Nicor Inc 12/31/2005 Form 10K

10-K 1 nicor123105_form10k.htm NICOR INC 12/31/2005 FORM 10K Nicor Inc 12/31/2005 Form 10K

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 SECURITIES
	EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2005

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

Commission File Number 1-7297

NICOR INC.

(Exact name of registrant as specified in its charter)

Illinois		36-2855175
(State of Incorporation)		(I.R.S. Employer
		Identification Number)
1844 Ferry Road
Naperville, Illinois 60563-9600		(630) 305-9500
(Address of principal executive offices)		(Registrant’s telephone number)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Name of each exchange on which registered
Common Stock, par value $2.50 per share		New York Stock Exchange
		Chicago 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. [X]

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, 2005 closing price of $41.17) held by non-affiliates of the registrant was approximately $1.8 billion. As of February 21, 2006, there were 44,192,259 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the company’s 2006 Annual Meeting Definitive Proxy Statement, to be filed on or about March 10, 2006, are incorporated by reference into Part III.

Nicor Inc.

Table of Contents

	Item No.	Description	Page No.

		Glossary	ii

		Part I
	1.	Business	1
	1A.	Risk Factors	6
	1B.	Unresolved Staff Comments	10
	2.	Properties	10
	3.	Legal Proceedings	10
	4.	Submission of Matters to a Vote of Security Holders	10
		Executive Officers of the Registrant	11

		Part II
	5.	Market for Registrant’s Common Equity, Related Stockholder Matters and issuer Purchases of Equity Securities	12
	6.	Selected Financial Data	13
	7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
	7A.	Quantitative and Qualitative Disclosures about Market Risk	34
	8.	Financial Statements and Supplementary Data	36
	9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	71
	9A.	Controls and Procedures	71
	9B.	Other Information	73

		Part III
	10.	Directors and Executive Officers of the Registrant	73
	11.	Executive Compensation	73
	12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	74
	13.	Certain Relationships and Related Transactions	74
	14.	Principal Accountant Fees and Services	74

		Part IV
	15.	Exhibits and Financial Statement Schedules	75
		Signatures	77
		Exhibit Index	78

Nicor Inc.

Glossary

Chicago Hub. A venture of Northern Illinois Gas Company, doing business as Nicor Gas Company (“Nicor Gas”) which provides natural gas storage and transmission-related services to marketers and other gas distribution companies.

Degree day. The extent to which the daily average temperature falls below 65 degrees Fahrenheit. Normal weather for Nicor Gas service territory, for purposes of this report, is considered to be 5,830 degree days per year for 2005 and 6,000 degree days per year for 2004 and 2003.

EN Engineering. EN Engineering, L.L.C., a 50-percent-owned joint venture that provides engineering and corrosion services.

FERC. Federal Energy Regulatory Commission, the agency that regulates the interstate transportation of natural gas, oil and electricity.

Horizon Pipeline. 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.

Mcf, MMcf, Bcf. Thousand cubic feet, million cubic feet, billion cubic feet.

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’ product risks.

Nicor Energy. Nicor Energy, L.L.C., a 50-percent-owned retail energy marketing joint venture which disposed of its customer contracts and ceased operations during 2003.

Nicor Gas. Northern Illinois Gas Company (doing business as Nicor Gas Company) is a wholly owned public utility business and one of the nation’s largest distributors of natural gas.

Nicor Services. 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.

TEU. Twenty-foot equivalent unit, a measure of volume in containerized shipping equal to one 20-foot-long container.

Glossary

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 leading carrier of containerized freight in the Bahamas and the Caribbean region.

iii

PART I

Item 1. Business

Nicor Inc. (“Nicor”), an Illinois corporation formed in 1976, is a holding company. Gas distribution is Nicor’s primary business. Nicor’s principal subsidiaries are Northern Illinois Gas Company (doing business as Nicor Gas Company (“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 and Nicor Solutions, 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 3,700 employees at year-end 2005.

Summary financial information for Nicor’s major business segments is included in Item 8 - Notes to the Consolidated Financial Statements - Note 13 - 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 over 2.1 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 22 for operating revenues, deliveries and number of customers by customer classification. Nicor Gas had approximately 2,200 employees at year-end 2005.

