region, as well as tourist-related shipments intended
        for use in hotels and resorts, and on cruise ships. As a result, Tropical
        Shipping’s results of operations, cash flows and financial condition can be
        significantly affected by general economic conditions in the United States,
        the
        Bahamas, Caribbean region and Canada.
  ***The
        occurrence of hurricanes, storms and other natural disasters in Tropical
        Shipping’s area of operations could adversely affect its results of operations,
        cash flows and financial condition.***
  Tropical
        Shipping’s operations are affected by weather conditions in Florida, Canada, the
        Bahamas and Caribbean regions. During
        hurricane season in the summer and fall, Tropical Shipping may be subject
        to
        revenue loss, higher operating expenses, business interruptions, delays and
        ship, equipment and facilities damage which could adversely affect Tropical
        Shipping’s results of operations, cash flows and financial condition.
  ***Nicor
        has credit risk that could adversely affect the company’s results of operations,
        cash flows and financial condition.***
 
 Nicor
        extends credit to its counterparties. Despite what the company believes to
        be
        prudent credit policies and the maintenance of netting arrangements, the
        company
        is exposed to the risk that it may not
  9
 
 Table
              of Contents
 be
        able to collect amounts owed to it. If the
        counterparty to such a transaction fails to perform and any collateral the
        company has secured is inadequate, it could experience financial
        losses.
  ***The
        company is involved in legal or administrative proceedings before various
        courts
        and agencies that could adversely affect the company’s results of operations,
        cash flows and financial condition.***
 
 The
        company is involved in legal or administrative proceedings before various
        courts
        and agencies with respect to general claims, rates, taxes, environmental,
        gas
        cost prudence reviews and other matters. Adverse decisions regarding these
        matters, to the extent they require the company to make payments in excess
        of
        amounts provided for in its financial statements, could adversely affect
        the
        company’s results of operations, cash flows and financial condition. See Item 7
        - Management’s Discussion and Analysis of Financial Condition and Results of
        Operations for further discussion.
 
 The
        risks
        described above should be carefully considered in addition to the other
        cautionary statements and risks described elsewhere, and the other information
        contained in this report and in Nicor’s other filings with the SEC, including
        its subsequent reports on Forms 10-Q and 8-K. The risks and uncertainties
        described above are not the only risks Nicor faces although they are the
        most
        significant risks. See Item 7 - Management’s
        Discussion and Analysis of Financial Condition and Results of Operations,
        Item
        7A - Quantitative and Qualitative Disclosures About Market Risk, and Item
        8 - Notes
        to
        the Consolidated Financial Statements - Note 10 - Income and Other Taxes
        and
        Note 21 - Contingencies for further discussion of these and other risks Nicor
        faces.
 
 **Item
        1B.Unresolved
        Staff Comments**
  None.
  Item
        2. Properties
  Information
        concerning Nicor and its major subsidiaries’ properties is included in Item 1 -
        Business, and is incorporated herein by reference. These properties are
        suitable, adequate and utilized in the company’s operations.
  **Item
        3. Legal
        Proceedings**
  See
        Item
        8 - Notes to the Consolidated Financial Statements - Note 21 - Contingencies,
        which is incorporated herein by reference.
  **Item
        4. Submission
        of Matters to a Vote of Security Holders**
  None.
  10
 
 Table
            of Contents
 **Executive
        Officers of the Registrant**
 
 Name
              
              Age
              
              Current
                  Position and BackgroundRuss
                  M. Strobel
              
              54
              
              Chairman,
                  Nicor and Nicor Gas (since 2005); Chief Executive Officer, Nicor
                  (since
                  2005); Chief Executive Officer, Nicor Gas (since 2003); President,
                  Nicor
                  and Nicor Gas (since 2002); Executive Vice President, General Counsel
                  and
                  Secretary, Nicor and Nicor Gas (2002); Senior Vice President, General
                  Counsel and Secretary, Nicor and Nicor Gas (2000-2002).Richard
                  L. Hawley
              
              57
              
              Executive
                  Vice President and Chief Financial Officer, Nicor and Nicor Gas
                  (since
                  2003); Vice President and Chief Financial Officer, Puget Energy,
                  Inc., a
                  holding company with its primary business being an electric and
                  natural
                  gas provider (2000-2002) and Puget Sound Energy, Inc., electric
                  and
                  natural gas provider (1998-2002).Rocco
                  J. D’Alessandro
              
              48
              
              Executive
                  Vice President Operations, Nicor Gas (since December 2006); Senior
                  Vice
                  President Operations, Nicor Gas (2002-2006); Vice President Customer
                  Service, Nicor Gas (1999-2002).Claudia
                  J. Colalillo
              
              57
              
              Senior
                  Vice President Human Resources and Corporate Communications, Nicor
                  and
                  Nicor Gas (since 2002); Vice President Human Resources, Nicor and
                  Nicor
                  Gas (1998-2002).Daniel
                  R. Dodge
              
              53
              
              Senior
                  Vice President Diversified Ventures and Corporate Planning, Nicor
                  and
                  Nicor Gas (since 2002); Vice President Business Development, Nicor
                  and
                  Nicor Gas (1998-2002).Paul
                  C. Gracey, Jr.
              
              47
              
              Senior
                  Vice President, General Counsel and Secretary, Nicor and Nicor
                  Gas (since
                  March 2006); Vice President, General Counsel and Secretary, Nicor
                  and
                  Nicor Gas (2002-2006); Vice President and General Counsel, Midwest
                  Generation, Chicago, independent power producer (2000-2002).Gerald
                  P. O’Connor
              
              55
              
              Vice
                  President Finance and Treasurer, Nicor and Nicor Gas (since June
                  2006);
                  Vice President Administration and Finance, Nicor and Nicor Gas
                  (2004-2006); Temporary General Manager - Internal Audit, Nicor
                  and Nicor
                  Gas (2003-2004); Partner, Tatum Partners L.L.C., professional services
                  (2003-2004); Vice President and Chief Financial Officer, Aux Sable
                  Liquid
                  Products L.L.P., natural gas processing (2000-2002).Karen
                  K. Pepping
              
              42
              
              Vice
                  President and Controller, Nicor and Nicor Gas (since June 2006);
                  Assistant
                  Vice President and Controller, Nicor and Nicor Gas (2005-2006);
                  Assistant
                  Controller, Nicor and Nicor Gas (2003-2005); Assistant Corporate
                  Controller, Wallace Computer Services, Inc., commercial printing
                  (2002-2003); Director of Accounting, Tellabs, Inc., telecommunication
                  equipment manufacturer (2000-2002).
 
  11
 
 Table
            of Contents
 **PART
        II**
  **Item
        5. **Market
        for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
        of Equity Securities****
  Nicor
        common stock is listed on the New York and Chicago Stock Exchanges. At February
        16, 2007, there were approximately 20,900 common stockholders of record and
        the
        closing stock price was $46.81.
 
 Stock
                  price
              
              DividendsQuarter
              
              High
              
              Low
              
              Declared**2006****First**
              
              **$**
              **43.12**
              
              **$**
              **39.25**
              
              **$**
              **.465****Second**
              
              
              **42.29**
              
              
              **38.72**
              
              
              **.465****Third**
              
              
              **44.40**
              
              
              **41.01**
              
              
              **.465****Fourth**
              
              
              **49.92**
              
              
              **42.38**
              
              
              **.465**2005First
              
              $
              38.33
              
              $
              35.50
              
              $
              .465Second
              
              
              41.87
              
              
              35.76
              
              
              .465Third
              
              
              42.59
              
              
              39.10
              
              
              .465Fourth
              
              
              42.97
              
              
              37.42
              
              
              .465
 
 In
        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 2006 or 2005. As of December 31, 2006, $21.5 million remained authorized
        for the repurchase of common stock.
  12
 
 Table
            of Contents
 **STOCK
        PERFORMANCE GRAPH**
 
 The
        following graph shows a five-year comparison of cumulative total returns
        for
        Nicor Common Stock, the S&P Utilities Index and the S&P 500 Index (both
        of which include Nicor Common Stock) as of December 31 of each of the years
        indicated, assuming $100 was invested on January 1, 2002, and all dividends
        were
        reinvested.
 
 **Comparison
        of Five-Year Cumulative Total Return**
 
 
 2002
                
                2003
                
                2004
                
                2005
                
                2006Nicor
                
                $
                86
                
                $
                91
                
                $
                104
                
                $
                116
                
                $
                144S&P
                    Utilities
                
                
                70
                
                
                88
                
                
                110
                
                
                128
                
                
                155S&P
                    500
                
                
                78
                
                
                100
                
                
                111
                
                
                117
                
                
                135
  13
 
 Table
                of Contents


**Nicor
                  Inc.****Item
                  6.  Selected Financial
                  Data**(in
                  millions, except per share data)Year
                  ended December 31**2006**
              
              2005
              
              2004
              
              2003
              
              2002Operating
                  revenues
              **$**
              **2,960.0**
              
              $
              3,357.8
              
              $
              2,739.7
              
              $
              2,662.7
              
              $
              1,897.4Operating
                  income
              **$**
              **202.5**
              
              $
              201.7
              
              $
              137.7
              
              $
              189.4
              
              $
              226.5Income
                  before cumulative effect ofaccounting
                  change
              
              
              
              
              **$**
              **128.3**
              
              $
              136.3
              
              $
              75.1
              
              $
              109.8
              *
              $
              128.0Net
                  income
              
              
              
              
              **$**
              **128.3**
              
              $
              136.3
              
              $
              75.1
              
              $
              105.3
              
              $
              128.0Earnings
                  per common shareBasicBefore cumulative effect ofaccounting change
              
              
              
              
              **$**
              **2.88**
              
              $
              3.08
              
              $
              1.71
              
              $
              2.49
              
              $
              2.90Basic earnings per share
              
              
              
              
              
              **2.88**
              
              
              3.08
              
              
              1.71
              
              
              2.39
              
              
              2.90DilutedBefore cumulative effect ofaccounting change
              
              
              
              
              **$**
              **2.87**
              
              $
              3.07
              
              $
              1.70
              
              $
              2.48
              
              $
              2.88Diluted earnings per share
              
              
              
              
              
              **2.87**
              
              
              3.07
              
              
              1.70
              
              
              2.38
              
              
              2.88Dividends
                  declared per common share
              **$**
              **1.86**
              
              $
              1.86
              
              $
              1.86
              
              $
              1.86
              
              $
              1.84Property,
                  plant and equipmentGross
              
              
              
              
              **$**
              **4,479.7**
              
              $
              4,351.3
              
              $
              4,143.6
              
              $
              3,999.5
              
              $
              3,872.8Net
              
              
              
              
              
              **2,714.7**
              
              
              2,659.1
              
              
              2,549.8
              
              
              2,484.2
              
              
              2,421.8Total
                  assets
              **$**
              **4,090.1**
              
              $
              4,391.2
              
              $
              3,975.2
              
              $
              3,797.2
              
              $
              3,524.4CapitalizationLong-term
                  debt, net ofunamortized discount
              
              
              
              
              **$**
              **497.5**
              
              $
              485.8
              
              $
              495.3
              
              $
              495.1
              
              $
              396.2Mandatorily
                  redeemable preferred stock
              
              
              
              
              
              **.6**
              
              
              .6
              
              
              1.6
              
              
              1.8
              
              
              4.3Common
                  equity
              
              
              
              
              
              **872.6**
              
              
              811.3
              
              
              749.1
              
              
              754.6
              
              
              728.4**$**
              **1,370.7**
              
              $
              1,297.7
              
              $
              1,246.0
              
              $
              1,251.5
              
              $
              1,128.9See
                  Item 1A - Risk Factors and Item 7 - Management's Discussion and
                  Analysis
                  of Financial Condition and Resultsof
                  Operations for factors that can impact year-to-year comparisons
                  and may
                  affect the future performance of Nicor'sbusiness.*
                  The change in accounting method relates to a rescission of Emerging
                  Issues
                  Task Force Consensus No. 98-10,*Accounting
                  for Contracts Involved in Energy Trading and Risk Management Activities,*which
                  disallowed therecording
                  of inventory at fair value. Effective January 1, 2003, Nicor’s wholesale
                  natural gas marketing business,Nicor
                  Enerchange, began applying accrual accounting rather than fair
                  value
                  accounting to gas in storage andcertain
                  energy-related contracts, such as storage and transportation agreements.
                  Effective with the change, Nicorrecorded
                  a $4.5 million cumulative effect loss from the change in accounting
                  principle, which was net of $3.0 millionin
                  income tax benefits.




14


Table
          of Contents


**Item
        7.****Management’s
        Discussion and Analysis of Financial Condition and Results of
        Operations**
 
 The
        purpose of this financial review is to explain changes in operating results
        and
        financial condition from 2004 to 2006 and to discuss business trends that
        might
        affect Nicor. Certain terms used herein are defined in the glossary on pages
        ii
        and iii. The discussion is organized into six sections - Summary, Results
        of
        Operations, Financial Condition and Liquidity, Outlook, Contingencies and
        Critical Accounting Estimates.
 
 **SUMMARY**
 
 Nicor
        is
        a holding company. Gas distribution is Nicor’s primary business. Nicor’s
        subsidiaries include Nicor Gas, one of the nation’s largest distributors of
        natural gas, and Tropical Shipping, a leading transporter of containerized
        freight in the Bahamas and the Caribbean region. Nicor also owns several
        energy-related ventures, including Nicor Services, Nicor Solutions and Nicor
        Advanced Energy, which provide energy-related products and services to retail
        markets, and Nicor Enerchange, a wholesale natural gas marketing company.
        Nicor
        also has equity interests in energy-related businesses.
 
 Net
        income and diluted earnings per common share are presented below (in millions,
        except per share data):
  **2006**
              
              2005
              
              2004Net
                  income
              
              **$**
              **128.3**
              
              $
              136.3
              
              $
              75.1Diluted
                  earnings per common share
              
              
              **2.87**
              
              
              3.07
              
              
              1.70
 
 Net
        income and diluted earnings per common share were lower in 2006 compared
        with
        2005 due to a $10 million charge ($.22 per share and non-deductible for tax
        purposes) associated with the company’s outstanding SEC inquiry recorded in the
        second quarter of 2006, the absence of a 2005 pretax benefit of $29.9 million
        ($.41 per share) related to net insurance recoveries and earnings thereon
        related to the securities class action and shareholder derivative lawsuit
        settlements, and the absence of a $17 million tax benefit ($.38 per share)
        recognized in the fourth quarter of 2005 in connection with the Jobs Act,
        partially offset by a first quarter of 2006 pretax recovery of $3.8 million
        ($.05 per share) associated with Nicor Gas’ mercury inspection and repair
        program. Year over year comparisons (excluding the effects of the items noted
        above) reflect improved operating results across all business segments and
        the
        recognition of certain income tax benefits including those resulting from
        the
        reorganization of certain shipping and related operations.
 
 Net
        income and diluted earnings per common share for 2005 compared with 2004
        were
        impacted significantly by the absence of the 2004 first-quarter securities
        class
        action settlement charge of $38.5 million ($.52 per share) coupled with the
        2005
        pretax benefit of $29.9 million ($.41 per share) related to net insurance
        recoveries mentioned earlier. 2005 was also significantly impacted by a tax
        benefit of approximately $17 million ($.38 per share) in connection with
        the
        Jobs Act. Year over year comparisons were also impacted by higher operating
        results at Tropical Shipping and lower corporate overhead costs, partially
        offset by lower operating results in the gas distribution and other
        energy-related businesses. Results of the gas distribution business reflect
        the
        impact of the base rate increase which became effective in the fourth quarter
        of
        2005.
 
 For
        more
        information on the SEC inquiry, see the Contingencies section of this
        discussion.
 
 **Rate
        proceeding** *.*  In
        2005,
        Nicor Gas received approval from the ICC for a $54.2 million base rate increase
        which reflected an allowed rate of return on original-cost rate base of 8.85
        percent, including 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’ PGA rider and the shifting of certain
  15
 
 Table
            of Contents
 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. These rates were implemented in the fourth quarter
        of
        2005. Because the order shifts certain items between base rates and Nicor
        Gas’
PGA rider, the company estimated that, under normal weather conditions and
        demand as reflected in the rate case, the annual net revenue increase resulting
        from implementing the rate order would have been about $34.7 million under
        the
        tariffs that would have been placed into effect.
 
 In
        October 2005, Nicor Gas and six other parties filed applications for rehearing
        of the final order of the rate case.  In March 2006, the ICC issued its
        decision on rehearing in which it adjusted the amount of the annual net rate
        increase to $49.7 million from the $54.2 million that had been approved in
        the
        earlier order. The company estimates that because the revised order similarly
        shifts certain items between base rates and Nicor Gas’ PGA rider, under normal
        weather conditions and demand as reflected in the rate case, the increase
        in
        annual net revenue decreased to $30.2 million from the estimated $34.7 million
        under the previous order. Rate changes resulting from the rehearing order
        were
        prospective and went into effect on April 11, 2006. Parties, including Nicor
        Gas, that appealed the ICC’s rate case decision to the state appellate courts
        have since withdrawn their appeals. As a result, the ICC rate order is no
        longer
        subject to judicial review.
 
 As
        a
        result of the rate order which became effective in the fourth quarter of
        2005,
        certain storage-related costs have been recorded in operating and maintenance
        expense. Storage related gas costs recorded in operating and maintenance
        expense
        during 2006 and 2005 totaled $21.4 million and $6.5 million, respectively.
        Storage-related gas costs incurred prior to the effective date of the rate
        order
        and recorded as cost of gas in 2005 totaled $11.1 million.
 
 Details
        of various financial and operating information by segment can be found on
        the
        pages that follow.
 
 **Operating
        income by segment.** Operating
        income (loss) by major business segment is presented below (in
        millions):
 **2006**
              
              2005
              
              2004Gas
                  distribution
              
              **$**
              **123.9**
              
              $
              116.9
              
              $
              130.8Shipping
              
              
              **47.5**
              
              
              40.4
              
              
              31.6Other
                  energy ventures
              
              
              **26.6**
              
              
              14.1
              
              
              19.3Corporate
                  and eliminations
              
              
              **4.5**
              
              
              30.3
              
              
              (44.0
              )**$**
              **202.5**
              
              $
              201.7
              
              $
              137.7
 
 The
        following summarizes operating income (loss) comparisons by major business
        segments:
 
 **·**
              Gas
                  distribution operating income increased $7.0 million in 2006 as
                  compared
                  with 2005 due to the positive effects of higher gas distribution
                  margin
                  ($19.0 million increase), a first quarter mercury-related recovery
                  of $3.8
                  million and higher gains on property sales ($2.9 million increase).
                  These
                  positive factors were partially offset by higher operating and
                  maintenance
                  expenses ($13.7 million increase) and higher depreciation expense
                  ($5.6
                  million increase). Higher gas distribution margin was primarily
                  due to the
                  impact of the base rate increase (approximately $36 million) and
                  higher
                  demand unrelated to weather (approximately $5 million increase),
                  partially
                  offset by the negative impact of warmer weather than in 2005
                  (approximately $17 million decrease) and the passage of Chicago
                  Hub
                  revenues through the PGA effective with the rate order (approximately
                  $8
                  million decrease).
 
 Gas
        distribution operating income decreased $13.9 million in 2005 as compared
        with
        2004 due to higher operating and maintenance expenses ($19.9 million increase),
        higher depreciation expense ($5.7 million increase), and lower gains on property
        sales ($5.5 million decrease). The adverse impact of these factors was partially
        offset by higher gas distribution margin ($17.5 million increase). Higher
        gas
        distribution margin was largely driven by higher average rates (approximately
        $19 million
  16
 
 Table
            of Contents
 increase)
        due in part to the rate increase which became effective during the fourth
        quarter of 2005 (approximately $13 million) and the positive impact of colder
        weather than in 2004 (approximately $4 million increase), partially offset
        by
        lower demand unrelated to weather (approximately $6 million decrease).
  **·**
              Shipping
                  operating income for 2006 increased $7.1 million as compared with
                  2005 due
                  to higher operating revenues ($19.8 million increase) which were
                  partially
                  offset by higher operating costs ($12.7 million increase). Higher
                  operating revenues were attributable to higher average rates ($40.0
                  million increase), partially offset by lower volumes shipped ($19.5
                  million decrease). Higher operating costs were due to higher
                  transportation-related costs including fuel ($6.3 million increase),
                  employee-related costs ($5.0 million increase), repairs and maintenance
                  ($2.7 million increase) and leased freight equipment ($2.5 million
                  increase), partially offset by lower legal and audit fees ($4.2
                  million
                  decrease). Included in legal and audit fees for 2005 were approximately
                  $5.1 million of costs incurred in connection with the repatriation
                  of
                  funds and the reorganization of Tropical Shipping to take advantage
                  of the
                  benefits of the Jobs Act.
 
 Shipping
        operating income for 2005 increased $8.8 million compared with 2004 due
        primarily to an increase in revenue ($67.8 million increase) driven by higher
        average rates and increased volumes shipped across substantially all ports,
        partially offset by increased operating expenses ($59.0 million increase).
        Shipping segment operating expenses increased due primarily to higher
        transportation ($37.7 million increase) and payroll-related costs ($6.2 million
        increase), driven by general price increases and higher volumes shipped.
        Transportation-related costs include fuel, inland freight, vessel charter,
        voyage and transportation, and port costs. Higher legal and audit fees also
        contributed to the increase in expenses, reflecting approximately $5.1 million
        of costs incurred in connection with the repatriation of funds and the
        reorganization of Tropical Shipping.
 
 **·**
              Operating
                  income from Nicor’s other energy ventures for 2006 increased $12.5 million
                  primarily due to higher operating income at Nicor Enerchange ($13.2
                  million increase), offset by lower operating results at Nicor’s
                  energy-related products and services businesses ($0.6 million decrease).
                  Improved results at Nicor Enerchange were primarily due to a significant
                  positive variation in fair value adjustments associated with derivatives
                  hedging purchases and sales of inventory, partially offset by unfavorable
                  costing of physical sales activity. Lower operating results at
                  Nicor’s
                  energy-related products and services businesses were due to higher
                  operating costs ($45.4 million increase) offset, in part, by higher
                  operating revenues ($44.8 million
                  increase).
 
 Operating
        income from Nicor’s other energy ventures for 2005 decreased $5.2 million
        compared with 2004 due primarily to lower operating results at Nicor Enerchange
        ($6.3 million decrease). Lower Nicor Enerchange results reflect unfavorable
        fair
        value adjustments related to derivative instruments used to hedge future
        sales
        of natural gas inventory.
 
 Nicor
        Enerchange purchases and holds natural gas in storage to earn a profit margin
        from its ultimate sale. Nicor Enerchange uses derivatives to mitigate commodity
        price risk in order to substantially lock-in the profit margin that will
        ultimately be realized. However, gas stored in inventory is required to be
        accounted for at the lower of weighted-average cost or market, whereas the
        derivatives used to reduce the risk associated with a change in the value
        of the
        inventory are accounted for at fair value, with changes in fair value recorded
        in operating results in the period of change. As a result, earnings are subject
        to volatility as the market price of derivatives change, even when the
        underlying hedged value of the inventory is unchanged. The volatility resulting
        from this accounting can be significant from period to period.
 
 **·**
              “Corporate
                  and eliminations” operating income for 2006, 2005 and 2004 were impacted
                  by the following items:
 
 17
 
 Table
            of Contents
  In
        2006,
        the company reached a tentative agreement with the staff of the SEC Enforcement
        Division in settlement of an anticipated civil action for a payment of $10
        million. Nicor recorded a $10 million charge (non-deductible for tax purposes)
        in the second quarter associated with the outstanding SEC inquiry. For more
        information, see Item 8 - Notes to the Consolidated Financial Statements
        - Note
        21 - Contingencies - SEC and U.S. Attorney Inquiries.
 
 Included
        in corporate and eliminations’ 2006 operating income is approximately $9.5
        million of benefits associated with Nicor’s other energy ventures’ utility-bill
        management  products
        attributable to warmer than normal weather (excludes costs of approximately
        $0.7
        million recorded within other energy ventures). Benefits or costs resulting
        from
        variances from normal weather are recorded primarily at the corporate level
        as a
        result of an agreement between the parent company and certain of its
        subsidiaries. The weather impact of these contracts generally serves to
        partially offset the gas distribution segment’s weather risk. The amount of the
        offset attributable to the utility-bill management products marketed by Nicor’s
        other energy ventures will vary depending upon a number of factors including
        the
        time of year, weather patterns, the number of customers for these products
        and
        the market price for natural gas.
 
 In
        2006
        and 2005, the company recognized insurance recoveries related to previously
        incurred legal expenses associated with the securities class action and
        shareholder derivative lawsuits. The recoveries totaled $5.2 million and
        $2.8
        million, respectively.
 
 In
        2005,
        the company recorded a $29.4 million recovery from an insurance carrier related
        to costs previously incurred by Nicor in connection with a securities class
        action and a related shareholder derivative action which were previously
        settled
        and a $0.5 million net recovery which was comprised of a shareholder derivative
        action settlement ($3.5 million) and a related Directors and Officers
        (“D&O”) insurance recovery ($4.0 million).
 
 In
        2004,
        the company recorded a $38.5 million settlement charge relating to a securities
        class action settlement. For more information, see Item 8 - Notes to the
        Consolidated Financial Statements - Note 21 - Contingencies -
        Other.
 
 These
        factors are discussed in more detail in the Results of Operations
        section.
 
 **RESULTS
        OF OPERATIONS**
 
 Details
        of various financial and operating information by segment can be found in
        the
        tables throughout this review. The following discussion summarizes the major
        items impacting Nicor’s operating income.
 
 **Operating
        revenues.** Operating
        revenues by major business segment are presented below (in
        millions):
 
 **2006**
              
              2005
              
              2004Gas
                  distribution
              
              **$**
              **2,452.3**
              
              $
              2,909.6
              
              $
              2,362.1Shipping
              
              
              **398.3**
              
              
              378.5
              
              
              310.7Other
                  energy ventures
              
              
              **215.9**
              
              
              157.0
              
              
              155.3Corporate
                  and eliminations
              
              
              **(106.5**
              **)**
              
              (87.3
              )
              
              (88.4
              )**$**
              **2,960.0**
              
              $
              3,357.8
              
              $
              2,739.7
 
 Gas
        distribution revenues are impacted by changes in natural gas costs, which
        are
        passed directly through to customers without markup, subject to ICC review.
        For
        the year 2006, gas distribution revenues decreased $457.3 million as compared
        to
        2005 due to lower natural gas costs (approximately $300 million decrease)
        and
        the negative impact of warmer weather than the corresponding period in 2005
        (approximately $250 million decrease), partially offset by higher demand
        unrelated to weather
  18
 
 Table
            of Contents
   (approximately
        $35 million increase) and the impact of the base rate increase (approximately
        $36 million increase).
  For
        the
        year 2005, gas distribution revenues increased $547.5 million as compared
        with
        2004 due primarily to higher natural gas costs (approximately $525 million
        increase) and the positive impact of colder weather than in 2004 (approximately
        $60 million increase), partially offset by lower demand unrelated to weather
        (approximately $70 million decrease). These results also reflect the impact
        of
        the rate order tariffs, which became effective during the fourth quarter
        of
        2005, and increased revenues by approximately $13 million.
 
