Southwest Gas Corporation
Southwest Gas Corporation
Sales: $644.06 million (1996)
Stock Exchanges: New York
SICs: 4924 Natural Gas Distribution
Southwest Gas Corporation is a natural gas utility serving one of the fastest growing regions of the United States. Southwest purchases, transports, and distributes natural gas to residential, commercial, and industrial customers in three states: Nevada, particularly the Las Vegas and northern Nevada areas; California, including the Lake Tahoe and San Bernardino County areas; and Arizona, in an area encompassing most of southern, central, and northwestern Arizona and including Phoenix and Tucson. Southwest is the largest natural gas utility in both Nevada and Arizona. In all, the company serves more than 1.1 million customers, of which 80 percent are residential customers, 14 percent are industrial customers, and six percent are small and large commercial and resale customers. The region’s building boom, spurred by strong population growth in the 1990s, has also proved a boon to Southwest; in 1996 alone the company added 63,000 customers. Since 1990, the influx of new residents to the Las Vegas area alone has added more than 100,000 customers to Southwest. Despite this strong growth, Southwest has been able to maintain a healthy productivity ratio, with a customer-to-employee ratio of 691 to 1, compared with the industry average of 319 to 1.
The company’s southwestern market may seem an unlikely growth market for a natural gas utility, which typically derives the bulk of revenues from heating systems and winter sales. In fact, the average winter temperature in the region served by Southwest Gas has been seen to be rising during the last decades of the 20th century. For this reason, Southwest has been active in encouraging the application of natural gas to other applications, specifically for combination air conditioning and heating systems, and for natural gas vehicles. The use of natural gas for air conditioning, particularly among industrial customers, is on the rise and provides more efficient and less expensive operation than traditional electric air conditioning systems. While Southwest contends with the trend toward milder winters, the company must also brace itself for the coming deregulation of the electric utility industry. Toward this end, the company has undergone a refocus of its operations. In 1996, Southwest sold off the last of its banking assets, a diversification move made by the company during the 1980s. In that same year, Southwest acquired Northern Pipeline Construction Co., based in Phoenix, for a stock swap valued at $24 million. Northern provides installation, replacement, and maintenance services for natural gas and other pipelines for some 25 utilities throughout the United States. Southwest had previously been one of Northern’s largest competitors. The acquisition added Northern’s $100 million in revenues to South west’s annual sales, while positioning the company to extend its services beyond the Southwest region and its natural gas customers.
Southwest posted revenues of $644 million in 1996, for an operating profit of nearly $71.6 million and a net income of nearly $6.6 million. The company is led by Michael O. Maffie, who has served as president and chief executive officer since 1993.
Founded in 1931
Southwest Gas was founded in 1931 by Harold G. Laub, Joe Gray, Jr., and John Koeneman to provide butane gas distribution services to the small town of Barstow, California. Laub served as the company’s first president, holding that position until 1964. Energy distribution, particularly the distribution of gas, was still in its infant stages as an industry, but the company was helped when the Santa Fe Railroad built a diesel locomotive repair facility in Barstow and later replaced its original roundhouse with a switching yard that would become the West’s largest such facility. The railroad’s presence (Barstow was also served by the Union Pacific line) gave Southwest Gas a ready means of receiving gas supplies. Gas was brought in on tank cars and delivered to the company’s nearby plant. From there, the gas was distributed through Southwest Gas’s pipeline to its customers. In its first year, the company served some 160 customers. Soon after, Southwest Gas added a second California town, Victorville, servicing another 120 gas meters from a two-story structure that had once been used by the famed Wells Fargo company and by a western version of the Pony Express.
Despite its Depression-era roots, Southwest remained a thriving, if modest, operation, soon expanding to service other communities and installations in the Barstow area, including Apple Valley, Bicycle Lake, which later became Fort Irwin, and Victorville Airfield, later the site of the George Air Force Base. Then the construction of a pipeline bringing natural gas from Texas to California in the 1950s encouraged the company’s evolution. The pipeline, owned by Pacific Gas & Electric, had been built to provide natural gas to that company’s San Francisco service area. Southwest proposed to tap into the pipeline to route natural gas to its customers in Barstow and Victorville, replacing its tank car distribution system and the more volatile butane gas. Pacific Gas refused to allow Southwest Gas to feed off its pipeline. The intercession of the Federal Power Commission, however, opened the way to creating a natural gas pipeline network. In 1951, the company constructed a small pipeline and connected to Pacific Gas’s 36-inch main.
