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Nicor Inc.

Nicor Inc.

1844 Ferry Road
Naperville, Illinois 60563-9600
U.S.A.
Telephone: (630) 305-9500
Toll Free: (888) 642-6748
Fax: (630) 983-9328
Web site: http://www.nicor.com

Public Company
Incorporated:
1953
Employees: 3,700
Sales: $2.7 billion (2006)
Stock Exchanges: New York
Ticker Symbol: GAS
NAIC: 221210 Natural Gas Distribution

Nicor Inc. is a Naperville, Illinois-based holding company for one of the United States largest gas distribution companies, Nicor Gas, and several other subsidiaries. Nicor Gas is a regulated gas distribution utility serving about 2.2 million residential, commercial, and industrial customers in northern Illinois, but not including the city of Chicago. Nicors second largest unit is Florida-based Tropical Shipping. Operating a fleet of ten company-owned and 8 chartered vessels, it is one of the largest containerized cargo carriers serving the Caribbean and the Bahamas, shipping building materials, food, and items used by the areas tourist industry from ports along the East Coast of the United States and Canada. Nicor is also involved in a number of other energy ventures, including heating and cooling solutions and billing options for residential customers, wholesale natural gas marketing, and engineering consulting services for gas transmission systems and pipelines.

NORTHERN ILLINOIS GAS FORMED: 1953

Nicors history begins in the early 1950s when the Commonwealth Edison Company, then a diversified Illinois utility, began the process of divesting its natural gas distribution business. In 1953 Commonwealth Edison formed Nicors predecessor, Northern Illinois Gas, to operate its gas utility properties. Ni-Gas became operational the following year and in 1955 was spun off to Commonwealth Edison stockholders. At its start, Ni-Gas was the 13th largest gas distributor in the country and the second largest gas company in Illinois.

Five goals established for Ni-Gas by president Marvin Chandler, who took office in November 1954, were Separation, Symbolism, Supply, Sales, and Service. Separation entailed taking over functions handled by Commonwealth Edison, such as meter reading, customer service, and the selling of appliances. At the heart of Symbolism was a branding effort to distinguish Ni-Gas from both Commonwealth Edison and its former gas business in the area, Public Service. Increasing the supply of natural gas was especially important because some 100,000 homes were on a waiting list for gas heating, a situation that was complicated by regulatory red tape. Because Ni-Gas was competing against its former corporate parent for industrial business as well as in the sale of stoves, water heaters, clothes dryers, and other household appliances, Chandler also emphasized the companys sales capacity. Finally, solid service was important to keeping customers satisfied and a key to continued growth. Expansion was not one of Chandlers expressed goals, but he seized an opportunity to grow the business through acquisition when the owner of Union Gas & Electric Co. of Bloomington, Illinois, approached Ni-Gas about buying him out. An agreement was reached and the deal was completed in June 1955, adding nearly 12,500 new customers to Ni-Gass customer base of 500,000. More importantly, the Bloomington area was home to Illinois State University and a number of industries, and increasing in population, providing Ni-Gas with a source of increasing sales.

In the early 1960s, Ni-Gas grew rapidly. On July 12, 1961, it acquired the municipal gas system of Watseka, Illinois, and on December 31, 1963, it purchased the outstanding stock of the Allied Gas Company of Paxton, Illinois. By 1962 it had more than 800,000 customers. Between 1960 and 1965 per share earnings doubled. During this period Chandler launched an exploration effort so that Ni-Gas could become familiar with the drilling process should a time come when the company might face a supply shortage.

Ni-Gas began drilling and found a small amount of gas in Oklahoma, but it had no expectations of satisfying a major share of customer demand through the drill bit. In the second half of the decade, Ni-Gas continued to take advantage of opportunities that arose to expand its operations by acquiring gas companies in adjoining territories. In 1965, for example, the company extended service to 35 additional communities, bringing the number of communities served to more than 400 and the number of customers to more than 900,000. At the end of the year it purchased the properties and business of Princeton Gas Service Company of Princeton, Illinois, and the following year acquired the gas utility business of Hicksgas Gifford, Inc., of Gifford, Illinois.

