Nicor Gas Company
                                                             Form 10-K
                                                             Exhibit 1.01




 
                         NORTHERN ILLINOIS GAS COMPANY
                                  $50,000,000
                              FIRST MORTGAGE BONDS
                       5.37% SERIES DUE FEBRUARY 1, 2009
 
                             UNDERWRITING AGREEMENT
                                                                January 28, 1999
Salomon Smith Barney Inc.
7 World Trade Center
New York, New York 10048
 
Dear Sirs:
 
     Northern Illinois Gas Company, doing business as Nicor Gas Company (the
"Company") proposes, subject to the terms and conditions stated herein and in
the General Terms and Conditions of Underwriting Agreement in the form of Annex
A hereto, a copy of which you have previously received, to issue and sell to you
(the "Underwriter"), $50,000,000 aggregate principal amount of the Company's
First Mortgage Bonds (the "Bonds"). All of the provisions of such General Terms
and Conditions of Underwriting Agreement are incorporated herein by reference in
their entirety, and shall be deemed to be a part of this Underwriting Agreement
to the same extent as if such provisions had been set forth in full herein.
Unless otherwise defined herein, terms defined in the General Terms and
Conditions of Underwriting Agreement are used herein as therein defined.
 
     An amendment to the Registration Statement, or a supplement to the
Prospectus, as the case may be, relating to the Bonds in the form heretofore
delivered to you is now proposed to be filed or mailed for filing with the
Commission. Such amendment or supplement sets forth the terms of the Bonds.
 
     Subject to the terms and conditions set forth herein, the Company agrees to
issue and sell to the Underwriter, and the Underwriter agrees to purchase from
the Company, all of the Bonds on the following terms and conditions:
 
<TABLE>
       <S>                                              <C>
       Aggregate principal amount of Bonds to be
         purchased:.................................    $50,000,000
       Rate of interest per annum to be borne by the
         Bonds (payable semiannually):..............    5.37% (such rate to be a multiple of .001%)
       Maturity date of the Bonds:..................    February 1, 2009
       Price to be paid to the Company for the
         Bonds:.....................................    99.35% of the principal amount of the Bonds (not
                                                        less than 99%) plus accrued interest from date
                                                        of Supplemental Indenture to the date of
                                                        delivery of the Bonds.
       Initial public offering price of the
         Bonds:.....................................    100% of the principal amount of the Bonds plus
                                                        accrued interest from date of Supplemental
                                                        Indenture to the date of delivery of the Bonds.
                                                        (If other, give details.)
       Place for delivery of Bonds:.................    The Depository Trust Company
                                                        55 Water Street
                                                        New York, New York 10004
       Date and time of Time of Delivery:...........    February 5, 1999 at 9:00 a.m. Chicago Time
       Place for checking Bonds on the business day
         prior to Time of Delivery:.................    The Depository Trust Company
                                                        55 Water Street
                                                        New York, New York 10004
       Redemption and Sinking Fund:.................    The Bonds may not be called for redemption by
                                                        the Company. No sinking fund will be provided.
</TABLE>
 
                                        1
<PAGE>
 
<TABLE>
<S>                                            <C>
Address for notices per Section 12 of the
  General Terms and Conditions of
  Underwriting Agreement:....................
</TABLE>
 
     If the foregoing is in accordance with your understanding, please sign and
return to us the enclosed counterparts hereof, whereupon it will become a
binding agreement between the Underwriters and the Company in accordance with
its terms. It is understood that your acceptance of this letter on behalf of
each of the Underwriters constitutes your representation that you are authorized
to execute this Underwriting Agreement on behalf of each of the Underwriters.
 
                                          Very truly yours,
 
                                          NORTHERN ILLINOIS GAS COMPANY
 
                                          BY
 
                                            ------------------------------------
                                          TITLE:Senior Vice President,
                                              Secretary and Controller
 
The foregoing Underwriting Agreement
is hereby
     confirmed and accepted as of the
date first      above written.
 
[Name(s) of Representatives]
 
BY
 
    ----------------------------------
TITLE:
 
     On behalf of itself and as Representative(s) of each of the Underwriters
named in Schedule I hereto.
 
                                        2







 
                                                                         ANNEX A
 
                         NORTHERN ILLINOIS GAS COMPANY
 
                                 $50,000,000
 
                             FIRST MORTGAGE BONDS
 
             GENERAL TERMS AND CONDITIONS OF UNDERWRITING AGREEMENT
 
     Northern Illinois Gas Company, an Illinois corporation (the "Company"),
proposes to enter into an Underwriting Agreement into which these General Terms
and Conditions are incorporated by reference (the "Underwriting Agreement") and,
subject to the terms and conditions stated therein, to issue and sell to the
underwriter or underwriters named in Schedule I to the Underwriting Agreement up
to $ 50,000,000 aggregate principal amount of its First Mortgage Bonds
(hereinafter called the "Bonds") under the registration statement referred to in
Section 2(a) hereof. Such Bonds will be issued under the Company's Indenture
dated as of January 1, 1954, to Continental Bank, National Association, Trustee
(the "Trustee"), as supplemented by supplemental indentures dated February 9,
1954, April 1, 1956, June 1, 1959, July 1, 1960, June 1, 1963, July 1, 1963,
August 1, 1964, August 1, 1965, May 1, 1966, August 1, 1966, July 1, 1967, June
1, 1968, December 1, 1969, August 1, 1970, June 1, 1971, July 1, 1972, July 1,
1973, April 1, 1975, April 30, 1976, April 30, 1976, July 1, 1976, August 1,
1976, December 1, 1977, January 15, 1979, December 1, 1981, March 1, 1983,
October 1, 1984, December 1, 1986, March 15, 1988, July 1, 1988, July 1, 1989,
July 15, 1990, August 15, 1991, July 15, 1992, February 1, 1993, March 15, 1993,
May 1, 1993, July 1, 1993, August 15, 1994, October 15, 1995, May 10, 1996,
August 1, 1996, June 1, 1997, October 15, 1997, February 15, 1998, and June 1,
1998, respectively, and as to be further supplemented by a Supplemental
Indenture (the "Supplemental Indenture") which will be dated the first or
fifteenth day of the calendar month in which the "Time of Delivery" (as
hereinafter defined) falls, creating the series in which the Bonds are to be
issued. Said Indenture as so supplemented is hereinafter called the "Indenture."
The term "Underwriters" herein shall refer to the several persons, firms and
corporations named in Schedule I to the Underwriting Agreement and the term
"Representatives" herein shall refer to the Underwriters identified as the
Representatives who are acting on behalf of the Underwriters (including
themselves) in the Underwriting Agreement. All obligations of the Underwriters
under the Underwriting Agreement are several and not joint. The terms
"Underwriters", "Representatives", "persons", "firms" and "corporations" shall
include the singular as well as the plural.
 