The opening of private pipelines to third parties prompted Southwest Gas to expand its own operations. In 1953, the company moved into Nevada, forming Nevada Natural Gas Pipe Line Co. and building a 110-mile pipeline to connect to the Topock, Arizona pipeline owned by El Paso Natural Gas Company. Next, Southwest Gas created a new subsidiary, Nevada Southern Gas Company, which purchased the propane distribution business of Las Vegas Gas Company. Nevada Southern converted Las Vegas from propane to natural gas and began providing natural gas to industrial customers in Henderson, Nevada as well.
The company’s move into Las Vegas proved to be the foundation of Southwest Gas’s later growth. The first hotels had already appeared in Las Vegas during the 1940s, but the trans-formation of Las Vegas from a sleepy resort town into a national entertainment and gambling mecca began in earnest during the 1950s. Commercial customers such as the Last Frontier, the Desert Inn, the Golden Nugget, the Flamingo, the Thunderbird, the Sahara, and other casino hotels fashioned the famed Vegas Strip and stepped up the demand for natural gas, while also luring new residents to the area. By 1956, Southwest Gas counted 5,500 customers and had grown to more than $700,000 in annual revenues. To fuel its growth, the company went public that year, issuing some 44,000 shares of stock, and began trading on the OTC market. The following year, Southwest Gas merged Nevada Southern into the parent company’s operations, and the expanded company struck out into new territory, acquiring Natural Gas Service of Arizona and that company’s copper mining and cotton growing customers.
Southwest Gas moved its headquarters to Las Vegas in 1958, placing the company at the center of its three-state service area. The region was then undergoing its first population boom, and Southwest Gas set up a new subsidiary, Unity Financial Corp., to finance home mortgages and encourage the use of natural gas-burning equipment and appliances in new construction. The company’s California base grew with the acquisition of a liquefied petroleum gas provider in the Big Bear Lake resort area. But Southwest Gas’s largest growth would come first from Nevada. In 1961, the company bought the Carson Water Company, which supplied the water system to the state’s capitol; the venture into water distribution did not last long, however, and the water system was later sold to the city. Mean-while, the company had been granted certification to supply the natural gas requirements of some 16 towns in the Reno area, including that city. In 1963, Southwest Gas built a new, 230-mile pipeline that stretched from Idaho to Reno. From there, the company’s customer base continued to expand, reaching the Lake Tahoe resort region. In 1964, Laub’s son, William, took over as the company’s president and chief executive officer, holding that position until 1987.
Fueling Growth from the 1970s
Strong population growth in Southwest Gas’s service areas helped the company build its annual sales. Southern Nevada, including the Las Vegas area, was the nation’s fastest growing region in terms of population. Arizona was also undergoing a population boom, as that state became a popular retirement region. As the 1970s began, Southwest Gas celebrated the addition of its 100,000th customer. The company had previously moved into the Colorado River region, with service to Bullhead City; in 1972, Southwest Gas extended its operations to Boulder City, next to the Hoover Dam, with the acquisition of Boulder Natural Gas Company. Two years later, the company moved into a new headquarters, combining its corporate and administrative operations under one roof. Designing the new headquarters brought the company into a new area—commercial design—and the company created a subsidiary, Design-Center Southwest, for that business. At the same time, Southwest Gas formed a gas exploration and development subsidiary, Energy Increments Inc., to lessen its reliance on third party natural gas suppliers. By 1976 the company’s annual revenues had swelled to $110 million and by 1978 sales had grown to $133 million. One year later, however, Southwest Gas’s sales more than doubled.
The Arab Oil Embargo of 1973 had prompted Washington to draft the Energy Act of 1978. As an offshoot of this legislation and the pervasive national fears that the country’s energy resources were dwindling, the state of Arizona declared a three-year moratorium on new energy hookups. This move in turn led to the state-regulated breakup of Tucson Gas & Electric, which sold its gas system, and its 130,000 customers, to Southwest Gas. The company’s revenues jumped to $275 million for 1979. In that year, Southwest Gas began trading on the New York Stock Exchange.
Entering the 1980s, the company added to its infrastructure, building a liquefied natural gas plant in Lovelock, Nevada and opening a liquid propane gas plant in Reno. The company also purchased a former cattle ranch near Spirit Mountain in Kingman, Arizona to begin developing a natural gas storage facility there. By 1981, revenues had grown again, reaching $315 mil-lion on a customer base of 335,000. Three years later, the company made its next major acquisition, paying $120 million to Arizona Public Service Company (APS) for its natural gas operations. The APS purchase added 339,000 customers. The purchase also brought Southwest Gas some 6,500 miles of pipeline, much of it in sore need of repair. While the deteriorated state of the APS pipeline system had been partially accounted for in the acquisition price, the cost of replacing the mains would far outrun the discount. The company had experienced a similar situation with the Tucson Gas & Electric gas system purchase; eventually, Southwest Gas won a court settlement that required the previous owner to repay nearly half of Southwest Gas’s purchase price. No such relief was available to the company for the APS purchase, however, as the $30 million discount on that purchase included a provision that prohibited Southwest Gas from pursuing any legal action related to the sale.