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’ Purchased Gas Adjustment (“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 Federal Energy Regulatory Commission (“FERC”). When firm pipeline services are temporarily not needed, Nicor Gas may release the services in 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 provide for 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 one-half 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 Expiration
Natural Gas Pipeline Company (NGPL)	698,000	March 2009
Horizon Pipeline	300,000	May 2012
Tennessee Gas Pipeline Company (TGPC)	300,000	October 2009
Midwestern Gas Transmission Company	297,000	October 2009
Northern Natural Gas Company	206,000	October 2008
Natural Gas Pipeline Company (NGPL)	140,000	March 2007
Natural Gas Pipeline Company (NGPL)	60,000	March 2008
ANR Pipeline	25,000	October 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 winter only transportation contracts and contracts that enhance Nicor Gas’ operational flexibility. The availability numbers shown above represent maximums during the winter heating season and in some cases are reduced to lower levels 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 billion cubic feet (“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.

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 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 about $1.5 million to $2.0 million.

In the first quarter of 2003, Nicor Gas purchased earnings protection against the impact of significantly warmer-than-normal or colder-than-normal weather. No such protection has been purchased since the first quarter of 2003, 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. 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 2004, the offsetting impact related to utility-bill management products was about one-third of the gas distribution weather effect.

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 Illinois Commerce Commission (“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 17 - 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. The ICC annually reviews the company’s natural gas purchasing practices for prudence, and may disallow the pass-through of costs considered imprudent.

·	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 performance-based rate (“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 19 - Contingencies - Performance-Based Rate Plan.

Gas distribution, transmission and storage system, and other properties

The gas distribution, transmission and storage system includes approximately 33,000 miles of steel, plastic and cast iron main; approximately 1.9 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. Tropical Shipping’s financial results can be significantly affected by general economic conditions in the United States, the Caribbean region and Canada. The company is a major carrier of exports from the east coast of the United States and Canada to the Caribbean region. 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, 2005, Tropical Shipping’s fleet consisted of 10 owned vessels and 8 chartered vessels with a container capacity totaling approximately 5,900 twenty-foot equivalent units (“TEUs”). In addition to the vessels, the company owns containers, container-handling equipment, chassis and other equipment. The company leases containers and 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.

OTHER ENERGY VENTURES

Nicor owns several energy-related ventures, including two companies marketing energy-related products and services, and a wholesale natural gas marketing company. Nicor also has equity interests in several joint ventures including a FERC-regulated natural gas pipeline.

Nicor Services and Nicor Solutions 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 product warranty contracts, repair, maintenance and installation services and equipment covering heating, air conditioning and related equipment, such as natural gas piping inside homes and ductwork, 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 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’ product risks.

During 2002, Horizon Pipeline, a 50-percent-owned joint venture with NGPL, put into operation 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.

Nicor Energy was a 50-percent-owned former retail energy marketing joint venture with Dynegy Marketing and Trade. During 2003, Nicor Energy disposed of its customer contracts and ceased operations. For information about Nicor Energy, see Item 8 - Notes to the Consolidated Financial Statements - Note 19 - Contingencies - Nicor Energy.

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 an equity investment in Triton Container Investments L.L.C., a cargo container leasing business.

AVAILABLE INFORMATION

Nicor files various reports with the Securities and Exchange Commission (“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.

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 1999-2005 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 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, 2005, the company had recorded a liability of $19.5 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.

An adverse decision in the proceedings concerning Nicor Gas’ Performance-Based Rate 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, SEC and U.S. Attorney for the Northern District of Illinois 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 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 these 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.

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

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 Statement of Financial Accounting Standard 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. See Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations for further discussion.

Transporting and storing natural gas involves 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 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 to both 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 ("ISPS") Code and is also subject to the United States Maritime Transportation Security Act ("MTSA"), both of which require extensive security assessments, plans and procedures. Tropical Shipping is also subject to the regulations of both the Federal Maritime Commission (“FMC”), and the Surface Transportation Board (“STB”), 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 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 Enerchange has credit risk that could adversely affect the company’s results of operations, cash flows and financial condition.