     The terms of the issuance of the Bonds shall be as specified in the
Underwriting Agreement. The Underwriting Agreement shall constitute an agreement
by the Company and the Underwriters to be bound by all of the provisions of
these General Terms and Conditions of Underwriting Agreement, as follows:
<PAGE> 
     SECTION 1. Sale of Bonds. Sales of the Bonds will be made to the
Underwriters, for whom the Representatives will act as such. The obligation of
the Company to issue and sell any of the Bonds and the obligation of any of the
Underwriters to purchase any of the Bonds shall be evidenced by the Underwriting
Agreement. The Underwriting Agreement shall specify the aggregate principal
amount of Bonds to be purchased, the rate and time of payment of interest to be
borne by the Bonds, the maturity date of the Bonds, the price to be paid to the
Company for the Bonds, the initial public offering price or other offering terms
of such Bonds and the redemption prices and other special terms, if any,
relating to the Bonds, the names of the Underwriters of such Bonds, the names of
the Representatives of such Underwriters and the amount of Bonds to be purchased
by each Underwriter, and, subject to the provisions of Section 3 hereof, shall
set forth the date, time and manner of the delivery of such Bonds. The terms of
the Bonds will be set forth in the Prospectus Supplement (as hereinafter
defined). The Underwriting Agreement shall be in the form of an executed writing
(which may be in counterparts) and may be evidenced by an exchange of telecopied
communications or any other rapid transmission device to produce a written
record of communications transmitted.
 
     SECTION 2. Representations and Warranties of the Company. The Company
represents and warrants to, and agrees with, the several Underwriters that:
 
          (a) A registration statement on Form S-3 with respect to the Bonds,
     including a related preliminary prospectus, has been prepared by the
     Company in conformity with the requirements of the Securities Act of 1993,
     as amended (the "Act"), and the rules and regulations of the Securities and
     Exchange Commission (the "Commission") under the Act (the "Regulations"),
     and has been filed with the Commission on December 17,1998 and, if one or
     more amendments to such registration statement, which may include an
     amended preliminary prospectus, have been filed with the Commission, such
     amendments have been similarly prepared; and such registration statement
     has become effective. Such registration statement, as amended to the date
     of the Underwriting Agreement, together with the prospectus supplement
     referred to below is hereinafter referred to as the "Registration
     Statement". Such prospectus as supplemented specifically relating to the
     Bonds and filed with the Commission under Rule 424(b) of the Act is
     hereinafter referred to as the "Prospectus". The Prospectus has been
     prepared by the Company in conformity with the requirements of the Act and
     the Regulations. Copies of the Registration Statement and any related
     prospectus have been delivered to the Representatives. As used herein,
     Registration Statement, Prospectus and preliminary prospectus shall
     include, in each case, the material incorporated therein pursuant to Item
     12 of Form S-3 filed under the Securities Exchange Act of 1934 (the "1934
     Act") on or prior to the date of the Underwriting Agreement, and "amended",
     "amendment" or "supplement" with respect to the Registration Statement or
     the Prospectus shall be deemed to include the filing by the Company of any
     document pursuant to Sections 13(a), 13(c), 14 or 15(d) of the 1934 Act
     after the date of the Underwriting Agreement.
 
          (b) The registration statement at the time it became effective, and
     the related prospectus and any amendments and supplements thereto filed
     prior to the date of the Underwriting Agreement, conformed in all material
     respects to the provisions of the Act and the Trust Indenture Act of 1939,
     as amended (the "Trust Indenture Act") and the rules and regulations of the
     Commission thereunder, on the date of the Underwriting Agreement and at the
     Time of Delivery (referred to in Section 3) the Registration Statement, the
     Prospectus, and any amendments and supplements thereto, and the Indenture,
     will conform in all material respects to the Act, the Trust Indenture Act
     and the respective rules and regulations of the Commission thereunder; and
     at the time the registration statement became effective, the registration
     statement and related prospectus did not contain any untrue statement of a
     material fact or omit to state a material fact required to be stated
     therein or necessary to make the statements therein not misleading; and at
     the date of this Underwriting Agreement and at the Time of Delivery, the
     Registration Statement and the Prospectus and any amendments and
     supplements thereto do not and will not contain any untrue statement of a
     material fact or omit to state a material fact necessary in order to make
     the statements therein not misleading; provided, however, that none of the
     representations and warranties in this subsection shall apply to statements
     in or omissions from the Registration Statement or Prospectus or any
     amendment or supplement thereto made in reliance upon and in conformity
     with information respecting the Underwriters furnished to the Company in
     writing by or on behalf of any Underwriter through the Representatives
     expressly for use in the Registration Statement or Prospectus.
 
          (c) The documents incorporated by reference into the Prospectus, at
     the time they were filed with the Commission, complied in all material
     respects with the requirements of the 1934 Act and the rules and
     regulations of the Commission thereunder (the "1934 Regulations"), and, at
     the date of this Underwriting Agreement and at the Time of Delivery, when
     read together with the Prospectus and any supplement thereto will not
     contain an untrue statement of a material fact or omit to state a material
     fact required to be stated therein or necessary to make the statements
     therein not misleading, and any documents filed after the date of the
     Underwriting Agreement and so incorporated by reference in the Prospectus
     will, when they are filed with the Commission, comply in all material
     respects with the requirements of the 1934 Act and the 1934 Regulations,
     and when read together with the Prospectus and any supplement thereto will
     not contain an untrue statement of material fact or omit to state a
     material fact required to be stated therein or necessary to make the
     statements therein not misleading.
 
                                        2
<PAGE>
 
          (d) Arthur Andersen LLP are independent public accountants with
     respect to the Company and its subsidiaries as required by the Act and the
     Regulations.
 
          (e) The financial statements included in the Registration Statement
     present fairly the financial position of the Company and its consolidated
     subsidiaries as of the dates indicated and the results of their operations
     for the periods specified, and said financial statements have been prepared
     in conformity with generally accepted accounting principles applied on a
     consistent basis during the periods involved.
 
          (f) The Company is a corporation in good standing, duly organized and
     validly existing under the laws of Illinois, and has due corporate
     authority to carry on the business in which it is engaged and to own and
     operate the properties used by it in such business as described in the
     Prospectus. The Company's subsidiary constitutes less than 5% of its
     consolidated assets and during the year ended December 31, 1998 contributed
     less than 5% of its consolidated annual operating revenues and net income,
     and the Company does not consider its subsidiary to be material.
 
          (g) The execution and delivery of the Underwriting Agreement have been
     duly authorized by the Company and the Underwriting Agreement constitutes a
     valid and legally binding obligation of the Company; the Bonds have been
     duly authorized, and when issued and delivered pursuant to the Underwriting
     Agreement and the Indenture, will have been duly executed, authenticated,
     issued and delivered and will constitute valid and legally binding
     obligations of the Company in accordance with their respective terms,
     entitled to the benefits provided by the Indenture; the Supplemental
     Indenture has been duly authorized in substantially the form filed as an
     exhibit to the Registration Statement and, when executed and delivered by
     the Company and the Trustee, will constitute a valid and legally binding
     instrument enforceable in accordance with its terms, except to the extent
     the enforceability of the Bonds and the Indenture may be limited by
     bankruptcy, insolvency, reorganization or other laws of general application
     relating to or affecting the enforcement of creditors' rights or general
     equity principles; and the Indenture and the Bonds as executed and
     delivered will conform in all material respects to the descriptions thereof
     in the Prospectus.
 