 In
        2006,
        shipping segment operating revenues increased over 2005 due to higher average
        rates ($40.0 million increase), partially offset by lower volumes shipped
        ($19.5
        million decrease). Rates were higher due to general rate increases across
        all
        markets and higher cost-recovery surcharges for fuel and security. Volumes
        were
        lower due to the adverse impact of increased competition in several of the
        ports
        served, the strategic decision not to compete for certain low margin business,
        and changing global trade patterns.
 
 In
        2005,
        shipping segment operating revenues increased over 2004 due primarily to
        higher
        average rates ($41.8 million increase) and increased volumes shipped ($25.3
        million increase). Rates were higher due to general rate increases across
        all
        markets and higher cost-recovery surcharges for fuel and security.
 The
        volume increases were recognized across substantially all ports, reflecting
        improvements in the economy, significant increases in Bahamian and Caribbean
        investment, and rebuilding efforts following the 2004 hurricanes.
 
 The
        2006
        increase in revenues for other energy ventures was due primarily to higher
        revenues at Nicor’s energy-related products and services business ($44.8 million
        increase) and higher revenues at Nicor Enerchange ($14.2 million increase).
        Higher revenues at Nicor’s energy-related products and services businesses were
        attributable primarily to higher average prices ($17.5 million increase)
        and an
        increase in customer contracts ($17.0 million increase). Higher revenues
        at
        Nicor Enerchange were due to a significant positive variation in fair value
        adjustments associated with derivatives hedging purchases and sales of
        inventory, partially offset by unfavorable costing of physical sales
        activity.
 
 The
        2005
        increase in revenues for other energy ventures was due to improved revenues
        at
        Nicor’s energy-related products and services businesses ($8.3 million increase)
        due primarily to new business initiatives, higher contract volumes, and improved
        average contract pricing, partially offset by lower revenues at Nicor Enerchange
        ($6.5 million decrease) due primarily to unfavorable fair value adjustments
        discussed above under the Operating income by segment section.
 
 Corporate
        and eliminations primarily reflects the elimination of gas distribution revenues
        against Nicor Solutions’ expenses for customers purchasing the utility-bill
        management  products.
 
 **Gas
        distribution margin.** Nicor
        utilizes a measure it refers to as “gas distribution margin” to evaluate the
        operating income impact of gas distribution revenues. Gas distribution revenues
        include natural gas costs, which are passed directly through to customers
        without markup, subject to ICC review, and revenue taxes, for which Nicor
        Gas
        earns a small administrative fee. These items often cause significant
        fluctuations in gas distribution revenues, and yet they have virtually no
        direct
        impact on gas distribution operating income.
   19
 
 Table
            of Contents
  A
        reconciliation of gas distribution revenues and margin follows (in
        millions):
 
 **2006**
              
              2005
              
              2004Gas
                  distribution revenues
              
              **$**
              **2,452.3**
              
              $
              2,909.6
              
              $
              2,362.1Cost
                  of gas
              
              
              **(1,743.7**
              **)**
              
              (2,212.4
              )
              
              (1,695.0
              )Revenue
                  tax expense
              
              
              **(144.4**
              **)**
              
              (152.0
              )
              
              (139.4
              )Gas
                  distribution margin
              
              **$**
              **564.2**
              
              $
              545.2
              
              $
              527.7
 
 For
        the
        year 2006, gas distribution margin increased $19.0 million from 2005 due
        primarily to the impact of the base rate increase (approximately $36 million)
        and higher demand unrelated to weather (approximately $5 million increase),
        partially offset by the negative impact of warmer weather than in 2005
        (approximately $17 million decrease) and the passage of Chicago Hub revenues
        through the PGA effective with the rate order (approximately $8 million
        decrease).
 
 For
        the
        year 2005, gas distribution margin increased $17.5 million from 2004 due
        primarily to higher average rates (approximately $19 million increase) driven
        by
        the rate increase (approximately $13 million), and the positive impact of
        colder
        weather than in 2004 (approximately $4 million increase), partially offset
        by
        lower demand unrelated to weather (approximately $6 million decrease).
 
 **Gas
        distribution operating and maintenance expense.** The
        $13.7
        million increase in gas distribution operating and maintenance expense in
        2006
        as compared with the prior year reflects higher storage-related gas costs
        ($14.9
        million increase) and company use gas ($9.9 million increase), partially
        offset
        by lower bad debt expense ($4.5 million decrease), net claims arising from
        normal operations ($4.5 million decrease) and payroll and benefit-related
        costs
        ($3.1 million decrease).
 
 The
        $19.9
        million increase in gas distribution operating and maintenance expense in
        2005
        as compared with the prior year reflects higher bad debt expense ($12.1 million
        increase), company use gas ($4.0 million increase) and storage-related gas
        costs
        ($6.5 million increase in the fourth quarter). These increases were partially
        offset by lower net legal and claims expenses ($4.7 million decrease).
 
 The
        rate
        order, which became effective in the fourth quarter of 2005, results in certain
        storage-related gas costs **** being **** charged
        to operating and maintenance expense. Prior to the effective date of the
        rate
        order, storage-related gas costs were charged to cost of gas and passed through
        to customers as part of the PGA rider.
 
 **Other
        gas distribution operating expenses.** Mercury-related
        costs (recoveries), net reflect the estimated costs, credits and recoveries
        associated with the company’s mercury inspection and repair program. During the
        first quarter of 2006, a mercury-related recovery of $3.8 million was realized.
        This net recovery resulted from a settlement reached with an independent
        contractor of Nicor Gas. Net mercury-related costs (recoveries) were
        insignificant in 2005 and 2004. Additional information about the company’s
        mercury inspection and repair program is presented in Item 8 - Notes to the
        Consolidated Financial Statements - Note 21 - Contingencies -
        Mercury.
 
 Property
        sale gains and losses vary from year-to-year depending upon property sales
        activity. During 2006, Nicor Gas realized a $3.3 million pretax gain on the
        sale
        of property. Property sale gains and losses were insignificant during 2005.
        During 2004, Nicor Gas realized a $5.9 million pretax gain on the sale of
        property. The company continues to assess its ownership of certain real estate
        holdings.
 
 **Shipping
        operating expenses.** Shipping
        segment operating expenses increased $12.7 million in 2006 as compared with
        2005
        due to higher transportation-related costs including fuel ($6.3 million
        increase), employee-related costs ($5.0 million increase), repairs and
        maintenance ($2.7 million increase) and leased
  20
 
 Table
            of Contents
 freight
        equipment ($2.5 million increase), partially offset by lower legal and audit
        fees ($4.2 million decrease). Included in legal and audit fees for 2005 were
        approximately $5.1 million of costs incurred in connection
        with the repatriation of funds and the reorganization of Tropical Shipping
        to
        take advantage of the benefits of the Jobs Act.
 
 Shipping
        segment operating expenses increased $59.0 million in 2005 as compared with
        2004
        due primarily to higher transportation-related costs, which include fuel,
        inland
        freight, vessel charter, voyage and transportation, and port costs ($37.7
        million increase), and higher payroll-related costs ($6.2 million increase).
        The
        increases were due to general price increases and increased volumes shipped.
        Higher legal and audit fees ($5.2 million increase) also contributed to the
        increase. Included in these amounts were approximately $5.1 million of costs
        incurred in connection with repatriation of funds and the reorganization
        of
        Tropical Shipping.
 
 **Operating
        expenses of other energy ventures.** The
        $46.4
        million increase in the 2006 operating expenses compared with 2005 were due
        to
        higher expenses at Nicor’s energy-related products and services businesses
        ($45.4 million increase) reflecting a higher average cost of gas ($14.8 million
        increase), costs related to an increase in customer contracts ($12.4 million
        increase) and higher selling, general and administrative costs attributable
        to
        acquiring new customer contracts ($8.8 million increase).
 
 The
        $6.9
        million increase in the 2005 operating expenses compared with 2004 was due
        primarily to higher expenses at Nicor’s energy-related products and services
        businesses ($7.1 million increase), due largely to higher risk management
        costs
        and expenses related to new business initiatives, partially offset by the
        impact
        of a decreased average number of fixed utility bill management
        customers.
 
 **Litigation
        charges (recoveries), net.** In
        the
        second quarter of 2006, Nicor recorded a $10 million charge (non-deductible
        for
        tax purposes) associated with the outstanding SEC inquiry. In July 2006,
        the
        company reached a tentative agreement with the staff of the SEC Enforcement
        Division in settlement of an anticipated civil action for a payment of $10
        million. For more information, see Item 8 - Notes to the Consolidated Financial
        Statements - Note 21 - Contingencies - SEC and U.S. Attorney
        Inquiries.
 
 In
        the
        first quarter of 2005, the company recorded a $0.5 million net recovery which
        was comprised of a shareholder derivative action settlement ($3.5 million)
        and a
        related D&O insurance recovery ($4.0 million). During the second quarter of
        2005, the company recorded $29.4 million of income related to the recovery
        from
        an insurance carrier of costs previously incurred by Nicor in connection
        with a
        securities class action and a related shareholder derivative action which
        were
        previously settled. For more information, see Item 8 - Notes to the Consolidated
        Financial Statements - Note 21 - Contingencies - Other.
 
 In
        the
        first quarter of 2004, the company recorded a $38.5 million litigation charge
        related to an agreement to settle the securities class actions.
 
 **Other
        corporate expenses and eliminations.** Other
        corporate operating expenses (income) were ($5.2) million, ($0.8) million
        and
        $5.5 million in 2006, 2005 and 2004, respectively. In 2006 and 2005, the
        company
        recorded a benefit from insurance recoveries related to legal expenses incurred
        in 2004 and prior. Also included in these amounts are business development
        costs.
 
 Intercompany
        eliminations were ($115.8) million, ($86.9) million and ($88.4) million in
        2006,
        2005 and 2004, respectively, and related primarily to utility-bill management
        products.
 
 **Interest
        expense.** Interest
        expense for 2006 increased $2.3 million over the 2005 period. This increase
        primarily reflects the impact of higher average interest rates ($2.5 million
        increase).
 
 Interest
        expense for 2005 increased $5.6 million over the 2004 period. This increase
        reflects the impact of higher average interest rates ($6.2 million increase)
        and
        higher estimated interest on income tax matters
  21
 
 Table
            of Contents
  ($3.7
        million increase), partially offset by the impact of lower average borrowing
        levels ($4.8 million decrease).
 
 **Net
        equity investment income.** Net
        equity investment income increased $1.8 million in 2006 over the 2005 period
        due
        primarily to a $2.4 million gain on a sale of an equity investment recognized
        in
        the third quarter of 2006 and higher income from EN Engineering ($0.8 million
        increase). These items were partially offset by lower income from Triton
        ($1.6
        million decrease).
 
 Equity
        investment results for 2005 increased by $3.0 million as compared with 2004
        due
        primarily to higher results related to low income housing investments ($1.1
        million increase) and higher income from Triton ($0.9 million increase).
 
 Equity
        investment results include $5.8 million, $7.4 million and $6.5 million for
        2006,
        2005 and 2004, respectively, for Nicor’s share of income from
        Triton.
 
 **Interest
        income.** Interest
        income **** increased
        $3.0 million in 2006 over 2005 **** and
        $3.7
        million in 2005 over 2004 due to higher average rates and higher investment
        balances.
 
 **Income
        tax expense.** During
        December 2005, Nicor repatriated $132 million of cumulative undistributed
        earnings of foreign subsidiaries. The repatriation was funded by cash available
        from foreign subsidiaries coupled with the proceeds received by Tropical
        Shipping in connection with the December 2005 issuance of a $40 million two-year
        senior unsecured term loan. The federal income tax benefit resulting from
        the
        repatriation is approximately $17 million and was recognized in the fourth
        quarter of 2005. In conjunction with the repatriation, Nicor reclassified
        approximately $7.6 million of deferred income tax liabilities to other income
        tax reserves.
 
 Effective
        January 2006, the company reorganized certain shipping and related operations.
        The reorganization allows the company to take advantage of certain provisions
        of
        the Jobs Act that provide the opportunity for tax savings subsequent to the
        date
        of the reorganization. Generally, to the extent foreign shipping earnings
        are
        not repatriated to the United States, such earnings are not expected to be
        subject to current taxation. In addition, to the extent such earnings are
        expected to be indefinitely reinvested offshore, no deferred income tax expense
        would be recorded by the company. For the year ended December 31, 2006, income
        tax expense has not been provided on approximately $29 million of foreign
        company shipping earnings that are expected to be indefinitely reinvested
        offshore. In connection with these activities, a net income tax benefit of
        $5.2
        million from the elimination of certain deferred income taxes and $4.7 million
        in current income tax expense was recorded in 2006.
 
 The
        overall effective income tax rate for 2006 increased to 26.3 percent from
        the
        prior year rate of 20.3 percent, due primarily to the 2005 tax benefits recorded
        in connection with the Jobs Act (approximately $17 million). The decline
        in the
        company’s effective income tax rate to 20.3 percent in 2005 from 28.7 percent in
        2004 was also primarily a result of the tax benefits recorded in 2005 related
        to
        the Jobs Act. In addition, the 2006 effective income tax rate reflects the
        ongoing benefit of untaxed foreign shipping earnings, the recognition of
        tax
        benefits related to the first quarter 2006 reorganization of the company’s
        shipping and related operations and second quarter 2006 favorable adjustments
        associated with tax audits (which occur in the ordinary course of business)
        offset, in part, by the non-deductible $10 million charge in the second quarter
        2006 associated with the company’s outstanding SEC inquiry. The 2005 effective
        income tax rate was adversely impacted by recording net litigation recoveries
        and earnings thereon ($29.9 million) at the company’s marginal tax rate of
        approximately 40 percent.
  22
 
 Table
            of Contents





**Nicor
                  Inc.****Gas
                  Distribution Statistics****2006**
              
              2005
              
              2004**Operating
                  revenues**(millions)SalesResidential
              
              **$**
              **1,671.1**
              
              $
              2,031.4
              
              $
              1,625.5Commercial
              
              
              **373.9**
              
              
              453.5
              
              
              349.9Industrial
              
              
              **42.8**
              
              
              61.8
              
              
              49.3**2,087.8**
              
              
              2,546.7
              
              
              2,024.7TransportationResidential
              
              
              **32.0**
              
              
              27.9
              
              
              23.6Commercial
              
              
              **82.1**
              
              
              73.1
              
              
              69.9Industrial
              
              
              **41.0**
              
              
              39.2
              
              
              39.9Other
              
              
              **3.7**
              
              
              11.7
              
              
              14.0**158.8**
              
              
              151.9
              
              
              147.4Other
                  revenuesRevenue
                  taxes
              
              
              **147.7**
              
              
              156.4
              
              
              143.5Environmental
                  cost recovery
              
              
              **11.6**
              
              
              21.0
              
              
              20.6Chicago
                  Hub
              
              
              **26.4**
              
              
              11.5
              
              
              7.9Performance-based
                  rate plan
              
              
              -
              
              
              -
              
              
              (1.8
              )Other
              
              
              **20.0**
              
              
              22.1
              
              
              19.8**205.7**
              
              
              211.0
              
              
              190.0**$**
              **2,452.3**
              
              $
              2,909.6
              
              $
              2,362.1**Deliveries**(Bcf)SalesResidential
              
              
              **185.9**
              
              
              200.2
              
              
              204.8Commercial
              
              
              **41.8**
              
              
              44.7
              
              
              44.3Industrial
              
              
              **5.0**
              
              
              6.3
              
              
              6.4**232.7**
              
              
              251.2
              
              
              255.5TransportationResidential
              
              
              **17.0**
              
              
              18.9
              
              
              16.6Commercial
              
              
              **80.4**
              
              
              87.5
              
              
              84.1Industrial
              
              
              **108.6**
              
              
              113.0
              
              
              117.0**206.0**
              
              
              219.4
              
              
              217.7**438.7**
              
              
              470.6
              
              
              473.2**Year-end
                  customers**(thousands)
                  (1)SalesResidential
              
              
              **1,807**
              
              
              1,796
              
              
              1,777Commercial
              
              
              **123**
              
              
              120
              
              
              117Industrial
              
              
              **7**
              
              
              8
              
              
              7**1,937**
              
              
              1,924
              
              
              1,901TransportationResidential
              
              
              **166**
              
              
              157
              
              
              148Commercial
              
              
              **57**
              
              
              58
              
              
              60Industrial
              
              
              **6**
              
              
              6
              
              
              6**229**
              
              
              221
              
              
              214**2,166**
              
              
              2,145
              
              
              2,115**Other
                  statistics**Degree
                  days
              
              
              **5,174**
              
              
              5,783
              
              
              5,637Warmer
                  than normal (2)
              
              
              **(11**
              **%)**
              
              (1
              %)
              
              (6
              %)Average
                  gas cost per Mcf sold
              
              **$**
              **7.44**
              
              $
              8.74
              
              $
              6.56(1)
                  The company has redefined the customer count methodology in 2006
                  in
                  conjunction with its newcustomer
                  care and billing system.(2)
                  Normal weather for Nicor Gas' service territory, for purposes of
                  this
                  report, is considered to be 5,830degree
                  days per year for 2006 and 2005 and 6,000 degree days for 2004.
                  On a 6,000
                  degree day basis,2006
                  and 2005 would have been 14% and 4% warmer than normal,
                  respectively.




23


Table
          of Contents


**Shipping
                  Statistics****2006**
              
              2005
              
              2004TEUs
                  shipped (thousands)
              
              
              203.1
              
              
              214.2
              
              
              198.0Average
                  revenue per TEU
              
              $
              1,961
              
              $
              1,764
              
              $
              1,569At
                  end of periodPorts
                  served
              
              
              27
              
              
              25
              
              
              24Vessels
                  operated at year-end
              
              
              18
              
              
              18
              
              
              20
 
 **FINANCIAL
        CONDITION AND LIQUIDITY**
 
 The
        company believes it has access to adequate resources to meet its needs for
        capital expenditures, debt redemptions, dividend payments and working capital.
        These resources include net cash flow from operating activities, access to
        capital markets, lines of credit and short-term investments.
 
 **Operating
        cash flows.** The
        gas
        distribution business is highly seasonal and operating cash flow may fluctuate
        significantly during the year and from year-to-year due to factors such as
        weather, natural gas prices, the timing of collections from customers, 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 and accounts receivable. During
        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, or eliminate, short-term debt during the first
        half of the year.
 
 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.
 
 Net
        cash
        flow provided from operating activities was $447.0 million, $206.2 million
        and
        $317.7 million in 2006, 2005 and 2004, respectively. The increase in operating
        cash flow in 2006 compared to 2005 is due primarily to the impact of lower
        natural gas prices on working capital. This was partially offset by the absence
        of the $29.9 million of D&O net insurance recoveries, including earnings
        thereon, received during 2005 related to settlement costs incurred by Nicor
        in
        connection with a securities class action and a related shareholder derivative
        action. The decrease in operating cash flow provided in 2005 compared to
        2004 is
        due, in part, to the impact of higher gas prices on working capital, coupled
        with the partial repayment of the income tax refund received in 2003, as
        discussed below. These effects were partially offset by the $29.9 million
        of
        D&O net insurance recoveries mentioned above, and the absence of the $38.5
        million pretax litigation charge in 2004 related to an agreement to settle
        the
        securities class action litigation.
 
 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 approximated
        $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 2005,
        the IRS
        revised the regulations pertaining to the aforementioned tax accounting method.
        The new regulations required repayment in 2005 and 2006 of amounts previously
        taken as current tax deductions. During 2006 and 2005, the company reclassified
        income tax expense from deferred to current and repaid approximately $135
        million equally over those years.
 
  24
 
 Table
            of Contents
 **Investing
        activities.** Net
        cash
        flow used for investing activities was $192.2 million, $154.7 million and
        $204.7
        million in 2006, 2005 and 2004, respectively.
 
 *Capital
        expenditures* . **** Capital
        expenditures is an internal measure utilized by management and represent
        cash
        additions to property, plant and equipment, adjusted for items including
        the
        accrual of work performed through period end and other non-cash items,
        contributions in aid of construction and expenditures associated with asset
        retirement obligations **.** Capital
        expenditures by business segment are presented below (in millions):
  Estimated2007
              
              **2006**
              
              2005
              
              2004Gas
                  distribution
              
              $
              175
              
              **$**
              **164**
              
              $
              186
              
              $
              175Shipping
              
              
              21
              
              
              **17**
              
              
              11
              
              
              9Other
                  energy ventures
              
              
              4
              
              
              **6**
              
              
              3
              
              
              3$
              200
              
              **$**
              **187**
              
              $
              200
              
              $
              187
 
 Gas
        distribution segment capital expenditures decreased in 2006 versus 2005 due,
        in
        part, to the absence of expenditures related to the acquisition of a storage
        compressor in 2005 (approximately $9 million decrease) and a reduction in
        costs
        for information technology system improvements (approximately $8 million
        decrease). In April 2006, the company implemented a new customer care and
        billing system. Capital expenditures for 2005 increased over 2004 due primarily
        to increased storage system expenditures attributable to the acquisition
        of the
        previously mentioned storage compressor (approximately $9 million increase).
 
 Capital
        expenditures in the gas distribution segment are expected to increase in
        2007
        versus 2006 due, in part, to higher expenditures associated with distribution
        system improvements and facility expansion, partially offset by lower spending
        on information technology.
 
 Shipping
        segment capital expenditures for 2006 increased $6 million over 2005 due
        primarily to the purchase of a new vessel which was placed in service in
        early
        2007. Shipping segment capital expenditures for 2005 increased $2 million
        over
        2004 due primarily to higher purchases of freight handling
        equipment. ****
 
 Capital
        expenditures in the shipping segment are expected to increase in 2007 versus
        2006 due primarily to higher expenditures related to freight handling equipment
        and facilities expansion.
 
 *Additional
        investing activiti* es.
        Investment activities in 2006 also reflect the absence of proceeds from the
        2005
        sale of various investments, the third quarter 2006 funding of an escrow
        account
        associated with the tentative agreement with the staff of the SEC Enforcement
        Division in settlement of an anticipated civil action of $10.0 million and
        net
        proceeds of $7.0 million associated with the company’s sale of an equity
        investment. In 2005, additional investment activities include proceeds from
        the
        2005 sale of various investments coupled with the absence of $21.8 million
        of
        purchases of available-for-sale securities in 2004. In 2004, the company
        also
        realized net proceeds of $8.0 million on the sale of property.
  25
 
 Table
            of Contents
 **Financing
        activities.** Nicor
        Gas
        has credit ratings that are among the highest in the gas distribution industry.
        The current credit ratings for Nicor Inc. and Nicor Gas are as
        follows:
 
 Standard
                  & Poor’s
              
              Moody’s
              
              FitchNicor
                  Inc.Commercial
                  Paper
              
              
              A-1+
              
              
              P-2
              
              
              F-1Senior
                  Unsecured Debt
              
              
              AA-
              
              
              n/a
              
              
              ACorporate
                  Credit Rating
              
              
              AA
              
              
              n/a
              
              
              n/a
  Nicor
                  GasCommercial
                  Paper
              
              
              A-1+
              
              
              P-1
              
              
              F-1+Senior
                  Secured Debt
              
              
              AA
              
              
              A1
              
              
              AA-Senior
                  Unsecured Debt
              
              
              AA-
              
              
              A2
              
              
              A+Corporate
                  Credit Rating
              
              
              AA
              
              
              n/a
              
              
              n/a
 
 In
        the
        second quarter of 2006, Standard and Poor’s and Fitch reaffirmed their credit
        ratings of Nicor and Nicor Gas. In July 2006, Moody’s Investors Service
        (“Moody’s”) downgraded Nicor’s commercial paper rating to Prime-2 from Prime-1,
        Nicor’s preferred stock rating to Baa2 from Baa1, Nicor Gas’ senior secured
        (First Mortgage Bonds) rating to A1 from Aa3 and Nicor Gas’ senior unsecured
        debt rating to A2 from A1. Nicor Gas’ Prime-1 commercial paper rating was not
        under review by Moody’s. The company does not expect this downgrade to have a
        significant impact on its results of operations, cash flows or financial
        condition.
 
 Nicor’s
        debt-related financial statistics at December 31 include:
 
 **2006**
              
              2005
              
              2004Long-term
                  obligations, net of current maturities,
                as
                  a percent of capitalization
              
              
              **36.3**
              **%**
              
              37.5
              %
              
              39.9
              %Times
                  interest earned, before income taxes
              
              
              **4.5**
              
              
              4.5
              
              
              3.5
 
 *Long-term
        debt.* The
        company typically uses the net proceeds from long-term debt for refinancing
        outstanding debt, for construction programs to the extent not provided by
        internally generated funds, and for general corporate purposes.
 
 At
        December 31, 2006, Nicor Gas had the capacity to issue approximately $390
        million of First Mortgage Bonds under the terms of its indenture, of which
        $75
        million was available for issuance under a July 2001 shelf registration
        filing. ** Nicor
        believes it is in compliance with its debt covenants and believes it will
        continue to remain so. Nicor’s long-term debt agreements do not include ratings
        triggers or material adverse change provisions. Substantially all gas
        distribution properties are subject to the lien of the indenture securing
        Nicor
        Gas’ First Mortgage Bonds.
 
 In
        December 2006, Nicor Gas, through a private placement, issued $50 million
        of
        First Mortgage Bonds at 5.85 percent, due in 2036. Proceeds from this issuance
        were applied to the maturity of the $50 million 5.55 percent First Mortgage
        Bond
        series, due in December 2006.
 
 In
        December 2005, Tropical Shipping obtained a $40 million two-year senior
        unsecured term loan which was used along with cash available from foreign
        subsidiaries to fund the repatriation of $132 million of its cumulative
        undistributed foreign earnings under the provisions of the Jobs Act. The
        term
        loan had a floating interest rate based on LIBOR plus 0.50 percent per annum.
        For the purpose of obtaining a lower borrowing rate, the term loan was
        guaranteed by Nicor. The loan was fully paid off as of December 31,
        2006.
  26
 
 Table
            of Contents
 *Short-term
        debt.*  In
        October 2006, Nicor Gas established a $400 million, 210-day seasonal revolver,
        which expires in May 2007, to replace the $400 million, 210-day seasonal
        revolver, which expired in April 2006. In September 2005, Nicor and Nicor
        Gas
        established a $600 million, five-year revolver, expiring September 2010.
        These
        facilities were established with major domestic and foreign banks and serve
        as
        backup for the issuance of commercial paper. The company had $350 million
        and
        $586 million of commercial paper borrowings outstanding at December 31, 2006
        and
        2005, respectively. The company believes it is in compliance with all debt
        covenants and believes it will continue to remain so. 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.
 