NEW PRESIDENT: 1969

In 1969 C. J. Gauthier succeeded Chandler as Ni-Gas president. Chandler stayed on as chairman and CEO for another two years. During that time Ni-Gas completed a major acquisition, picking up the Mid-Illinois Gas Company of Rockford, Illinois. It was the companys largest-ever gas company acquisition, adding about 80,000 customers in the Rockford-Freeport area.

The natural gas crunch of the early 1970s was the dominant event of Gauthiers early administration after Chandlers departure. Pipeline companies with firm delivery commitments curtailed Ni-Gass supplies, severely limiting the utilitys ability to pursue new customers. In 1973 Gauthier told Forbes what happened: One bright sunshiny day in 1970, the Natural Gas Pipeline Co., which [supplied] about 75 percent of our gas came to us and said, Were going to abrogate your 20-year supply contract. After all, it had only 19 years to run. And we found that under the Natural Gas Act they could do it. And they did.

In 1971 and 1972 Natural Gas Pipeline cut its deliveries to Ni-Gas by 10 percent, with deliveries falling a further 15 percent in 1973. As a result Ni-Gas had to scour the market for new supplies and put prospective industrial customers on a waiting list.

Gauthier sought to drill for new reserves but after a 1972 ruling in which the Illinois Commerce Commission turned down the companys request for a price surcharge to cover its drilling costs, he could not obtain financing. It was a frustrating situation. We [were] at the mercy of third parties, he later told Forbes. When the gas shortage developed, we, unlike some other companies, didnt have the backlog of interruptibles to upgrade and we really had to scurry around to get supplies.

The company was not totally impotent, however, in terms of obtaining new supplies. It built a $55 million synthetic natural gas plant in Morris, Illinois, which by 1976 accounted for 10 percent of total supply. Gas from the Morris plant was substantially more expensive than gas drilled from the ground but supplies were at least reliable. Gauthier also stepped up drilling in Elk City, Oklahoma, participated in offshore Louisiana exploration programs with Mobil Oil, and in 1974 signed an agreement with then-Illinois Governor Dan Walker to seek development of an Illinois-based $250 million coal liquification plant.

COMPANY PERSPECTIVES

Nicor has been part of the fabric of the communities in northern Illinois and the Chicago suburbs for five decades. The corporations largest subsidiary, Nicor Gas, was founded in 1954 as Northern Illinois Gas and today is one of the largest natural gas distribution companies in the country, serving more than two million customers in 641 communities.

Supply was not the only problem of the early 1970s. The gas crunch also put pressure on profits. Though the Illinois Commerce Commission allowed the company to pass along wholesale price increases, it was not as sympathetic to the general rise in costs caused by inflation. As a result, earnings rose only 5 percent between 1970 and 1973 while return on equity fell to 11.9 percent in 1972 from 13.5 percent in 1970.

The situation changed dramatically in 1974 when the commission granted Ni-Gas its first general rate increase in 20 years. This, combined with a Gauthier-led program of efficiency, automation, and cost-cutting, made Ni-Gas one of the industrys top moneymakers by the mid-1970s. Return on total capital averaged 7.1 percent between 1971 and 1976; among gas utilities, only Oklahoma Natural Gas did better in the same time period.

Because Ni-Gas was so dependent on regulatory decisions, which often led to lower-than-expected rates of return, Gauthier had long wanted to diversify. To do this, however, he needed holding-company status, which would give new nonutility subsidiaries financial flexibility and shield them from the Illinois Commerce Commissions regulatory power. In 1976 the company was granted such holding-company status; and that same year, it reorganized as Nicor with Ni-Gas as its principal subsidiary. Gauthier was elected chairman and president of Nicor and Owen D. Bekkum became president of Ni-Gas.

Over the next decade, Nicor invested extensively in a variety of energy-related nonutility businesses. In 1978 it acquired National Marine Service of St. Louis, a barge company whose primary business was moving petroleum products on 14,000 miles of inland waterways but which also operated maintenance-repair facilities serving other companies fleets.

Other investments included $28 million in recoverable coal reserves, a contract drilling company, and a variety of expensive but possibly important oil leases. Gauthier was confident about these long-term investments. We have about $110 million in leases, Gauthier told Business Week in 1980, and its tough to have that much money sterile for seven years, but you have to bite the bullet on leases and get positions in pioneering areas. Those leases are our earning power of the future.