          (h) The issue and sale of the Bonds and the compliance by the Company
     with all of the provisions of the Bonds, the Indenture, and the
     Underwriting Agreement and the transactions contemplated thereby will not
     conflict with or result in any breach or violation of any of the provisions
     of, or constitute (disregarding any grace or notice period) a default
     under, or result in the imposition of any lien, charge or encumbrance upon
     any property or assets of the Company pursuant to the terms of, any other
     indenture, or any mortgage, loan agreement, contract, note, lease or other
     agreement or instrument to which the Company is a party or by which the
     Company may be bound or to which any of the property or assets of the
     Company is subject, nor will such action result in any violation of the
     provisions of the charter or by-laws of the Company or any statute or any
     order, rule or regulation applicable to the Company of any court or any
     federal, state or other regulatory authority or other governmental body
     having jurisdiction over the Company or any of its properties.
 
          (i) Since the respective dates as of which information is given in the
     Registration Statement and Prospectus and except as may otherwise be stated
     or contemplated therein; (i) there has not been any material adverse change
     in the condition, financial or otherwise, of the Company and its
     subsidiaries considered as one enterprise, or in the earnings, affairs,
     business prospects or properties of the Company and its subsidiaries
     considered as one enterprise, whether or not arising in the ordinary course
     of business or arising from any court or governmental action, order or
     decree, and (ii) there has been no transaction entered into by the Company
     or any subsidiary which is material to the Company and its subsidiaries
     considered as one enterprise, other than transactions in the ordinary
     course of business.
 
          (j) Except as set forth in the Prospectus, the Company, with minor
     exceptions, and subject to noncompliance with certain procedural and other
     requirements in the procurement and granting of gas franchises in a number
     of smaller municipalities formerly served by Mid-Illinois Gas Company, has
     statutory authority, franchises, licenses, rights-of-way, easements and
     consents, free from unduly burdensome restrictions and adequate for the
     conduct of the business in which it is engaged.
 
                                        3
<PAGE>
 
          (k) The Illinois Commerce Commission has entered an order authorizing
     the issue and sale of the Bonds by the Company upon terms consistent with
     the Underwriting Agreement, and no other consent, approval, authorization
     or other order or filing with any regulatory or governmental body is
     required for the issuance and sale of the Bonds and consummation of the
     transactions contemplated hereby, except such consents, approvals,
     authorizations, registrations or qualifications as may be required under
     state securities or Blue Sky laws in connection with the purchase and
     distribution of the Bonds by the Underwriters.
 
          (l) The Company is not in violation of its charter or, except as
     disclosed in the Prospectus, in default in the performance or observance of
     any obligation, agreement, covenant or condition contained in any contract,
     indenture, mortgage, loan agreement, note, lease or other instrument to
     which it is a party or by which it or its property is bound or affected
     which is material to the Company and its subsidiary considered as one
     enterprise.
 
          (m) Except as set forth in the Registration Statement and Prospectus,
     there are no legal or governmental proceedings pending to which the Company
     or its subsidiary is a party or of which any property of the Company or its
     subsidiary is the subject, and, to the best of the Company's knowledge, no
     such proceedings are threatened or contemplated by governmental authorities
     or threatened by others, other than proceedings which, if determined
     adversely to the Company and its subsidiary, would not individually or in
     the aggregate have a material adverse effect on the business, properties,
     financial position, net worth or results of operations of the Company and
     its subsidiary considered as a whole.
 
          (n) the Company has good and sufficient title to all property
     described or referred to in the Indenture and purported to be conveyed
     thereby (except property released from the lien of the Indenture in
     connection with the sale or other disposition thereof), subject only to the
     lien of the Indenture and to permitted liens as defined therein; the
     Indenture has been duly filed for recordation in such manner and in such
     places as is required by law in order to give constructive notice of,
     establish, preserve and protect the lien of the Indenture; the Indenture
     constitutes a valid, direct first mortgage lien, subject only to permitted
     liens, on substantially all property of the Company, except property
     expressly excepted by the terms of the Indenture; the Indenture will, when
     recorded or registered by the Company in accordance with its covenants
     under the Indenture, constitute a valid, direct first mortgage lien on all
     property of the character of that now subject to the lien of the Indenture
     hereafter acquired by the Company, subject only to permitted liens and to
     liens, if any, existing or placed on such after-acquired property at the
     time of the acquisition thereof;
 
     Any certificate signed by any officer of the Company and delivered to you
or to Underwriters' counsel shall be deemed a representation and warranty by the
Company to each Underwriter as to the statements made therein.
 
     SECTION 3. Purchase, Sale and Delivery of Bonds. Following the execution of
the Underwriting Agreement, the several Underwriters propose to make a public
offering of their respective portions of the Bonds as soon as in the
Representatives' judgment it is advisable upon the terms and conditions set
forth in the Prospectus Supplement.
 
     The Bonds to be purchased by each Underwriter pursuant to the Underwriting
Agreement, in definitive form and registered in such names as the
Representatives may request upon at least forty-eight hours' prior notice to the
Company, shall be delivered by or on behalf of the Company to the
Representatives for the respective accounts of the several Underwriters, against
payment therefor as specified in the Underwriting Agreement in immediately
available funds, at the office of Mayer, Brown & Platt, 190 South LaSalle
Street, Chicago, Illinois 60603 (except as hereinafter provided with respect to
delivery of such Bonds), at the time and date specified in the Underwriting
Agreement or at such other place and time and date as the Representatives and
the Company may agree upon in writing, such time and date being herein called
the "Time of Delivery". If specified by the Representatives in the Underwriting
Agreement, delivery of the Bonds will be made at the Time of Delivery at such
place in New York, New York as shall have been so specified against payment
therefor in Chicago as aforesaid.
 
                                        4
<PAGE>
 
     SECTION 4. Covenants of the Company. The Company covenants with each
Underwriter that:
 
          (a) The Company will notify the Representatives immediately and
     confirm the notice in writing (i) of the receipt of any request by the
     Commission for any amendment or supplement to the Registration Statement or
     the Prospectus or any amendment or supplement thereto or for additional
     information, and (ii) of the issuance by the Commission of any stop order
     suspending the effectiveness of the Registration Statement or of the
     initiation or threatened initiation of any proceedings for that purpose or
     of the suspension or threatened suspension of the qualification of the
     Bonds for offering or sale in any jurisdiction. The Company will make every
     reasonable effort to prevent the issuance by the Commission of any stop
     order and, if any such stop order shall at any time be issued, to obtain
     the lifting thereof at the earliest moment.
 
          (b) The Company will not file any amendment to the Registration
     Statement or any amendment or supplement to the Prospectus (including a
     prospectus filed pursuant to Rule 424 and including documents deemed to be
     incorporated by reference into the Prospectus) without first having
     furnished the Representatives with a copy of the proposed form thereof and
     given the Representatives a reasonable opportunity to review and comment
     respecting the same and having given reasonable consideration to any
     comments or objections made by the Representatives.
 