Nicor Enerchange extends credit to its counterparties. Despite prudent credit policies and the maintenance of netting arrangements, the company is exposed to the risk that it may not be able to collect amounts owed to it. If the counterparty to such a transaction fails to perform and any collateral Nicor Enerchange has secured is inadequate, Nicor Enerchange 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 8 - Income and Other Taxes and Note 19 - 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 17 - Rate proceeding and Note 19 - Contingencies, which are incorporated herein by reference.

Item 4. Submission of Matters to a Vote of Securities Holders

None.

Executive Officers of the Registrant

Name	Age	Current Position and Background

Russ M. Strobel	53	Chairman, Nicor and Nicor Gas (since November 2005); Chief Executive Officer, Nicor (since March 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	56	Executive Vice President and Chief Financial Officer, Nicor and Nicor Gas (since 2003); Vice President and Chief Financial Officer, Puget Energy, Inc., electric and natural gas provider (2000-2002) and Puget Sound Energy, Inc., electric and natural gas provider (1998-2002).

Claudia J. Colalillo	56	Senior Vice President Human Resources and Corporate Communications, Nicor and Nicor Gas (since 2002); Vice President Human Resources, Nicor and Nicor Gas (1998-2002).

Rocco J. D’Alessandro	47	Senior Vice President Operations, Nicor Gas (since 2002); Vice President Customer Service, Nicor Gas (1999-2002).

Daniel R. Dodge	52	Senior Vice President Diversified Ventures and Corporate Planning, Nicor and Nicor Gas (since 2002); Vice President Business Development, Nicor and Nicor Gas (1998-2002).

George M. Behrens	50	Vice President and Treasurer, Nicor and Nicor Gas (since 2004); Vice President Administration and Treasurer, Nicor and Nicor Gas (2000-2004).

Paul C. Gracey, Jr.	46	Vice President, General Counsel and Secretary, Nicor and Nicor Gas (since 2002); Vice President and General Counsel, Midwest Generation, Chicago, independent power producer (2000-2002).

Gerald P. O’Connor	54	Vice President Administration and Finance, Nicor and Nicor Gas (since 2004); 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).

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 21, 2006, there were approximately 22,300 common stockholders of record and the closing stock price was $41.76.

		Stock price				Dividends
Quarter		High		Low		Declared

2005
First	$	38.33	$	35.50	$	.465
Second		41.87		35.76		.465
Third		42.59		39.10		.465
Fourth		42.97		37.42		.465

2004
First	$	37.43	$	32.49	$	.465
Second		35.65		32.04		.465
Third		37.36		32.37		.465
Fourth		39.65		35.89		.465

In September 2001, Nicor announced a $50 million common stock repurchase program, under which Nicor may purchase its common stock as market conditions permit through open market transactions and to the extent cash flow is available after other cash needs and investment opportunities. There have been no repurchases under this program during 2005 or 2004. As of December 31, 2005, $21.5 million remained authorized for the repurchase of common stock.

On December 30, 2004, the company transferred 8,141 shares of its common stock to one individual in connection with the 2003 purchase of the assets and assumption of certain liabilities of a heating and air conditioning business owned by that individual. The shares were sold without registration under the Securities Act of 1933, pursuant to an exemption under Rule 505 of Regulation D under the Securities Act of 1933. The issuance was effected without general solicitation or advertising.

Nicor Inc.

Item 6. Selected Financial Data
(in millions, except per share data)
Year ended December 31
		2005		2004		2003		2002		2001

Operating revenues	$	3,357.8	$	2,739.7	$	2,662.7	$	1,897.4	$	2,366.3

Operating income	$	201.7	$	137.7	$	189.4	$	226.5	$	219.2

Income before cumulative effect of
accounting change	$	136.3	$	75.1	$	109.8	$	128.0	$	122.1

Net income	$	136.3	$	75.1	$	105.3	$	128.0	$	122.1

Earnings per common share
Basic
Before cumulative effect of
accounting change	$	3.08	$	1.71	$	2.49	$	2.90	$	2.70
Basic earnings per share		3.08		1.71		2.39		2.90		2.70