While Gauthier and other Nicor executives were building a diversified conglomerate, Ni-Gasstill by far Nicors largest subsidiarywas earning record profits. Between 1974 and 1977, while other distributors were struggling to serve the customers they already had, Ni-Gas with its underground storage capabilities was able to add customers and maintain service without interruption. In 1979 it recorded its tenth straight year of record profits, earning $87.4 million on sales of $1.6 billion and boasting a 15.1 percent return on equity, a figure well above the average 12.8 percent return on equity for large utilities.

In 1980 Nicor spent $133 million on exploration and participated in the comeback of coal by developing mines in Illinois and Colorado. In December of that same year it acquired Arcadian Marine Service, Inc., which owned vessels serving the offshore drilling industry in Nigeria, Mexico, and the Gulf of Mexico, as well as ships serving the Navy in Bermuda.

Gauthiers investment strategy went beyond acquiring other businesses. He recapitalized them and expanded their operations. In 1980 he announced a five-year $1 billion capital spending program aimed at Nicors rapidly expanding oil and gas explorations, coal mining operations, and contract drilling and marine transportation businesses. As Gauthier saw it, investment in nonutility businesses was the only way Nicor could satisfy its stockholders demands for growth. According to his plan, nonutility business would eventually increase to 50 percent of earnings, compared to 10 percent of earnings in 1979. Our customer base is not increasing fast enough, he told Business Week, and the regulators who set our rates are more interested in politics and less and less in economics. Were simply facing the fact that we dont have the growth potential in distribution that we had in the past.

Reaction to Gauthiers plans was mixed. One analyst told Business Week, Its going to be a lot more risky than reading meters and sending out the monthly bills. An executive at a rival midwestern distributor, however, had kinder words: Nicor has always had one of the strongest managements in the utility business. Theyre smart enough to get the people they need to make good business decisions outside the utility . Theyre sticking to energy-related moves, where they at least know the lay of the land.

KEY DATES

1953:
Northern Illinois Gas is formed.
1971:
C. J. Gauthier succeeds Marvin Chandler as CEO and chairman.
1980:
Nicor expands oil and gas exploration efforts.
1993:
Oil and gas assets are sold.
1997:
Nicor Energy LLC is formed.
2003:
Nicor Gas accused of accounting irregularities.
2006:
Nicor agrees to $10 million fine.

Initial results from diversification were good. While gas distribution earnings stalled in a regulatory tangle, nonutility income soared, rising to $27 million in fiscal 1980 from $7.7 million in fiscal 1979. Chairman Gauthier was more than optimistic. We originally projected about 3035 percent non-utility by 1985, but were producing more oil and gas than we expected, he told Barrons, and our contract drilling unit has grown faster than we expected.

Nicor continued to grow. In February 1981 officials announced a plan to spend $100 million to add 20 more rigs to its 35-rig contract drilling operation. In June of that year the Wall Street Transcript quoted Chairman Gauthier describing Nicor as more than two dozen companies with operations all across the United States, on foreign soil and in foreign waters. The following year, Nicor acquired Birdsall, Inc., a shipper of general commodities that, through its Tropical Shipping & Construction Ltd. subsidiary, transported cargo, primarily foodstuffs, to Caribbean ports.

Gauthier had made his plans when high energy prices made the drilling business very profitable. In the mid-1980s, however, energy prices plunged and threw a spanner in the works. Deregulation led to increased drilling, which in turn led to a glut of oil and gas on the market. Drilling operations, which had been profitable in an environment of scarcity, became money losers. Rigs in the companys contract drilling operation fell into disuse or were rented out at prices below the breakeven point. Nicors 1982 earnings fell 34 percent to $86.8 million, or $3.30 a share on revenue of $2.17 billion. Gauthiers annual stockholder letter was gloomy at best: We have no signs the energy industrys economic situation will turn around fast enough to expect 1983 to be much better than 1982. In the wake of lower earnings the company indicated that it planned to cut 1983 capital spending to $240 million from $350 million in 1982. Like others in the energy business, Gauthier wrote, we need to pull in our horns a bit until the oil and gas glut is worked down and the energy regulation and price situation stabilize. Despite pulling in its horns, Nicors earnings dropped to $50 million in 1983 while its contract drilling operation lost $35 million.