          (c) The Company will deliver to each of the Representatives, as soon
     as available, one signed copy of the Registration Statement as originally
     filed and of each amendment thereto, including, in each case, documents
     incorporated by reference into the Registration Statement and one set of
     exhibits thereto (other than exhibits incorporated by reference which will
     be furnished upon specific request), and will also deliver to the
     Representatives a reasonable number of conformed copies of the Registration
     Statement as originally filed and of each amendment and post-effective
     amendment thereto including such incorporated documents (without exhibits)
     for each of the Underwriters.
 
          (d) The Company will deliver to each Underwriter from time to time
     during the period when a prospectus is required to be delivered under the
     Act such number of copies of the Prospectus (as amended or supplemented and
     including incorporated documents) as the Representatives may reasonably
     request for the purposes contemplated by the Act or the Regulations;
     provided, however, that the delivery of copies of the Prospectus (as
     amended or supplemented and including incorporated documents) more than
     nine months after the date of the Underwriting Agreement shall be at the
     expense of the Underwriter requesting such delivery.
 
          (e) During the period when a prospectus is required to be delivered
     under the Act, the Company will comply so far as it is able, and at its own
     expense (for a period not to exceed nine months), with all requirements
     imposed upon it by the Act, and by Sections 13 and 14 of the 1934 Act, as
     now or hereafter amended, and by the Regulations, as from time to time in
     force, so far as necessary to permit the continuance of sales of or dealing
     in the Bonds during such period in accordance with the provisions hereof
     and of the Prospectus.
 
          (f) If any event shall occur as a result of which it is necessary, in
     the opinion of counsel for the Company and of Underwriters' counsel, to
     amend or supplement the Prospectus in order to make the Prospectus not
     misleading in the light of the circumstances existing at the time it is
     delivered to a purchaser, or if it is necessary to amend or supplement the
     Prospectus to comply with law, the Company will forthwith prepare and
     furnish to the Underwriters, without expense to them except as otherwise
     provided in subsection (d) of this Section 4, a reasonable number of copies
     of an amendment or amendments or a supplement or supplements to the
     Prospectus (in the form referred to in subsection (b) of this Section 4)
     which will amend or supplement the Prospectus so that as amended or
     supplemented it will not contain any untrue statement of a material fact or
     omit to state any material fact necessary in order to make the statements
     therein not misleading, or so that the Prospectus will comply with law. For
     the purposes of this subsection, the Company will furnish such information
     as the Representatives may from time to time reasonably request.
 
                                        5
<PAGE>
 
          (g) The Company will endeavor in good faith, in cooperation with the
     Underwriters, to qualify the Bonds for offering and sale under the
     applicable securities laws of such jurisdictions as the Representatives may
     designate; provided, however, that the Company shall not be obligated to
     file any general consent to service or to qualify as a foreign corporation
     or as a dealer in securities in any jurisdiction in which it is not so
     qualified. In each jurisdiction where any of the Bonds shall be qualified
     as above provided, the Company will make and file such statements and
     reports in each year as are or may be reasonably required by the laws
     thereof.
 
          (h) The Company will make generally available to its security holders
     as soon as practicable, but not later than 75 days after the close of the
     period covered thereby, an earnings statement (in form complying with the
     provisions of Section 11(a) of the Act and the Regulations thereunder
     (including, at the option of the Company, Rule 158), which need not be
     certified by independent public accountants unless required by the Act or
     the Regulations), covering a twelve-month period beginning on the first day
     of the calendar quarter following the Time of Delivery.
 
          (i) The Company agrees that it will not publicly offer or sell any
     intermediate or long-term debt between the date of the Underwriting
     Agreement and Time of Delivery without the prior written consent of the
     Representatives.
 
     SECTION 5. Payment of Expenses. The Company will pay all expenses incident
to the performance of its obligations under the Underwriting Agreement,
including (i) the printing and filing by the Company of the registration
statement and the printing of the Underwriting Agreement, any Agreement Among
Underwriters, any Selling Agreement, the Supplemental Indenture and the
Underwriters' Questionnaire, (ii) the authorization, issuance and delivery of
the Bonds to the Underwriters, including the printing and engraving of the
Bonds, and all taxes, if any, upon the issuance and sale of the Bonds to the
Underwriters, (iii) the qualification of the Bonds under the securities laws of
the various jurisdictions in accordance with the provisions of subsection (g) of
Section 4, including filing fees and fees and disbursements of Underwriters'
counsel in connection with such qualification and in connection with the
preparation of the Blue Sky Survey (such fees of Underwriters' counsel not to
exceed $     in the aggregate), (iv) any fees charged by securities rating
services for rating the Bonds, (v) the fees and expenses of the Trustee and its
counsel in connection with the Bonds and the Supplemental Indenture, (vi) the
printing and delivery to the Underwriters and dealers in quantities as
hereinbefore stated of copies of the registration statement and all amendments
thereto, of any preliminary prospectuses and amended preliminary prospectuses,
of the Registration Statement and any amendments thereto, and of the Prospectus
and any amendments or supplements thereto, and (vii) the cost of printing and
delivery to the Underwriters of copies of the Blue Sky Survey.
 
     If this Agreement is terminated by the Representatives in accordance with
the provisions of Section 6 or Section 10(b), or is prevented by the Company
from becoming effective in accordance with the provisions of Section 10(a), the
Company shall reimburse the Underwriters severally for their out-of-pocket
expenses, including the reasonable fees and disbursements of counsel for the
Underwriters incurred in connection with the offering.
 
     SECTION 6. Conditions of Underwriters' Obligations. The several obligations
of the Underwriters hereunder are subject to the accuracy of and compliance with
the representations and warranties of the Company herein contained, to the
performance by the Company of its obligations hereunder and to the following
further conditions:
 
          (a) At the Time of Delivery no stop order suspending the effectiveness
     of the Registration Statement shall have been issued under the Act or
     proceedings therefor initiated or threatened by the Commission.
 