Diluted
Before cumulative effect of
accounting change	$	3.07	$	1.70	$	2.48	$	2.88	$	2.69
Diluted earnings per share		3.07		1.70		2.38		2.88		2.69

Dividends declared per
common share	$	1.86	$	1.86	$	1.86	$	1.84	$	1.76

Property, plant and equipment
Gross	$	4,351.3	$	4,143.6	$	3,999.5	$	3,872.8	$	3,733.0
Net		2,659.1		2,549.8		2,484.2		2,421.8		2,343.6

Total assets	$	4,391.2	$	3,975.2	$	3,797.2	$	3,524.4	$	3,182.2

Capitalization
Long-term bonds and notes, net of
current maturities	$	485.8	$	495.3	$	495.1	$	396.2	$	446.4
Mandatorily redeemable preferred stock		.6		1.6		1.8		4.3		6.1
Common equity		811.3		749.1		754.6		728.4		704.2
	$	1,297.7	$	1,246.0	$	1,251.5	$	1,128.9	$	1,156.7

See Item 1A - Risk Factors and Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations for factors that can impact year-to-year comparisons and may affect the future performance of Nicor's business.

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 2003 to 2005 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 Inc. (“Nicor”) is a holding company with two principal business segments - gas distribution and shipping. Northern Illinois Gas Company (doing business as Nicor Gas Company (“Nicor Gas”)) is one of the nation’s largest natural gas distribution companies, and it is Nicor’s primary business. Tropical Shipping is a containerized shipping business serving the Bahamas and the Caribbean region that typically represents most of the balance of Nicor’s operating income. Nicor also owns or has equity interests in several energy-related businesses.

Net income and diluted earnings per common share are presented below (in millions, except per share data):

	2005		2004		2003

Income before cumulative effect of accounting change	$	136.3	$	75.1	$	109.8
Net income		136.3		75.1		105.3
Earnings per average share of common stock:
Diluted - before cumulative effect of accounting change		3.07		1.70		2.48
Diluted - after cumulative effect of accounting change		3.07		1.70		2.38

Net income and diluted earnings per share for 2005 compared with 2004 were impacted significantly by the absence of last year’s first-quarter securities class action settlement charge ($38.5 million pretax or $0.52 per share) coupled with net 2005 insurance recoveries and earnings thereon ($29.9 million pretax or $0.41 per share) related to the securities class action and shareholder derivative lawsuit settlements. The current year was also significantly impacted by a tax benefit recognized in the fourth quarter of 2005 (approximately $17 million or $0.38 per share) in connection with the American Jobs Creation Act (the “Jobs Act”). For more information, see Item 8 - Notes to the Consolidated Financial Statements - Note 19 - Contingencies - Securities Class Actions, Shareholder Derivative Lawsuits and Other, and Note 8 - Income and Other Taxes.

Year over year comparisons also reflect 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. See Item 8 - Notes to the Consolidated Financial Statements - Note 17 - Rate proceeding for further discussion of the rate order.

Net income and diluted earnings per share were lower in 2004 compared with 2003 due in large part to a $38.5 million pretax litigation charge recorded in the first quarter of 2004 related to an agreement to settle securities class action lawsuits. The charge reduced net income by $23.2 million and diluted earnings per share by $0.52. For more information, see Item 8 - Notes to the Consolidated Financial Statements - Note 19 - Contingencies - Securities Class Actions.

Results for 2004 were also impacted by lower operating results in the gas distribution segment and an absence of gains that occurred in 2003 related to the company’s previously written off investment in Nicor Energy. Partially offsetting these negative factors were higher operating results in the shipping segment and at Nicor’s other energy ventures, a decrease in the effective income tax rate, and the absence of a cumulative effect loss that occurred in 2003 due to a change in accounting method at Nicor Enerchange.