The energy glut continued to have a profound effect in the mid-1980s. In 1984 the company lost $225 million on revenues of $2.4 billion. Combined 198485 losses totaled $350 million. Under pressure from red ink on the balance sheet, Nicor cut its common stock dividend from $3.04 to $1.80 in 1986, divested itself of unprofitable contract drilling, river barge, and mining and mineral subsidiaries, and worked to become a leaner and more focused organization.

On January 1, 1986, Richard G. Cline, a Nicor board member and former chairman and president of Jewel Companies, succeeded Gauthier as Nicor president and chief operating officer. Cline completed the nonutility divestments and ministered to what was left. Cline saw nonutility businesses as complementing Ni-Gas rather than equaling or surpassing utility earnings: Through our diversified non-utility businesses, he wrote in the companys 1988 annual report, we intend to provide earnings growth that complements the stability of Ni-Gas. In 1988 the company hired former Tenneco executive and conglomerate specialist Larry Garberding as president. Cline assigned him to oversee Nicors nonutility business and help map corporate strategy. Despite Garberdings hiring, Nicor soon decided to again narrow its focus, and in the fall of 1989 sold its marine supply unit, which operated a fleet of 40 vessels. With the diversification effort essentially scrapped, Garberding resigned in early 1990. It was mutually agreed that Larrys moving on might be the best thing, a Nicor spokesman told the Chicago Tribune. A lot of Larrys work isnt needed anymore.

DIVESTMENTS IN 1993

Nicor cast off its drilling operation, a coal-mining business, and a shipping company that operated on the Mississippi River. What remained was Ni-Gas, Tropical Shipping, and the companys oil and gas development and production operations. When the oil and gas assets struggled because of a dip in gas prices in 1992, they too were divested in June 1993.

After Cline resigned in May 1995, Thomas L. Fisher became chairman, president, and CEO. Fisher began his career at Nicor in 1967 after earning a degree at Purdue University. He took the helm at a time when utilities were looking to become involved in providing unregulated energy services. As a result, Nicor established a subsidiary to offer gas marketing services to consumers. Looking to take advantage of deregulation of electricity in a number of markets, in 1997 the company formed a joint venture, Nicor Energy LLC, with Houstons Dynergy Inc., a major gas and electric marketing company, to take advantage of the situation. The unit was established to offer a range of energy-related products to industrial, commercial, and residential customers in Illinois, with the goal of eventually expanding to other markets in the Midwest. Because Nicor was fashioning itself as more of a consumer products company than a utility, it also began to tout the Nicor name as its primary brand. In keeping with this idea, Ni-Gas took the name Nicor Gas. In 1998 the holding company formed another nonregulated business, Nicor Enerchange, a wholesale natural gas marketing company.

Although Nicor Gas and Tropical Shipping remained the core businesses, Nicor was pleased with the launch of Nicor Energy and the other energy services ventures, Overall, the early years of Fishers tenure appeared promising, but his administration was beset with problems at the start of the new century. The companys attempt to replace old mercury-filled gas regulators in the interior of homes with new exterior units turned into a fiasco. Nicors subcontractors botched the job, spilling mercury and contaminating the inside of thousands of homes. Not only did the company have to pay a reported $130 million to inspect and clean up the homes, the adverse publicity harmed the Nicor brand the company had hoped to nurture.

Matters grew worse in 2002 when an anonymous whistle-blower faxed a document to a utility watchdog group, Chicago-based Citizens Utility Board, outlining how Nicor Gas had overcharged customers when natural gas prices had spiked in the winter of 20002001 by manipulating gas inventories. The information was passed on to the Illinois Commerce Commission, which in 2003 accused Nicor Gas of willfully withholding documents and providing inaccurate testimony during rate hearings. The company maintained that the overcharging was an accounting oversight. While this matter was adjudicated, Nicor Energy experienced its own accounting problems. In December 2003 U.S. Attorney Patrick J. Fitzgerald and the Securities and Exchange Commission filed separate charges against three top executives of the subsidiary and their legal counsel, alleging a wire fraud scheme in 2001 to inflate revenues in order to obtain $400,000 in bonuses as well as other benefits. All but the legal counsel would plead guilty to the charges, and the company was ultimately shut down.