                                        6
<PAGE>
 
          (b) At the Time of Delivery the Representatives shall have received:
 
             (1) The favorable opinion, dated as of the Time of Delivery, of
        Mayer, Brown & Platt, counsel for the Company, in form and substance
        satisfactory to counsel for the Underwriters, to the effect that:
 
                (i) the Company is a corporation in good standing, duly
           organized and validly existing under the laws of the State of
           Illinois and has due corporate authority to carry on the business in
           which it is engaged and to own and operate the properties used by it
           in such business;
 
                (ii) the Indenture is in due and proper form, has been duly and
           validly authorized by the necessary corporate action and by orders
           duly entered by the Illinois Commerce Commission; no authorization,
           approval, consent, certificate or order of any other state commission
           or regulatory authority or of any federal commission or regulatory
           authority not already obtained is required in respect of the
           execution and delivery of the Indenture; and the Indenture has been
           duly and validly executed and delivered and is a valid and
           enforceable instrument in accordance with its terms, except as
           enforcement of provisions of the Indenture may be limited by
           bankruptcy or other laws of general application affecting the
           enforcement of creditors' rights and by general equity principles;
 
                (iii) the Bonds are in due and proper form; the issue and sale
           of the Bonds by the Company in accordance with the terms of the
           Underwriting Agreement have been duly and validly authorized by the
           necessary corporate action and by order duly entered by the Illinois
           Commerce Commission; no authorization, approval, consent, certificate
           or order of any other state commission or regulatory authority or of
           any federal commission or regulatory authority not already obtained
           is required in respect of such issue and sale (except such consents,
           approvals, authorizations, registrations or qualifications as may be
           required under state securities or Blue Sky laws in connection with
           the purchase and distribution of the Bonds by the Underwriters); the
           Bonds have been duly executed and delivered to the Underwriters
           against payment of the agreed consideration therefor and, assuming
           due authentication thereof by the Trustee, constitute valid and
           enforceable obligations of the Company in accordance with their
           terms, secured by the lien of and, with like exception as noted in
           the foregoing subdivision (ii), entitled to the benefits provided by
           the Indenture, and the registered owners of the Bonds will be
           entitled to the payment of principal and interest, and premium in
           case of redemption, as therein provided; the Bonds and the Indenture
           conform as to legal matters in all material respects with the
           statements concerning them made in the Prospectus, and such
           statements accurately set forth the matters respecting the Bonds and
           the Indenture required to be set forth in the Prospectus;
 
                (iv) The Registration Statement is effective under the Act and
           the Indenture has been duly qualified under the Trust Indenture Act,
           and to the best of the knowledge of said counsel no proceedings for a
           stop order are pending or threatened under Section 8(d) of the Act;
 
                (v) the execution and delivery of the Underwriting Agreement by
           the Company has been duly authorized by the necessary corporate
           action, and the Underwriting Agreement has been duly executed and
           delivered by the Company;
 
                (vi) the issue and sale of the Bonds and the compliance by the
           Company with all of the provisions of the Bonds, the Indenture and
           the Underwriting Agreement will not conflict with or result in a
           breach or violation of any of the provisions of, or constitute
           (disregarding any grace or notice period) a default under, any
           indenture, mortgage, loan agreement, contract, note, lease or other
           agreement or instrument, known to such counsel, to which the Company
           is a party or by which the Company is bound or to which any of the
           property or assets of the Company is subject (with such exceptions as
           are in the aggregate not material to the business or financial
           condition of the Company or the validity of the Bonds), nor will such
           action result in any violation of the provisions of the Charter or
           By-Laws of the Company, or, to the best of their
 
                                        7
<PAGE>
 
           knowledge, any statute or any order, rule or regulation applicable to
           the Company of any court or governmental agency or body having
           jurisdiction over the Company or any of its properties (except such
           consents, approvals, authorizations, registrations or qualifications
           as may be required under state securities or Blue Sky laws in
           connection with the purchase and distribution of the Bonds by the
           Underwriters);
 
                (vii) at the time the registration statement became effective,
           the registration statement and the related prospectus (other than the
           financial statements and notices thereto and supporting schedules and
           other financial information included therein, as to which no opinion
           need be rendered) complied as to form in all material respects with
           the requirements of the Act and the Trust Indenture Act and the
           Regulations;
 
                (viii) with minor exceptions, and subject to noncompliance with
           certain procedural and other requirements in the procurement and
           granting of gas franchises in a number of smaller municipalities
           formerly served by Mid-Illinois Gas Company, the Company holds
           franchises from all of the incorporated cities and villages included
           in the communities in which the Company renders gas service; all of
           the franchises so held by the Company are valid and subsisting and
           authorize it to engage in the business conducted by it in the
           respective municipalities granting such franchises; the Company also
           holds certificates of public convenience and necessity issued by the
           Illinois Commerce Commission, which are valid and subsisting and
           constitute due authorization by such commission for the conduct by
           the Company of its operations in all areas served;
 
                (ix) to the best of their knowledge and information, there are
           no contracts, indentures, mortgages, loan agreements, notes, leases
           or other instruments of a character required to be described in the
           Registration Statement or Prospectus or to be filed as exhibits to
           the Registration Statement other than those described therein or
           filed or incorporated by reference as exhibits thereto and the
           descriptions thereof or reference thereto are correct; and
 
                (x) except as disclosed in the Prospectus, there are no material
           pending or threatened legal proceedings, considering the Company and
           the subsidiaries as a single enterprise, known to said counsel, to
           which the Company or any subsidiary is a party or of which property
           of the Company or any subsidiary is the subject, and to the best of
           the knowledge of said counsel there are no such proceedings
           contemplated by governmental authorities.
 
        Such counsel shall further state that, based upon their participation in
        the preparation of the Registration Statement and the Prospectus, and
        any amendment or supplement thereto, and upon their review and
        discussions of the contents thereof, but without independent check or
        verification except as specified, nothing has come to their attention
        that has caused them to believe that the Registration Statement, at the
        time it became effective, contained an untrue statement of a material
        fact or omitted to state a material fact required to be stated therein
        or necessary to make the statements therein not misleading or that the
        Prospectus, and any amendment or supplement thereto, at the date the
        Registration Statement became effective, the date of this Agreement or
        at the Time of Delivery, contained an untrue statement of a material
        fact or omitted to state a material fact necessary in order to make the
        statements therein, in light of the circumstances under which they were
        made, not misleading.
 
             (2) The favorable opinion of Wildman, Harrold, Allen & Dixon,
        counsel for the Underwriters, with respect to the incorporation of the
        Company, the validity of the Bonds and the Indenture, the Registration
        Statement, the Prospectus and other related matters as the
        Representatives may reasonably request; provided that any opinion
        requested with respect to the jurisdiction of regulatory authorities
        (other than the Illinois Commerce Commission, the Securities and
        Exchange Commission and state securities or Blue Sky authorities) and
        the matters in subdivisions (vi) and (ix) above will rely upon the
        opinion of Mayer, Brown & Platt.
 