Rate proceeding. Nicor Gas filed a request with the Illinois Commerce Commission (“ICC”) for an overall increase in base rates on November 4, 2004. In late 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’ Purchased Gas Adjustment (“PGA”) rider and the shifting of certain storage-related costs from the PGA rider to base rates. In addition, rates were established using a 10-year average for weather as opposed to the previous use of a 30-year average. The new 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 estimates that, under normal weather conditions, the annual net revenue increase resulting from implementing the new rate order will be about $34.7 million under the tariffs that 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. The ICC granted rehearing on seven issues, only two of which relate to the amount of the approved annual net revenue increase, and denied rehearing on all other issues raised in the applications. The ICC is expected to issue its decision on rehearing in March 2006. As a result of the rehearing process, the actual annual net revenue increase approved by the ICC could change. Based on the positions of the parties on the rehearing issues, the outcome could range from an approximate $7.1 million reduction to the annual net revenue increase to an approximate $0.9 million additional annual increase. Rate changes, if any, resulting from the outcome of the rehearing process would be prospective.

Shifting of certain storage-related costs from the PGA rider to base rates results in Nicor Gas bearing the impact that changes in natural gas prices have on those costs. During 2005 these costs approximated $17.5 million, $6.5 million of which were incurred after the effective date of the rate order and were therefore classified as operating and maintenance expense. Costs incurred prior to the effective date of the rate order are classified as cost of gas.

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):

	2005		2004			2003

Gas distribution	$	116.9	$	130.8		$	166.2
Shipping		40.4		31.6			22.7
Other energy ventures		14.1		19.3			7.9
Corporate and eliminations		30.3		(44.0	)		(7.4	)
	$	201.7	$	137.7		$	189.4

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

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 due in part to the rate increase which became effective during the fourth quarter of 2005 ($12.8 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). After consideration of the impacts of the rate order on gas distribution margin and operating and maintenance expenses, the fourth quarter rate increase added approximately $9 million to gas distribution operating income.

Gas distribution operating income decreased $35.4 million in 2004 as compared with 2003 due primarily to decreased mercury-related recoveries ($17.8 million decrease, net of costs), higher operating and maintenance expenses ($14.8 million increase), the negative impact of warmer weather than in 2003 (approximately $6 million decrease) and higher depreciation expense ($5.3 million increase). These negative factors were partially offset by an increase in gains on property sales ($5.5 million increase) and the impact of an increased number of customers ($3.3 million increase).

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 and payroll-related costs, driven by 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 to take advantage of the benefits of the Jobs Act.

Earnings during 2005 were positively impacted due to favorable economic conditions and the rebuilding efforts following the 2004 hurricanes. Shipping operating income for 2004 increased $8.9 million compared with 2003 due primarily to an increase in revenue ($38.5 million increase) driven by increased volumes shipped and higher average rates, partially offset by lower charter income and increased operating expenses ($29.6 million increase), primarily voyage and transportation, inland freight, port and other costs. Unfavorable economic conditions in the Caribbean, the Bahamas and the United States in 2003 had a negative impact on tourism and on construction projects.

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. These losses are expected to reverse in the future as the underlying transactions are settled. 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.

Operating income from Nicor’s other energy ventures for 2004 increased $11.4 million compared with 2003 due primarily to higher operating results at Nicor Enerchange ($5.8 million increase) and at Nicor’s energy-related products and services businesses ($4.2 million increase), and the absence of prior-year losses from former business activities ($0.8 million decrease). The improvements were due predominantly to an increased average number of utility-bill management customers at Nicor Solutions and related risk-management activities handled by Nicor Enerchange instead of by an outside party.

The $74.3 million increase in operating income for 2005 as compared with 2004 attributed to “Corporate and eliminations” is due primarily to the absence of last year’s securities class action settlement charge ($38.5 million) and 2005 net insurance recoveries and earnings thereon ($29.9 million) related to the securities class action and shareholder derivative lawsuit settlements. For more information, see Litigation charges (recoveries), net and Other corporate expenses and eliminations discussion below and Item 8 - Notes to the Consolidated Financial Statements - Note 19 - Contingencies - Securities Class Actions, Shareholder Derivative Lawsuits and Other.

The 2004 increase in operating loss attributed to “Corporate and eliminations” as compared with 2003 is due primarily to the 2004 litigation charge of $38.5 million as noted above.

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):

	2005			2004			2003

Gas distribution	$	2,909.6		$	2,362.1		$	2,351.6
Shipping		378.5			310.7			272.2
Other energy ventures		157.0			155.3			96.5
Corporate and eliminations		(87.3	)		(88.4	)		(57.6	)
	$	3,357.8		$	2,739.7		$	2,662.7

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 2005, gas distribution revenues increased $547.5 million as compared with 2004 due primarily to higher natural gas costs ($526.1 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 $12.8 million.