In September 2006 Nicor agreed to pay a $10 million fine as part of a settlement over the deceptive accounting practices at Nicor Gas. The company had already paid about $42 million to settle a shareholder suit and class-action suit, and was still on the hook for tens of millions of dollars in restitution to customers. By this time Fisher had left the company, having abruptly announced his retirement in March 2005. Charged with repairing the damage was Russ M. Strobel, who had joined the company in 2000 as general counsel. He became president of Nicor two years later, and then succeeded Fisher as CEO in 2003. With Fishers departure he assumed the chairmanship as well.

Jordan Wankoff
Updated, Ed Dinger

PRINCIPAL SUBSIDIARIES

Northern Illinois Gas Company; Birdsall, Inc.

PRINCIPAL COMPETITORS

Alliant Energy Corporation; Ameren Corporation; Ameren Corporation.

FURTHER READING

Abrupt Resignation by Nicor President, Chicago Tribune, January 28, 1990.

At the Wellhead, Barrons, February 2, 1981.

Baeb, Eddie, and Alby F. Gallun, Mercury Costs Rising for Nicor, Crains Chicago Business, September 18, 2000, p. 3.

Byrne, Harlan S., Nicor Inc.; A Weather Watch on Rebounding Profits, Barrons, December 14, 1992, p. 45.

Carey, Susan, Former Executives of Nicor Energy Indicted for Fraud, Wall Street Journal, December 11, 2003, p. B7.

Comerford, Mike, Regulators Say Nicor Lied as Rates Were Set, Daily Herald (Arlington Heights, Ill.), March 8, 20003, p. 1.

Kukec, Anna Marie, Ex-Nicor Leaders Indicted, Daily Herald (Arlington Heights, Ill.), December 11, 2003, p. 1.

, Nicor Undergoes Leadership Shake-Up, Daily Herald (Arlington Heights, Ill.), March 19, 2005, p. 1.

Nicor: A Risky, Belated Push into Oil and Gas Exploration, Business Week, July 28, 1980.

Northern Illinois Gas, Peoples Gas Call Off Consolidation Studies, Wall Street Journal, November 7, 1966.

Ouch!: Pioneering Doesnt Always Pay, Forbes, March 1, 1973.

Outlook Turns Favorable at Northern Illinois Gas, Barrons, June 12, 1972.

Technical Triumph, Forbes, April 15, 1976.

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NICOR Inc.

NICOR Inc.

P.O. Box 3014
Naperville, Illinois 60566-7014
U.S.A.
(708) 305-9500
Fax: (708) 983-9328

Public Company
Incorporated: 1953
Employees: 3,600
Sales: $1.52 billion
Stock Exchanges: New York Midwest

NICOR Inc. is a holding company whose principal subsidiary, Northern Illinois Gas Co. (NI-Gas), distributes natural gas to some 1.7 million customers in 544 communities and adjacent areas in a northern Illinois area that includes the suburbs of Chicago. Other subsidiaries include NICOR Oil and Gas, which drills for oil and natural gas, and Birdsall, Inc., whose subsidiary Tropical Shipping, Inc., owns a fleet of containerized ships that carry freight between Florida and the Caribbean and Central American ports.

NICORs history begins in the early 1950s when the Commonwealth Edison Company, then a diversified Illinois utility, began the process of divesting its natural gas distribution business. In 1953 Commonwealth Edison formed NICORs predecessor, Northern Illinois Gas, to operate its gas utility properties. NI-Gas became operational the following year and in 1955 was spun off to Commonwealth Edison stockholders. At its start, NI-Gas was the 13th largest gas distributor in the country and the second largest gas company in Illinois.

Two initial concerns of NI-Gas chief executive officer Marvin Chandler were expansion and supply. Expansion came quickly and would continue steadily for more than 20 years. The companys first independent acquisition came on June 9, 1955, when the company acquired Union Gas & Electric Co. of Bloomington, Illinois. The two companies merged the following November.

Supply was a more difficult problem. In the winter, when demand was high, prices would go up and supply, which was limited by what pipeline companies could provide, would sometimes be interrupted. Conversely, in the summer, demand would fall and the utility would be forced to sell to so-called interruptible customers who demanded deep discounts in exchange for allowing the utility to interrupt their service during peak demand periods.