                                        8
<PAGE>
 
          (c) At the effective date of the Registration Statement and at the
     Time of Delivery the Representatives shall have received a letter from
     Arthur Andersen LLP, dated the effective date or Time of Delivery,
     respectively, in form and substance satisfactory to the Representatives,
     advising that (i) they are independent public accountants with respect to
     the Company and its subsidiaries as required by the Act and the 1934 Act
     and the applicable Regulations, (ii) in their opinion, the audited
     consolidated financial statements and any supplemental financial
     information and schedules of the Company examined by them and incorporated
     by reference in the Registration Statement and Prospectus comply as to form
     in all material respects with the applicable accounting requirements of the
     Act, the 1934 Act and the applicable Regulations, (iii) on the basis of a
     reading of the latest available unaudited interim consolidated financial
     statements prepared by the Company, a reading of the minutes of meetings of
     the shareholder and the board of directors and executive committee of the
     Company and its subsidiaries, consultation with officers of the Company
     responsible for financial and accounting matters and other specified
     procedures, nothing has come to their attention which caused them to
     believe that (A) the unaudited interim condensed consolidated financial
     statements included or incorporated by reference in the Prospectus do not
     comply as to form in all material respects with the applicable accounting
     requirements of the Act, the 1934 Act and the applicable Regulations or are
     not in conformity with generally accepted accounting principles applied on
     a basis substantially consistent with that of the audited financial
     statements incorporated as aforesaid, (B) the unaudited income statement
     data and balance sheet data (other than such data for the periods referred
     to in (A) above) included or incorporated by reference in the Prospectus do
     not agree with the corresponding items in the audited or unaudited, as the
     case may be, financial statements from which such data were derived or were
     not determined on a basis substantially consistent with that of the
     corresponding amounts included in the audited consolidated financial
     statements of the Company incorporated in the Registration Statement and
     Prospectus, or (C) at a specified date within five business days of the
     date of such letter with respect to (1) below, and during the period from
     the date of the latest audited consolidated financial statements or
     unaudited interim condensed consolidated financial statements, as the case
     may be, incorporated in the Prospectus to the date of the latest available
     unaudited interim consolidated financial statements (if any) prepared by
     the Company with respect to (2) below, except in all instances as set forth
     in or contemplated by the Prospectus or as set forth in such letter: (1)
     there was any increase in the consolidated long-term debt of the Company
     and its subsidiaries, as compared with the amounts set forth in the latest
     balance sheet included or incorporated by reference in the Prospectus, or
     (2) there were any decreases in consolidated operating income or net income
     as compared with the corresponding period in the preceding year; and (iv)
     they have carried out specified procedures performed for the purpose of
     comparing certain financial information and percentages (which is limited
     to financial information derived from general accounting records of the
     Company) specified by the Representatives and appearing in the Registration
     Statement or in schedules or exhibits to the Registration Statement or in
     the Prospectus or in documents incorporated by reference in the Prospectus
     with indicated amounts in the financial statements or accounting records of
     the Company and (excluding any questions of legal interpretation and, in
     the case of the letter delivered at the Time of Delivery, any exceptions
     disclosed in the letter delivered at the Effective Date) have found such
     information and percentages to be in agreement with the relevant accounting
     and financial information of the Company referred to in such letter in the
     description of the procedures performed by them. If such letter discloses
     any material adverse decreases or increases, as the case may be, in the
     items specified in item (iii) (C) above which are not set forth in or
     contemplated by the Prospectus which, in the judgment of the
     Representatives, makes it impracticable or inadvisable to proceed with the
     public offering or the delivery of the Bonds on the terms and in the manner
     contemplated by the Prospectus, this Agreement and all obligations of the
     Underwriters hereunder may be cancelled by the Representatives by notifying
     the Company in the manner and with the effect provided below in the last
     sentence of this Section 6.
 
          (d) At the Time of Delivery the Representatives shall have received a
     certificate of the Chairman, President, Vice President and principal
     financial officer, Vice President and principal accounting officer or
     Treasurer of the Company, dated as of the Time of Delivery, to the effect
     that the signer of such certificate has carefully examined the Registration
     Statement, the Prospectus and any amendment or
 
                                        9
<PAGE>
 
     supplement thereto and the Underwriting Agreement and that, in his opinion,
     at the time the Registration Statement became effective, the Registration
     Statement did not contain an untrue statement of a material fact or omit to
     state a material fact required to be stated therein or necessary in order
     to make the statements therein not misleading, and at the date of the
     Underwriting Agreement the Prospectus did not contain an untrue statement
     of a material fact or omit to state a material fact required to be stated
     therein or necessary in order to make the statements therein not
     misleading, and since the date of the Underwriting Agreement, no event has
     occurred which should have been set forth in an amendment of or supplement
     to the Prospectus which has not been so set forth; and no stop order
     suspending the effectiveness of the Registration Statement has been issued
     and no proceedings therefor have been instituted or threatened by the
     Commission; and to the further effect that all the representations and
     warranties contained in Section 2 hereof are true and correct, with the
     same force and effect as though expressly made at the Time of Delivery.
 
          (e) At the Time of Delivery the rating assigned by any nationally
     recognized securities rating agency to any debt securities of the Company
     as of the date of the Underwriting Agreement shall not have been lowered
     since the date of the Underwriting Agreement and no such agency shall have
     publicly announced that it has placed any of such debt securities on what
     is commonly termed a "watch list" for possible downgrading.
 
          (f) At the Time of Delivery counsel for the Underwriters shall have
     been furnished with such documents and opinions as they may reasonably
     require for the purpose of enabling them to pass upon the sale of the Bonds
     as herein contemplated and related proceedings, or in order to evidence the
     accuracy or completeness of any of the representations or warranties, or
     the fulfillment of any of the conditions, herein contained; and all
     proceedings taken by the Company in connection with the sale of the Bonds
     as herein contemplated shall be satisfactory in form and substance to the
     Representatives and counsel for the Underwriters.
 
     If any of the conditions specified in this Section shall not have been
fulfilled when and as required by this Agreement to be fulfilled, this Agreement
and all obligations of the Underwriters hereunder may be cancelled by the
Representatives by notifying the Company of such cancellation in writing or by
telecopy at any time at or prior to the Time of Delivery and any such
cancellation shall be without liability of any party to any other party except
as otherwise provided in this Agreement.
 
     SECTION 7. Condition of Company's Obligations. The obligations of the
Company to sell and deliver the Bonds are subject to the following conditions:
that at the Time of Delivery no stop order suspending the effectiveness of the
Registration Statement shall have been issued or proceedings therefor initiated
or threatened; that the order of the Illinois Commerce Commission, referred to
in Section 2(k), shall be in full force and effect substantially in the form in
which such order shall originally have been entered; and that the Indenture
shall be qualified under the Trust Indenture Act.
 
     SECTION 8. Indemnification. (a) The Company agrees to indemnify and hold
harmless each Underwriter and each person, if any, who controls any Underwriter
within the meaning of the Act or the 1934 Act, as follows:
 
          (i) against any and all loss, liability, claim, damage and expense,
     whatsoever, arising out of any untrue statement or alleged untrue statement
     of a material fact contained in the registration statement as it became
     effective, or in any amendment thereto, or in the Registration Statement
     (or any amendment thereto), or the omission or alleged omission therefrom
     of a material fact required to be stated therein or necessary to make the
     statements therein not misleading, or arising out of any untrue statement
     or alleged untrue statement of a material fact contained in any preliminary
     prospectus or the Prospectus (or any amendment or supplement thereto) or
     the omission or alleged omission therefrom of a material fact necessary in
     order to make the statements therein, in light of the circumstances under
     which they were made, not misleading, unless such untrue statement or
     omission or such alleged untrue statement or omission was made in reliance
     upon and in conformity with written information respecting the Underwriters
     furnished to the Company by or on behalf of any Underwriter through the
     Representatives
 
                                       10
<PAGE>
 
     expressly for use in the Registration Statement (or any amendment thereto)
     or the Prospectus (or any amendment or supplement thereto);
 
          (ii) against any and all loss, liability, claim, damage and expense
     whatsoever to the extent of the aggregate amount paid in settlement of any
     litigation, commenced or threatened, or of any claim whatsoever based upon
     any such untrue statement or omission or any such alleged untrue statement
     or omission, if such settlement is effected with the written consent of the
     Company; and
 
          (iii) against any and all expenses whatsoever reasonably incurred in
     investigating, preparing or defending against any litigation, commenced or
     threatened, or any claim whatsoever based upon any such untrue statement or
     omission, or any such alleged untrue statement or omission, to the extent
     that any such expense is not paid under (i) or (ii) above, and, in the case
     of (i) above, unless such untrue statement or omission or such alleged
     untrue statement or omission was made in reliance upon and in conformity
     with written information respecting the Underwriters furnished to the
     Company by or on behalf of any Underwriter through the Representatives
     expressly for use in the Registration Statement (or any amendment thereto)
     or the Prospectus (or any amendment or supplement thereto), or, in the case
     of (ii) above, provided such settlement is effected with the written
     consent of the Company.
 
