Nicor
      Inc.

    Form
      8-K

    Exhibit
      10.7

    


    2006
      NICOR GAS ANNUAL INCENTIVE COMPENSATION PLAN FOR
      OFFICERS

    


    


    
      	 	
              The
                2006 Nicor Gas Annual Incentive Compensation Plan for Officers is
                designed
                to link participant incentive compensation to the accomplishment
                of
                corporate and operating unit financial performance as well as
                non-financial measures of operating performance across the Company
                and
                operating units. It ties the pay an individual receives to Company
                performance and non-financial goals. This plan is intended to provide
                a
                framework for a performance-based bonus program for Nicor
                Gas.

            


    

    


    
      	 	
              Purpose

            


    

    The
      purpose of this Plan is to provide meaningful annual incentive award opportunity
      to the participants. Awards will be directly tied to the achievement of
      corporate financial and operating goals and non-financial objectives. The Plan
      has been structured to encourage teamwork among business units and encourage
      the
      achievement of both shareholder and ratepayer oriented goals.

    


    
      	 	
              Eligible
                Group

            


    

    Officers
      of Nicor Gas in Salary Bands 1 or higher are eligible for participation. As
      such, participation is limited to employees in positions which enable them
      to
      make significant contributions to the performance and growth of the
      Company.

    


    Compensation
      Objective

    Base
      Salary + Bonus Target = Short-Term Compensation Objective

    


    An
      individual's short-term compensation objective will be based on salary plus
      a
      bonus, expected to be earned if established performance targets are met.
      Short-term compensation above (or below) target levels may be paid in the event
      performance exceeds (or falls short of) goals.

    


    Base
      Salary

    Standards
      for base salaries will be targeted to the 50th
      percentile of the appropriate industry survey data. Base salaries are reviewed
      annually by the Compensation Committee of the Board of Directors.

    


    Bonus
      Targets

    The
      bonus
      target amount varies according to pay, job responsibilities and ability to
      impact the organization and is consistent with the bonus opportunity ranges
      set
      by officer salary bands. Higher responsibility and impact levels result in
      greater dollars at risk.

    


    Performance
      Targets

    Performance
      criteria focus on the achievement of established and documented strategic goals.
      Performance targets may include measures of corporate financial and operating
      performance, defined group objectives or individual performance objectives.
      Each
      particular performance target will be assigned weighting reflected as a
      percentage of bonus target.

    


    Goal
      Setting Guidelines

    The
      most
      important aspect of this Plan will be the establishment of effective goals.
      In
      addition to measures of corporate financial and operating performance, other
      non-financial measures of performance will also be established. The goals should
      be realistic and measurable wherever possible by quantifiable performance
      criteria. It is recognized that measurement of some goals will require
      subjective assessments of performance. Goals must be consistent with the
      longer-term strategic plan.

    


    A
      set of
      guidelines will be devised by the Nicor Human Resources Department to aid in
      this process. These guidelines will provide direction as to the formulation
      and
      reporting of non-financial goals.

    


    Amount
      of
      bonus payment for financial/budget related goals can vary above and below target
      based upon results achieved. For targets met, bonus amount will be 100% of
      bonus
      target. When targets are exceeded or are not reached, bonus will be
      proportionately more or less than the target.

    


    The
      Compensation Committee may make appropriate upward or downward adjustments
      if,
      after taking into consideration all of the facts and circumstances of the
      performance period, it determines that adjustments are warranted.

    


    Plan
      Schedule

    The
      2006
      Nicor Gas Incentive Compensation Plan runs on a calendar year basis, with the
      strategic planning cycle and budgeting process serving as the primary link
      to
      performance and bonus targets. The Accounting Department is responsible for
      the
      determination of actual financial results. Performance will be reviewed at
      least
      twice a year to monitor progress and adjust accruals.

    


    Year-end
      results should be available and evaluated as early as possible in the following
      year. No bonus shall be paid until the Compensation Committee of the Board
      of
      Directors (the “Compensation Committee”) approves such payment. Following
      approval by the Compensation Committee, bonuses will be paid to participants
      by
      March 15 of the year in which such approval is given, unless payment by March
      15
      is not administratively practicable, in which case payment shall be made by
      December 31.