 *Common
        stock.* **** Nicor
        maintained its quarterly common stock dividend rate during 2006 of $0.465
        per
        common share. The company paid dividends on its common stock of $82.9 million,
        $82.1 million and $82.0 million in 2006, 2005 and 2004, respectively. Nicor
        currently has no contractual or regulatory restrictions on the payment of
        dividends.
 
 In
        2001,
        Nicor announced a $50
        million common stock repurchase program. Purchases may be made as market
        conditions permit through open market transactions and to the extent cash
        flow
        is available after other cash needs and investment opportunities. There were
        no
        purchases under this program in 2006, 2005 and 2004, and at December 31,
        2006,
        $21.5 million remained authorized for the repurchase of common stock.
 
 *Preferred
        Stock* .
        In
        November 2005, Nicor redeemed 20,062 shares of 5% Mandatorily Redeemable
        Preferred Stock, $50 par value, at a per share redemption price of $51 plus
        accrued and unpaid dividends.
 
 **Off-balance
        sheet arrangements.** Nicor
        has certain guarantees, as further described in Item 8 - Notes to
        the Consolidated Financial Statements - Note 20 - Guarantees and Indemnities.
        The company believes that it is not probable that these guarantees will have
        a
        material effect on its financial condition.
 
 **Contractual
        obligations.** As of
        December 31, 2006, Nicor had contractual obligations with payments due as
        follows (in millions):
  Payments due by
        period
 Less
                than
                  1
                year
              
              1-3
                years
              
              3-5
                years
              
              More
                than
                  5
                years
              
              TotalPurchase
                  obligations
              
              $
              844.9
              
              $
              424.2
              
              $
              49.1
              
              $
              7.6
              
              $
              1,325.8Long-term
                  debt
              
              
              -
              
              
              125.0
              
              
              75.0
              
              
              300.0
              
              
              500.0Fixed
                  interest on
                long-term
                  debt
              
              
              30.7
              
              
              52.8
              
              
              42.6
              
              
              302.7
              
              
              428.8Operating
                  leases
              
              
              30.4
              
              
              38.3
              
              
              10.1
              
              
              15.6
              
              
              94.4Other
                  long-term obligations
              
              
              1.8
              
              
              1.4
              
              
              .2
              
              
              .6
              
              
              4.0$
              907.8
              
              $
              641.7
              
              $
              177.0
              
              $
              626.5
              
              $
              2,353.0
 
 Purchase
        obligations consist primarily of natural gas purchase agreements, and natural
        gas transportation and storage contracts in the gas distribution and wholesale
        natural gas marketing business segments. Natural gas purchase agreements
        include
        obligations to purchase natural gas at future market prices, calculated using
        December 31, 2006 New York Mercantile Exchange futures prices. The company
        also
        has long-term obligations for postretirement benefits which are not included
        in
        the above table. Information regarding the company’s obligations for
        postretirement benefits can be found in Item 8 - Notes to the Consolidated
        Financial Statements - Note 11 - Postretirement Benefits.
 
 Operating
        leases are primarily for vessels, containers and equipment in the shipping
        segment, office space and equipment in the gas distribution segment and office
        space at other energy ventures. Tropical
  27
 
 Table
            of Contents
 Shipping
        has certain equipment operating leases which include purchase and/or renewal
        options, at fair market amounts at the time of purchase or renewal.  Rental
        expense under operating leases was $41.7 million, $37.2 million and $27.5
        million in 2006, 2005 and 2004, respectively. The increase in rent expense
        from
        2006 to 2005 was primarily driven by the addition of equipment leases and
        higher
        charter rates in the shipping segment.
 
 Nicor
        Gas
        signed an agreement in the second quarter of 2006 to purchase approximately
        16
        Bcf of synthetic natural gas annually for a 20-year term beginning as early
        as
        2010. Since the agreement is contingent upon various milestones to be achieved
        by the counterparty to the agreement and the fact that the counterparty can
        terminate, without penalty, prior to the realization of these milestones,
        the
        company’s obligation under this agreement is not certain at this
        time.
 
 **Other.** Restrictions
        imposed by regulatory agencies and loan agreements limiting the amount of
        subsidiary net assets that can be transferred to Nicor are not expected to
        have
        a material impact on the company’s ability to meet its cash obligations.
 
 **OUTLOOK**
 
 Nicor’s
        outlook assumes normal weather for 2007, but excludes, among other things,
        any
        future impacts associated with the ICC’s PBR plan/PGA review or other
        contingencies. The company’s outlook also does not reflect the additional
        variability in earnings due to fair value accounting adjustments at Nicor
        Enerchange and other impacts that could occur because of future volatility
        in
        the natural gas markets. While these items could materially affect 2007
        earnings, they are currently not estimable.
 
 *Gas
        Distribution.* Nicor
        Gas expects higher pretax operating results (after removing the $3.8 million
        impact of the 2006 mercury-related insurance recovery) due, in part, to
        increased natural gas deliveries attributable to normal weather and lower
        operating and maintenance expenses, partially offset by higher depreciation
        costs. Operating and maintenance expenses are expected to be lower due primarily
        to lower storage-related gas costs and natural gas and fuel costs to operate
        company equipment and facilities.
 
 The
        company estimates that a 100-degree day variation from normal weather would
        affect Nicor Gas’ net income by approximately $1.6 million. The consolidated
        impact, however, is generally reduced somewhat because of the natural weather
        hedge attributable to the utility-bill management products offered by certain
        of
        Nicor’s other energy ventures.
 
 *Shipping.* Tropical
        Shipping’s operating results are expected to be comparable to 2006. The company
        also continues to expect relatively low tax costs on operating earnings
        attributable to the January 2006 reorganization of certain shipping and related
        operations.
 
 *Other
        Energy Ventures* .
        The
        company expects improved operating results in its other energy ventures
        resulting from improved expected results from its energy-related products
        and
        services businesses.
 
 *Other.* Nicor
        also expects earnings to be adversely impacted by higher net interest costs
        and
        the absence of certain benefits recorded in 2006, including the gain on the
        sale
        of an equity interest, insurance recoveries of previously incurred legal
        costs,
        and certain tax-related benefits, discussed in preceding paragraphs. Because
        the
        company is assuming normal weather, 2007 also reflects the absence of the
        benefit recorded in 2006 from the other energy ventures’ utility-bill management
        products which reduced the negative effects of warmer weather in Nicor’s gas
        distribution segment. Additionally, 2007 excludes the $10 million charge
        associated with the SEC inquiry recorded in 2006.
  28
 
 Table
            of Contents
 **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.
 
 *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. The
        company has committed to cooperate fully in the reviews of the PBR
        plan.
 
 In
        response to these allegations, on July 18, 2002, the Nicor Board of Directors
        appointed a special committee of independent, non-management directors to
        conduct an inquiry into issues surrounding natural gas purchases, sales,
        transportation, storage and such other matters as may come to the attention
        of
        the special committee in the course of its investigation. The special committee
        presented the report of its counsel (“Report”) to Nicor’s Board of Directors on
        October 28, 2002. A copy of the report is available at the Nicor website
        and has
        been previously produced to all parties in the ICC Proceedings.
 
 In
        response, the Nicor Board of Directors directed the company’s management to,
        among other things, make appropriate adjustments to account for, and fully
        address, the adverse consequences to ratepayers of the items noted in the
        Report, and conduct a detailed study of the adequacy of internal accounting
        and
        regulatory controls . The
        adjustments were made in prior years’ financial statements resulting in a $24.8
        million liability. Included in such $24.8 million liability is a $4.1 million
        loss contingency. A $1.8 million adjustment to the previously recorded
        liability, which is discussed below, was made in 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 plans to seek in testimony to
        be
        filed in compliance with the new scheduling order 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,
  29
 
 Table
            of Contents
 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. In December 2006,
        Nicor Gas withdrew its previously filed testimony. Nicor Gas anticipates
        refiling its direct testimony in compliance with the new scheduling order
        discussed below which it expects to be consistent with the findings of the
        special committee Report. Nicor Gas plans to seek a reimbursement of
        approximately $1 million as referenced above. In 2004, the evidentiary hearings
        on this matter were stayed in order to permit the parties 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. In December 2006, the additional third party
        discovery from EKT was obtained and the Administrative Law Judges issued
        a
        scheduling order that provides for Nicor Gas to submit its direct testimony
        by
        April 13, 2007. No date has been set for evidentiary hearings on this
        matter.
 
 During
        the course of the SEC investigation discussed below, the company became aware
        of
        additional information relating to the activities of individuals affecting
        the
        PBR plan for the period from 1999 through 2002, including information consisting
        of third party documents and recordings of telephone conversations from EKT.
        Review of additional information completed in 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 in 2004 indicated 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 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 2004.
 
 Nicor
        is
        unable to predict the outcome of the ICC’s review or the company’s potential
        exposure thereunder. Because the PBR plan and historical gas costs are still
        under ICC review, the final outcome could be materially different than the
        amounts reflected in the company’s financial statements as of December 31,
        2006.
 
 *SEC
        and U.S. Attorney Inquiries.* In 2002,
        the staff of the SEC Division of Enforcement (“SEC Staff”) informed Nicor that
        the SEC is conducting a formal inquiry regarding the PBR plan. A representative
        of the Office of the United States Attorney for the Northern District of
        Illinois (the “U.S. Attorney”) also notified Nicor that that office was
        conducting an inquiry on the same matters that the SEC is investigating,
        and a
        grand jury was also reviewing these matters. In April 2004, Nicor was advised
        by
        the SEC Staff 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.
        On
        July 7, 2006, the company announced that it reached a tentative agreement
        with
        the SEC Staff in settlement of an
  30
 
 Table
            of Contents
 anticipated
        civil action to which the company and the SEC will be parties. Under the
        terms
        of the tentative settlement, the company will be subject to disgorgement
        of one
        dollar, a monetary fine of $10 million and an injunction. The company will
        neither admit nor deny any wrongdoing. In July 2006, the company deposited
        the
        $10 million in escrow pending final approval of the tentative settlement
        by the
        SEC commissioners and entry of a final judgment by a federal court. The SEC
        Staff will submit the tentative settlement to the SEC commissioners for
        approval. The SEC commissioners have the authority to approve, modify or
        reject
        the tentative settlement. Nicor recorded a $10 million charge to its second
        quarter earnings in connection with this matter. The $10 million fine is
        not
        deductible for federal or state income tax purposes. In December 2006, the
        U.S.
        Attorney advised that it is closing its inquiry and will not seek to prosecute
        the company or any individuals in connection with this matter.
 
 *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 Item 8 - Notes to the Consolidated Financial
        Statements - Note 21 - 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 Item 8 - Notes to the Consolidated Financial Statements - Note
        21 -
        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 Item 8 - Notes to the
        Consolidated Financial Statements - Note 21 - Contingencies - Fixed Bill
        Service.
 
 *Other
        contingencies.* **** The
        company is involved in legal or administrative proceedings before various
        courts
        and agencies with respect to general claims, rates, taxes, environmental,
        gas
        cost prudence reviews and other matters. See Item 8 - Notes to the Consolidated
        Financial Statements - Note 10 - Income and Other Taxes and Note 21 -
        Contingencies.
 
 In
        2004,
        one of Nicor’s Directors and Officers 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
        then
        pending securities class actions and shareholder derivative lawsuits and
        related
        matters, with any remaining balance to be paid to Nicor. The securities class
        actions were settled in 2004 for a payment by Nicor of $38.5 million. As
        a
        result of this settlement and the settlement of the shareholder derivative
        lawsuits in 2005, the escrow was terminated and the $29.0 million, plus earnings
        of approximately $0.4 million, held by the escrow agent was paid to Nicor
        in the
        second quarter of 2005. These recoveries were recorded in “Litigation charges
        (recoveries), net” in the Consolidated Statement of Operations for the year
        ended December 31, 2005. In addition, Nicor had asserted claims against its
        excess insurance carrier arising out of these securities class actions and
        shareholder derivative lawsuits. In connection with the settlement of the
        shareholder derivative lawsuits, in the first quarter of 2005, Nicor’s excess
        insurance carrier paid Nicor $4 million. Under the terms of the shareholder
        derivative lawsuits settlement, Nicor agreed to adopt certain new corporate
        governance policies and to pay $3.5 million out of the $4 million received
        from
        the excess insurance carrier to plaintiffs’ attorneys to reimburse them for the
        fees and expenses expended in pursuing the derivative actions. The $0.5 million
        net of these payments was reflected in “Litigation charges (recoveries), net” in
        the Consolidated Statement of Operations for the year ended December 31,
        2005.
        Additionally, Nicor received payments of $5.2 million and $2.8 million in
        2006
        and 2005, respectively, from insurance carriers as reimbursement of legal
        defense costs in connection with these matters. These payments have been
        recorded in “Other corporate eliminations and expenses” in the Consolidated
        Statement of Operations for the respective years.
 
 In
        addition, see Item 1A - Risk Factors and Item 7A - Quantitative and Qualitative
        Disclosures about Market Risk.
  31
 
 Table
            of Contents
 **CRITICAL
        ACCOUNTING ESTIMATES**
 
 Nicor
        prepares its consolidated financial statements in accordance with accounting
        principles generally accepted in the United States, which regularly require
        Nicor’s management to exercise judgment in the selection and application of
        accounting methods. The application of accounting methods includes making
        estimates using subjective assumptions and judgments about matters that are
        inherently uncertain.
 
 The
        use
        of estimates and the selection of accounting policies affect Nicor’s reported
        results and financial condition. The company has adopted several significant
        accounting policies and is required to make significant accounting estimates
        that are important to understanding its financial statements. These significant
        policies and estimates are described throughout Item 8 - Notes to the
        Consolidated Financial Statements.
 
 Although
        there are numerous areas in which Nicor’s management makes significant
        accounting estimates, it believes its critical estimates are those that require
        management’s most difficult and subjective or complex judgments. Nicor’s
        management has a practice of reviewing its critical accounting estimates
        and
        policy decisions with the audit committee of its board of directors. Its
        critical estimates typically involve loss contingencies, derivative instruments,
        pension and other postretirement benefits, income taxes, credit risk, unbilled
        revenues and regulatory assets and liabilities because they are estimates
        which
        could materially impact Nicor’s financial statements.
 
 **Loss
        contingencies.** Nicor
        and
        its subsidiaries record contingent losses as liabilities when a loss is both
        probable and the amount or range of loss, including related legal defense
        costs,
        is reasonably estimable. When only a range of potential loss is estimable,
        the
        company records a liability for the minimum anticipated loss. Nicor and its
        subsidiaries and affiliates are involved in various legal and regulatory
        proceedings and are exposed to various loss contingencies. These loss
        contingencies are in some cases resolved in stages over time, estimates may
        change significantly from period to period, and the company’s ultimate
        obligations may differ materially from its recorded amounts. Of particular
        note
        is the PBR plan contingency at Nicor Gas and the SEC inquiry described in
        Item 8
        - Notes to the Consolidated Financial Statements - Note 21 -
        Contingencies.
 
 **Derivative
        instruments.** The
        rules
        for determining whether a contract meets the definition of a derivative
        instrument or qualifies for hedge accounting treatment are numerous and complex.
        The treatment of a single contract may vary from period to period depending
        upon
        accounting elections, changes in management’s assessment of the likelihood of
        future hedged transactions or new interpretations of accounting rules. As
        a
        result, management judgment is required in the determination of the appropriate
        accounting treatment. In addition, the estimated fair value of derivative
        instruments may change significantly from period to period depending upon
        market
        projections, and changes in hedge effectiveness may impact the accounting
        treatment. These determinations and changes in estimates may have a material
        impact on reported results.
 
 **Pension
        and other postretirement benefits.** The
        company’s cost of providing postretirement benefits is dependent upon various
        factors and assumptions, including life expectancies, the discount rate used
        in
        determining the projected benefit obligation, the expected long-term rate
        of
        return on plan assets, the long-term rate of compensation increase and
        anticipated health care costs. Changes in these assumptions typically do
        not
        have a significant impact on the expenses recorded from year to year. However,
        actual experience in any one period, particularly the actual return on plan
        assets, often varies significantly from these mostly long-term assumptions.
        When
        cumulatively significant, the gains and losses generated from such variances
        are
        amortized into operating income over the remaining service lives of employees
        covered by the plans (approximately 11 years for the pension plan and 14
        years
        for the health care plan). Additional information is presented in Item 8
        - Notes
        to the Consolidated Financial Statements - Note 11 - Postretirement Benefits,
        including plan asset investment allocation, estimated future benefit payments,
        general descriptions of the plans, significant assumptions, the impact of
        certain changes in assumptions, and significant changes in estimates.
  32
 
 Table
            of Contents
 The
        company’s estimated postretirement benefit cost included in operating income was
        $5.5 million, $9.6 million and $9.1 million in 2006, 2005 and 2004,
        respectively. Nicor Gas expects to record postretirement benefit cost for
        2007
        of $4.6 million. Actuarial assumptions affecting 2007 include an expected
        rate
        of return on plan assets of 8.50 percent, consistent with the prior year,
        and a
        discount rate of 5.75 percent compared with 5.50 percent a year earlier.
        The
        5.75 percent discount rate was based upon the Citigroup Pension Liability
        Index
        whose underlying average benefit duration approximates Nicor’s.
 
 **Income
        taxes.** A
        deferred income tax liability is not recorded on undistributed foreign earnings
        that are expected in management’s judgment to be indefinitely reinvested
        offshore. Nicor has remaining at December 31, 2006 approximately $12 million
        of
        deferred income tax liabilities related to approximately $34 million of
        cumulative undistributed earnings of its foreign subsidiaries. Nicor has
        not
        recorded deferred income taxes of approximately $28 million on approximately
        $81
        million of cumulative undistributed foreign earnings that are expected in
        management’s judgment to be indefinitely reinvested offshore. Changes in
        management’s investment or repatriation plans or circumstances could result in a
        different deferred income tax liability.
 
 **Credit
        risk** . **** Nicor’s
        subsidiaries and affiliates are required to estimate credit risk in establishing
        allowances for doubtful accounts and in estimating the fair values of certain
        derivative instruments with counterparty credit risk being an especially
        difficult and critical judgment. Actual credit losses could vary materially
        from
        Nicor’s estimates. Nicor’s allowance for doubtful accounts at December 31, 2006,
        2005 and 2004 was $33.4 million, $31.5 million and $21.9 million, respectively,
        as presented on Schedule II in Item 15 - Exhibits and Financial Statement
        Schedules.
 
 **Unbilled
        revenues** . **** Nicor
        Gas
        estimates revenues for natural gas deliveries not yet billed to customers
        from
        the last billing date to month-end (“unbilled revenues”). Unbilled revenue
        estimates are dependent upon a number of customer-usage factors which require
        management judgment, including weather factors. These revenue estimates are
        adjusted when actual billings occur, and variances in estimates can be material.
        Estimated unbilled revenues for Nicor Gas at December 31, 2006, 2005 and
        2004
        were $158.9 million, $300.4 million and $204.4 million,
        respectively.
 
 **Regulatory
        assets and liabilities.** Nicor
        Gas is regulated by the ICC, which establishes the rules and regulations
        governing utility rates and services in Illinois. As a rate-regulated company,
        Nicor Gas applies SFAS No. 71, *Accounting
        for the Effects of Certain Types of Regulation* ,
        which
        allows Nicor Gas to recognize the economic effects of rate regulation and,
        accordingly, has recorded regulatory assets and liabilities. Regulatory assets
        represent probable future revenue associated with certain costs that are
        expected to be recovered from customers through rate riders or rate cases,
        upon
        approval by the ICC. Regulatory liabilities represent probable future reductions
        in revenues collected from ratepayers through a rate rider or base rates.
        If all
        or a portion of Nicor Gas’ operations become no longer subject to the provisions
        of SFAS No. 71, a write-off of the net book value of its regulatory assets
        and
        liabilities would be required. Additional information on regulatory assets
        and
        liabilities is presented in Item 8 - Notes to the Consolidated Financial
        Statements - Note 1 - Accounting Policies.
 
 **NEW
        ACCOUNTING PRONOUNCEMENTS**
 
 In
        2006,
        the FASB issued SFAS No. 158, *Employers’
        Accounting for Defined Benefit Pension and Other Postretirement Plans,* Interpretation
        No. 48, *Accounting
        for Uncertainty in Income Taxes* ,
        FASB
        Staff Position No. AUG AIR-1, *Accounting
        for Planned Major Maintenance Activities,* and
        SFAS
        No. 157, *Fair
        Value Measurements* .
        In
        2004, the FASB issued SFAS No. 123 (revised 2004), *Share-Based
        Payment.* For
        more
        information, see Item 8 - Notes to the Consolidated Financial Statements
        - Note
        2 - New Accounting Pronouncements.
  33
 
 Table
            of Contents
 **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 an SEC inquiry, and undue reliance should not be placed
        on
        such statements.
 
 Other
        factors that could cause materially different results include, but are not
        limited to, weather conditions; natural 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
        7A.****Quantitative
        and Qualitative Disclosures about Market Risk**
 
 Nicor
        is
        exposed to market risk in the normal course of its business operations,
        including the risk of loss arising from adverse changes in natural gas and
        fuel
        commodity prices, and interest rates. It is Nicor’s practice to manage these
        risks utilizing derivative instruments and other methods, as deemed appropriate.
 
 *Commodity
        price risk.* With
        regard to commodity price risk, the company has established policies and
        procedures governing the management of such risks and the use of derivative
        instruments to hedge its exposure to such risks. Company management oversees
        compliance with such policies and procedures. The company utilizes various
        techniques to limit, measure and monitor market risk, including limits based
        on
        volume, dollar amounts, maturity, and in some cases value at risk (“VaR”).
 
 VaR
        is
        the potential loss for an instrument or portfolio from adverse changes in
        market
        factors, for a specified time period and at a specified confidence level.
        The
        company has established exposure limits at such a level that material adverse
        economic results are not expected. The company’s commodity price risk policies
        and procedures continue to evolve with its businesses and are subject to
        ongoing
        review and modification.
 
 In
        accordance with SEC disclosure requirements, Nicor performs sensitivity analyses
        to assess the potential loss in earnings based upon a hypothetical 10 percent
        adverse change in market prices. Management does not believe that sensitivity
        analyses alone provide an accurate or reliable method for monitoring and
        controlling risks and therefore also relies on the experience and judgment
        of
        its management to revise strategies and adjust positions as deemed necessary.
        Losses in excess of the amounts determined in sensitivity analyses could
        occur
        if market prices exceed the 10 percent shift used for the analyses.
 
 As
        a
        regulated utility, Nicor Gas’ exposure to market risk caused by changes in
        commodity prices is substantially mitigated because of Illinois rate regulation
        allowing for the recovery of prudently incurred natural gas supply costs
        from
        customers. However, substantial changes in natural gas prices may impact
  34
 
 Table
            of Contents
 Nicor
        Gas’ earnings by increasing or decreasing the cost of gas used by the company,
        storage-related gas costs, bad debt expense, and other operating and financing
        expenses. The company purchases about 4 Bcf of natural gas annually for its
        own
        use and to cover storage-related gas costs. The level of natural gas prices
        may
        also impact customer gas consumption and therefore gas distribution margin.
        The
        actual impact of natural gas price fluctuations on Nicor Gas’ earnings is
        dependent upon several factors, including the company’s hedging practices. At
        December 31, 2006, Nicor Gas had hedged its forecasted 2007 and a portion
        of its
        2008 company use and storage-related gas costs through the use of fixed-price
        purchase and swap agreements.
 
 Nicor’s
        other energy businesses are subject to natural gas commodity price risk,
        arising
        primarily from purchase and sale agreements, transportation agreements, natural
        gas inventories and utility-bill management contracts. Derivative instruments
        such as futures, options, forwards and swaps may be used to hedge these risks.
        Based on Nicor’s other energy businesses unhedged positions at December 31,
        2006, a 10 percent adverse change in natural gas prices would have decreased
        Nicor’s earnings for the periods ended December 31, 2006 and 2005 by about $0.4
        million and $1.0 million, respectively.
 
 At
        December 31, 2006, **** Nicor
        Enerchange, Nicor’s wholesale natural gas marketing business, held derivative
        contracts with the following asset (liability) fair values, net (in
        millions):
 
 MaturitySource
                  of Fair Value
              
              Total
                Fair
                  Value
              
              Less
                  than
                1
                  Year
              
              1
                  to 3
                Years
              
              3
                  to 5
                YearsPrices
                  actively quoted
              
              $
              2.1
              
              $
              2.2
              
              $
              (.1
              )
              $
              -Prices
                  based on pricing models
              
              
              .2
              
              
              .2
              
              
              -
              
              
              -Total
              
              $
              2.3
              
              $
              2.4
              
              $
              (.1
              )
              $
              -
 
 Tropical
        Shipping’s objective is to substantially mitigate its exposure to higher fuel
        costs through fuel surcharges.
 
 *Credit
        risk* .
        The
        company has a diversified customer base, which limits its exposure to
        concentrations of credit risk in any one industry or income class and believes
        that it maintains prudent credit policies. Additionally, the gas distribution
        segment offers options to help customers manage their bills, such as energy
        assistance programs for low-income customers and a budget payment plan that
        spreads gas bills more evenly throughout the year.
 
 The
        company is also exposed to credit risk in the event a counterparty, customer
        or
        supplier defaults on a contract to pay for or deliver product at agreed-upon
        terms and conditions. To manage this risk, the company has established
        procedures to determine and monitor the creditworthiness of counterparties,
        to
        require guarantees or collateral back-up, and to limit its exposure to any
        one
        counterparty. The company also, in some instances, enters into netting
        arrangements to mitigate counterparty credit risk.
 