     This indemnity agreement is subject to the condition that, insofar as it
relates to any untrue statement, alleged untrue statement, omission or alleged
omission made in a preliminary prospectus or preliminary prospectus supplement,
but eliminated or remedied in the Prospectus, such indemnity agreement shall not
inure to the benefit of any Underwriter from whom the person asserting any loss,
liability, claim or damage purchases the Bonds which are the subject thereof (or
to the benefit of any person who controls such Underwriter) if such Underwriter
fails to send or give a copy of the Prospectus (excluding documents incorporated
by reference) to such person prior to or together with written confirmation of
the sale of such Bonds to such person and the delivery thereof would have
constituted a defense to the claim by such person.
 
     In no case shall the Company be liable under this indemnity agreement with
respect to any claim made against any Underwriter or any such controlling person
unless the Company shall be notified in writing of the nature of the claim
within a reasonable time after the assertion thereof, but failure to so notify
the Company shall not relieve it from any liability which it may have otherwise
than on account of this indemnity agreement. The Company shall be entitled to
participate at its own expense in the defense, or, if it so elects, within a
reasonable time after receipt of such notice, to assume the defense of any suit
brought to enforce any such claim, but if it so elects to assume the defense,
such defense shall be conducted by counsel chosen by it and approved by the
Underwriter or Underwriters or controlling person or persons, defendant or
defendants in any suit so brought, which approval shall not be unreasonably
withheld. In the event that the Company elects to assume the defense of any such
suit and retains such counsel, the Underwriter or Underwriters or controlling
person or persons, defendant or defendants in the suit shall thereafter bear the
fees and expenses of any additional counsel retained by them. In the event that
the parties to any such action (including impleaded parties) include both the
Company and one or more Underwriters and any such Underwriter shall have been
advised by counsel chosen by it and satisfactory to the Company that there may
be one or more legal defenses available to it which are different from or
additional to those available to the Company, the Company shall not have the
right to assume the defense of such action on behalf of such Underwriter and
will reimburse such Underwriter and any person controlling such Underwriter as
aforesaid for the reasonable fees and expenses of any counsel retained by them,
it being understood that the Company shall not, in connection with any one
action or separate but similar or related actions in the same jurisdiction
arising out of the same general allegations or circumstances, be liable for the
reasonable fees and expense of more than one separate firm of attorneys for all
such Underwriters and controlling persons, which firm shall be designated in
writing by the Representatives. The Company agrees to notify the Representatives
within a reasonable time of the assertion of any claim against it, any of its
officers or directors or any person who controls the Company within the meaning
of the Act or the 1934 Act, in connection with the sale of the Bonds.
 
     (b) Each Underwriter severally agrees that it will indemnify and hold
harmless the Company, its directors, and each of its officers who signed the
Registration Statement and each person, if any, who controls the Company within
the meaning of the Act or the 1934 Act, to the same extent as the indemnity
contained in
 
                                       11
<PAGE>
 
subsection (a) of this Section, but only with respect to statements or omissions
made in the registration statement as it became effective, or in any amendment
thereto, or in the Registration Statement (or any amendment thereto) or the
Prospectus (or any amendment or supplement thereto) in reliance upon and in
conformity with written information respecting the Underwriters furnished to the
Company by or on behalf of such Underwriter through the Representatives
expressly for use in the Registration Statement (or any amendment thereto) or
the Prospectus (or any amendment or supplement thereto). In case any action
shall be brought against the Company or any person so indemnified based on the
Registration Statement (or any amendment thereto) or the Prospectus (or any
amendment or supplement thereto) and in respect of which indemnity may be sought
against any Underwriter, such Underwriter shall have the rights and duties given
to the Company, and the Company and each person so indemnified shall have the
rights and duties given to the Underwriters, by the provisions of subsection (a)
of this Section.
 
     (c) If the indemnification provided for in this Section is unavailable or
insufficient to hold harmless an indemnified party under subsection (a) or (b)
above, then each indemnifying party shall contribute to the amount paid or
payable by such indemnified party as a result of the losses, claims, damages or
liabilities referred to in subsection (a) or (b) above (i) in such proportion as
is appropriate to reflect the relative benefits received by the Company on the
one hand and the Underwriters on the other from the offering of the Securities
and also the relative fault of the Company on the one hand and the Underwriters
on the other in connection with the statements or omissions which resulted in
such losses, claims, damages or liabilities as well as any other relevant
equitable considerations. The relative fault shall be determined by reference
to, among other things, whether the untrue or alleged untrue statement of a
material fact, or the omission or alleged omission to state a material fact
relates to information supplied by the Company or the Underwriters and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such untrue statement or omission. The amount paid by an
indemnified party as a result of the losses, claims, damages or liabilities
referred to in the first sentence of this subsection (c) shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any action or claim which is
the subject of this subsection (c). Notwithstanding the provisions of this
subsection (c), no Underwriter shall be required to contribute any amount in
excess of the amount by which the total price at which the Securities
underwritten by it and distributed to the public were offered to the public
exceeds the amount of any damages which such Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations in this subsection (c) to contribute are several in
proportion to their respective underwriting obligations and not joint.
 
     (d) The obligations of the Company under this Section 8 shall be in
addition to any liability which the Company may otherwise have and shall extend,
upon the same terms and conditions, to each person, if any, who controls any
Underwriter within the meaning of the Act or the 1934 Act; and the obligations
of the Underwriters under this Section 8 shall be in addition to any liability
which the respective Underwriters may otherwise have and shall extend, upon the
same terms and conditions, to each officer and director of the Company and to
each person, if any, who controls the Company within the meaning of the Act or
the 1934 Act.
 
     SECTION 9. Representations, Warranties and Agreements to Survive
Delivery. All representations, warranties and agreements contained in the
Underwriting Agreement and/or contained in certificates of officers of the
Company submitted pursuant hereto, shall remain operative and in full force and
effect, regardless of any investigation made by or on behalf of any Underwriter
or any controlling person of any Underwriter, or by or on behalf of the Company,
and shall survive payment for and delivery of the Bonds.
 
