NICOR INC. History

Address:

P.O. Box 3014
Naperville, Illinois 60566-7014
U.S.A.

Telephone: (708) 305-9500
Fax: (708) 983-9328

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

Company History:

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.

NICOR's 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 NICOR's 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 company's 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 company's 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 company's winter supplies.

Chandler adopted Gauthier's idea and in 1958 the company completed the first piece of what was to become the world's 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 utility's winter needs. Questioned by Forbes about how he got his idea, Gauthier replied, 'I wasn't a geologist so I didn't 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-Gas's 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-Gas's 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 couldn't 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 company's 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 Gauthier's early administration. Pipeline companies with firm delivery commitments curtailed NI-Gas's supplies, severely limiting the utility's 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, 'We're 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 company's 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, didn't 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 industry's 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 Commission's 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 it's 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-Gas--still by far NICOR's largest subsidiary--was 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.

Gauthier's 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 NICOR's 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. We're simply facing the fact that we don't have the growth potential in distribution that we had in the past.'

Reaction to Gauthier's plans was mixed. One analyst told Business Week, 'It's 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. They're smart enough to get the people they need to make good business decisions outside the utility.... They're 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 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 30-35 percent non-utility by 1985, but we're producing more oil and gas than we expected,' he told Barron's, '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 Birdsall, Inc., a shipper of general commodities which, 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 company's contract drilling operation fell into disuse or were rented out at prices below the break-even point. NICOR's 1982 earnings fell 34 percent to $86.8 million, or $3.30 a share on revenue of $2.17 billion. Gauthier's annual stockholder letter was gloomy at best: 'We have no signs the energy industry's 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, NICOR's 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 company's 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 NICOR's non-utility business and help map corporate strategy. Despite Garberding's 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 Larry's moving on might be the best thing,' a NICOR spokesman told the Chicago Tribune. 'A lot of Larry's work isn't 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.

NICOR INC. History

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