 *Interest
        rate risk.* Nicor
        is
        exposed to changes in interest rates. The company manages its interest rate
        risk
        by issuing primarily fixed-rate long-term debt with varying maturities,
        refinancing certain debt and, at times, hedging the interest rate on anticipated
        borrowings. If market rates were to hypothetically increase by 10 percent
        from
        Nicor’s weighted-average floating interest rate on commercial paper, interest
        expense would have increased causing Nicor’s earnings to decrease by
        approximately $0.5 million in 2006. For further information about debt
        securities, interest rates and fair values, see Item 8 - Financial Statements
        -
        Consolidated Statements of Capitalization, and Item 8 - Notes to the
        Consolidated Financial Statements - Note 7 - Short-Term and Long-Term Debt
        and
        Note 9 - Fair Value of Financial Instruments.
  35
 
 Table
            of Contents
 **Nicor
        Inc.**
  Item
        8.Financial Statements
        and Supplementary Data
 PageReport
                  of Independent Registered Public Accounting Firm
              37Financial
                  Statements:Consolidated
                  Statements of Operations
              39Consolidated
                  Statements of Cash Flows
              40Consolidated
                  Balance Sheets
              41Consolidated
                  Statements of Capitalization
              42Consolidated
                  Statements of Common Equity
              43Consolidated
                  Statements of Comprehensive Income
              43Notes
                  to the Consolidated Financial Statements
              44
 
  
 
 
 
 
 
 
  36
 
 Table
            of Contents
 **REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
        FIRM**
  To
        the
        Board of Directors and Stockholders of Nicor Inc.
  We
        have
        audited the accompanying consolidated balance sheets and statements of
        capitalization of Nicor Inc. and subsidiaries (the “Company”) as of December 31,
        2006 and 2005, and the related consolidated statements of operations, common
        equity, comprehensive income and cash flows for each of the three years in
        the
        period ended December 31, 2006.  Our audits also included the financial
        statement schedule listed in the Index at Item 15(a)(2).  We also have
        audited management's assessment, included in the accompanying Management’s
        Report on Internal Control Over Financial Reporting, that the Company maintained
        effective internal control over financial reporting as of December 31, 2006,
        based on criteria established in *Internal
        Control—Integrated Framework* issued
        by
        the Committee of Sponsoring Organizations of the Treadway Commission.  The
        Company's management is responsible for these financial statements and financial
        statement schedule, for maintaining effective internal control over financial
        reporting, and for its assessment of the effectiveness of internal control
        over
        financial reporting.  Our responsibility is to express an opinion on these
        financial statements and financial statement schedule, an opinion on
        management's assessment, and an opinion on the effectiveness of the Company's
        internal control over financial reporting based on our audits.
  We
        conducted our audits in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether the financial
        statements are free of material misstatement and whether effective internal
        control over financial reporting was maintained in all material respects. 
Our audit of financial statements included examining, on a test basis, evidence
        supporting the amounts and disclosures in the financial statements, assessing
        the accounting principles used and significant estimates made by management,
        and
        evaluating the overall financial statement presentation.  Our audit of
        internal control over financial reporting included obtaining an understanding
        of
        internal control over financial reporting, evaluating management's assessment,
        testing and evaluating the design and operating effectiveness of internal
        control, and performing such other procedures as we considered necessary
        in the
        circumstances.  We believe that our audits provide a reasonable basis for
        our opinions.
  A
        company's internal control over financial reporting is a process designed
        by, or
        under the supervision of, the company's principal executive and principal
        financial officers, or persons performing similar functions, and effected
        by the
        company's board of directors, management, and other personnel to provide
        reasonable assurance regarding the reliability of financial reporting and
        the
        preparation of financial statements for external purposes in accordance with
        generally accepted accounting principles.  A company's internal control
        over financial reporting includes those policies and procedures that (1)
        pertain
        to the maintenance of records that, in reasonable detail, accurately and
        fairly
        reflect the transactions and dispositions of the assets of the company; (2)
        provide reasonable assurance that transactions are recorded as necessary
        to
        permit preparation of financial statements in accordance with generally accepted
        accounting principles, and that receipts and expenditures of the company
        are
        being made only in accordance with authorizations of management and directors
        of
        the company; and (3) provide reasonable assurance regarding prevention or
        timely
        detection of unauthorized acquisition, use, or disposition of the company's
        assets that could have a material effect on the financial
        statements.
  Because
        of the inherent limitations of internal control over financial reporting,
        including the possibility of collusion or improper management override of
        controls, material misstatements due to error or fraud may not be prevented
        or
        detected on a timely basis.  Also, projections of any evaluation of the
        effectiveness of the internal control over financial reporting to future
        periods
        are subject to the risk that the controls may become inadequate because of
        changes in conditions, or that the degree of compliance with the policies
        or
        procedures may deteriorate.
   37
 
 Table
            of Contents
 **REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
        (concluded)**
 
 In
        our
        opinion, the consolidated financial statements referred to above present
        fairly,
        in all material respects, the financial position of the Company as of December
        31, 2006 and 2005, and the results of its operations and its cash flows for
        each
        of the three years in the period ended December 31, 2006, in conformity with
        accounting principles generally accepted in the United States of America. 
Also, in our opinion, such financial statement schedule, when considered
        in
        relation to the basic consolidated financial statements taken as a whole,
        presents fairly, in all material respects, the information set forth therein.
        Also, in our opinion, management's assessment that the Company maintained
        effective internal control over financial reporting as of December 31, 2006,
        is
        fairly stated, in all material respects, based on the criteria established
        in *Internal
        Control—Integrated Framework* issued
        by
        the Committee of Sponsoring Organizations of the Treadway Commission. 
Furthermore, in our opinion, the Company maintained, in all material respects,
        effective internal control over financial reporting as of December 31, 2006,
        based on the criteria established in *Internal
        Control—Integrated Framework* issued
        by
        the Committee of Sponsoring Organizations of the Treadway Commission *.*
 
 As
        discussed in Note 2 to the consolidated financial statements, in 2006 the
        Company changed its method of accounting for defined benefit pension and
        other
        postretirement plans, and its method of accounting for share based payments.
        As
        discussed in Note 5 to the consolidated financial statements, in 2005 the
        Company changed its method of accounting for conditional asset retirement
        obligations.
   */s/
        DELOITTE & TOUCHE LLP*
  Chicago,
        Illinois
 February
        23, 2007
  
  
 
 
  38
 
 Table
            of Contents


**Nicor
                Inc.****Consolidated
                Statements of
                Operations****(millions,
                except per share data)**Year
                ended December 31**2006**
            
            2005
            
            2004Operating
                revenuesGas
                distribution (includes revenue taxes of $147.7,$156.4,
                and $143.5, respectively)
            
            **$**
            **2,452.3**
            
            $
            2,909.6
            
            $
            2,362.1Shipping
            
            
            **398.3**
            
            
            378.5
            
            
            310.7Other
                energy ventures
            
            
            **215.9**
            
            
            157.0
            
            
            155.3Corporate
                and eliminations
            
            
            **(106.5**
            **)**
            
            (87.3
            )
            
            (88.4
            )Total
                operating revenues
            
            
            **2,960.0**
            
            
            3,357.8
            
            
            2,739.7Operating
                expensesGas
                distributionCost
                of gas
            
            
            **1,743.7**
            
            
            2,212.4
            
            
            1,695.0Operating
                and maintenance
            
            
            **268.5**
            
            
            254.8
            
            
            234.9Depreciation
            
            
            **160.1**
            
            
            154.5
            
            
            148.8Taxes,
                other than income taxes
            
            
            **163.0**
            
            
            171.0
            
            
            158.5Mercury-related
                costs (recoveries), net
            
            
            **(3.6**
            **)**
            
            .4
            
            
            -Property
                sale gains
            
            
            **(3.3**
            **)**
            
            (.4
            )
            
            (5.9
            )Shipping
            
            
            **350.8**
            
            
            338.1
            
            
            279.1Other
                energy ventures
            
            
            **189.3**
            
            
            142.9
            
            
            136.0Litigation
                charges (recoveries), net
            
            
            **10.0**
            
            
            (29.9
            )
            
            38.5Other
                corporate expenses and eliminations
            
            
            **(121.0**
            **)**
            
            (87.7
            )
            
            (82.9
            )Total
                operating expenses
            
            
            **2,757.5**
            
            
            3,156.1
            
            
            2,602.0Operating
                income
            
            
            **202.5**
            
            
            201.7
            
            
            137.7Interest
                expense, net of amounts capitalized
            
            
            **49.1**
            
            
            46.8
            
            
            41.2Equity
                investment income, net
            
            
            **11.1**
            
            
            9.3
            
            
            6.3Interest
                income
            
            
            **9.0**
            
            
            6.0
            
            
            2.3Other
                income, net
            
            
            **.6**
            
            
            .8
            
            
            .2Income
                before income taxes
            
            
            **174.1**
            
            
            171.0
            
            
            105.3Income
                tax expense, net of benefits
            
            
            **45.8**
            
            
            34.7
            
            
            30.2Net
                income
            
            **$**
            **128.3**
            
            $
            136.3
            
            $
            75.1Average
                shares of common stock outstandingBasic
            
            
            **44.6**
            
            
            44.2
            
            
            44.1Diluted
            
            
            **44.7**
            
            
            44.4
            
            
            44.3Earnings
                per average share of common stockBasic
            
            **$**
            **2.88**
            
            $
            3.08
            
            $
            1.71Diluted
            
            **$**
            **2.87**
            
            $
            3.07
            
            $
            1.70The
                accompanying notes are an integral part of these
                statements.






39
 
 Table
          of Contents




**Nicor
                  Inc.****Consolidated
                  Statements of Cash
                  Flows****(millions)**Year
                  ended December 31**2006**
              
              2005
              
              2004Operating
                  activitiesNet
                  income
              
              **$**
              **128.3**
              
              $
              136.3
              
              $
              75.1Adjustments
                  to reconcile net income to net cash flowprovided
                  from operating activities:Depreciation
              
              
              **178.1**
              
              
              172.4
              
              
              166.6Deferred
                  income tax expense (benefit)
              
              
              **(44.5**
              **)**
              
              (102.1
              )
              
              27.3Net
                  (gain) loss on sale of property, plant and equipment
              
              
              **(3.3**
              **)**
              
              .3
              
              
              (5.8
              )Gain
                  on sale of equity investment
              
              
              **(2.4**
              **)**
              
              -
              
              
              -Changes
                  in assets and liabilities:Receivables,
                  less allowances
              
              
              **325.6**
              
              
              (305.9
              )
              
              (121.5
              )Gas
                  in storage
              
              
              **75.3**
              
              
              (40.6
              )
              
              13.3Deferred/accrued
                  gas costs
              
              
              **(173.2**
              **)**
              
              154.9
              
              
              21.3Pension
                  benefits
              
              
              **26.6**
              
              
              (6.1
              )
              
              (4.4
              )Regulatory
                  postretirement asset
              
              
              **(113.5**
              **)**
              
              -
              
              
              -Other
                  assets
              
              
              **21.1**
              
              
              13.9
              
              
              (.9
              )Accounts
                  payable
              
              
              **(93.7**
              **)**
              
              155.3
              
              
              124.1Health
                  care and other postretirement benefits
              
              
              **89.1**
              
              
              12.6
              
              
              11.2Other
                  liabilities
              
              
              **53.8**
              
              
              9.2
              
              
              9.0Other
                  items
              
              
              **(20.3**
              **)**
              
              6.0
              
              
              2.4Net
                  cash flow provided from operating activities
              
              
              **447.0**
              
              
              206.2
              
              
              317.7Investing
                  activitiesAdditions
                  to property, plant & equipment
              
              
              **(187.4**
              **)**
              
              (201.9
              )
              
              (190.4
              )Additions
                  to restricted short-term investments
              
              
              **(10.0**
              **)**
              
              -
              
              
              -Purchase
                  of equity investments
              
              
              **(2.7**
              **)**
              
              (2.3
              )
              
              (2.6
              )Purchases
                  of available-for-sale securities
              
              
              -
              
              
              -
              
              
              (21.8
              )Purchases
                  of held-to-maturity securities
              
              
              **(2.6**
              **)**
              
              (2.9
              )
              
              (2.9
              )Proceeds
                  from sales or maturities of available-for-sale securities
              
              
              -
              
              
              15.1
              
              
              6.9Proceeds
                  from sales or maturities of held-to-maturity securities
              
              
              **1.5**
              
              
              3.6
              
              
              2.8Net
                  (increase) decrease in other short-term investments
              
              
              **(7.9**
              **)**
              
              29.7
              
              
              (4.7
              )Net
                  proceeds from sale of property, plant and equipment
              
              
              **3.9**
              
              
              1.0
              
              
              8.0Proceeds
                  from sale of equity investment
              
              
              **7.0**
              
              
              -
              
              
              -Other
                  investing activities
              
              
              **6.0**
              
              
              3.0
              
              
              -Net
                  cash flow used for investing activities
              
              
              **(192.2**
              **)**
              
              (154.7
              )
              
              (204.7
              )Financing
                  activitiesProceeds
                  from issuing long-term debt
              
              
              **50.0**
              
              
              39.9
              
              
              -Disbursements
                  to retire long-term obligations
              
              
              **(90.0**
              **)**
              
              (1.2
              )
              
              -Commercial
                  paper issuances with maturities over 90 days
              
              
              -
              
              
              -
              
              
              35.0Commercial
                  paper repayments with maturities over 90 days
              
              
              -
              
              
              -
              
              
              (575.0
              )Net
                  issuances (repayments) of commercial paper with maturities of90 days or less
              
              
              **(236.0**
              **)**
              
              96.0
              
              
              455.0Dividends
                  paid
              
              
              **(82.9**
              **)**
              
              (82.1
              )
              
              (82.0
              )Borrowing
                  against cash surrender value of life insurance policies
              
              
              -
              
              
              -
              
              
              26.1Repayment
                  of loan against cash surrender value of life insurance
                  policies
              
              
              -
              
              
              -
              
              
              (11.7
              )Proceeds
                  from exercise of stock options
              
              
              **22.6**
              
              
              1.4
              
              
              .6Other
                  financing activities
              
              
              **3.7**
              
              
              .5
              
              
              1.6Net
                  cash flow provided from (used for) financing activities
              
              
              **(332.6**
              **)**
              
              54.5
              
              
              (150.4
              )Net
                  increase (decrease) in cash and cash equivalents
              
              
              **(77.8**
              **)**
              
              106.0
              
              
              (37.4
              )Cash
                  and cash equivalents, beginning of year
              
              
              **118.9**
              
              
              12.9
              
              
              50.3Cash
                  and cash equivalents, end of year
              
              **$**
              **41.1**
              
              $
              118.9
              
              $
              12.9Supplemental
                  informationIncome
                  taxes paid, net
              
              **$**
              **86.1**
              
              $
              99.6
              
              $
              10.4Interest
                  paid, net of amounts capitalized
              
              
              **40.3**
              
              
              39.1
              
              
              37.9Supplemental
                  schedule of noncash investing and financing activities:In
                  2004, one of Nicor's Directors and Officers insurance carriers
                  paid $29.0
                  million into an escrow accountto
                  be used to satisfy Nicor's directors' and officers' liabilities
                  and
                  expenses associated with claimsasserted
                  against them, with any remaining balance to be paid to
                  Nicor.During
                  2005, the escrow arrangement was terminated and the full amount
                  of the
                  escrowof
                  $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 nettedin
                Investing activities above.The
                  accompanying notes are an integral part of these
                  statements.






40
 
 Table
          of Contents


**Nicor
                Inc.****Consolidated
                Balance
                Sheets****(millions)**December
                31**2006**
            
            2005**Assets**Current
                assetsCash
                and cash equivalents
            
            **$**
            **41.1**
            
            $
            118.9Restricted
                short-term investments
            
            
            **10.2**
            
            
            -Short-term
                investments, at cost which approximates market
            
            
            **16.3**
            
            
            8.0Receivables,
                less allowances of $33.4 and $31.5, respectively
            
            
            **563.5**
            
            
            889.1Gas
                in storage
            
            
            **186.0**
            
            
            261.3Deferred
                income taxes
            
            
            **39.1**
            
            
            3.0Other
            
            
            **54.5**
            
            
            65.4Total
                current assets
            
            
            **910.7**
            
            
            1,345.7Property,
                plant and equipment, at costGas
                distribution
            
            
            **4,157.1**
            
            
            4,043.2Shipping
            
            
            **302.9**
            
            
            293.9Other
            
            
            **19.7**
            
            
            14.2**4,479.7**
            
            
            4,351.3Less
                accumulated depreciation
            
            
            **1,765.0**
            
            
            1,692.2Total
                property, plant and equipment, net
            
            
            **2,714.7**
            
            
            2,659.1Pension
                benefits
            
            
            **161.0**
            
            
            187.6Long-term
                investments
            
            
            **134.7**
            
            
            133.2Other
                assets
            
            
            **169.0**
            
            
            65.6Total
                assets
            
            **$**
            **4,090.1**
            
            $
            4,391.2**Liabilities
                and Capitalization**Current
                liabilitiesLong-term
                debt due within one year
            
            **$**
            **-**
            
            $
            50.0Short-term
                debt
            
            
            **350.0**
            
            
            586.0Accounts
                payable
            
            
            **564.5**
            
            
            658.2Accrued
                gas costs
            
            
            **50.0**
            
            
            223.2Dividends
                payable
            
            
            **20.9**
            
            
            20.5Deferred
                income taxes
            
            
            **-**
            
            
            7.4Obligations
                related to restricted investments
            
            
            **10.0**
            
            
            -Other
            
            
            **147.0**
            
            
            77.6Total
                current liabilities
            
            
            **1,142.4**
            
            
            1,622.9Deferred
                credits and other liabilitiesRegulatory
                retirement cost liability
            
            
            **676.7**
            
            
            631.7Deferred
                income taxes
            
            
            **399.6**
            
            
            421.6Health
                care and other postretirement benefits
            
            
            **181.6**
            
            
            101.6Asset
                retirement obligation
            
            
            **169.3**
            
            
            164.0Regulatory
                income tax liability
            
            
            **53.8**
            
            
            41.3Unamortized
                investment tax credits
            
            
            **29.6**
            
            
            31.7Other
            
            
            **66.4**
            
            
            78.7Total
                deferred credits and other liabilities
            
            
            **1,577.0**
            
            
            1,470.6Commitments
                and contingenciesCapitalizationLong-term
                obligationsLong-term
                debt, net of unamortized discount
            
            
            **497.5**
            
            
            485.8Mandatorily
                redeemable preferred stock
            
            
            **.6**
            
            
            .6Total
                long-term obligations
            
            
            **498.1**
            
            
            486.4Common
                equity
            
            
            **872.6**
            
            
            811.3Total
                capitalization
            
            
            **1,370.7**
            
            
            1,297.7Total
                liabilities and capitalization
            
            **$**
            **4,090.1**
            
            $
            4,391.2The
                accompanying notes are an integral part of these
                statements.






41
 
 Table
          of Contents


**Nicor
                Inc.****Consolidated
                Statements of
                Capitalization****(millions,
                except share data)**December
                31**2006**
            
            2005First
                Mortgage Bonds5.55%
                Series due 2006
            
            
            
            
            **$**
            **-**
            
            
            
            
            $
            50.05.875%
                Series due 2008
            
            
            
            
            
            **75.0**
            
            
            
            
            
            75.05.37%
                Series due 2009
            
            
            
            
            
            **50.0**
            
            
            
            
            
            50.06.625%
                Series due 2011
            
            
            
            
            
            **75.0**
            
            
            
            
            
            75.07.20%
                Series due 2016
            
            
            
            
            
            **50.0**
            
            
            
            
            
            50.05.80%
                Series due 2023
            
            
            
            
            
            **50.0**
            
            
            
            
            
            50.06.58%
                Series due 2028
            
            
            
            
            
            **50.0**
            
            
            
            
            
            50.05.90%
                Series due 2032
            
            
            
            
            
            **50.0**
            
            
            
            
            
            50.05.90%
                Series due 2033
            
            
            
            
            
            **50.0**
            
            
            
            
            
            50.05.85%
                Series due 2036
            
            
            
            
            
            **50.0**
            
            
            
            
            
            -**500.0**
            
            
            
            
            
            500.0Less: 
                Amount due within one year
            
            
            
            
            
            **-**
            
            
            
            
            
            50.0Unamortized
                debt discount, net of premium
            
            
            
            
            
            **2.5**
            
            
            
            
            
            4.2**497.5**
            
            
            **36.3**
            **%**
            
            445.8
            
            
            34.4
            %Other
                long-term debtSenior
                unsecured term loan, variable interest rate ofLIBOR
                plus .5%, due 2007
            
            
            
            
            
            **-**
            
            
            **-**
            
            
            40.0
            
            
            3.1Total
                long-term debt
            
            
            
            
            
            **497.5**
            
            
            **36.3**
            
            
            485.8
            
            
            37.5Mandatorily
                redeemable preferred and preference stockCumulative,
                $50 par value, 1,600,000 preferredshares
                authorized; and cumulative, without parvalue,
                20,000,000 preference shares authorized(11,681
                shares of redeemable preferred stock,4.48%
                series, outstanding at December 31, 2006and
                2005)
            
            
            
            
            
            **.6**
            
            
            **-**
            
            
            .6
            
            
            -Common
                equityCommon
                stock, $2.50 par value, 160,000,000 sharesauthorized
                (1,715,263 and 2,447,380 shares reservedfor
                share-based awards and other purposes, and 44,901,454and
                44,179,972 shares outstanding, respectively)
            
            
            
            
            
            **112.3**
            
            
            
            
            
            110.5Paid-in
                capital
            
            
            
            
            
            **34.1**
            
            
            
            
            
            8.0Retained
                earnings
            
            
            
            
            
            **739.5**
            
            
            
            
            
            694.5Unearned
                compensation
            
            
            
            
            
            **-**
            
            
            
            
            
            (.1
            )Accumulated
                other comprehensive loss, netCash
                flow hedges
            
            
            
            
            
            **(10.3**
            **)**
            
            
            
            
            (1.6
            )Unrecognized
                postretirement loss
            
            
            
            
            
            **(3.1**
            **)**
            
            
            
            
            -Minimum
                pension liability
            
            
            
            
            
            **-**
            
            
            
            
            
            (.3
            )Foreign
                currency translation adjustment
            
            
            
            
            
            **.1**
            
            
            
            
            
            .3Total
                accumulated other comprehensive loss
            
            
            
            
            
            **(13.3**
            **)**
            
            
            
            
            (1.6
            )Total
                common equity
            
            
            
            
            
            **872.6**
            
            
            **63.7**
            
            
            811.3
            
            
            62.5Total
                capitalization
            **$**
            **1,370.7**
            
            
            **100.0**
            **%**
            $
            1,297.7
            
            
            100.0
            %The
                accompanying notes are an integral part of these
                statements.






42
 
 Table
          of Contents


**Nicor
                Inc.****Consolidated
                Statements of Common
                Equity****(millions,
                except per share data)**Year
                ended December 31**2006**
            
            2005
            
            2004Common
                stockBalance
                at beginning of year
            
            **$**
            **110.5**
            
            $
            110.2
            
            $
            110.1Issued
                and converted stock
            
            
            **1.8**
            
            
            .3
            
            
            .1Balance
                at end of year
            
            
            **112.3**
            
            
            110.5
            
            
            110.2Paid-in
                capitalBalance
                at beginning of year
            
            
            **8.0**
            
            
            5.6
            
            
            3.6Issued
                and converted stock
            
            
            **26.6**
            
            
            2.8
            
            
            2.4Reacquired
                and cancelled stock
            
            
            **(.5**
            **)**
            
            (.4
            )
            
            (.4
            )Balance
                at end of year
            
            
            **34.1**
            
            
            8.0
            
            
            5.6Retained
                earningsBalance
                at beginning of year
            
            
            **694.5**
            
            
            640.3
            
            
            647.1Net
                income
            
            
            **128.3**
            
            
            136.3
            
            
            75.1Dividends
                on common stock ($1.86 per share for 2006to
                2004)
            
            
            **(83.3**
            **)**
            
            (82.1
            )
            
            (81.9
            )Balance
                at end of year
            
            
            **739.5**
            
            
            694.5
            
            
            640.3Unearned
                compensationBalance
                at beginning of year
            
            
            **(.1**
            **)**
            
            (.2
            )
            
            (.2
            )Restricted
                stock amortization
            
            
            **.1**
            
            
            .1
            
            
            -Balance
                at end of year
            
            
            -
            
            
            (.1
            )
            
            (.2
            )Accumulated
                other comprehensive lossBalance
                at beginning of year
            
            
            **(1.6**
            **)**
            
            (6.8
            )
            
            (6.0
            )Other
                comprehensive income (loss)
            
            
            **(8.8**
            **)**
            
            5.2
            
            
            (.8
            )SFAS
                158 transition amount
            
            
            **(2.9**
            **)**
            
            -
            
            
            -Balance
                at end of year
            
            
            **(13.3**
            **)**
            
            (1.6
            )
            
            (6.8
            )Total
                common equity
            
            **$**
            **872.6**
            
            $
            811.3
            
            $
            749.1**Consolidated
                Statements of Comprehensive
                Income****(millions)**Year
                ended December 31**2006**
            
            
            2005
            
            
            2004Net
                income
            
            **$**
            **128.3**
            
            $
            136.3
            
            $
            75.1Other
                comprehensive income (loss), before taxGain
                (loss) on cash flow hedges
            
            
            **(19.0**
            **)**
            
            11.6
            
            
            1.6Loss
                on available-for-sale securities
            
            
            -
            
            
            (.1
            )
            
            (.1
            )Reclassifications
                of hedge (gains) losses to net income
            
            
            **4.6**
            
            
            (4.9
            )
            
            (3.9
            )Decrease
                to minimum pension liability
            
            
            **-**
            
            
            2.2
            
            
            -Foreign
                currency translation adjustment
            
            
            **(.2**
            **)**
            
            (.1
            )
            
            .6**(14.6**
            **)**
            
            8.7
            
            
            (1.8
            )Related
                income tax benefit (expense)
            
            
            **5.8**
            
            
            (3.5
            )
            
            1.0Other
                comprehensive income (loss), net of tax
            
            
            **(8.8**
            **)**
            
            5.2
            
            
            (.8
            )Comprehensive
                income
            
            **$**
            **119.5**
            
            $
            141.5
            
            $
            74.3The
                accompanying notes are an integral part of these
                statements.






43
 
 Table
          of Contents




**Notes
      to the Consolidated Financial
      Statements**





**1.** **ACCOUNTING
      POLICIES**





**Consolidation.** The
      consolidated financial statements include the accounts of Nicor and all
      majority-owned subsidiaries. Nicor’s key subsidiaries are described in Note 15 -
      Business Segment and Geographic Information. All significant intercompany
      balances and transactions have been eliminated.





**Use
      of estimates.** The
      preparation of the financial statements in conformity with accounting principles
      generally accepted in the United States requires management to make estimates
      that affect reported amounts. Actual results could differ from those estimates
      and such differences could be material. Accounting estimates requiring
      significant management judgment involve accruals for legal, regulatory and
      environmental contingencies, unbilled revenues, the allowance for doubtful
      accounts receivable, postretirement benefit assets and liabilities, asset
      retirement obligations, income taxes and related assets and liabilities, the
      identification and valuation of derivative instruments, and potential asset
      impairments.





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





**Cash
      and cash equivalents.** Cash
      equivalents are comprised of highly liquid investments of domestic subsidiaries
      with an initial maturity of three months or less. The carrying value of these
      investments approximates fair value because of their short
      maturity.





**Regulatory
      assets and liabilities.** Nicor
      Gas, a wholly owned subsidiary of Nicor, is regulated by the ICC, which
      establishes the rules and regulations governing utility rates and services
      in
      Illinois. As a rate-regulated company, Nicor Gas applies SFAS No. 71, *Accounting
      for the Effects of Certain Types of Regulation* ,
      which
      allows Nicor Gas to recognize the economic effects of rate regulation and,
      accordingly, has recorded regulatory assets and liabilities. Regulatory assets
      represent probable future revenue associated with certain costs that are
      expected to be recovered from customers through rate riders or rate cases,
      upon
      approval by the ICC. Regulatory liabilities represent probable future reductions
      in revenues collected from ratepayers through a rate rider or base rates. If
      all
      or a portion of Nicor Gas’ operations become no longer subject to the provisions
      of SFAS No. 71, a write-off of net regulatory liabilities would be
      required.