For the year 2004, gas distribution revenues increased $10.5 million as compared with 2003 due primarily to higher natural gas costs ($96.5 million increase) and higher revenue taxes ($16.5 million increase). These positive factors were largely offset by the negative effect of warmer weather than in 2003 (approximately $100 million decrease).

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.

In 2004, shipping segment operating revenues increased over 2003 due primarily to increased volumes shipped ($31.9 million increase) and higher average rates ($8.7 million increase), partially offset by decreased charter income ($2.1 million decrease). These higher volumes reflect increased tourism and post-hurricane construction activity in the Caribbean region and the Bahamas. Rates were higher due to a general rate increase and higher cost-recovery surcharges for fuel and security.

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.

The 2004 increase in revenues for other energy ventures was due primarily to higher revenues at Nicor’s energy-related products and services businesses ($52.4 million increase), and Nicor Enerchange ($7.2 million increase). The improvements were due predominantly to an increased average number of utility-bill management customers at Nicor Solutions and related risk-management activities handled by Nicor Enerchange instead of by an outside party.

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.

A reconciliation of gas distribution revenues and margin follows (in millions):

	2005			2004			2003

Gas distribution revenues	$	2,909.6		$	2,362.1		$	2,351.6
Cost of gas		(2,212.4	)		(1,695.0	)		(1,692.7	)
Revenue tax expense		(152.0	)		(139.4	)		(130.9	)
Gas distribution margin	$	545.2		$	527.7		$	528.0

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 ($12.8 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).

For the year 2004, gas distribution margin was essentially unchanged from 2003, although affected by a number of offsetting factors. Warmer weather than in 2003 (approximately $6 million decrease) and an adjustment related to prior-year performance-based rate (“PBR”) plan results ($1.8 million) had a negative effect on margin. These negative factors were partially offset by the impact of an increased number of customers ($3.3 million increase), higher average rates charged during the period ($2.2 million increase) and higher revenue tax administration fees ($1.0 million increase).

Gas distribution operating and maintenance expense. 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 gas storage-related costs ($6.5 million increase in the fourth quarter). 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, these storage-related gas costs were charged to cost of gas and passed through to customers as part of the PGA rider. These increases were partially offset by lower net legal and claims expenses ($4.7 million decrease).

Gas distribution operating and maintenance expense for 2004 of $234.9 million was $14.8 million higher than 2003 due primarily to increases in legal defense costs associated with the PBR-related litigation ($5.4 million increase) and payroll costs ($3.5 million increase), adjustments related to customer reimbursements ($3.1 million), higher bad debt expense ($2.7 million increase), due in part to high natural gas prices, and higher compliance costs ($2.6 million increase). These negative factors were partially offset by higher pension credits ($3.6 million increase).

Other gas distribution operating expenses. Property sale gains and losses vary from year-to-year depending upon property sales activity. Property sale gains and losses were insignificant during 2005 and 2003. During 2004, Nicor Gas realized a $5.9 million pretax gain on the sale of land. The company continues to assess its ownership of real estate holdings.

Mercury-related costs (recoveries), net reflect the estimated costs, credits and recoveries associated with the company’s mercury inspection and repair program. Net mercury-related costs (recoveries) were insignificant in 2005 and 2004, and approximately $(17.8) million in 2003. The 2003 net recoveries resulted from agreements reached with insurers of independent contractors of Nicor Gas. Additional information about the company’s mercury inspection and repair program is presented in Item 8 - Notes to the Consolidated Financial Statements - Note 19 - Contingencies - Mercury.

Shipping operating expenses. 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 to take advantage of the benefits of the Jobs Act.

Shipping segment operating expenses increased $29.6 million in 2004 as compared with 2003 due primarily to higher voyage and transportation, inland freight and port costs ($16.0 million increase), payroll and related costs ($4.7 million increase), leased equipment costs ($2.7 million increase) and vessel charter costs ($2.0 million increase). The increases were due primarily to increased volumes shipped.