Other utilities handled the winter supply problem by building peak shaving plants to manufacture gas. At NI-Gas however, a young employee named C. J. Gauthier saw the answer in the companys geographic location. Gauthier suggested storing cheap summer gas in naturally occurring aquifers (underground rock formations) that occurred abundantly beneath the NI-Gas service area. This stored gas could then be used to supplement the companys winter supplies.

Chandler adopted Gauthiers idea and in 1958 the company completed the first piece of what was to become the worlds largest underground aquifer storage system. The aquifer system eventually grew to 142 billion cubic feet and at times supplied up to 50 percent of the utilitys winter needs. Questioned by Forbes about how he got his idea, Gauthier replied, I wasnt a geologist so I didnt let the facts confuse me.

In the early 1960s, NI-Gas grew rapidly. On July 12, 1961, it acquired the municipal gas system of Watseka, Illinois, and on December 31, 1963, it purchased the outstanding stock of the Allied Gas Company of Paxton, Illinois. By 1962 it had more than 800,000 customers. Between 1960 and 1965 per share earnings doubled. NI-Gass rapidly growing customer base caused Chandler to continue to worry about supply. Deciding that NI-Gas needed to find its own supplies, he organized for exploration, and in the early 1960s NI-Gas began drilling for its own needs. The company found some gas in Oklahoma, but not nearly enough to satisfy expected customer demand.

In the second half of the decade, NI-Gas worked aggressively to expand its operations. In 1965 the company extended service to 35 additional communities, bringing the number of communities served to more than 400 and the number of customers to more than 900,000. On December 30th of that year it purchased the properties and business of Princeton Gas Service Company of Princeton, Illinois. And on December 30, 1966, it acquired the gas utility business of Hicksgas Gifford, Inc., of Gifford, Illinois.

In March of 1966 Chandler entered into merger discussions with Peoples Gas, which served the city of Chicago. The two companies soon undertook studies to determine what mutual advantages there might be in consolidation. Chandler found nothing in these studies that would persuade him to merge with NI-Gass Chicago neighbor, and in November of 1966 the two companies announced that they would not merge. When you put two companies together you want to have compelling advantages, Chandler told the Wall Street Journal. We couldnt find them compelling for our stockholders or the public.

In 1969 Gauthier succeeded Chandler as NI-Gas president; Gauthier, like Chandler, saw the need to expand and diversify the company. That year, NI-Gas acquired the Citizens Gas Co. of Hannibal, Missouri, and the Mid-Illinois Gas Co. of Rockford, Illinois. The latter was the companys largest-ever gas company acquisition, adding about 80,000 customers in the Rockford-Freeport area.

The natural gas crunch of the early 1970s was the dominant event of Gauthiers early administration. Pipeline companies with firm delivery commitments curtailed NI-Gass supplies, severely limiting the utilitys ability to pursue new customers. In 1973 Gauthier told Forbes what happened: One bright sunshiny day in 1970, the Natural Gas Pipeline Co., which [supplied] about 75 percent of our gas came to us and said, Were going to abrogate your 20-year supply contract. After all, it had only 19 years to run. And we found that under the Natural Gas Act they could do it. And they did.

In 1971 and 1972 Natural Gas Pipeline cut its deliveries to NI-Gas by 10 percent, with deliveries falling a further 15 percent in 1973. As a result NI-Gas had to scour the market for new supplies and put prospective industrial customers on a waiting list.

Gauthier sought to drill for new reserves but after a 1972 ruling in which the Illinois Commerce Commission turned down the companys request for a price surcharge to cover its drilling costs, he could not obtain financing. It was a frustrating situation. We [were] at the mercy of third parties, he later told Forbes. When the gas shortage developed, we, unlike some other companies, didnt have the backlog of interruptibles to upgrade and we really had to scurry around to get supplies.

The company was not totally impotent, however, in terms of obtaining new supplies. It built a $55 million synthetic natural gas plant in Morris, Illinois, which by 1976 accounted for 10 percent of total supply. Gas from the Morris plant was substantially more expensive than gas drilled from the ground but supplies were at least reliable. Gauthier also stepped up drilling in Elk City, Oklahoma, participated in offshore Louisiana exploration programs with Mobil Oil, and in 1974 signed an agreement with then-Illinois Governor Dan Walker to seek development of an Illinois-based $250 million coal liquification plant.