The
      company had regulatory assets and liabilities at December 31 as follows (in
      millions):





**2006**
            
            2005**Regulatory
                assets**Regulatory
                postretirement asset - current
            
            **$**
            **8.8**
            
            $
            -Regulatory
                postretirement asset - noncurrent
            
            
            **104.7**
            
            
            -Deferred
                environmental costs
            
            
            **16.0**
            
            
            15.1Unamortized
                losses on reacquired debt
            
            
            **17.6**
            
            
            18.7Deferred
                rate case costs
            
            
            **3.0**
            
            
            3.5Other
            
            
            **1.0**
            
            
            .3**$**
            **151.1**
            
            $
            37.6**Regulatory
                liabilities**Regulatory
                retirement cost liability - current
            
            **$**
            **8.0**
            
            $
            9.0Regulatory
                retirement cost liability - noncurrent
            
            
            **676.7**
            
            
            631.7Accrued
                gas costs
            
            
            **50.0**
            
            
            223.2Regulatory
                income tax liability
            
            
            **53.8**
            
            
            41.3Other
            
            
            **-**
            
            
            1.8**$**
            **788.5**
            
            $
            907.0








44
 
 Table
            of Contents


The
      current portion of the regulatory postretirement asset is classified in current
      other assets and all other regulatory assets are classified in noncurrent other
      assets. The current portion of the regulatory retirement cost liability is
      classified in current other liabilities. Regulatory liabilities - Other is
      classified in noncurrent other liabilities.





The
      ICC
      does not presently allow Nicor Gas the opportunity to earn a return on its
      regulatory postretirement asset. The regulatory asset is expected to be
      recovered from ratepayers over a period of approximately 10 to 15 years. The
      regulatory assets related to debt are not included in rate base, but are
      recovered over the term of the debt through the rate of return authorized by
      the
      ICC.





**Investments** . **** The
      company classifies money market funds held by its non-U.S. subsidiaries as
      short-term investments. The company’s investments in marketable securities are
      classified at the date of acquisition into either held-to-maturity or
      available-for-sale categories. Securities are classified as held-to-maturity
      when the company has the positive intent and ability to hold the securities
      to
      maturity. The company carries held-to-maturity securities at amortized cost,
      which approximates fair value. Securities classified as available-for-sale
      are
      carried at fair value, with unrealized gains and losses, net of tax, reported
      in
      common equity as a component of accumulated other comprehensive income or loss.
      The specific identification method is used to determine realized gains or losses
      on the sale of marketable securities. These money market funds and marketable
      securities are included in either short-term or long-term investments based
      upon
      contractual maturity date.





**Equity
      investments.** The
      company invests in several partnerships and limited liability companies that
      are
      accounted for under the equity method. Related investment balances classified
      as
      long-term investments at December 31, 2006 and 2005 were $117.7 million and
      $118.4 million, respectively, and include $95.0 million and $92.9 million at
      December 31, 2006 and 2005, respectively, related to Triton.





**Goodwill.** Goodwill
      is the excess cost of an acquired business over the fair value of assets
      acquired and liabilities assumed in a business combination. Tropical Shipping
      had goodwill of $15.6 million at December 31, 2006 and 2005, and Nicor Services
      had goodwill of $3.6 million and $3.5 million at December 31, 2006 and 2005,
      respectively. Goodwill is classified in noncurrent other assets and is tested
      for impairment annually.





**Asset
      retirement obligations.** The
      company records legal obligations associated with the retirement of long-lived
      assets in the period in which the obligation is incurred, if sufficient
      information exists to reasonably estimate the fair value of the obligation.
      The
      obligation is recorded as both a cost of the long-lived asset and a
      corresponding liability. Subsequently, the asset retirement cost is depreciated
      over the life of the asset on a straight-line basis and the asset retirement
      obligation is accreted to the expected settlement amount.





Subject
      to rate regulation, Nicor Gas continues to accrue all future asset retirement
      costs through depreciation over the lives of its assets even when a legal
      retirement obligation does not exist or insufficient information exists to
      determine the fair value of the obligation. Amounts charged to depreciation
      by
      Nicor Gas for future retirement costs in excess of the normal depreciation
      and
      accretion described above are classified as a regulatory retirement cost
      liability.





**Derivative
      instruments.** Fair
      values on derivatives are determined from quoted market prices and other
      external sources, where available, or are estimated using internal models.
      Estimates from internal models were not material to Nicor’s financial
      statements. Derivative instruments are classified as current or noncurrent
      other
      assets or liabilities as appropriate. Cash flows from derivative instruments
      are
      recognized in the consolidated statements of cash flows, and gains and losses
      are recognized in the consolidated statements of operations, in the same
      categories as the underlying transactions.





Cash
      flow
      hedge accounting may be elected only for highly effective hedges, based upon
      an
      assessment, performed at least quarterly, of the historical and probable future
      correlation of changes in the fair value





45
 
 Table
            of Contents


of
      the
      derivative instrument to changes in the expected future cash flows of the hedged
      item. To the extent cash flow hedge accounting is applied, the effective portion
      of any changes in the fair value of the derivative instruments is reported
      as a
      component of accumulated other comprehensive income or loss. Ineffectiveness,
      if
      any, is immediately recognized in operating income. The amount in accumulated
      other comprehensive income or loss is reclassified to earnings when the
      forecasted transaction occurs, even if the derivative instrument is sold,
      extinguished or terminated prior to the transaction occurring. If the forecasted
      transaction is no longer expected to occur, the amount in accumulated other
      comprehensive income or loss is immediately reclassified to earnings.





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





At
      times,
      Nicor Gas enters into futures contracts, options, swap agreements and
      fixed-price purchase agreements to reduce the earnings impact of certain
      forecasted operating costs arising from fluctuations in natural gas prices.
      These derivative instruments are carried at fair value, unless they qualify
      for
      the normal purchases and normal sales exception, in which case they are carried
      at cost. For those instruments carried at fair value, hedge accounting was
      generally not elected and, accordingly, changes in such fair values were
      recorded in earnings as operating and maintenance expense. In late 2006, Nicor
      Gas hedged a portion of its forecasted 2008 natural gas purchases through the
      execution of swap agreements and has elected hedge accounting for such
      transactions. There was no ineffectiveness and the deferred gains and losses
      associated with these instruments were immaterial at December 31,
      2006.





*Nicor
      Enerchange* .
      Derivative instruments, such as futures contracts, options, forward contracts,
      swap agreements and other energy-related contracts are held by Nicor’s wholesale
      natural gas marketing business, Nicor Enerchange, for trading purposes. Certain
      of these derivative instruments are used to economically hedge price risk
      associated with inventories of natural gas and fixed-price purchase and sale
      agreements. Nicor Enerchange records such derivative instruments at fair value
      and generally does not elect hedge accounting. As a result, changes in
      derivative fair values may have a material impact on Nicor’s financial
      statements. Other derivative instruments are used by Nicor Enerchange to hedge
      price risks related to certain utility-bill management products. Derivative
      instruments are carried at fair value and cash flow hedge accounting is
      generally elected.





Hedge
      accounting ineffectiveness was $2.9 million and $4.0 million for the years
      ended
      December 31, 2006 and 2005, respectively, and was immaterial for the year ended
      December 31, 2004. At December 31, 2006, the cash flow hedges component of
      accumulated other comprehensive loss was $6.1 million, reported net of $4.0
      million of related income tax benefits. This is expected to be reclassified
      to
      earnings within the next 12 months.





*Nicor
      Inc.* At
      December 31, 2006, accumulated other comprehensive loss also included a loss
      of
      $4.1 million, reported net of $2.7 million of income tax benefits, related
      to
      derivative instruments that were designated as hedges of interest payments
      on
      30-year bonds issued by Nicor Gas in December 2003. The amount deferred in
      accumulated other comprehensive loss is being amortized to interest expense
      on a
      straight-line basis over the remaining life of the bonds.





**Credit
      risk.** Nicor’s
      major subsidiaries have diversified customer bases and the company believes
      that
      it maintains prudent credit policies which mitigate customer receivable and
      derivative counterparty credit risk . The
      company is exposed to credit risk in the event a counterparty, customer or
      supplier defaults on a contract to pay for or deliver product at agreed-upon
      terms and conditions. To manage this risk, the company has established
      procedures to determine and monitor the creditworthiness of counterparties,
      to





46
 
 Table
            of Contents


require
      guarantees or collateral back-up, and to limit its exposure to any one
      counterparty. Nicor also, in some instances, enters into netting arrangements
      to
      mitigate counterparty credit risk. Credit losses are accrued as liabilities
      when
      probable and reasonably estimable.





**Operating
      revenues and gas costs.** Gas
      distribution revenues are recognized when natural gas is delivered to customers.
      In accordance with ICC regulations and subject to its review, the cost of gas
      delivered is charged to customers without markup, although the timing of cost
      recovery can vary. Temporary undercollections and overcollections of gas costs
      are deferred or accrued as a regulatory asset or liability with a corresponding
      decrease or increase to cost of gas, respectively.





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





For
      Nicor
      Solutions and Nicor Advanced Energy, revenue is recognized on their 12-month
      utility-bill management contracts as the lesser of cumulative earned or
      cumulative billed amounts. Nicor Services recognizes revenue for warranty and
      repair contracts on a straight-line basis over the contract term. Revenue for
      maintenance services is recognized at the time such services are performed.
      Nicor Enerchange presents revenue from natural gas sales, cost of sales, and
      related derivative instruments, which are entered into for trading purposes,
      on
      a net basis.





**Repair
      and maintenance expense.** Nicor
      records expense for repair and maintenance costs as incurred, with one exception
      - Tropical Shipping uses the accrue-in-advance method for planned major
      maintenance related to dry-docking and major repairs of its owned vessels.
      These
      costs are typically accrued over a period of about three years. As a result
      of
      the issuance of FSP No. AUG AIR-1, *Accounting
      for Planned Major Maintenance Activities* ,
      Nicor
      intends to adopt the direct expensing method on January 1, 2007. See Note 2
      -
      New Accounting Pronouncements for more information.





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





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





**Revenue
      taxes.** Nicor
      Gas classifies revenue taxes billed to customers as operating revenues and
      related taxes incurred as operating expenses. Revenue taxes included in
      operating expense for 2006, 2005 and 2004 were $144.4 million, $152.0 million
      and $139.4 million, respectively.





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





Nicor
      has
      remaining at December 31, 2006 approximately $12 million of deferred income
      tax
      liabilities related to approximately $34 million of cumulative undistributed
      earnings of its foreign subsidiaries. Nicor has not recorded deferred income
      taxes of approximately $28 million on approximately $81 million of cumulative
      undistributed foreign earnings that are expected in management’s judgment to be
      indefinitely reinvested offshore.





47
 
 Table
            of Contents


**2.** **NEW
      ACCOUNTING PRONOUNCEMENTS**





**Share-based
      payment** .
      Effective January 1, 2006, the company adopted SFAS No. 123 (revised 2004), *Share-Based
      Payment* (“SFAS
      123(R)”), using the modified-prospective transition method. Under such method,
      compensation cost recognized in 2006 includes: (a) compensation cost for all
      share-based equity awards granted prior to, but not yet vested as of January
      1,
      2006, based on the grant date fair value estimated in accordance with the
      original provisions of SFAS No. 123, *Accounting
      for Stock-Based Compensation* (“SFAS
      123”) and (b) compensation cost for all share-based equity awards granted
      subsequent to January 1, 2006, based on the grant-date fair value estimated
      in
      accordance with the provisions of SFAS 123(R). In addition, liability awards
      will be adjusted to fair value at each quarter-end. See Note 12 - Stock-Based
      Compensation for a description of the company’s stock-based compensation
      plans.





Prior
      to
      January 1, 2006, the company accounted for its stock-based compensation plans
      under the recognition and measurement provisions of Accounting Principles Board
      Opinion No. 25, *Accounting
      for Stock Issued to Employees* (“APB
      25”), and related Interpretations, as permitted by SFAS 123. Under APB 25, Nicor
      did not recognize compensation cost for stock options or employee stock purchase
      plan discounts, and certain liability awards were adjusted to intrinsic value.
      Results from prior periods have not been restated.





Upon
      adoption of SFAS 123(R), a $0.1 million after-tax benefit was recognized. As
      a
      result of adopting SFAS 123(R), net income, earnings per share and cash flows
      have not been materially different than if the company had continued to account
      for share-based compensation under APB 25.





The
      effect on net income and earnings per share for the years ended December 31
      had
      the company applied the fair value recognition provisions of SFAS 123 is
      illustrated in the following table (in millions, except per share
      data).




2005
            
            2004**Net
                income**As
                reported
            
            $
            136.3
            
            $
            75.1Less:
                Total stock-based employee compensation
              expense
                determined under the fair value
              method
                for all awards, net of tax
            
            
            1.2
            
            
            1.2Pro
                forma
            
            $
            135.1
            
            $
            73.9**Earnings
                per share**Basic
                - As reported
            
            $
            3.08
            
            $
            1.71Basic
                - Pro forma
            
            
            3.05
            
            
            1.68Diluted
                - As reported
            
            
            3.07
            
            
            1.70Diluted
                - Pro forma
            
            
            3.05
            
            
            1.67





**Defined
      benefit pension and other postretirement plans.** In
      September 2006, the FASB issued SFAS No. 158, *Employers’*  *Accounting
      for Defined Benefit Pension and Other Postretirement Plans* .
      This
      Statement requires an entity to immediately recognize the funded status of
      a
      defined benefit postretirement plan as an asset or liability in its balance
      sheet, and to recognize changes in that funded status through comprehensive
      income to the extent not recognized in net income pursuant to existing
      accounting rules. As a regulated utility, Nicor Gas expects continued rate
      recovery of the eligible costs of its defined benefit postretirement plans
      and,
      accordingly, associated changes in the plan’s funded status have been deferred
      as a regulatory asset or liability until recognized in net income, instead
      of
      being recorded in comprehensive income.





On
      December 31, 2006, the company adopted the recognition provisions of SFAS No.
      158 *.* The
      incremental effect of applying SFAS 158 on individual line items of the December
      31, 2006 balance sheet was as follows (in millions):





48
 
 Table
            of Contents





Before
                application
            
            Adjustments
            
            After
                applicationCurrent
                deferred income taxes
            
            $
            36.2
            
            $
            2.9
            
            $
            39.1Current
                other assets (1)
            
            
            45.7
            
            
            8.8
            
            
            54.5Pension
                benefits
            
            
            197.4
            
            
            (36.4
            )
            
            161.0Noncurrent
                other assets (1)
            
            
            64.6
            
            
            104.4
            
            
            169.0Current
                other liabilities
            
            
            (137.9
            )
            
            (9.1
            )
            
            (147.0
            )Noncurrent
                deferred income taxes
            
            
            (414.9
            )
            
            15.3
            
            
            (399.6
            )Health
                care and other postretirement benefits
            
            
            (108.3
            )
            
            (73.3
            )
            
            (181.6
            )Regulatory
                income tax liability
            
            
            (38.3
            )
            
            (15.5
            )
            
            (53.8
            )Accumulated
                other comprehensive loss, net
            
            
            10.4
            
            
            2.9
            
            
            13.3





(1)
            “Adjustments”
                to these line items primarily represent the establishment of a regulatory
                asset.





This
      Statement will also require Nicor to change its plan measurement date to
      December 31. Such provision is effective for Nicor no later than December 31,
      2008 and will be adopted prospectively at that time. The company has not yet
      determined the impact of adopting this provision.





**Uncertain
      tax positions.** In
      July
      2006, the FASB issued Interpretation No. 48, *Accounting
      for Uncertainty in Income Taxes* .
      This
      Interpretation sets forth a recognition threshold and valuation method to
      recognize and measure an income tax position taken, or expected to be taken,
      in
      a tax return. The evaluation is based on a two-step approach. The first step
      requires an entity to evaluate whether the tax position would “more likely than
      not,” based upon its technical merits, be sustained upon examination by the
      appropriate taxing authority. The second step requires the tax position to
      be
      measured at the largest amount of tax benefit that is greater than 50 percent
      likely of being realized upon ultimate settlement. In addition, previously
      recognized benefits from tax positions that no longer meet the new criteria
      would be derecognized. The application of this Interpretation will be considered
      a change in accounting principle with the cumulative effect of the change
      recorded to the opening balance of retained earnings in the period of adoption.
      This Interpretation will be effective for Nicor on January 1, 2007. Upon
      adoption of this Interpretation, the company currently estimates the required
      cumulative effect adjustment to the opening balance of retained earnings to
      be
      an increase of approximately zero to $2 million.





**Planned
      major maintenance activities.** In
      September 2006, FSP No. AUG AIR-1, *Accounting
      for Planned Major Maintenance Activities* ,
      was
      issued. This FSP disallows the accrue-in-advance method of accounting for
      planned major maintenance activities, which is the method currently utilized
      by
      Nicor’s wholly owned subsidiary, Tropical Shipping, for the planned major
      maintenance of its owned vessels. Tropical Shipping carries an accrual of
      approximately $3.5 million as of December 31, 2006 for such future maintenance.
      Tropical Shipping will be required to change its accounting to one of the
      following methods: direct expensing, built-in overhaul or deferral, which are
      still permitted under this FSP. This FSP is effective for Nicor on January
      1,
      2007 and requires retrospective application. The company intends to adopt the
      direct expensing method on January 1, 2007 by retrospectively increasing the
      January 1, 2005 balance of retained earnings by $3.5 million .
      Since
      the new method would have no material impact on previously issued income
      statements, those income statements will not be retrospectively adjusted.





**Fair
      value measurements.** In
      September 2006, the FASB issued SFAS No. 157, *Fair
      Value Measurements* .
      This
      Statement defines fair value, establishes a framework for measuring fair value
      and expands disclosures about fair value measurements. The Statement does not
      require any new fair value measurements, rather it provides guidance on how
      to
      perform fair value measurements as required or permitted under other accounting
      pronouncements. This Statement is effective for Nicor no later than January
      1,
      2008 and is expected to be adopted prospectively at that time. The company
      is
      currently





49
 
 Table
            of Contents


evaluating
      the Statement and the impact it may have on the company’s results of operations
      and financial condition.





**3.** **INVESTMENTS**





At
      December 31, 2006 and 2005, short-term investments totaled $16.3 million and
      $8.0 million, respectively. These investments include $11.8 million and $5.7
      million of money market funds held by the company’s non-U.S. subsidiaries and
      $4.5 million and $2.3 million of available-for-sale and held-to-maturity
      securities at December 31, 2006 and 2005, respectively. The remaining marketable
      securities are included in long-term investments.





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




**2006**
            
            2005**Available-for-sale**
            
            **$**
            **-**
            
            $
            .6**Held-to-maturity**Corporate
                bonds
            
            
            **7.7**
            
            
            6.9Certificates
                of deposit
            
            
            **1.3**
            
            
            .3Other
            
            
            **1.1**
            
            
            -**10.1**
            
            
            7.2**$**
            **10.1**
            
            $
            7.8





The
      contractual maturities of held-to-maturity marketable securities at December
      31,
      2006 are as follows (in millions):




Years to
      maturity


Less
              than
                1
              year
            
            1-5
              years
            
            5-10
              years
            
            More
              than
                10
              years
            
            Total$                   
                4.5
            
            $                   
                5.6
            
            $                      
                -
            
            $                          
                -
            
            $                 
                10.1





Proceeds
      from the sale of available-for-sale securities were zero, $15.1 million and
      $6.9
      million in 2006, 2005 and 2004, respectively. There were no significant realized
      gains or losses from the sale of available-for-sale securities in 2006, 2005
      or
      2004.





**4.** **RESTRICTED
      SHORT-TERM INVESTMENTS**





At
      December 31, 2006, Nicor had $10.2 million of restricted short-term investments,
      including $0.2 million in interest earned, held in an escrow fund and a
      corresponding $10.0 million current liability. In 2006, Nicor reached a
      tentative agreement with the staff of the Enforcement Division of the SEC in
      settlement of an anticipated civil action against the company for a payment
      of
      $10 million. In July 2006, the company deposited $10 million in an escrow
      account pending review and final approval of the tentative settlement by the
      SEC
      commissioners. As of December 31, 2006, the SEC commissioners had not reviewed
      or approved the tentative settlement. There were no similar restricted
      short-term investments at December 31, 2005. For further information, see Note
      21 - Contingencies - SEC and U.S. Attorney Inquiries.





50
 
 Table
            of Contents


**5.** **ASSET
      RETIREMENT OBLIGATIONS**





In
      2005,
      Nicor adopted FASB Interpretation No. 47, *Accounting
      for Conditional Asset Retirement Obligations* (“FIN
      47”) *,* which
      broadened the assessment of when assets contain measurable retirement
      obligations. Prior to adopting FIN 47, Nicor recorded AROs related primarily
      to
      the required removal and/or disposal of mercury regulators.





Upon
      adoption, Nicor recorded additional AROs associated with services, mains and
      other components of the distribution system and the buildings in its gas
      distribution segment and with certain equipment in its shipping segment of
      $160.6 million, increased the carrying value of the related assets by $60.1
      million, increased accumulated depreciation by $26.4 million and reduced its
      regulatory liability for future retirement costs by $126.6 million. Nicor Gas
      has not recognized an ARO associated with gathering lines and storage wells
      because there is insufficient company or industry retirement history to
      reasonably estimate the fair value of the obligation. In connection with the
      adoption, $0.2 million was charged to net income in 2005. At December 31, 2005,
      a total ARO of $164.8 million was recorded.





The
      following table presents a reconciliation of the beginning and ending ARO for
      the year ended December 31, 2006 (in millions):





Beginning
                of period
            
            **$**
            **164.8**Liabilities
                incurred during the period
            
            
            **2.2**Liabilities
                settled during the period
            
            
            **(3.2**
            **)**Accretion
            
            
            **9.5**Revision
                in estimated cash flows
            
            
            **(2.7**
            **)**End
                of period
            
            **$**
            **170.6**





Substantially
      all of the ARO is classified as a noncurrent liability. If the company had
      applied the provisions of FIN 47 to prior periods, it would have recorded an
      ARO
      of $152.9 million at December 31, 2004.





**6.** **GAS
      IN STORAGE**





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





**2006**
            
            2005Nicor
                Gas
            
            **$**
            **153.0**
            
            $
            221.0Nicor
                Enerchange
            
            
            **33.0**
            
            
            40.3**$**
            **186.0**
            
            $
            261.3





Nicor
      Gas
      inventory is carried at cost on a LIFO basis. Nicor Enerchange inventory is
      carried at the lower of weighted-average cost or market.





Based
      on
      the average cost of gas purchased in December 2006 and 2005, the estimated
      replacement cost of Nicor Gas’ inventory at December 31, 2006 and 2005 exceeded
      the LIFO cost by $449.9 million and $778.4 million, respectively.





During
      2006, Nicor Gas liquidated LIFO layers totaling 10 Bcf at an average cost per
      Mcf of $6.81. For gas purchased in 2006, the company’s average cost per Mcf was
      $0.28 lower than the LIFO liquidation rate. Applying LIFO cost in valuing the
      liquidations, as opposed to using the average gas purchase cost, had the effect
      of increasing the cost of gas in 2006 by $2.8 million. However, since the cost
      of gas, including inventory costs, is charged to customers without markup,
      these
      amounts had no impact on net income.





51
 
 Table
            of Contents


During
      2004, Nicor Gas partially liquidated a LIFO layer at a cost per Mcf of $5.81.
      For gas purchased in 2004, the company’s average cost per Mcf was $0.24 higher
      than the LIFO liquidation rate. Applying LIFO cost in valuing the liquidations,
      as opposed to using the average gas purchase cost, had the effect of decreasing
      the cost of gas in 2004 by $0.7 million. However, since the cost of gas,
      including inventory costs, is charged to customers without markup, these amounts
      had no impact on net income.





There
      was
      no liquidation of any LIFO layers during 2005.





**7.** **SHORT-TERM
      AND LONG-TERM DEBT**





In
      December 2006, Nicor Gas, through a private placement, issued $50 million of
      First Mortgage Bonds at 5.85 percent, due in 2036. Proceeds from this issuance
      were applied to the maturity of the $50 million 5.55 percent First Mortgage
      Bond
      series, due in December 2006. Substantially all gas distribution properties
      are
      subject to the lien of the indenture securing Nicor Gas’ First Mortgage
      Bonds.





In
      October 2006, Nicor Gas established a $400 million, 210-day seasonal revolver,
      which expires in May 2007, to replace the $400 million, 210-day seasonal
      revolver, which expired in April 2006. In September 2005, Nicor and Nicor Gas
      established a $600 million, five-year revolver, expiring September 2010. These
      facilities were established with major domestic and foreign banks and serve
      as
      backup for the issuance of commercial paper. The company had $350 million and
      $586 million of commercial paper outstanding with a weighted-average interest
      rate of 5.4 percent and 4.1 percent at December 31, 2006 and 2005,
      respectively.





In
      December 2005, Tropical Shipping obtained a $40 million two-year senior
      unsecured term loan used to fund a portion of the repatriation of its cumulative
      undistributed foreign earnings in connection with the Jobs Act. The term loan
      had a floating interest rate based on LIBOR plus 0.50 percent per annum. As
      of
      December 31, 2006, this loan was paid in full.





The
      company believes it is in compliance with all debt covenants.





The
      company incurred total interest expense of $49.8 million, $47.9 million, and
      $41.6 million in 2006, 2005 and 2004, respectively. Interest expense is reported
      net of amounts capitalized. Interest expense capitalized for the years ended
      December 31, 2006, 2005 and 2004 was $0.7 million, $1.1 million and $0.4
      million, respectively.





**8.** **ACCRUED
      UNBILLED REVENUES**





Receivables
      include accrued unbilled revenues of $159.5 million and $300.9 million at
      December 31, 2006 and 2005, 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, restricted short-term investments
      and
      short-term borrowings approximates fair value because of the short maturity
      of
      the instruments. Long-term debt outstanding, including current maturities,
      is
      recorded at the principal balance outstanding, net of unamortized discounts.
      The
      principal balance of Nicor Gas’ First Mortgage Bonds outstanding at December 31,
      2006 and 2005 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 $518 million and $525 million at December 31,
      2006
      and 2005, respectively.





Derivative
      financial instruments are recorded at fair value as determined primarily from
      actively quoted prices. The fair value of derivative financial instruments
      held
      at December 31, 2006 relates primarily to Nicor Gas. The majority of derivative
      financial instruments held by Nicor Gas are for the purpose of





52
 
 Table
            of Contents


hedging
      natural gas purchases for its customers, and their settlement is passed directly
      through to customers without markup, subject to ICC review. The gross asset
      and
      liability fair values of these instruments are reflected on the Consolidated
      Balance Sheets at December 31 as follows (in millions):





**2006**
            
            2005Current
                other assets
            
            **$**
            **5.3**
            
            $
            29.2Noncurrent
                other assets
            
            
            **.5**
            
            
            2.3**$**
            **5.8**
            
            $
            31.5Current
                other liabilities
            
            **$**
            **51.3**
            
            $
            6.1Noncurrent
                other liabilities
            
            
            **1.2**
            
            
            1.4**$**
            **52.5**
            
            $
            7.5





Nicor
      maintains margin accounts related to financial derivative transactions. At
      December 31, 2006 and 2005, the balance of these accounts were $16.2 million
      and
      $37.0 million, respectively, and were reflected in the Consolidated Balance
      Sheets as Receivables.