Operating expenses of other energy ventures. 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 expense related to new business initiatives, partially offset by the impact of a decreased average number of fixed utility bill management customers.

The $47.4 million increase in the 2004 operating expenses compared with 2003 was due mainly to higher expenses at Nicor’s energy-related products and services businesses ($48.2 million increase), reflecting an increased average number of utility-bill management customers and the higher average cost of gas.

Litigation charges (recoveries), net. In the first quarter of 2005, the company recorded a $0.5 million pretax net recovery which was comprised of a shareholder derivative action settlement ($3.5 million pretax) and a related Directors and Officers (“D&O”) insurance recovery ($4.0 million). During the second quarter of 2005, the company recorded $29.4 million of pretax 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. In the first quarter of 2004, the company recorded a $38.5 million pretax litigation charge related to an agreement to settle the securities class actions. For more information, see Item 8 - Notes to the Consolidated Financial Statements - Note 19 - Contingencies - Securities Class Actions, Shareholder Derivative Lawsuits and Other.

Other corporate expenses and eliminations. Other corporate operating expenses (income) were $(0.8) million, $5.5 million and $8.3 million in 2005, 2004 and 2003, respectively, consisting primarily of legal and business development costs.

Intercompany eliminations were $(86.9) million, $(88.4) million and $(58.5) million in 2005, 2004 and 2003, respectively, and related primarily to utility-bill management products.

Interest expense. 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 ($3.7 million increase), partially offset by the impact of lower average borrowing levels ($4.8 million decrease).

Interest expense increased $3.9 million in 2004 over 2003 due to the impact of higher average interest rates ($4.4 million increase) and higher estimated interest on income tax matters ($1.8 million increase), partially offset by the impact of lower average borrowing levels ($2.3 million decrease).

Net equity investment income. Net equity investment income increased $3.0 million in 2005 over the 2004 period due primarily to higher results related to low income housing investments ($1.1 million increase) and higher income from Triton Container Investments L.L.C. (“Triton”), a cargo container leasing business ($0.9 million increase).

Equity investment results for 2004 decreased by $9.0 million as compared with 2003 due primarily to the absence of a $9.6 million cash recovery related to Nicor Energy that occurred in 2003. Information related to this investment is more fully described in Item 8 - Notes to the Consolidated Financial Statements - Note 19 - Contingencies - Nicor Energy.

Equity investment results include $7.4 million, $6.5 million and $5.5 million for 2005, 2004 and 2003, respectively, for Nicor’s share of income from Triton.

Interest income. Interest income increased $3.7 million in 2005 over 2004 due to higher average rates and higher investment balances. The 2004 change in interest income over the 2003 period was insignificant.

Income tax expense. The overall effective income tax rate for 2005 decreased to 20.3 percent from the prior year rate of 28.7 percent, due primarily to the 2005 tax benefits recorded in connection with the Jobs Act (approximately $17 million).

The decline in the effective income tax rate to 28.7 percent in 2004 from 35.2 percent in 2003 was primarily a result of lower pretax income (which typically causes a lower effective income tax rate since permanent differences and tax credits are a larger share of pretax income).

Cumulative effect of accounting change. The cumulative effect of a January 1, 2003 required accounting change relates to the application of accrual accounting, rather than fair value accounting, to gas in storage and certain energy-related contracts, such as storage and transportation contracts, at Nicor Enerchange.

Nicor Inc.

Gas Distribution Statistics		2005		2004			2003

Operating revenues (millions)
Sales
Residential	$	2,031.4	$	1,625.5		$	1,611.9
Commercial		453.5		349.9			351.7
Industrial		61.8		49.3			51.2
		2,546.7		2,024.7			2,014.8
Transportation
Residential		27.9		23.6			22.7
Commercial		73.1		69.9			71.6
Industrial		39.2		39.9			41.7
Other		11.7		14.0			12.0
		151.9		147.4			148.0
Other revenues
Revenue taxes		156.4		143.5			134.0
Environmental cost recovery		21.0		20.6			31.3
Chicago Hub		11.5		7.9			7.3
Performance-based rate plan		-		(1.8	)		-
Other		22.1		19.8			16.2