     SECTION 10. Effective Date of the Underwriting Agreement and Termination
Thereof. (a) The Underwriting Agreement shall become effective at the time of
the initial public offering by the Underwriters of any of the Bonds. The time of
the initial public offering shall mean 12:00 noon, New York City time, on the
first full business day after the Underwriting Agreement is executed or at such
time as the Representatives may authorize the sale of the Bonds to the public by
the Underwriters or other securities dealers, whichever shall
                                       12
<PAGE>
 
first occur. The Representatives or the Company may prevent the Underwriting
Agreement from becoming effective without liability of any party to any other
party, except as otherwise provided in the Underwriting Agreement, by giving the
notice indicated below in this Section prior to the time the Underwriting
Agreement would otherwise become effective as herein provided.
 
     (b) The Representatives shall have the right to terminate the Underwriting
Agreement by giving the notice indicated below in this Section at any time at or
prior to the Time of Delivery if (i) the Company shall have sustained since the
respective dates as of which information is given in the Prospectus any material
loss or interference with its business from fire, explosion, flood or other
calamity, whether or not covered by insurance, or from any labor dispute or
court or governmental action, order or decree; or (ii) since the respective
dates as of which information is given in the Prospectus there shall have been
any material increase in the long-term debt, or any material adverse change, or
any development involving a prospective material adverse change, in or affecting
the general business affairs, management, financial position, results of
operations, or business prospects of the Company and its subsidiaries considered
as one enterprise, otherwise than as set forth or contemplated in the
Prospectus, the effect of which, in any such case described in clause (i) or
(ii), in the judgment of the Representatives makes it impracticable or
inadvisable to proceed with the public offering or the delivery of the Bonds on
the terms and in the manner contemplated in the Prospectus; or (iii) there shall
have occurred the outbreak or escalation of hostilities involving in a
significant way the armed forces of the United States, or the declaration by the
United States, on or after the date of the Underwriting Agreement, of a national
emergency or war, or there shall have occurred a general suspension or
limitation of trading in securities on the New York or American Stock Exchanges,
or the establishment of minimum prices on either such Exchange, or a general
moratorium on commercial banking activities in New York is declared by either
federal or New York state authorities, the effect of which in the judgment of
the Representatives makes it impracticable or inadvisable to proceed with the
public offering or the delivery of the Bonds on the terms and in the manner
contemplated in the Prospectus. If the Representatives shall so terminate the
Underwriting Agreement, such termination shall be without liability of any party
to any other party except as otherwise provided in the Underwriting Agreement.
 
     (c) If the Representatives elect to prevent the Underwriting Agreement from
becoming effective or to terminate the Underwriting Agreement as provided in
this Section, the Company and each other Underwriter shall be notified promptly
by the Representatives, by telephone or telegram, confirmed by letter. If the
Company elects to prevent the Underwriting Agreement from becoming effective as
provided in this Section, the Representatives shall be notified promptly by the
Company by telephone or telegram, confirmed by letter.
 
     SECTION 11. Default of Underwriters. If any one or more of the Underwriters
shall fail at the Time of Delivery to purchase the amount of Bonds which it or
they are obligated to purchase hereunder (the "Defaulted Bonds"), then the
Representatives shall have the right, within 24 hours thereafter, to make
arrangements for one or more of the non-defaulting Underwriters, or any other
underwriters, to purchase all, but not less than all, of the Defaulted Bonds in
such amounts as may be agreed upon and upon the terms herein set forth. If,
however, during such 24 hours the Representatives shall not have completed such
arrangements for the purchase of all of the Defaulted Bonds, then the Company
shall be entitled to a further period of 24 hours within which to procure
another party of parties satisfactory to the Representatives to purchase all of
such Defaulted Bonds on such terms. If, after giving effect to any arrangements
for the purchase of Defaulted Bonds by the Representatives and the Company as
provided above, then:
 
          (a) if the amount of Defaulted Bonds does not exceed 10% of the
     aggregate principal amount of the Bonds being sold hereunder, the
     non-defaulting Underwriters shall be obligated to purchase severally the
     full amount thereof in the proportions that their respective underwriting
     obligations hereunder bear to the underwriting obligations of all
     non-defaulting Underwriters, or
 
          (b) if the amount of Defaulted Bonds exceeds 10% of the aggregate
     principal amount of the Bonds being sold hereunder, the Underwriting
     Agreement shall terminate without any liability on the part of the Company
     or any non-defaulting Underwriter.
 
     The termination of the Underwriting Agreement pursuant to this Section
shall be without liability on the part of the Company or any of said
non-defaulting Underwriters, except for the respective obligations of the
                                       13
<PAGE>
 
Company and the Underwriters pursuant to Section 8 and except that the Company
shall be obligated to reimburse the Underwriters for their out-of-pocket
expenses (including reasonable fees and disbursements of counsel for the
Underwriters) incurred in connection with the offering if the Underwriting
Agreement could have been terminated by the Representatives pursuant to Section
6 or 10(b).
 
     Nothing herein shall relieve any Underwriter so defaulting from liability,
if any, for such default.
 
     In the event of a default by any one or more Underwriters as set forth in
this Section, either the Representatives or the Company shall have the right to
postpone the Time of Delivery for an additional period not exceeding 7 days in
order that any required changes in the Registration Statement and Prospectus or
in any other documents or arrangements may be effected.
 
     SECTION 12. Notices. Except as otherwise provided in the Underwriting
Agreement, all communications under the Underwriting Agreement shall be in
writing, and, if sent to the Underwriters, shall be mailed, delivered or
telecopied and confirmed to the address of the Representatives, as set forth in
the Underwriting Agreement (except that any notice to an Underwriter pursuant to
Section 8 hereof shall be sent to it at its address set forth in the copies of
the Underwriters' Questionnaires furnished to the Company), or, if sent to the
Company shall be mailed or telecopied and confirmed to it at P.O. Box 190,
Aurora, Illinois 60507-0190, or delivered to it at 1844 Ferry Road, Naperville,
Illinois, for the attention of David L. Cyranoski, Senior Vice President,
Secretary and Treasurer.
 
     SECTION 13. Parties. The Underwriting Agreement shall inure to the benefit
of and be binding upon the Underwriters and the Company and their respective
successors. Nothing expressed or mentioned in the Underwriting Agreement is
intended or shall be construed to give any person, firm or corporation, other
than the parties hereto and their respective successors and the controlling
persons and the directors and officers referred to in Section 8, any legal or
equitable right, remedy or claim under or in respect of the Underwriting
Agreement or any provision herein contained; the Underwriting Agreement and all
conditions and provisions hereof being intended to be and being for the sole and
exclusive benefit of the parties hereto and their respective successors and said
controlling persons, directors and officers and for the benefit of no other
person, firm or corporation. No purchaser of any Bonds from any Underwriter
shall be deemed to be a successor by reason merely of such purchase.
 
     SECTION 14. Choice of Law. The Underwriting Agreement shall be construed in
accordance with, and governed by, the laws of the State of Illinois.
 
                                       14