**10.** **INCOME
      AND OTHER TAXES**





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





**2006**
            
            2005
            
            2004CurrentFederal
            **$**
            **73.6**
            
            
            $
            116.3
            
            
            $
            9.3State
            
            **18.2**
            
            
            
            22.1
            
            
            
            (5.0
            )**91.8**
            
            
            
            138.4
            
            
            
            4.3DeferredFederal
            
            **(22.4**
            **)**
            
            
            (87.7
            )
            
            
            17.0State
            
            **(22.1**
            **)**
            
            
            (14.4
            )
            
            
            10.3**(44.5**
            **)**
            
            
            (102.1
            )
            
            
            27.3Amortization
                of investment tax credits, net
            
            **(2.1**
            **)**
            
            
            (2.1
            )
            
            
            (1.8
            )Foreign
                taxes
            
            **.6**
            
            
            
            .5
            
            
            
            .4Income
                tax expense, net
            **$**
            **45.8**
            
            
            $
            34.7
            
            
            $
            30.2





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




**2006**
            
            
            2005Deferred
                tax liabilitiesProperty,
                plant and equipment
            **$**
            **291.2**
            
            
            $
            354.7Investment
                in partnerships
            
            **120.8**
            
            
            
            134.3Other
            
            **35.0**
            
            
            
            43.2**447.0**
            
            
            
            532.2Deferred
                tax assetsAlternative
                minimum tax
            
            **-**
            
            
            
            32.0Other
            
            **86.5**
            
            
            
            74.2**86.5**
            
            
            
            106.2Net
                deferred tax liability
            **$**
            **360.5**
            
            
            $
            426.0





For
      purposes of computing deferred income tax assets and
      liabilities, temporary differences associated with regulatory assets and
      liabilities have been netted against related offsetting temporary
      differences.





53
 
 Table
            of Contents




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




**2006**
            
            2005
            
            2004Federal
                statutory rate
            
            **35.0**
            **%**
            
            
            35.0
            %
            
            
            35.0
            %Foreign
                earnings repatriation
            
            **-**
            
            
            
            (9.9
            )
            
            
            -State
                income taxes, net
            
            **2.8**
            
            
            
            3.1
            
            
            
            3.7Tax
                credits
            
            **(3.1**
            **)**
            
            
            (3.1
            )
            
            
            (5.3
            )Amortization
                of regulatory income tax liability
            
            **(0.9**
            **)**
            
            
            (1.1
            )
            
            
            (1.8
            )Undistributed
                foreign earnings
            
            **(6.0**
            **)**
            
            
            (3.3
            )
            
            
            (3.0
            )Reorganization
                of certain shipping operations
            
            **(2.7**
            **)**
            
            
            **-**
            
            
            
            **-**SEC
                tentative settlement
            
            **2.0**
            
            
            
            **-**
            
            
            
            **-**Other,
                net
            
            **(.8**
            **)**
            
            
            (.4
            )
            
            
            .1Effective
                combined federal and state income tax rate
            
            **26.3**
            **%**
            
            
            20.3
            %
            
            
            28.7
            %





The
      overall effective income tax rate for 2006 increased to 26.3 percent from the
      prior year rate of 20.3 percent, due primarily to the 2005 tax benefits recorded
      in connection with the Jobs Act (approximately $17 million). The decline in
      the
      company’s effective income tax rate to 20.3 percent in 2005 from 28.7 percent in
      2004 was also primarily a result of the tax benefits recorded in 2005 related
      to
      the Jobs Act.  In
      addition, the 2006 effective income tax rate reflects the ongoing benefit of
      untaxed foreign shipping earnings, the recognition of tax benefits related
      to
      the first quarter 2006 reorganization of the company’s shipping and related
      operations and second quarter 2006 favorable adjustments associated with tax
      audits (which occur in the ordinary course of business) offset, in part, by
      the
      non-deductible $10 million charge in the second quarter 2006 associated with
      the
      company’s outstanding SEC inquiry. The 2005 effective income tax rate was
      adversely impacted by recording net litigation recoveries and earnings thereon
      ($29.9 million) at the company’s marginal tax rate of approximately 40
      percent.




The
      company accrues tax and interest related to tax uncertainties. Tax uncertainties
      arise due to actual or potential disagreements about the tax treatment of
      specific items between the company and the governmental agency reviewing the
      company’s tax returns. At December 31, 2006 and 2005, the company had accrued
      approximately $20 million and $17 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 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 approximated
      $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 2005, the
      IRS
      revised the regulations pertaining to the aforementioned tax accounting method.
      The new regulations required repayment in 2005 and 2006 of amounts previously
      taken as current tax deductions. During 2006 and 2005, the company reclassified
      income tax expense from deferred to current and repaid approximately $135
      million equally over those years.





During
      December 2005, Nicor repatriated $132 million of cumulative undistributed
      earnings. The repatriation was funded by cash available from foreign
      subsidiaries coupled with the proceeds received by Tropical Shipping in
      connection with the December 2005 issuance of a $40 million two-year senior
      unsecured term loan. The federal income tax benefit resulting from the
      repatriation is approximately $17 million and was recognized in the fourth
      quarter of 2005. In conjunction with the repatriation, Nicor reclassified
      approximately $7.6 million of deferred income tax liabilities to other income
      tax reserves.





Effective
      January 2006, the company reorganized certain shipping and related operations.
      The reorganization allows the company to take advantage of certain provisions
      of
      the Jobs Act that provide the opportunity for tax savings subsequent to the
      date
      of the reorganization. Generally, to the extent foreign shipping earnings are
      not repatriated to the United States, such earnings are not expected to be
      subject to





54
 
 Table
            of Contents


current
      taxation. In addition, to the extent such earnings are expected to be
      indefinitely reinvested offshore, no deferred income tax expense would be
      recorded by the company. For the year ended December 31, 2006, income tax
      expense has not been provided on approximately $29 million of foreign company
      shipping earnings that are expected to be indefinitely reinvested offshore.
      In
      connection with these
      activities, a net income tax benefit of $5.2 million from the elimination of
      certain deferred income taxes and $4.7 million in current income tax expense
      was
      recorded in 2006.





As
      of
      December 31, 2006, Nicor has not recorded deferred income taxes of approximately
      $28 million on approximately $81 million of cumulative undistributed foreign
      earnings that are expected in management’s judgment to be indefinitely
      reinvested offshore.





**11.** **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. To the extent eligible employees
      perform services for non-regulated affiliates, such affiliates are charged
      for
      the cost of these benefits.





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


Pension
                benefits
            
            Health
                care and
              other
                benefits**2006**
            
            2005
            
            **2006**
            
            2005**Change
                in benefit obligation**Benefit
                obligation at beginning of period
            
            **$**
            **284.4**
            
            $
            282.6
            
            **$**
            **192.5**
            
            $
            184.7Service
                cost
            
            
            **9.4**
            
            
            9.3
            
            
            **2.4**
            
            
            2.7Interest
                cost
            
            
            **14.9**
            
            
            15.6
            
            
            **10.3**
            
            
            10.3Actuarial
                (gain) loss
            
            
            **(9.7**
            **)**
            
            7.1
            
            
            **.4**
            
            
            4.9Participant
                contributions
            
            
            **-**
            
            
            -
            
            
            **.7**
            
            
            .8Benefits
                paid
            
            
            **(27.7**
            **)**
            
            (30.2
            )
            
            **(12.6**
            **)**
            
            (10.9
            )Benefit
                obligation at end of period
            
            
            **271.3**
            
            
            284.4
            
            
            **193.7**
            
            
            192.5





**Change
                in plan assets**Fair
                value of plan assets at beginning of period
            
            
            **424.0**
            
            
            402.0
            
            
            **6.9**
            
            
            10.6Actual
                return on plan assets
            
            
            **36.0**
            
            
            52.2
            
            
            **.2**
            
            
            1.0Employer
                contributions
            
            
            **-**
            
            
            -
            
            
            **6.0**
            
            
            5.4Participant
                contributions
            
            
            **-**
            
            
            -
            
            
            **.7**
            
            
            .8Benefits
                paid
            
            
            **(27.7**
            **)**
            
            (30.2
            )
            
            **(12.6**
            **)**
            
            (10.9
            )Fair
                value of plan assets at end of period
            
            
            **432.3**
            
            
            424.0
            
            
            **1.2**
            
            
            6.9Funded
                status
            
            
            **161.0**
            
            
            139.6
            
            
            **(192.5**
            **)**
            
            (185.6
            )Unrecognized
                net actuarial loss
            
            
            **-**
            
            
            44.9
            
            
            **-**
            
            
            88.5Unrecognized
                prior service cost
            
            
            **-**
            
            
            3.1
            
            
            **-**
            
            
            (.7
            )Other
            
            
            **-**
            
            
            -
            
            
            **1.8**
            
            
            (3.8
            )Postretirement
                benefit asset (liability)
            
            **$**
            **161.0**
            
            $
            187.6
            
            **$**
            **(190.7**
            **)**
            $
            (101.6
            )









55
 
 Table
            of Contents


Amounts classified on the balance sheet as of December
      31
      consist of (in millions):




Pension
                benefits
            
            Health
                care and
              other
                benefits**2006**
            
            2005
            
            **2006**
            
            2005Noncurrent
                assets
            
            **$**
            **161.0**
            
            $
            187.6
            
            **$**
            **-**
            
            $
            -Current
                liabilities
            
            
            **-**
            
            
            -
            
            
            **(9.1**
            **)**
            
            -Noncurrent
                liabilities
            
            
            **-**
            
            
            -
            
            
            **(181.6**
            **)**
            
            (101.6
            )**$**
            **161.0**
            
            $
            187.6
            
            **$**
            **(190.7**
            **)**
            $
            (101.6
            )





Changes
      in the funded status attributable to eligible employees performing work for
      a
      non-regulated affiliate that were recognized in accumulated other comprehensive
      income on December 31, 2006 were as follows (in millions):




Pension
                benefits
            
            Health
                care and
              other
                benefitsNet
                loss
            
            **$**
            **1.7**
            
            **$**
            **4.2**Prior
                service cost
            
            
            **.1**
            
            
            **-****$**
            **1.8**
            
            **$**
            **4.2**





The
      associated amount in accumulated other comprehensive income at December 31,
      2006
      that is expected to be reclassed to net periodic benefit cost in 2007 is
      approximately $0.3 million.





The
      accumulated benefit obligation for pension benefits, a measure which excludes
      the effect of salary and wage increases, was $233.4 million and $246.1 million
      at October 1, 2006 and 2005, respectively.





In
      2003,
      the company amended the retiree health care plan as it applies to non-unionized
      employees to improve consistency of benefits among participant groups and reduce
      the company’s share of plan costs effective January 1, 2004. In 2004, further
      cost-sharing amendments, effective January 1, 2006, were made to the plan for
      all employees.





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




Pension
                benefits
            
            Health
                care and
              other
                benefits**2006**
            
            2005
            
            2004
            
            **2006**
            
            2005
            
            2004Service
                cost
            
            **$**
            **9.4**
            
            $
            9.3
            
            $
            9.0
            
            **$**
            **2.4**
            
            $
            2.7
            
            $
            2.4Interest
                cost
            
            
            **14.9**
            
            
            15.6
            
            
            15.7
            
            
            **10.3**
            
            
            10.3
            
            
            10.1Expected
                return on plan assets
            
            
            **(34.8**
            **)**
            
            (33.2
            )
            
            (31.7
            )
            
            **(.2**
            **)**
            
            (.9
            )
            
            (1.0
            )Recognized
                net actuarial loss
            
            
            **.2**
            
            
            1.6
            
            
            2.0
            
            
            **5.0**
            
            
            4.9
            
            
            4.6Amortization
                of unrecognized transitionobligation
            
            
            **-**
            
            
            -
            
            
            -
            
            
            **-**
            
            
            -
            
            
            .1Amortization
                of prior service cost
            
            
            **.5**
            
            
            .6
            
            
            .6
            
            
            **(.1**
            **)**
            
            (.1
            )
            
            -Net
                periodic benefit cost (credit)
            
            **$**
            **(9.8**
            **)**
            $
            (6.1
            )
            $
            (4.4
            )
            **$**
            **17.4**
            
            $
            16.9
            
            $
            16.2








56
 
 Table
            of Contents


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





Pension
                benefits
            
            Health
                care and
              other
                benefits**2006**
            
            2005
            
            **2006**
            
            2005Discount
                rate
            
            
            **5.75**
            **%**
            
            5.50
            %
            
            **5.75**
            **%**
            
            5.50
            %Rate
                of compensation increase
            
            
            **3.75**
            
            
            3.75
            
            
            **3.75**
            
            
            3.75





The
      2006
      discount rate was determined by reference to the Citigroup Pension Liability
      index rate. Periodically, the company will perform bond matching studies, using
      non-callable, high quality bonds (AA- or better), whose cash flows match the
      timing and amount of future benefit payments of the plans. Such studies have
      historically yielded a single equivalent discount rate comparable to the
      Citigroup Pension Liability index rate.





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




Pension
                benefits
            
            Health
                care and other benefits**2006**
            
            2005
            
            2004
            
            **2006**
            
            2005
            
            2004Discount
                rate
            
            
            **5.50**
            **%**
            
            5.75
            %
            
            6.00
            %
            
            **5.50**
            **%**
            
            5.75
            %
            
            6.00
            %Expected
                return on assets
            
            
            **8.50**
            
            
            8.50
            
            
            8.50
            
            
            **8.50**
            
            
            8.50
            
            
            8.50Rate
                of compensation increase
            
            
            **3.75**
            
            
            4.00
            
            
            4.00
            
            
            **3.75**
            
            
            4.00
            
            
            4.00





Nicor
      Gas
      establishes its expected long-term return-on-asset assumption by considering
      historical and projected returns for each investment asset category. Projected
      returns are calculated with the assistance of independent firms via
      probability-based models. The company has elected to apply this assumption
      to
      the fair value of plan assets, rather than to a rolling-average fair value,
      in
      calculating the expected return on plan assets component of net periodic benefit
      cost. The assumed rate of return on assets can have a significant effect on
      the
      amounts reported for pension benefits. A one-percentage-point change in the
      assumed rate of return on assets would impact the net periodic pension credit
      by
      approximately $4 million.





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





**2006**
            
            2005Health
                care cost trend rate
            
            
            **9.5**
            **%**
            
            9.5
            %Rate
                to which the cost trend rate is assumed to decline (the ultimate
                rate)
            
            
            **5.0**
            **%**
            
            5.0
            %Years
                to reach ultimate rate
            
            
            **5**
            
            
            5





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




**2006**
            
            2005
            
            2004Health
                care cost trend rate
            
            
            **9.5**
            **%**
            
            9.5
            %
            
            9.5
            %Rate
                to which the cost trend rate is assumed to decline (the ultimate
                rate)
            
            
            **5.0**
            **%**
            
            5.0
            %
            
            5.0
            %Years
                to reach ultimate rate
            
            
            **5**
            
            
            4
            
            
            4








57
 
 Table
            of Contents


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




One-percentIncrease
            
            DecreaseEffect
                on total of service and interest cost components
            
            $
            1.1
            
            $
            (.9
            )Effect
                on benefit obligation
            
            
            18.3
            
            
            (15.6
            )





The
      Medicare Prescription Drug, Improvement and Modernization Act of 2003 provides
      a
      prescription drug benefit as well as a potential federal subsidy to sponsors
      of
      certain retiree health care benefit plans whose prescription drug benefits
      are
      actuarially equivalent to the Medicare Part D benefit. Nicor has determined
      that
      the prescription drug benefits of its plan are actuarially equivalent and
      accordingly have reflected the effects of the subsidy in its determination
      of
      the benefit obligation and annual net periodic benefit cost beginning with
      the
      October 1, 2004 valuation.





The
      company’s investment objective relating to pension plan assets is to have a high
      probability of meeting its obligations without additional cash contributions.
      The company’s investment strategy is to maintain an asset mix near its target
      asset allocation and to rebalance the portfolio monthly if the actual allocation
      deviates from the target by two or more percentage points. The following table
      sets forth the target allocation and actual percentage of plan assets by asset
      category:





Target
            
            Percentage
                of plan assets
              at
                October 1Asset
                category
            
            allocation
            
            **2006**
            
            2005Equity
                securities
            
            
            69
            %
            
            **69**
            **%**
            
            69
            %Debt
                securities
            
            
            31
            
            
            **31**
            
            
            31100
            %
            
            **100**
            **%**
            
            100
            %





The
      company does not expect to contribute to its pension plan in 2007 but does
      expect to contribute about $11.6 million to its other postretirement benefit
      plan in 2007. The following table sets forth the benefit payments from the
      plans
      expected over the next 10 years (in millions):





Twelve
                months ending October 1
            
            Pension
                benefits
            
            Health
                care and other benefits
            
            Expected
                Medicare subsidy2007
            
            $
            18.6
            
            $
            11.6
            
            $
            (1.3
            )2008
            
            
            17.4
            
            
            12.2
            
            
            (1.4
            )2009
            
            
            19.0
            
            
            13.0
            
            
            (1.5
            )2010
            
            
            19.8
            
            
            13.7
            
            
            (1.6
            )2011
            
            
            21.4
            
            
            14.3
            
            
            (1.7
            )2012-2016
            
            
            136.4
            
            
            77.8
            
            
            (9.2
            )





Nicor
      also has a separate unfunded supplemental retirement plan and provides unfunded
      postretirement health care and life insurance benefits to employees of
      discontinued businesses. These plans are noncontributory with defined benefits.
      Net plan expenses were zero, $2.5 million and $1.9 million in 2006, 2005 and
      2004, respectively. The projected benefit obligation associated with these
      plans
      was $6.5 million and $7.1 million at December 31, 2006 and 2005, respectively.





The
      company also sponsors defined contribution plans covering substantially all
      domestic employees. These plans provide for employer matching contributions.
      The
      total cost of these plans was $6.6 million, $6.5 million and $6.2 million in
      2006, 2005 and 2004, respectively.





58
 
 Table
            of Contents


**12.** **STOCK-BASED
      COMPENSATION**





Nicor
      has
      a long-term incentive compensation plan that permits the granting of restricted
      stock, performance units and stock options to key executives and managerial
      employees, as well as a stock deferral plan, an employee stock purchase plan
      and
      directors’ stock-based compensation plans.





In
      2006,
      the company primarily granted restricted stock and performance units under
      these
      plans, whereas in prior years grants consisted primarily of stock options and
      performance units.





As
      of
      December 31, 2006, there was $2.3 million of total unrecognized compensation
      cost related to all nonvested share-based compensation arrangements. That cost
      is expected to be recognized over a weighted-average period of approximately
      2
      years. The company recognized compensation cost and related tax effects for
      all
      share-based compensation arrangements for the years ended December 31 as follows
      (in millions):





**2006**
            
            2005
            
            2004Operating
                and maintenance expense
            
            **$**
            **3.4**
            
            $
            2.9
            
            $
            1.2Income
                tax benefits
            
            
            **1.4**
            
            
            1.2
            
            
            .5





Cash
      flows related to stock-based options for the years ended December 31 were as
      follows (in millions):





**2006**
            
            2005Proceeds
                from the exercise of stock options
            
            **$**
            **22.6**
            
            $
            1.4Associated
                income tax benefits realized
            
            
            **2.8**
            
            
            .4





The
      difference between the proceeds from the exercise of stock options and the
      par
      value of the stock is recorded within Paid-in capital on the balance sheet.





**Restricted
      stock.** Restricted stock represents shares of common stock that are nontransferable
      during a vesting period of generally four years. Compensation cost was measured
      at the grant date share price for all periods.





A
      summary
      of the status of the company’s restricted stock and changes during the year
      ended December 31, 2006 is as follows:




Weighted-Number
                of
            
            average
                grant-shares
            
            date
                fair valueNonvested
                at January 1, 2006
            
            
            5,999
            
            $
            41.11Granted
            
            
            35,870
            
            
            41.62Vested
            
            
            (3,000
            )
            
            41.11Forfeited
            
            
            (1,670
            )
            
            41.62Nonvested
                at December 31, 2006
            
            
            37,199
            
            
            41.58





There
      was
      no restricted stock granted in 2005. The total fair value of shares vested
      in
      both 2006 and 2005 was $0.1 million.





**Performance
      units.** These
      awards are paid out in cash based on a measure of relative total shareholder
      return over a three-year performance period as compared to the performance
      of
      the companies in a utility industry peer group (Standard & Poor’s utility
      group). Units vest over approximately three years, or upon retirement one year
      or more after the grant date. The liability for the units is adjusted to fair
      value each





59
 
 Table
            of Contents


quarter-end,
      and compensation cost is ultimately measured as the settlement date fair value
      (or cash payment). Interim fair values are estimated by discounting
      probability-weighted expected cash flows.




The
      company paid $0.8 million and $0.2 million during the years ended December
      31,
      2006 and 2005, respectively, to settle performance unit obligations.





**Other.** The
      company has other stock-based compensation plans, but the impact on net income
      and earnings per share for the year ended December 31, 2006 is immaterial.





**13.** **COMMON
      STOCK**





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





**2006**
            
            2005
            
            2004Beginning
                of year
            
            **44.2**
            
            
            
            44.1
            
            
            
            44.0Issued
            
            **.7**
            
            
            
            .1
            
            
            
            .1End
                of year
            
            **44.9**
            
            
            
            44.2
            
            
            
            44.1





Shares
      issued during 2006 were primarily due to stock option exercises. There were
      no
      repurchases of common stock in 2006, 2005 and 2004 under the common stock
      repurchase program announced in 2001.





**Dividend
      and other restrictions.** Nicor
      has no contractual or regulatory restrictions on the payment of dividends.
      Nicor
      Gas is restricted by regulation in the amount it can dividend or loan to
      affiliates. Dividends are allowed only to the extent of Nicor Gas’ retained
      earnings balance. In addition, Nicor Gas may not extend cash advances to an
      affiliate if Nicor Gas has any outstanding short-term borrowings. Nicor Gas’
practice also provides that the balance of cash deposits or advances from Nicor
      Gas to an affiliate at any time shall not exceed the unused balance of funds
      actually available to that affiliate under its existing bank credit agreements
      or its commercial paper facilities with unaffiliated third parties. Nicor Gas’
positive cash deposits, if any, may be applied by Nicor to offset negative
      balances of other Nicor subsidiaries and vice versa.





**14. 
      MANDATORILY REDEEMABLE PREFERRED STOCK**





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





**Mandatorily
      redeemable preferred stock.** In
      November 2005, Nicor redeemed 20,062 shares of 5% Mandatorily Redeemable
      Preferred Stock, $50 par value, at a per share redemption price of $51 plus
      accrued and unpaid dividends. There were 11,681 shares of the 4.48% Series
      Mandatorily Redeemable Preferred Stock, $50 par value, outstanding at December
      31, 2006.





60
 
 Table
            of Contents


**15.** **BUSINESS
      SEGMENT AND GEOGRAPHIC INFORMATION**





Nicor
      is
      a holding company that operates in two separately managed reportable business
      segments: gas distribution and shipping. The gas distribution segment, Nicor’s
      principal business, serves nearly 2.2 million customers in a service territory
      that encompasses most of the northern third of Illinois, excluding the city
      of
      Chicago. The shipping segment transports containerized freight between Florida,
      the eastern coast of Canada, the Bahamas and the Caribbean region. The shipping
      segment also includes amounts related to cargo insurance coverages sold to
      its
      customers and other third parties.





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





**2006**
            
            2005
            
            2004Bundled
                sales
            
            **$**
            **2,087.8**
            
            $
            2,546.7
            
            $
            2,024.7Transportation
            
            
            **158.8**
            
            
            151.9
            
            
            147.4Revenue
                taxes
            
            
            **147.7**
            
            
            156.4
            
            
            143.5Other
            
            
            **58.0**
            
            
            54.6
            
            
            46.5**$**
            **2,452.3**
            
            $
            2,909.6
            
            $
            2,362.1





The
      shipping segment’s vessels are under foreign registry, and its containers are
      considered instruments of international trade. Although the majority of its
      long-lived assets are foreign owned and its revenues are derived from foreign
      operations, the functional currency is generally the U.S. dollar. In connection
      with the company’s January 2006 reorganization of certain shipping and related
      operations, the shipping segment recorded $4.2 million in current income tax
      expense and recognized a $1.8 million net income tax charge associated with
      the
      elimination of certain deferred income taxes. The 2005 income tax benefit for
      the shipping segment includes the impact of the tax benefit recorded in
      connection with the Jobs Act (approximately $17 million).





Nicor’s
      other business segments operate primarily in northern Illinois and include
      businesses that market energy-related products and services at retail to
      residential and small business consumers through Nicor Services, Nicor Solutions
      and Nicor Advanced Energy, and natural gas at the wholesale level through Nicor
      Enerchange. They also include a 50-percent-owned natural gas pipeline (Horizon
      Pipeline) with Natural Gas Pipeline Company of America and a 50-percent-owned
      engineering and consulting firm (EN Engineering) with A. Epstein and Sons,
      International. Financial information about these other business segments is
      combined under the heading “Other energy ventures” on the table that follows.
      Intersegment revenues on the table are presented prior to
      elimination.





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





The
      majority of intersegment revenues represent gas distribution revenues related
      to
      customers entering into utility-bill management contracts with 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.





Operating
      income in the “Corporate and eliminations” column includes the following
      items:





·
            During
                2006 and 2005, the company recognized $5.2 million and $2.8 million,
                respectively, of insurance recoveries related to previously incurred
                legal
                expenses associated with the securities class
                action and shareholder derivative lawsuit settlements. No such recoveries
                occurred during 2004. For more information, see Note 21 - Contingencies
                -
                Other.





61
 
 Table
            of Contents




·
            During
                2006, the company recorded a $10 million charge (non-deductible for
                tax
                purposes) associated with the outstanding SEC inquiry. During 2005,
                the
                company recorded $29.9 million of net insurance recoveries and earnings
                thereon related to the securities class action and derivative lawsuit
                settlements. During 2004, the company recorded a $38.5 million securities
                class action settlement charge. For more information on these items,
                see
                Note 21 - Contingencies.


·
            Benefits
                associated with Nicor’s other energy ventures’ utility-bill management
                contracts attributable to warmer than normal weather in 2006 and
                recorded
                in corporate and eliminations were $9.5 million. The weather impact
                of
                these contracts generally serves to partially offset the gas distribution
                segment’s weather risk. This benefit (cost) is recorded primarily at the
                corporate level as a result of an agreement between the parent company
                and
                certain of its subsidiaries. Related costs of approximately $0.7
                million
                were recognized within other energy
                ventures.