Supply was not the only problem of the early 1970s. The gas crunch also put pressure on profits. Though the Illinois Commerce Commission allowed the company to pass along wholesale price increases, it was not as sympathetic to the general rise in costs caused by inflation. As a result, earnings rose only 5 percent between 1970 and 1973 while return on equity fell to 11.9 percent in 1972 from 13.5 percent in 1970.

The situation changed dramatically in 1974 when the Commission granted NI-Gas its first general rate increase in 20 years. This, combined with a Gauthier-led program of efficiency, automation, and cost-cutting, made NI-Gas one of the industrys top moneymakers by the mid-1970s. Return on total capital averaged 7.1 percent between 1971 and 1976; among gas utilities, only Oklahoma Natural Gas did better in the same time period.

Because NI-Gas was so dependent on regulatory decisions, which often led to lower-than-expected rates of return, Gauthier had long wanted to diversify. To do this, however, he needed holding-company status, which would give new non-utility subsidiaries financial flexibility and shield them from the Illinois Commerce Commissions regulatory power. In 1976 the company was granted such holding-company status; and that same year, it reorganized as NICOR with NI-Gas as its principal subsidiary. Gauthier was elected chairman and president of NICOR and Owen D. Bekkum became president of NI-Gas.

Over the next decade, NICOR invested extensively in a variety of energy-related non-utility businesses. In 1978 it acquired National Marine Service of St. Louis, a barge company whose primary business was moving petroleum products on 14,000 miles of inland waterways but which also operated maintenance-repair facilities serving other companies fleets.

Other investments included $28 million in recoverable coal reserves, a contract drilling company, and a variety of expensive but possibly important oil leases. Gauthier was confident about these long-term investments. We have about $110 million in leases, Gauthier told Business Week in 1980, and its tough to have that much money sterile for seven years, but you have to bite the bullet on leases and get positions in pioneering areas.... Those leases are our earning power of the future.

While Gauthier and other NICOR executives were building a diversified conglomerate, NI-Gasstill by far NICORs largest subsidiarywas earning record profits. Between 1974 and 1977, while other distributors were struggling to serve the customers they already had, NI-Gas with its underground storage capabilities was able to add customers and maintain service without interruption. In 1979 it recorded its tenth straight year of record profits, earning $87.4 million on sales of $1.6 billion and boasting a 15.1 percent return on equitya figure well above the average 12.8 percent return on equity for large utilities.

In 1980 NICOR spent $133 million on exploration and participated in the comeback of coal by developing mines in Illinois and Colorado. In December of that same year it acquired Arcadian Marine Service, Inc., which owned vessels serving the offshore drilling industry in Nigeria, Mexico, and the Gulf of Mexico, as well as ships serving the Navy in Bermuda.

Gauthiers investment strategy went beyond acquiring other businesses. He recapitalized them and expanded their operations. In 1980 he announced a five-year $1 billion capital spending program aimed at NICORs rapidly expanding oil and gas explorations, coal mining operations, and contract drilling and marine transportation businesses. As Gauthier saw it, investment in non-utility businesses was the only way NICOR could satisfy its stockholders demands for growth. According to his plan, non-utility business would eventually increase to 50 percent of earnings, compared to 10 percent of earnings in 1979. Our customer base is not increasing fast enough, he told Business Week, and the regulators who set our rates are more interested in politics and less and less in economics. Were simply facing the fact that we dont have the growth potential in distribution that we had in the past.

Reaction to Gauthiers plans was mixed. One analyst told Business Week, Its going to be a lot more risky than reading meters and sending out the monthly bills. But an executive at a rival midwestern distributor had kinder words: NICOR has always had one of the strongest managements in the utility business. Theyre smart enough to get the people they need to make good business decisions outside the utility___Theyre sticking to energy-related moves, where they at least know the lay of the land.

Initial results from diversification were good. While gas distribution earnings stalled in a regulatory tangle, non-utility income soaredrising to $27 million in fiscal 1980 from $7.7 million in fiscal 1979. Chairman Gauthier was more than optimistic. We originally projected about 30-35 percent non-utility by 1985, but were producing more oil and gas than we expected, he told Barrons, and our contract drilling unit has grown faster than we expected.