    


    Form
      of Payment

    All
      awards will be paid in cash, except that a participant in the Stock Deferral
      Plan may elect to defer up to 50% of their award into that plan and a
      participant in the Salary Deferral Plan may elect to defer 10% to 20% of their
      award into that plan. Deferral elections must meet the guidelines and timing
      of
      the Stock Deferral and/or Salary Deferral Plans to be effective. Appropriate
      taxes for the entire award amount will be withheld from the portion of the
      award
      being paid in cash.

    


    
      	 	
              Integration
                with Existing Programs

            


    

    Base
      salaries will be managed with range bands at the appropriate blend of general
      and industry data for comparable positions, with total compensation objectives
      to be managed at a level appropriate with the performance of the company, as
      determined by the Compensation Committee. Salaries will be monitored each year
      and increases granted based on merit and range bands. Bonus targets will be
      set
      as a percentage of base salary. A change, other than the annual salary review,
      in the compensation objective will customarily occur during the year only
      through promotion to various levels, at which time the base salary and bonus
      target are also likely to change. 

    


    Promotion
      of an employee during the year or reassignment to responsibilities in which
      new
      performance objectives apply will result in proration of the existing
      performance objectives and bonus target and assignment of new performance
      objectives and if appropriate, a new bonus target as determined by the
      Compensation Committee. Promotion into an Executive Salary Band would create
      eligibility for bonus at a prorated amount, based on the effective date of
      the
      promotion.

    


    If
      a
      participant voluntarily terminates or is terminated for cause prior to the
      end
      of the performance period, then no award shall be granted. In the event a
      participant shall die, become disabled, or retire before the end of the
      performance period, an award is payable prorated or the Compensation Committee
      may authorize payment of an award to the participant, or beneficiary, in such
      other amount as the Committee deems appropriate.

    


    
      	 	
              Responsibility

            


    

    The
      Human
      Resources Department will be responsible for the administration of the process
      for the company. This will include:

     

    
      	1)  	
              monitoring
                market salary and total compensation
                levels;

            


    

     

    
      	2)  	
              recommending
                structural changes in base salary and compensation objective
                adjustments;

            


    

     

    	3)  	
            assisting
              the Nicor Gas CEO in progress and exception reporting to the Compensation
              Committee;

          


    


    	4)  	
            assist
              the Nicor Gas CEO in monitoring financial performance targets through
              the
              Accounting Department and communicating progress reports to the
              participants;

          


    


    	5)  	
            monitoring
              compliance with related financial controls;
              and

          


    


    	6)  	
            maintaining
              the accuracy of the plan document(s) governing the
              plan.

          


    


    The
      Nicor
      Gas CEO shall be responsible for:

    


    
      	 	
              1)

            	
              reviewing
                market salary and compensation levels and approving recommendations
                before
                presentation to the Compensation
                Committee;

            


    

    


    
      	 	
              2)

            	
              approving
                structural changes in base salary and compensation objective adjustments
                before presentation to the Compensation
                Committee;

            


    

    


    
      	 	
              3)

            	
              recommending
                eligibility, performance targets and goals to the Compensation
                Committee;

            


    

    


    
      	 	
              4)

            	
              monitoring
                performance targets through the Accounting Department and other sources
                of
                necessary documentation;

            


    

    


    
      	 	
              5)

            	
              communicating
                progress reports to the participants;
                and,

            


    

    


    
      	 	
              6)

            	
              reporting
                performance results and making award recommendations to the Compensation
                Committee.

            


    

    


    The
      Company's 2006 Nicor Gas Annual Incentive Compensation Plan for Officers and
      changes to its performance targets and measurement criteria will be reviewed
      and
      approved by the Compensation Committee.

    


    In
      determining the actual bonus awards to be made, the Compensation Committee
      may
      take into account all of the facts and circumstances which exist during the
      year
      and may make appropriate upward or downward revisions in performance criteria,
      add or delete objectives, or change the relative percentages assigned to the
      various performance objectives.

    


    
      	 	
              Amendment
                and Termination

            


    

    The
      Board
      of Directors may amend or terminate the Plan at any time without the consent
      of
      the participants. No such amendment or termination shall negatively impact
      any
      participant's amount which accrued under the Plan prior to the calendar year
      in
      which the amendment is made.

    


    


    Nicor
      Human Resources

    March
      2006