·
            The
                income tax benefit for 2006 includes a net income tax benefit of
                $7.0
                million from the elimination of certain deferred income taxes associated
                with the January 2006 reorganization of certain shipping and related
                operations and $0.5 million in current income tax expense related
                to the
                repatriation of foreign earnings in
                2005.





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











62
 
 Table
            of Contents




**Nicor
                Inc.**Other
            
            CorporateGas
            
            
            
            energy
            
            anddistribution
            
            Shipping
            
            ventures
            
            eliminations
            
            Consolidated**Operating
                revenues****2006****External
                customers**
            
            
            
            
            **$**
            **2,370.9**
            
            **$**
            **398.3**
            
            **$**
            **190.8**
            
            **$**
            **-**
            
            **$**
            **2,960.0****Intersegment**
            
            
            
            
            
            **81.4**
            
            
            -
            
            
            **25.1**
            
            
            **(106.5**
            **)**
            
            -**2,452.3**
            
            
            **398.3**
            
            
            **215.9**
            
            
            **(106.5**
            **)**
            
            **2,960.0**2005External
                customers
            
            
            
            
            
            2,824.5
            
            
            378.5
            
            
            154.8
            
            
            -
            
            
            3,357.8Intersegment
            
            
            
            
            
            85.1
            
            
            -
            
            
            2.2
            
            
            (87.3
            )
            
            -2,909.6
            
            
            378.5
            
            
            157.0
            
            
            (87.3
            )
            
            3,357.82004External
                customers
            
            
            
            
            
            2,282.2
            
            
            310.7
            
            
            146.8
            
            
            -
            
            
            2,739.7Intersegment
            
            
            
            
            
            79.9
            
            
            -
            
            
            8.5
            
            
            (88.4
            )
            
            -2,362.1
            
            
            310.7
            
            
            155.3
            
            
            (88.4
            )
            
            2,739.7**Operating
                income (loss)****2006**
            
            
            
            
            **$**
            **123.9**
            
            **$**
            **47.5**
            
            **$**
            **26.6**
            
            **$**
            **4.5**
            
            **$**
            **202.5**2005
            
            
            
            
            
            116.9
            
            
            40.4
            
            
            14.1
            
            
            30.3
            
            
            201.72004
            
            
            
            
            
            130.8
            
            
            31.6
            
            
            19.3
            
            
            (44.0
            )
            
            137.7**Equity
                investment income (loss), net****2006**
            
            
            
            
            **$**
            **(.1**
            **)**
            **$**
            **-**
            
            **$**
            **7.1**
            
            **$**
            **4.1**
            
            **$**
            **11.1**2005
            
            
            
            
            
            **-**
            
            
            -
            
            
            3.3
            
            
            6.0
            
            
            9.32004
            
            
            
            
            
            (.1
            )
            
            -
            
            
            2.2
            
            
            4.2
            
            
            6.3**Interest
                income****2006**
            
            
            
            
            **$**
            **6.3**
            
            **$**
            **1.1**
            
            **$**
            **1.3**
            
            **$**
            **.3**
            
            **$**
            **9.0**2005
            
            
            
            
            
            4.3
            
            
            2.9
            
            
            .8
            
            
            (2.0
            )
            
            6.02004
            
            
            
            
            
            1.0
            
            
            1.1
            
            
            .3
            
            
            (.1
            )
            
            2.3**Other
                income (expense), net****2006**
            
            
            
            
            **$**
            **.6**
            
            **$**
            **.2**
            
            **$**
            **.1**
            
            **$**
            **(.3**
            **)**
            **$**
            **.6**2005
            
            
            
            
            
            (.5
            )
            
            .3
            
            
            -
            
            
            1.0
            
            
            .82004
            
            
            
            
            
            (2.4
            )
            
            (.4
            )
            
            .1
            
            
            2.9
            
            
            .2**Interest
                expense, net of****amounts
                capitalized****2006**
            
            
            
            
            **$**
            **44.3**
            
            **$**
            **2.3**
            
            **$**
            **2.5**
            
            **$**
            **-**
            
            **$**
            **49.1**2005
            
            
            
            
            
            42.1
            
            
            1.2
            
            
            1.2
            
            
            2.3
            
            
            46.82004
            
            
            
            
            
            37.2
            
            
            .7
            
            
            .5
            
            
            2.8
            
            
            41.2**Income
                tax expense (benefit), net****2006**
            
            
            
            
            **$**
            **27.8**
            
            **$**
            **9.0**
            
            **$**
            **12.9**
            
            **$**
            **(3.9**
            **)**
            **$**
            **45.8**2005
            
            
            
            
            
            26.1
            
            
            (7.5
            )
            
            6.8
            
            
            9.3
            
            
            34.72004
            
            
            
            
            
            33.1
            
            
            8.1
            
            
            8.7
            
            
            (19.7
            )
            
            30.2**Property,
                plant and****equipment,
                net****2006**
            
            
            
            
            **$**
            **2,580.7**
            
            **$**
            **121.3**
            
            **$**
            **13.2**
            
            **$**
            **(.5**
            **)**
            **$**
            **2,714.7**2005
            
            
            
            
            
            2,530.1
            
            
            119.9
            
            
            9.3
            
            
            (.2
            )
            
            2,659.12004
            
            
            
            
            
            2,416.4
            
            
            125.9
            
            
            7.6
            
            
            (.1
            )
            
            2,549.8**Capital
                expenditures****2006**
            
            
            
            
            **$**
            **164.5**
            
            **$**
            **16.9**
            
            **$**
            **5.9**
            
            **$**
            **(.2**
            **)**
            **$**
            **187.1**2005
            
            
            
            
            
            186.4
            
            
            10.7
            
            
            3.4
            
            
            (.1
            )
            
            200.42004
            
            
            
            
            
            175.1
            
            
            9.0
            
            
            3.2
            
            
            -
            
            
            187.3**Depreciation****2006**
            
            
            
            
            **$**
            **160.1**
            
            **$**
            **15.7**
            
            **$**
            **2.3**
            
            **$**
            **-**
            
            **$**
            **178.1**2005
            
            
            
            
            
            154.5
            
            
            16.2
            
            
            1.7
            
            
            -
            
            
            172.42004
            
            
            
            
            
            148.8
            
            
            16.4
            
            
            1.4
            
            
            -
            
            
            166.6






63
 
 Table
          of Contents


**16.** **EQUITY
        INVESTMENT INCOME, NET**
 
 Equity
        investment income, net included the following (in millions):
 
 **2006**
              
              2005
              
              2004Triton
              
              **$**
              **5.8**
              
              $
              7.4
              
              $
              6.5Adkins
                  Energy
              
              
              **3.8**
              
              
              .7
              
              
              .5Horizon
                  Pipeline
              
              
              **1.8**
              
              
              1.7
              
              
              1.6EN
                  Engineering
              
              
              **1.5**
              
              
              .7
              
              
              .1Affordable
                  housing investments
              
              
              **(1.8**
              **)**
              
              (1.3
              )
              
              (2.4
              )Other
              
              
              **-**
              
              
              .1
              
              
              -**$**
              **11.1**
              
              $
              9.3
              
              $
              6.3
 
 Included
        in equity investment income from Adkins Energy is the sale of the investment
        in
        the third quarter of 2006, which resulted in a $2.4 million gain.
 
 In
        2006,
        2005 and 2004, Nicor received dividends from equity investees of $7.4 million,
        $5.5 million and $5.6 million, respectively.
 
 **17.** **RELATED
        PARTY TRANSACTIONS**
 
 Horizon
        Pipeline charged Nicor Gas $10.3 million during the year ended December 31,
        2006, and $10.4 million in 2005 and 2004 for natural gas transportation under
        rates that have been accepted by the FERC.
 
 EN
        Engineering charged Nicor Gas $4.2 million and $4.4 million for engineering
        and
        corrosion services rendered for 2006 and 2005, respectively. In 2004, EN
        Engineering charged Nicor Technologies, a wholly owned subsidiary of Nicor,
        $4.0
        million for these services.
 
 In
        addition, certain related parties may acquire regulated utility services
        at
        rates approved by the ICC.
 
 **18.** **COMMITMENTS**
 
 As
        of
        December 31, 2006, Nicor had purchase commitments with payments due as follows
        (in millions):
  Purchase
                  obligations
              
              Operating
                  leases
              
              Other
                  long-term obligations2007
              
              $
              13.9
              
              $
              30.4
              
              $
              1.82008
              
              
              10.4
              
              
              24.9
              
              
              1.12009
              
              
              10.4
              
              
              13.4
              
              
              .32010
              
              
              10.4
              
              
              6.5
              
              
              .12011
              
              
              10.4
              
              
              3.6
              
              
              .1After
                  2011
              
              
              3.7
              
              
              15.6
              
              
              .6$
              59.2
              
              $
              94.4
              
              $
              4.0
 
 Purchase
        obligations consist of natural gas transportation agreements and property,
        plant
        and equipment purchases. Operating leases are primarily for vessels, containers
        and equipment in the shipping segment, office space and equipment in the
        gas
        distribution segment and office space for the other energy
        ventures.
 
 Tropical
        Shipping has certain equipment operating leases which include purchase and/or
        renewal options, at fair market amounts at the time of purchase or renewal.
        Rental expense under operating leases was
  
 64
 
 Table
            of Contents
  $41.7
        million, $37.2 million and $27.5 million in 2006, 2005 and 2004, respectively.
        Other long-term obligations consist primarily of equity fund commitments.
 
 **19.** **RATE
        PROCEEDING**
 
 In
        2005,
        Nicor Gas received approval from the ICC for a $54.2 million base rate increase
        which reflected an allowed rate of return on original-cost rate base of 8.85
        percent, including 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’ 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. These rates were implemented in the fourth quarter
        of
        2005.
 
 In
        October 2005, Nicor Gas and six other parties filed applications for rehearing
        of the final order of the rate case.  In March 2006, the ICC issued its
        decision on rehearing in which it adjusted the amount of the annual net rate
        increase to $49.7 million from the $54.2 million that had been approved in
        the
        earlier order. Rate changes resulting from the rehearing order were prospective
        and went into effect on April 11, 2006. Parties, including Nicor Gas, that
        appealed the ICC’s rate case decision to the state appellate courts have since
        withdrawn their appeals. As a result, the ICC rate order is no longer subject
        to
        judicial review.
 
 As
        a
        result of the rate order which became effective in the fourth quarter of
        2005,
        certain storage-related costs have been recorded in operating and maintenance
        expense. Storage-related gas costs recorded in operating and maintenance
        expense
        during 2006 and 2005 totaled $21.4 million and $6.5 million, respectively.
        Storage-related gas costs incurred prior to the effective date of the rate
        order
        and recorded as cost of gas in 2005 totaled $11.1 million.
 
 **20.** **GUARANTEES
        AND INDEMNITIES**
 
 Nicor
        and
        certain subsidiaries enter into various financial and performance guarantees
        and
        indemnities providing assurance to third parties.
 
 **Financial
        guarantees.** The
        company has issued guarantees of affiliate obligations to vendors and other
        third parties, requiring Nicor to repay the obligations should its affiliates
        default. The obligations of the company’s wholly owned subsidiaries are
        reflected in Nicor’s Consolidated Balance Sheet, while the obligations of its
        unconsolidated equity investments are not.
 
 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
        $11 million at December 31, 2006. Nicor believes the likelihood of any such
        payment by TEL is remote and has recorded no liability for this
        contingency.
 
 **Performance
        guarantees.** Nicor
        Services markets separately priced product warranty contracts that provide
        for
        the repair of heating, ventilation and air conditioning 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 $6.2 million,
        $5.0
        million and $2.9 million were incurred in 2006, 2005 and 2004, respectively.
 
 **Indemnities.** In
        certain instances, Nicor has undertaken to indemnify current property owners
        and
        others against costs associated with the effects and/or remediation of
        contaminated sites for which the company may be responsible under applicable
        federal or state environmental laws, generally with no limitation as to the
        amount. Aside from liabilities recorded in connection with coal tar cleanup,
        as
        discussed in
  65
 
 Table
            of Contents
 Note
        21 -
        Contingencies - Manufactured Gas Plant Sites, Nicor believes that 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. While the company does
        not
        expect to incur significant costs under these indemnifications, it is not
        possible to estimate the maximum future potential payments.
 
 **21.** **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.
 
 **PBR
        Plan.** Nicor
        Gas’ PBR plan for natural gas costs went into effect in 2000 and was terminated
        by the company effective January 1, 2003. Under the PBR plan, Nicor Gas’ total
        gas supply costs were compared to a market-sensitive benchmark. Savings and
        losses relative to the benchmark were determined annually and shared equally
        with sales customers. The PBR plan is currently under ICC review. There are
        allegations that the company acted improperly in connection with the PBR
        plan,
        and the ICC and others are reviewing these allegations. On June 27, 2002,
        the
        Citizens Utility Board (“CUB”) filed a motion to reopen the record in the ICC’s
        proceedings to review the PBR plan (the “ICC Proceedings”). As a result of the
        motion to reopen, Nicor Gas, the Cook County State’s Attorney Office (“CCSAO”),
        the staff of the ICC and CUB entered into a stipulation providing for additional
        discovery. The Illinois Attorney General’s Office (“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. 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 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 plans to seek in testimony to
        be
        filed in compliance with the new scheduling order 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.
  66
 
 Table
            of Contents
 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. In December 2006,
        Nicor Gas withdrew its previously filed testimony. Nicor Gas anticipates
        refiling its direct testimony in compliance with the new scheduling order
        discussed below which it expects to be consistent with the findings of the
        special committee Report. Nicor Gas plans to seek a reimbursement of
        approximately $1 million as referenced above. In 2004, the evidentiary hearings
        on this matter were stayed in order to permit the parties 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. In December 2006, the additional third party
        discovery from EKT was obtained and the Administrative Law Judges issued
        a
        scheduling order that provides for Nicor Gas to submit its direct testimony
        by
        April 13, 2007. No date has been set for evidentiary hearings on this
        matter.
 
 During
        the course of the SEC investigation discussed below, the company became aware
        of
        additional information relating to the activities of individuals affecting
        the
        PBR plan for the period from 1999 through 2002, including information consisting
        of third party documents and recordings of telephone conversations from EKT.
        Review of additional information completed in 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 in 2004 indicated 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 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 2004.
 
 Nicor
        is
        unable to predict the outcome of the ICC’s review or the company’s potential
        exposure thereunder. Because the PBR plan and historical gas costs are still
        under ICC review, the final outcome could be materially different than the
        amounts reflected in the company’s financial statements as of December 31,
        2006.
  67
 
 Table
            of Contents
 **SEC
        and U.S. Attorney Inquiries.** In 2002,
        the staff of the SEC Division of Enforcement (“SEC Staff”) informed Nicor that
        the SEC is conducting a formal inquiry regarding the PBR plan. A representative
        of the Office of the United States Attorney for the Northern District of
        Illinois (the “U.S Attorney”) also notified Nicor that that office was
        conducting an inquiry on the same matters that the SEC is investigating,
        and a
        grand jury was also reviewing these matters. In April 2004, Nicor was advised
        by
        the SEC Staff 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.
        On
        July 7, 2006, the company announced that it reached a tentative agreement
        with
        the SEC Staff in settlement of an anticipated civil action to which the company
        and the SEC will be parties. Under the terms of the tentative settlement,
        the
        company will be subject to disgorgement of one dollar, a monetary fine of
        $10
        million and an injunction. The company will neither admit nor deny any
        wrongdoing. In July 2006, the company deposited the $10 million in escrow
        pending final approval of the tentative settlement by the SEC commissioners
        and
        entry of a final judgment by a federal court. The SEC Staff will submit the
        tentative settlement to the SEC commissioners for approval. The SEC
        commissioners have the authority to approve, modify or reject the tentative
        settlement. Nicor recorded a $10 million charge to its second quarter earnings
        in connection with this matter. The $10 million fine is not deductible for
        federal or state income tax purposes. In December 2006, the U.S. Attorney
        advised that it is closing its separate inquiry and will not seek to prosecute
        the company or any individuals in connection with this matter.
 
 **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, the case is proceeding
        in the
        Circuit Court 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.
 
 **Mercury** .
        Nicor
        Gas has incurred, and expects to continue to incur, costs related to its
        historical use of mercury in various kinds of company equipment.
 
 Nicor
        Gas
        is a defendant in several private lawsuits, all in the Circuit Court of Cook
        County, Illinois, seeking a variety of unquantified damages (including bodily
        injury and property damages) allegedly caused by mercury spillage resulting
        from
        the removal of 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 was to use
        reasonable efforts to remove any remaining inside residential mercury regulators
        by March of 2006. Nicor Gas believes it is in compliance with its obligations
        under the settlement agreement. 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 14 households.
 
 As
        of
        December 31, 2006, Nicor Gas had remaining an estimated liability of $13.2
        million. This represents management’s best estimate of future costs based on an
        evaluation of currently available information, including potential liabilities
        relating to remaining lawsuits after taking into account an agreement of
        a
        subcontractor’s insurer to assume certain of these potential liabilities. 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.
  68
 
 Table
            of Contents
 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 received
        approximately $3.8 million, net of legal fees, from an independent contractor
        in
        the first quarter of 2006. 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 Nicor Gas and against various insurers
        in
        the amount of $10.2 million with respect to one of Nicor’s and Nicor Gas’
mercury-related insurance claims. The insurers filed an appeal of the judgment.
        On November 29, 2005, the First District Appellate Court reversed the Circuit
        Court’s judgment in favor of Nicor and Nicor Gas and remanded the case to the
        Circuit Court for proceedings consistent with the Appellate Court’s decision. On
        November 30, 2006, the Illinois Supreme Court upheld the decision of the
        Appellate Court and remanded the case to the trial court. In January 2007,
        an
        agreement in principle to settle this matter was reached with the lead insurers
        that would result in an additional net insurance recovery of approximately
        $0.7
        million.
 
 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 have some
        responsibility. Most of these properties are not presently owned by the company.
        Nicor Gas and Commonwealth Edison Company (“ComEd”) are parties to an interim
        agreement to cooperate in cleaning up residue at many of these properties.
        Under
        the interim agreement, mutually agreed costs are to be evenly split between
        Nicor Gas and ComEd until such time as they are finally allocated either
        through
        negotiation or arbitration. On April 17, 2006, Nicor Gas initiated arbitration
        to determine the final allocations of these costs between Nicor Gas and ComEd.
        The ultimate outcome of the arbitration is not presently determinable.
        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 December 31, 2006, the company
        had
        recorded a liability in connection with these matters of $17.7 million. In
        accordance with ICC authorization, the company has been recovering, and expects
        to continue to recover, these costs from its customers, subject to annual
        prudence reviews.
 
 In
        December 2001, a purported class action lawsuit was filed against Exelon
        Corporation, ComEd and Nicor Gas in the Circuit Court of Cook County alleging,
        among other things, that the 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, injunctive relief to compel the defendants
        to
        engage in various clean-up activities and punitive damages. An agreement
        in
        principle to settle the purported class action lawsuit has been reached and,
        as
        of December 31, 2006, the company has a $2.25 million liability recorded
        in
        connection with this matter. The proposed class action settlement was approved
        by the trial court. An appeal was filed by one objector and conclusion of
        the
        proposed settlement will depend on the resolution of that appeal. In accordance
        with ICC authorization, the company expects to recover costs of such settlement
        from its customers, subject to an annual prudence review. Management cannot
        predict the outcome of certain other pending lawsuits relating to the Oak
        Park
        site or the company’s potential exposure thereto and has not recorded a
        liability associated with those other pending matters.
  69
 
 Table
            of Contents
 In
        April
        2002, Nicor Gas was named as a defendant, together with ComEd, 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
        2004,
        one of Nicor’s Directors and Officers 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
        then
        pending securities class actions and shareholder derivative lawsuits and
        related
        matters, with any remaining balance to be paid to Nicor. The securities class
        actions were settled later in 2004 for a payment by Nicor of $38.5 million.
        As a
        result of this settlement and the settlement of the shareholder derivatives
        lawsuits in 2005, the escrow was terminated and the $29.0 million, plus earnings
        of approximately $0.4 million, held by the escrow agent was paid to Nicor
        in the
        second quarter of 2005. These recoveries were recorded in “Litigation charges
        (recoveries), net” in the Consolidated Statement of Operations for the year
        ended December 31, 2005. In addition, Nicor had asserted claims against its
        excess insurance carrier arising out of these securities class actions and
        shareholder derivative lawsuits. In connection with the settlement of the
        shareholder derivative lawsuits, in the first quarter of 2005, Nicor’s excess
        insurance carrier paid Nicor $4 million. Under the terms of the shareholder
        derivative lawsuits settlement, Nicor agreed to adopt certain new corporate
        governance policies and to pay $3.5 million out of the $4 million received
        from
        the excess insurance carrier to plaintiffs’ attorneys to reimburse them for the
        fees and costs expended in pursuing the derivative actions. The $0.5 million
        net
        of these payments was reflected in “Litigation charges (recoveries), net” in the
        Consolidated Statement of Operations for the year ended December 31, 2005.
        Additionally, Nicor received additional payments of $5.2 million and $2.8
        million in 2006 and 2005, respectively, from insurance carriers as reimbursement
        of legal defense costs in connection with these matters. These payments have
        been recorded in “Other corporate eliminations and expenses” in the Consolidated
        Statement of Operations for the respective years.
 
 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 cost 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.
  70
 
 Table
            of Contents
 **22.** **QUARTERLY
        RESULTS (UNAUDITED)**
 
 Summarized
        quarterly financial data is presented below (in millions, except per share
        data).
 
 Quarter
                  endedMar.
                  31
              
              June
                  30
              
              Sept.
                  30
              
              Dec.
                  312006Operating
                  revenues
              
              **$**
              **1,319.4**
              
              **$**
              **451.3**
              
              **$**
              **351.1**
              
              **$**
              **838.2**Operating
                  income
              
              
              **66.1**
              
              
              **16.9**
              
              
              **28.5**
              
              
              **91.0**Net
                  income
              
              
              **43.9**
              
              
              **8.5**
              
              
              **17.6**
              
              
              **58.3**Earnings
                  per common shareBasic
              
              
              **.99**
              
              
              **.19**
              
              
              **.39**
              
              
              **1.30**Diluted
              
              
              **.99**
              
              
              **.19**
              
              
              **.39**
              
              
              **1.29**2005Operating
                  revenues
              
              $
              1,179.8
              
              $
              484.4
              
              $
              336.0
              
              $
              1,357.5Operating
                  income
              
              
              69.8
              
              
              58.0
              
              
              .6
              
              
              73.3Net
                  income (loss)
              
              
              43.7
              
              
              33.4
              
              
              (2.7
              )
              
              62.0Earnings
                  (loss) per common shareBasic
              
              
              .99
              
              
              .76
              
              
              (.06
              )
              
              1.40Diluted
              
              
              .99
              
              
              .75
              
              
              (.06
              )
              
              1.40
 
 The
        second quarter of 2006 included a $10 million charge (non-deductible for
        tax
        purposes) associated with the outstanding SEC inquiry. The second quarter
        of
        2005 included $29.4 million of operating income related to insurance recoveries
        and earnings thereon related to the securities class action and derivative
        lawsuit settlements. Net income in the fourth quarter of 2005 includes the
        impact of the tax benefit recorded in connection with the Jobs Act of
        approximately $17 million.
 
 **Item
        9.****Changes
        in and Disagreements with Accountants on Accounting and Financial
        Disclosure**
 
 None.
 
 **Item
        9A.****Controls
        and Procedures**
 
 **Evaluation
        of Disclosure Controls and Procedures**
 
 The
        company carried out an evaluation under the supervision and with the
        participation of the company’s management, including its Chief Executive Officer
        and Chief Financial Officer, of the effectiveness of the design and operation
        of
        the company’s disclosure controls and procedures as of the end of the most
        recent fiscal quarter of the period covered by this Annual Report on Form
        10-K
        (the “Evaluation”).
 
 In
        designing and evaluating the disclosure controls and procedures, management
        recognizes that any disclosure controls and procedures, no matter how well
        designed and operated, can provide only reasonable assurance of achieving
        the
        desired control objectives, and management is required to apply its judgment
        in
        evaluating the cost-benefit relationship of possible disclosure controls
        and
        procedures. Based on the Evaluation, the company’s Chief Executive Officer and
        Chief Financial Officer concluded that the company’s disclosure controls and
        procedures, as of the end of the most recent fiscal quarter covered by this
        Annual Report on Form 10-K, were effective at the reasonable assurance level
        to
        ensure that information required to be disclosed by the company in reports
        that
        it files or submits under the Securities Exchange Act of 1934 is recorded,
        processed, summarized and reported within the time periods specified in United
        States Securities and Exchange Commission rules and forms.
  71
 
 Table
            of Contents
 **Management’s
        Report on Internal Control Over Financial Reporting**
 
 Internal
        control over financial reporting refers to the process designed by, or under
        the
        supervision of, the company’s Chief Executive Officer and Chief Financial
        Officer, and effected by the company’s board of directors, management and other
        personnel, to provide reasonable assurance regarding the reliability of
        financial reporting and the preparation of financial statements for external
        purposes in accordance with generally accepted accounting principles, and
        includes those policies and procedures that:
 
 1.
              Pertain
                  to the maintenance of records that in reasonable detail accurately
                  and
                  fairly reflect the transactions and dispositions of the assets
                  of the
                  company;
 
 2.
              Provide
                  reasonable assurance that transactions are recorded as necessary
                  to permit
                  preparation of financial statements in accordance with generally
                  accepted
                  accounting principles, and that receipts and expenditures of the
                  company
                  are being made only in accordance with authorizations of management
                  and
                  directors of the company; and
 
 3.
              Provide
                  reasonable assurance regarding prevention or timely detection of
                  unauthorized acquisition, use or disposition of the company’s assets that
                  could have a material effect on the financial
                  statements.
 
 Internal
        control over financial reporting cannot provide absolute assurance of achieving
        financial reporting objectives because of its inherent limitations. Internal
        control over financial reporting is a process that involves human diligence
        and
        compliance and is subject to lapses in judgment and breakdowns resulting
        from
        human failures. Internal control over financial reporting also can be
        circumvented by collusion or improper management override. Because of such
        limitations, there is a risk that material misstatements may not be prevented
        or
        detected on a timely basis by internal control over financial reporting.
        However, these inherent limitations are known features of the financial
        reporting process. Therefore, it is possible to design into the process
        safeguards to reduce, though not eliminate, this risk. Management is responsible
        for establishing and maintaining adequate internal control over financial
        reporting for the company.
 
 Management
        has used the framework set forth in the report entitled “Internal
        Control—Integrated Framework” published by the Committee of Sponsoring
        Organizations of the Treadway Commission to evaluate the effectiveness of
        the
        company’s internal control over financial reporting. Management has concluded
        that the company’s internal control over financial reporting was effective as of
        December 31, 2006. Deloitte & Touche LLP, an independent registered public
        accounting firm, has issued an attestation report on management’s assessment of
        the company’s internal control over financial reporting.
 