NICOR continued to grow. In February of 1981 officials announced a plan to spend $100 million to add 20 more rigs to its 35-rig contract-drilling operation. In June of that year the Wall Street Transcript quoted Chairman Gauthier describing NICOR as more than two dozen companies with operations all across the United States, on foreign soil and in foreign waters. The following year, NICOR acquired Bird-sail, Inc., a shipper of general commodities which, through its Tropical Shipping & Construction Ltd. subsidiary, transported cargoprimarily foodstuffsto Caribbean ports.

Gauthier had made his plans when high energy prices made the drilling business very profitable. In the mid-1980s however, energy prices plunged and threw a spanner in the works. Deregulation led to increased drilling, which in turn led to a glut of oil and gas on the market. Drilling operations, which had been profitable in an environment of scarcity, became money losers. Rigs in the companys contract drilling operation fell into disuse or were rented out at prices below the break-even point. NICORs 1982 earnings fell 34 percent to $86.8 million, or $3.30 a share on revenue of $2.17 billion. Gauthiers annual stockholder letter was gloomy at best: We have no signs the energy industrys economic situation will turn around fast enough to expect 1983 to be much better than 1982. In the wake of lower earnings the company indicated that it planned to cut 1983 capital spending to $240 million from $350 million in 1982. Like others in the energy business, Gauthier wrote, we need to pull in our horns a bit until the oil and gas glut is worked down and the energy regulation and price situation stabilize. Despite pulling in its horns, NICORs earnings dropped to $50 million in 1983 while its contract drilling operation lost $35 million.

The energy glut continued to have a profound effect in the mid-1980s. In 1984 the company lost $225 million on revenues of $2.4 billion. Combined 1984-85 losses totaled $350 million. Under pressure from red ink on the balance sheet, NICOR cut its common stock dividend from $3.04 to $1.80 in 1986, divested itself of unprofitable contract drilling, river barge, and mining and mineral subsidiaries, and worked to become a leaner and more focused organization.

On January 1, 1986, Richard G. Cline, a NICOR board member and former chairman and president of Jewel Companies, succeeded Gauthier as NICOR president and chief operating officer. Cline completed the non-utility divestments and ministered to what was left. Cline saw non-utility businesses as complementing NI-Gas rather than equaling or surpassing utility earnings: Through our diversified non-utility businesses, he wrote in the companys 1988 annual report, we intend to provide earnings growth that complements the stability of NI-Gas. In 1988 the company hired former Tenneco executive and conglomerate specialist Larry Garberding as president. Cline assigned him to oversee NICORs non-utility business and help map corporate strategy. Despite Garberdings hiring, NICOR decided to narrow its focus again and in the fall of 1989 sold its marine supply unit, which operated a fleet of 40 vessels. After the sale, Garberding resigned. It was mutually agreed that Larrys moving on might be the best thing, a NICOR spokesman told the Chicago Tribune. A lot of Larrys work isnt needed anymore.

Created as a Commonwealth Edison spin-off, NI-Gas grew during the 1950s and 1960s by acquiring small companies, serving previously unserved areas, and selling natural gas to customers who had not previously used it. During the 1970s, the company reorganized as NICOR and embarked on an aggressive diversification campaign, becoming involved in contract drilling, barge transportation, exploration and containerized shipping. The energy glut of the early 1980s jeopardized profits and in the mid-1980s forced the company to sell unprofitable enterprises. Concentrating on gas distribution, marine transportation, and oil and gas exploration, the company seemed stable and poised for growth.

Principal Subsidiaries

Northern Illinois Gas Co.; NICOR Oil and Gas Corp.; Birdsall, Inc.

Further Reading

Northern Illinois Gas, Peoples Gas Call Off Consolidation Studies, Wall Street Journal, November 7, 1966; Outlook Turns Favorable at Northern Illinois Gas, Barrons, June 12, 1972; Ouch!: Pioneering Doesnt Always Pay, Forbes, March 1, 1973; Technical Triumph, Forbes, April 15, 1976; Nicor: A Risky, Belated Push into Oil and Gas Exploration, Business Week, July 28, 1980; At the Wellhead, Barrons, February 2, 1981; Wall Street Transcript, July 27, 1981; Annual Report, Naperville, Illinois, NICOR Inc., 1988; Abrupt Resignation by NICOR President, Chicago Tribune, January 28, 1990.

Jordan Wankoff

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