Through the 1980s, however, the company’s growth continued. Revenues grew to $611 million in 1985, and net income was also high, nearing $24 million. Flush with cash, the company joined in on a growing trend toward diversification among energy companies. In 1986, Southwest Gas dropped its “pure play” status when it paid $130 million for the stock of Nevada Savings and Loan Association, a Las Vegas-based thrift with $1.4 billion in assets. The move into banking proved to be a success initially and encouraged the company to expand the subsidiary’s operations, which had grown to a chain of 28 branches and assets of $2.75 billion. In 1988, the banking operation’s name was changed to PriMerit Bank (in part to distance itself from the developing savings and loan crisis), which then acquired Union Savings and Loan Association of Phoenix. The addition of the banking business helped raise Southwest Gas’s revenues to more than $800 million by 1988. The banking operation also helped boost Southwest Gas’s profitability: net earnings for that year were $41 million.
Sputtering in the 1990s
By the beginning of the 1990s, however, the troubles with the former APS pipeline system proved to be a severe drain on the company. Replacement costs had already topped $100 mil-lion by the late 1980s. The company sought relief from the Arizona Corporation Commission (ACC), charged with over-seeing utility rates, asking for as much as a $52 million rate increase. The ACC, however, refused to pass the burden of pipeline replacement on to natural gas customers and, instead, shocked the company with a recommendation that its rates actually be lowered by $7 million.
At the same time, the savings and loan crisis was affecting the PriMerit subsidiary, dragging down its earnings. New federal regulations enacted in the wake of the crisis, which would bar PriMerit from the wholesale loan business and force the bank into more traditional, and less lucrative, banking operations, presented a bleak picture for PriMerit’s future. By 1991, Southwest Gas was sputtering. Revenues fell to $794 million and, after net interest deductions of nearly $44.5 million, the company posted a loss of more than $14 million. In 1993, Southwest made its first move to exit the banking business, selling off its Arizona operations to World Savings and Loan, based in Oakland, California. The rest of PriMerit followed in 1995, when Southwest Gas sold PriMerit’s Nevada operations to Norwest Bank for $175 million in cash.
The gains from the sale helped Southwest Gas return to the black, despite a drop in revenues to $538 million in 1993. In addition, the company was undergoing a boom in new customer hookups, as the region, particularly the Las Vegas and Arizona areas, led the nation in population growth. The company also expanded its service in the Henderson and Needles, Nevada markets with the $16 million acquisition of CP National’s gas operations in those communities. In 1995, Southwest Gas ex-tended its operations to include the installation, replacement, and maintenance of pipelines with the $24 million stock-swap purchase of Northern Pipeline Construction Co., based in Phoenix. By then, however, the company was facing a new threat to its bottom line. A warming trend in the Southwest had been leading to milder winters in the past two decades; the winter of 1995 was particularly mild, cutting deeply into the company’s sales. Revenues dropped from $599 million in 1994 to $563 million, and net income (not including a $17.5 million charge for discontinuing its PriMerit operations) sank to $2.7 million.
The company responded to the warming trend by promoting more heavily additional uses for natural gas, including new gas-driven air conditioning technology and natural gas vehicles. Southwest Gas also continued to add record numbers of new customers, including an estimated 66,000 in 1997. While the booming numbers of new customers helped to rebuild the company’s revenues, which climbed again to $644 million in 1996, the cost of outfitting the new hookups, at least in the short term, would continue to place pressure on the company’s bottom line. Nonetheless, the future appeared bright for the company as it neared its seventh decade. The coming deregulation of the electric utility industry spelled opportunity for natural gas sup-pliers. And the continuing population boom of its core Nevada and Arizona markets meant that Southwest Gas was likely to maintain its status as the nation’s fastest growing utility for some time to come.
Albrecht, Susan C., “Utility Aims for Jump in Customers,” Arizona Business Gazette, July 4, 1988, p. 12.
Basch, Mark, “Gas Company Plans To Enter S&L Field with Nevada Buy,” American Banker, March 26, 1986, p. 2.
Jarman, Max, “Utility’s S&L Move a Winner,” Arizona Business Gazette, September 8, 1989, p. 1.
Morrissey, John, “S&L Regulations, Arizona Ratemakers Burden ‘90 Earnings at Southwest Gas,” Las Vegas Business Press, June 3, 1991, p. 3.
Timmons, Tony, “Southwest Gas Tries To Preserve Investment Grade Bond Rating,” Las Vegas Business Press, January 13, 1997, p. 12.
Walker, Thom, “Cooling with Gas,” Arizona Daily Star, June 9, 1996, p. G1.
—M. L. Cohen