 There
        has
        been no change in the company’s internal controls over financial reporting
        during the company’s most recent fiscal quarter that has materially affected, or
        is reasonably likely to materially affect, the company’s internal control over
        financial reporting. In the second quarter of 2006, the company disclosed
        that
        Nicor Gas completed the implementation of a new customer care and billing
        system.
 
 **Item
        9B.****Other
        Information**
 
 None.
  72
 
 Table
            of Contents
 **PART
        III**
 
 **Item
        10.** **Directors
        and Executive Officers of the Registrant**
 
 Information
        on directors is contained under the Election of Directors and Section 16(a)
        Beneficial Ownership Reporting Compliance sections in Nicor’s Definitive Proxy
        Statement to be filed on or about March 14, 2007, and is incorporated herein
        by
        reference.
 
 Information
        about the audit committee financial expert is contained under the Audit
        Committee Report section in Nicor’s Definitive Proxy Statement to be filed on or
        about March 14, 2007, and is incorporated herein by reference.
 
 Information
        about executive officers is included in Part I of this Form 10-K, Executive
        Officers of the Registrant, and is incorporated herein by reference. Executive
        officers of the company are elected annually by the Board of
        Directors.
 
 In
        addition, security ownership information about executive officers is contained
        under the Section 16(a) Beneficial Ownership Reporting Compliance section
        in
        Nicor’s Definitive Proxy Statement to be filed on or about March 14, 2007, and
        is incorporated herein by reference.
 
 The
        company has adopted a Code of Ethics that applies to the company’s directors,
        officers and employees, including its principal executive officer, principal
        financial officer, principal accounting officer or controller or persons
        performing similar functions. We intend to satisfy the disclosure requirements
        under Item 5.05 of Form 8-K regarding an amendment to or waiver from a provision
        of such Code of Ethics as it applies to our principal executive officer,
        principal financial officer, principal accounting officer or controller or
        persons performing similar functions and that relates to certain topics,
        by
        posting such information on the company’s investor relations section of its
        Internet site at www.nicor.com .
 
 The
        company has disclosed its Code of Ethics, Audit Committee Charter, Corporate
        Governance Committee Charter, Compensation Committee Charter and Corporate
        Governance Guidelines on the company’s investor relations section of its
        Internet site at www.nicor.com .
        Any
        shareholder may also request this information in print form from the company’s
        Investor Relations department.
 
 **Item
        11.****Executive
        Compensation**
 
 Information
        on executive compensation is contained under the Compensation Committee Report
        and Compensation Discussion and Analysis sections in Nicor’s Definitive Proxy
        Statement to be filed on or about March 14, 2007, and is incorporated herein
        by
        reference.
 
 **Item
        12.****Security
        Ownership of Certain Beneficial Owners and Management and Related Stockholder
        Matters**
 
 Information
        on security ownership of certain beneficial owners and management is contained
        under the Security Ownership of Management and Beneficial Ownership of Common
        Stock sections in Nicor’s Definitive Proxy Statement to be filed on or about
        March 14, 2007, and is incorporated herein by reference.
  73
 
 Table
            of Contents
 
 **EQUITY
        COMPENSATION PLAN INFORMATION**
 Plan
                  category
              (a)
                
                Number
                  of securities to be issued upon exercise of outstanding options,
                  warrants,
                  and rights
              (b)
                
                Weighted-average
                  exercise price of outstanding options, warrants, and
                  rights
              (c)
                
                Number
                  of securities remaining available for future issuance under equity
                  compensation plans (excluding securities reflected in column
                  (a))Equity
                  compensation plans approved by security holders
              866,809
              $37.36****
              2,338,370**(1)**Equity
                  compensation plans not approved by security holders
              **-**
              **-**
              **-**Total
              866,809
              $37.36
              2,338,370
 
 **(1)**
              This
                  number includes 403,067 shares issuable under the 1997 Long-Term
                  Incentive
                  Plan, as amended. These shares can be used for awards under the
                  Stock
                  Deferral Plan, which allows eligible key executives and managerial
                  employees to convert up to 50 percent of their cash awards from
                  annual and
                  long-term incentive plans into Nicor common stock, the receipt
                  of which is
                  deferred. Also
                  included are 435,303 shares issuable under the Employee Stock Purchase
                  Plan. The remaining 1,500,000 shares are issuable under the 2006
                  Long-Term
                  Incentive Program, which the company approved in the second quarter
                  of
                  2006. These shares can be used for restricted stock, stock options
                  and
                  performance award units, including awards under the Stock Deferral
                  Plan.
                  The company expects to file a registration statement on Form S-8
                  in the
                  first quarter of 2007 to register these shares under the Securities
                  Act of
                  1933.
 
 **Item
        13.****Certain
        Relationships and Related Transactions**
 
 Information
        about certain relationships and related transactions is contained under the
        Certain Relationships and Related Transactions section in Nicor’s Definitive
        Proxy Statement to be filed on or about March 14, 2007, and is incorporated
        herein by reference.
 
 **Item
        14.****Principal
        Accountant Fees and Services**
 
 Information
        on principal accountant fees and services is contained under the Principal
        Accountant Fees and Services section in Nicor’s Definitive Proxy Statement to be
        filed on or about March 14, 2007, and is incorporated herein by
        reference.
  74
 
 Table
            of Contents
 **PART
        IV**
 
 **Item
        15.** **Exhibits
        and Financial Statement Schedules**
 
 a)
 
 1)  Financial
        Statements:
 
 See
        Item
        8, Financial Statements and Supplementary Data, filed herewith, for a list
        of
        financial statements.
 
 2)  Financial
        Statement Schedules:
 
 ScheduleNumber
              
              PageReport
                  of Independent Registered Public Accounting
                  Firm
              37II
              Valuation
                  and Qualifying Accounts
              76
 
 Schedules
                  other than those listed are omitted because they are not
                  applicable.
 
 3)  Exhibits
        Filed:
 
 See
        Exhibit Index filed herewith.
 
 
  
 
 
  75
 
 Table
            of Contents




**Nicor
                  Inc.****Schedule
                  II**VALUATION
                  AND QUALIFYING ACCOUNTS(millions)AdditionsBalance
                  at
              
              Charged
                  to
              
              Charged
                  to
              
              
              
              Balancebeginning
              
              costs
                  and
              
              other
              
              
              
              at
                  endDescription
              
              of
                  period
              
              expenses
              
              accounts
              
              Deductions
              
              of
                  period2006Allowance
                  for doubtfulaccounts receivable
              
              **$**
              **31.5**
              
              **$**
              **41.7**
              
              **$**
              **-**
              
              **$**
              **39.8**
              **(a)**
              **$**
              **33.4**Accrued
                  mercury-related costs
              
              
              **17.5**
              
              
              **-**
              
              
              -
              
              
              **4.3**
              **(b)**
              
              **13.2**Accrued
                  manufactured gas plantenvironmental costs
              
              
              **19.5**
              
              
              **-**
              
              
              **12.7**
              **(c)**
              
              **12.3**
              **(b)**
              
              **19.9**2005Allowance
                  for doubtfulaccounts receivable
              
              $
              21.9
              
              $
              44.1
              
              $
              -
              
              $
              34.5
              (a)
              $
              31.5Accrued
                  mercury-related costs
              
              
              20.2
              
              
              -
              
              
              -
              
              
              2.7
              (b)
              
              17.5Accrued
                  manufactured gas plantenvironmental costs
              
              
              36.8
              
              
              -
              
              
              0.6
              (c)
              
              17.9
              (b)
              
              19.52004Allowance
                  for doubtfulaccounts receivable
              
              $
              21.2
              
              $
              36.0
              
              $
              -
              
              $
              35.3
              (a)
              $
              21.9Accrued
                  mercury-related costs
              
              
              21.9
              
              
              -
              
              
              -
              
              
              1.7
              (b)
              
              20.2Accrued
                  manufactured gas plantenvironmental costs
              
              
              33.2
              
              
              -
              
              
              18.8
              (c)
              
              15.2
              (b)
              
              36.8(a)
                  Accounts receivable written off, net of recoveries.(b)
                  Expenditures, other adjustments.(c)
                  Accrual of estimated future remediation costs that are
                  deferredas regulatory assets.






76
 
 Table
          of Contents


**Signatures**





Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
      1934, the registrant has duly caused this report to be signed on its behalf
      by
      the undersigned, thereunto duly authorized.





Nicor
                Inc.DateFebruary
                23,
                2007
            
            /s/
                KAREN K.
                PEPPINGKaren
                K. PeppingVice
                President and Controller(Principal
                Accounting Officer andDuly
                Authorized Officer)Pursuant
                to the requirements of the Securities Exchange Act of 1934, this
                report
                has been signed below by
                the following persons on behalf of the registrant and in the capacities
                indicated on February 23, 2007.Signature
            
            Title/s/
                RUSS M.
                STROBELRuss
                M. Strobel
            
            Chairman,
                President and*(Principal
                Executive Officer)*
            
            Chief
                Executive Officer/s/ RICHARD L.
                HAWLEYRichard
                L. Hawley
            
            Executive
                Vice President and*(Principal
                Financial Officer)*
            
            Chief
                Financial Officer/s/ KAREN K.
                PEPPINGKaren
                K. Pepping
            
            Vice
                President and Controller*(Principal
                Accounting Officer)*ROBERT
                M. BEAVERS, JR.*
            
            DirectorBRUCE
                P. BICKNER*
            
            DirectorJOHN
                H. BIRDSALL, III*
            
            DirectorTHOMAS
                A. DONAHOE*
            
            DirectorRAYMOND
                A. JEAN*
            
            DirectorBRENDA
                J. GAINES*
            
            DirectorDENNIS
                J. KELLER*
            
            DirectorR.
                EDEN MARTIN*
            
            DirectorGEORGIA
                R. NELSON*
            
            DirectorJOHN
                RAU*
            
            DirectorJOHN
                F. RIORDAN*
            
            Director*
            By/s/
                RICHARD L.
                HAWLEYRichard
                L. Hawley(Attorney-in-fact)




77
 
 Table
          of Contents


**Exhibit
      Index**





ExhibitNumber
            
            Description
                of Document3.01
            *
            Restated
                Articles of Incorporation of the company. (File No. 1-7297, Form
                8-K for
                July 26, 2006, Nicor Inc.)3.02
            *
            By-Laws
                of the company as amended by the company’s Board of Directors on January
                15, 2004. (File No. 1-7297, Form 10-K for 2003, Nicor Inc., Exhibit
                3.09.)4.01
            *
            Indenture
                of Commonwealth Edison Company to Continental Illinois National Bank
                and
                Trust Company of Chicago, Trustee, dated as of January 1, 1954. (File
                No.
                1-7296, Form 10-K for 1995, Nicor Gas, Exhibit 4.01.)4.02
            *
            Indenture
                of Adoption of Nicor Gas to Continental Illinois National Bank and
                Trust
                Company of Chicago, Trustee, dated February 9, 1954. (File No. 1-7296,
                Form 10-K for 1995, Nicor Gas, Exhibit 4.02.)4.03
            *
            Supplemental
                Indenture, dated February 15, 1998, of Nicor Gas to Harris Trust
                and
                Savings Bank, Trustee, under Indenture dated as of January 1, 1954.
                (File
                No. 1-7296, Form 10-K for 1997, Nicor Gas, Exhibit
                4.19.)4.04
            *
            Supplemental
                Indenture, dated February 1, 1999, of Nicor Gas to Harris Trust and
                Savings Bank, Trustee, under Indenture dated as of January 1, 1954.
                (File
                No. 1-7296, Form 10-K for 1998, Nicor Gas, Exhibit
                4.19.)





4.05
            *
            Supplemental
                Indenture, dated February 1, 2001, of Nicor Gas to BNY Midwest Trust
                Company, Trustee, under Indenture dated as of January 1, 1954. (File
                No.
                1-7296, Form 10-K for 2000, Nicor Gas, Exhibit 4.17.)4.06
            *
            Supplemental
                Indenture, dated May 15, 2001, of Nicor Gas to BNY Midwest Trust
                Company,
                Trustee, under Indenture dated as of January 1, 1954. (File No. 1-7296,
                Form 10-Q for June 2001, Nicor Gas, Exhibit 4.01.)4.07
            *
            Supplemental
                Indenture, dated August 15, 2001, of Nicor Gas to BNY Midwest Trust
                Company, Trustee, under Indenture dated as of January 1, 1954. (File
                No.
                1-7296, Form 10-Q for September 2001, Nicor Gas, Exhibit
                4.01.)4.08
            *
            Supplemental
                Indenture, dated December 1, 2003, of Nicor Gas to BNY Midwest Trust
                Company, Trustee, under Indenture dated as of January 1, 1954. (File
                No.
                1-7297, Form 10-K for 2003, Nicor Inc., Exhibit 4.10.)4.09
            *
            Supplemental
                Indenture, dated December 1, 2003, of Nicor Gas to BNY Midwest Trust
                Company, Trustee, under Indenture dated as of January 1, 1954. (File
                No.
                1-7297, Form 10-K for 2003, Nicor Inc., Exhibit 4.11.)4.10
            *
            Supplemental
                Indenture, dated December 1, 2003, of Nicor Gas to BNY Midwest Trust
                Company, Trustee, under Indenture dated as of January 1, 1954. (File
                No.
                1-7297, Form 10-K for 2003, Nicor Inc., Exhibit 4.12.)




78
 
 Table
          of Contents


ExhibitNumber
            
            Description
                of Document4.11
            
            Supplemental
                Indenture, dated December
                1, 2006, of Nicor Gas to BNY Midwest Trust Company, Trustee, under
                Indenture dated as of January 1, 1954.


10.01
            *
            1984
                Nicor Officers’ Capital Accumulation Plan Participation Agreement. (File
                No. 1-7297, Form 10-K for 1988, Nicor Inc., Exhibit
                10-10.)10.01(a)
            *
            1985
                Nicor Officers’ Capital Accumulation Plan Participation Agreement. (File
                No. 1-7297, Form 10-K for 1988, Nicor Inc., Exhibit
                10-10(a).)10.02
            *
            1984
                Nicor Directors’ Capital Accumulation Plan Participation Agreement. (File
                No. 1-7297, Form 10-K for 1983, Nicor Inc., Exhibit
                10-13.)10.02(a)
            *
            1985
                Nicor Directors’ Capital Accumulation Plan Participation Agreement. (File
                No. 1-7297, Form 10-K for 1984, Nicor Inc., Exhibit
                10-13(a).)10.03
            *
            Directors’
                Deferred Compensation Plan. (File No. 1-7297, Form 10-K for 1983,
                Nicor
                Inc., Exhibit 10-16.)10.04
            *
            Directors’
                Pension Plan. (File No. 1-7297, Form 10-K for 1985, Nicor Inc., Exhibit
                10-18.)10.05
            *
            Flexible
                Spending Account for Executives. (File No. 1-7297, Form 10-K for
                1986,
                Nicor Inc., Exhibit 10-20.)





10.06
            *
            Amendment
                and Restatement of the Nicor Gas Incentive Compensation Plan. (File
                No.
                1-7297, Form 10-K for 1986, Nicor Inc., Exhibit 10-21.)10.07
            *
            Nicor
                Inc. 1989 Long-Term Incentive Plan. (Filed with Nicor Inc. Proxy
                Statement, dated April 20, 1989, Exhibit A.)10.08
            *
            Nicor
                Inc. Stock Deferral Plan. (File No. 1-7297, Form 10-Q for September
                1996,
                Nicor Inc., Exhibit 10.01.)10.09
            *
            Amendment
                to Nicor Inc. Stock Deferral Plan. (File No. 1-7297, Form 10-K for
                1997,
                Nicor Inc., Exhibit 10.22.)10.10
            *
            Nicor
                Inc. 1995 Directors’ Stock Plan. (File No. 1-7297, Form 10-Q for September
                1996, Nicor Inc., Exhibit 10.02.)10.11
            *
            Nicor
                Inc. 1997 Long-Term Incentive Plan. (Filed as appendix to the Nicor
                Inc.
                Proxy Statement, dated March 6, 1997.)10.12
            *
            Security
                Payment Plan. (File No. 1-7297, Form 10-K for 1999, Nicor Inc., Exhibit
                10.24.)10.13
            *
            Amendment
                and Restatement of Nicor Gas Supplementary Retirement Plan. (File
                No.
                1-7297, Form 10-Q for March 2000, Nicor Inc., Exhibit
                10.01.)10.14
            *
            Amendment
                and Restatement of Nicor Gas Supplementary Savings Plan. (File No.
                1-7297,
                Form 10-Q for March 2000, Nicor Inc., Exhibit 10.02.)





79
 
 Table
          of Contents


ExhibitNumber
            
            Description
                of Document10.15
            *
            First
                Amendment to Agreements Restating 1984 and 1985 Nicor Capital Accumulation
                Plan Participation Agreements for Officers and Directors. (File No.
                1-7297, Form 10-Q for March 2000, Nicor Inc., Exhibit
                10.04.)


10.16
            *
            First
                Amendment to Nicor 1989 Long-Term Incentive Plan. (File No. 1-7297,
                Form
                10-Q for March 2000, Nicor Inc., Exhibit 10.05.)10.17
            *
            First
                Amendment to Nicor 1997 Long-Term Incentive Plan. (File No. 1-7297,
                Form
                10-Q for March 2000, Nicor Inc., Exhibit 10.06.)10.18
            *
            Second
                Amendment to Nicor Stock Deferral Plan. (File No. 1-7297, Form 10-Q
                for
                March 2000, Nicor Inc., Exhibit 10.07.)10.19
            *
            Change-in-Control
                Agreement, dated December 20, 2000, between Nicor Inc. and Mr. Strobel.
                (File No. 1-7297, Form 10-K for 2001, Nicor Inc., Exhibit
                10.31.)10.20
            *
            Second
                Amendment and Restatement to Nicor Salary Deferral Plan. (File No.
                1-7297,
                Form 10-Q for September 30, 2002, Nicor Inc., Exhibit
                10.01.)10.21
            *
            First
                Amendment to the Change-in-Control Agreement, dated November 22,
                2002,
                between Nicor Inc. and Mr. Strobel. (File No. 1-7297, Form 10-K for
                2002,
                Nicor Inc., Exhibit 10.26.)





10.22
            *
            Supplemental
                Retirement Benefit Agreement between Nicor Inc. and Mr. Strobel.
                (File No.
                1-7297, Form 10-K for 2001, Nicor Inc., Exhibit 10.32.)10.23
            *
            Nicor
                Inc. Supplemental Senior Officer Retirement Plan. (File No. 1-7297,
                Form
                10-K for 2002, Nicor Inc., Exhibit 10.28.)10.24
            *
            Change-in-Control
                Agreement, dated November 22, 2002, between Nicor Inc. and Mr. Dodge.
                (File No. 1-7297, Form 10-K for 2003, Nicor Inc., Exhibit
                10.30.)10.25
            *
            Change-in-Control
                Agreement, dated December 8, 2003, between Nicor Inc. and Mr. Hawley.
                (File No. 1-7297, Form 10-K for 2003, Nicor Inc., Exhibit
                10.32.)10.26
            *
            2004
                Long-Term Incentive Program. (File No. 1-7297, Form 10-Q for March
                2004,
                Nicor Inc., Exhibit 10.01.)10.27
            *
            First
                Amendment to Nicor Inc. 1995 Directors’ Stock Plan. (File No. 1-7297, Form
                10-Q for March 2004, Nicor Inc., Exhibit 10.03.)10.28
            *
            Nicor
                Inc. Stock Deferral Plan Election Form. (File No. 1-7297, Form 8-K
                for
                December 17, 2004, Nicor Inc., Exhibit 99.1.)10.29
            *
            Nicor
                Inc. Salary Deferral Plan Election Form. (File No. 1-7297, Form 8-K
                for
                December 17, 2004, Nicor Inc., Exhibit 99.2.)10.30
            *
            Nicor
                Inc. Directors’ Deferred Compensation Plan Election Form. (File No.
                1-7297, Form 8-K for December 17, 2004, Nicor Inc., Exhibit
                99.3.)




80
 
 Table
          of Contents




ExhibitNumber
            
            Description
                of Document10.31
            *
            Nicor
                Gas Supplementary Savings Plan Enrollment Form. (File No. 1-7297,
                Form 8-K
                for December 27, 2004, Nicor Inc., Exhibit 99.1.)10.32
            *
            Stock
                Payment Election Stock Deferral Plan Form. (File No. 1-7297, Form
                8-K for
                February 15, 2005, Nicor Inc., Exhibit 99.1.)10.33
            *
            Non-Qualified
                Stock Option Agreement Form. (File No. 1-7297, Form 8-K for March
                17,
                2005, Nicor Inc., Exhibit
                10.01.)


10.34
            *
            Performance
                Cash Unit Agreement Form. (File No. 1-7297, Form 8-K for March 17,
                2005,
                Nicor Inc., Exhibit 10.02.)10.35
            *
            2005
                Long-Term Incentive Program. (File No. 1-7297, Form 8-K for March
                17,
                2005, Nicor Inc., Exhibit 10.03.)10.36
            *
            2005
                Incentive Compensation Plan. (File No. 1-7297, Form 10-Q for March
                31,
                2005, Nicor Inc., Exhibit 10.05.)10.37
            *
            Stipulation
                and Agreement of Settlement of Shareholder Derivative Litigation
                dated as
                of February 16, 2005. (File No. 1-7297, Form 10-Q for March 31, 2005,
                Nicor Inc., Exhibit 10.06.)





10.38
            *
            Final
                Judgment and Order of Dismissal dated as of March 29, 2005. (File
                No.
                1-7297 Form 10-Q for March 31, 2005, Nicor Inc., Exhibit
                10.07.)10.39
            *
            Directors
                Compensation. (File No. 1-7297, Form 8-K for September 21, 2005,
                Nicor
                Inc.)10.40
            *
            5-Year
                Credit Agreement dated as of September 13, 2005. (File No. 1-7297,
                Form
                10-Q for September 30, 2005, Nicor Inc., Exhibit
                10.03.)10.41
            *
            First
                Amendment to the Nicor Inc. Salary Deferral Plan. (File No. 1-7296,
                Form
                10-K for 2005, Nicor Inc., Exhibit 10.46.)10.42
            *
            Change-in-Control
                Agreement, dated July 20, 2004 between Nicor Inc. and Mr. O’Connor. (File
                No. 1-7296, Form 10-K for 2005, Nicor Inc., Exhibit
                10.47.)10.43
            *
            First
                Amendment to the Northern Illinois Gas Company Supplemental Retirement
                Plan. (File No. 1-7296, Form 10-K for December 31, 2005, Nicor Gas,
                Exhibit 10.05.)10.44
            *****
            Officer
                Compensation. (File No. 1-7297, Form 8-K for January 23, 2006, Nicor
                Inc.)10.45
            *
            Officer
                Compensation under the 2005 Annual Incentive Compensation Plan. (File
                No.
                1-7297, Form 8-K for February 27, 2006, Nicor Inc.)10.46
            *
            Deferred
                Restricted Stock Agreement under the Nicor Inc. 1997 Long-Term Incentive
                Plan. (File No. 1-7297, Form 8-K for March 17, 2006, Nicor
                Inc.)






81
 
 Table
          of Contents




ExhibitNumber
            
            Description
                of Document10.47
            *
            Restricted
                Stock Agreement Form under the Nicor Inc. 1997 Long-Term Incentive
                Plan.
                (File No. 1-7297, Form 8-K for March 17, 2006, Nicor
                Inc.)10.48
            *
            Performance
                Cash Unit Agreement Form under the Nicor Inc. 2006 Long-Term Incentive
                Program. (File No. 1-7297, Form 8-K for March 17, 2006, Nicor
                Inc.)10.49
            *
            2006
                Long-Term Incentive Program. (File No. 1-7297, Form 8-K for March
                17,
                2006, Nicor Inc.)10.50
            *
            Third
                Amendment to Nicor Inc. 1997 Long-Term Incentive Plan. (File No.
                1-7297,
                Form 8-K for March 17, 2006, Nicor Inc.)


10.51
            *
            2006
                Nicor Annual Incentive Compensation Plan for Officers. (File No.
                1-7297,
                Form 8-K for March 17, 2006, Nicor Inc.)10.52
            *
            2006
                Nicor Gas Annual Incentive Compensation Plan for Officers. (File
                No.
                1-7297, Form 8-K for March 17, 2006, Nicor Inc.)10.53
            *
            Non-Qualified
                Stock Option Agreement Form under the Nicor Inc. 1997 Long-Term Incentive
                Plan. (File No. 1-7297, Form 10-Q for March 31, 2006, Nicor Inc.,
                Exhibit
                10.10.)10.54
            *
            1993
                Interim Cooperative Agreement between Commonwealth Edison Company
                and
                Northern Illinois Gas Company. (File No. 1-7297, Form 10-Q for March
                31,
                2006, Nicor Inc., Exhibit 10.11.)10.55
            *
            Amendment
                No. 1 to the 1993 Interim Cooperative Agreement. (File No. 1-7297,
                Form
                10-Q for March 31, 2006, Nicor Inc., Exhibit 10.12.)10.56
            *
            Amendment
                No. 2 to the 1993 Interim Cooperative Agreement. (File No. 1-7297,
                Form
                10-Q for March 31, 2006, Nicor Inc., Exhibit 10.13.)10.57
            *
            Amendment
                No. 3 to the 1993 Interim Cooperative Agreement. (File No. 1-7297,
                Form
                10-Q for March 31, 2006, Nicor Inc., Exhibit 10.14.)10.58
            *
            2006
                Long Term Incentive Plan (File No. 1-7297, Form 8-K for April 20,
                2006,
                Nicor Inc.)10.59
            *
            210-Day
                Credit Agreement dated as of October 26, 2006. (File No. 1-7297,
                Form 10-Q
                for September 30, 2006, Nicor Inc., Exhibit 10.01.)10.60
            *
            Second
                Amendment to the 5-Year Credit Agreement dated as of October 26,
                2006.
                (File No. 1-7297, Form 10-Q for September 30, 2006, Nicor Inc., Exhibit
                10.02.)10.61
            *
            Change-in-Control
                Agreement, dated December 28, 2006, between Nicor Inc. and Mr. Gracey.
                (File No. 1-7297, Form 8-K for December 28, 2006, Nicor Inc., Exhibit
                99.1.)10.62
            
            Change-in-Control
                Agreement, dated
                November 22, 2002, between Nicor Inc. and Ms. Colalillo.






82
 
 Table
          of Contents




ExhibitNumber
            
            Description
                of Document21.01
            
            Subsidiaries.23.01
            
            Consent
                of Independent Registered
                Public Accounting Firm.24.01
            
            Powers
                of Attorney.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 Securities and Exchange
                Commission as exhibits to registration statements or to other filings
                with
                the Commission and are incorporated herein as exhibits by reference.
                The
                file number and exhibit number of each such exhibit, where applicable,
                are
                stated, in parentheses, in the description of such exhibit.





83