THE INTERVIEW:

Southwest Gas CEO talks natural gas, future of energy industry

Southwest Gas CEO Jeff Shaw is one happy man. Here, he tells us why natural gas rocks and the shareholders got paid.

Beyond VEGAS INC

Southwest Gas Corp. of Las Vegas, until recently, has been one of the quieter big companies in town.

Look for that to change as CEO Jeff Shaw makes the case that natural gas shouldn’t be overlooked amid all the excitement about renewable and green energy.

Shaw, CEO since 2004, is also focused on keeping costs down and delivering profits for shareholders.

He seems to be succeeding, with monthly residential bills in Southern Nevada averaging about $24 in the summer and $58 in the winter. Thanks to efficiency gains, the company says the number of customers served per employee has increased from 706 in 2006 to 782 in 2010.

Shareholders, in the meantime, have been rewarded with five consecutive annual increases in their dividend.

The dividend payout totaled nearly $45 million in 2010 and was made possible by profits increasing from about $61 million in 2008 to $88 million in 2009 and to $104 million in 2010.

Even as Southwest Gas has boosted results during the recession, it hasn’t been in the news much.

Exceptions include service disruptions like one affecting nine Las Vegas Strip hotel-casinos after an accident in 2006; and another involving some 18,000 customers in Southern Arizona in February because of a temporary gas shortage caused by freezing temperatures and power outages in the supply chain.

Southwest Gas this year and in 2012 plans to spend $14.5 million on its Strip Reliability Plan installing mains and valves to bring additional sources of gas to the Strip and to reduce the number of properties affected by potential outages.

The company is still dealing with the fallout from the Southern Arizona outage, with the Arizona Corporation Commission looking into the incident and Southwest examining ways to better communicate with customers during mass outages.

Shaw recently discussed Southwest Gas with VEGAS INC.

You’ve been with Southwest Gas since 1988 (and the CEO since 2004). What is it about this industry and this company that you obviously enjoy?

Energy is a fascinating business. It has many moving parts and many constituencies that are very interested in it.

It's obviously caught the attention of every politician -- and at the same time the real facts behind energy and what makes it go are probably not understood by many of those who are so interested in it.

It’s much more complicated than people think.

Why am I in the business? It’s intellectually stimulating and it’s certainly challenging and I have worked with a lot of very smart people over the years, which has made it very rewarding.

What initiatives and issues will you be focusing on the next few years?

We think natural gas has a prominent role in the energy discussion.

If you read the newspapers and what’s said, a lot of the focus is on renewables. But natural gas has a very important role. Most of the electric generation that has been built in the last decade-plus has been natural-gas fired.

Natural gas is domestically plentiful. With the shale finds they have, which are all over the country, I’m hearing numbers of a 100-plus year supply.

This is an issue you’ll focus on?

The thing we’d like to focus on is to make sure that when people consider energy, they realize natural gas is cleaner than you think. That’ll be an issue you see us exploring.

Natural gas is a clean-burning energy source -- much cleaner than coal or other sources used to generate electricity. So to the extent you can run your appliances with natural gas -- direct from the source -- through the pipes to the appliance, it’s much more efficient and cleaner than to use natural gas to run electric generation and run the same appliance in the home. We want that message to get out to consumers.

And with gasoline at the pump as high as it is now, if customers had the option of driving a car run off compressed natural gas -- CNG -- they would save a significant amount of money. The problem is Detroit isn’t building any type of automobiles really to speak of, anymore, that run on natural gas. And the conversion to a natural gas engine, from a gasoline engine or diesel, is very expensive. So we’re hopeful that because gasoline prices have risen that Detroit will take notice and start building CNG cars and trucks again that we can use in our business, and everyone will save some money.

It burns cleaner than gasoline or diesel.

It needs to start with the manufacturer?

And you need to have the infrastructure in place to fill up. We’ve done that before, we used to have fueling stations in some of our operations centers. We would run some of our trucks and vans using CNG -- less so today because they’re not building those fleet-type vehicles.

Are you worried about a loss of market share to people using solar? Can solar help Southwest Gas by reducing the amount of pipe you have to install?

I would point out that with the use of solar to heat water, you’ll need a backup. Obviously, I believe that backup should be natural gas. You need to take into consideration if you’re considering solar how sensitive you are to costs, and evaluate all of the costs associated with solar and a backup. If your electricity is generated by natural gas, why not have natural gas be your backup for that water heater?

Does solar for the homeowner to heat water make economic sense?

You have to evaluate all the costs. Personally, I wouldn’t do that, but others may choose to do so.

That being said, it’s in the utility industry’s best interests -- including Southwest Gas -- to work with renewables and find solutions that best serve our customers’ needs. And we think we have a place at the table.

Are there any other initiatives we can expect to see in the next few years?

We’re going to stay the course. We are very focused on keeping our costs as low as we can, while at the same time providing safe and reliable natural gas service.

For the consumer, whether its a homeowner or a business, what can you say about whether rates will change in the next few years?

If you look historically at our filing of rate cases and the increase in rates, the cost to the consumer has been less than the rate of inflation for the last decade or more. We’re focused on trying to continue to do just that. We do it through innovations in our operating activities, with new ideas and asking ``how can we deliver the service using technology in a more effective manner?’’ We’d love to have every customer take their bill electronically and make their payments electronically. That is the most cost-effective way for us to bill and receive payment from the customer. It would cost everybody less if most of our customers would move in that direction. We welcome any customer to call us so we can make that arrangement.

Based on your own costs and the wholesale cost of gas, do you see rates changing in the next few years?

I expect costs will increase, but I don’t expect dramatic increases. I expect them to be reasonable and rational over time. We will do all we can as a utility to keep those costs as low as possible.

In your service area of Nevada, Arizona and California, what are you seeing in terms of new hook-ups and whether we’re coming out of the recession?

I remain optimistic. The data right now suggests were sort of stable, maybe at the bottom. I have not seen any significant increases in new construction or additions of new customers for us. We’re waiting for signs that’s going to change.

Because of the recession your company is obviously installing fewer gas lines. Have there been other cuts -- have employees taken wage cuts?

We haven’t had to reduce employees’ wages. But if you look at our company through the last three years, without layoffs, though attrition we have seen a reduction in our number of full-time employees of almost 10 percent.

And because of the recession you didn’t fill those positions?

Yes. And we’re always looking at ways to do things more efficiently. So we’ve taken this opportunity, when things have not been at the same torrid pace that we saw in the early 2000s, to capitalize on any efficiency gains that we can.

As the economy picks up, do you expect to fill those positions?

We won’t sacrifice customer service as things start to pick back up. We’ll be appropriately staffed so our service remains high. We have historically in Southern Nevada maintained a very high customer satisfaction rating, we have that evaluated by a third party on a monthly basis. You’re never going to be successful as a utility and you’re not going to maintain good relationships with your regulatory commissions unless you’re providing very good customer service, so it’s very important to us.

What are you doing to enhance shareholder value, the stock price?

In all three states where we do business, one of the things we’ve done is asked developers and builders to front the cost of new construction until customers come on line and start paying rates. We therefore are not asking customers to carry the costs of development. We are asking the developers and builders to do that, and then we refund the money to them once they perform. And then it goes into rates.

So that’s been helpful to our balance sheet. It’s strengthened the balance sheet by us not having to put that capital out ahead of the time when customers are hooked up to our system.

That has helped -- it’s really been about capital expenditures.

The slowdown has also helped, the fact we haven’t had quite the capital outlay that we had in the past has helped our balance sheet. You’re not stressing it like when we had the robust growth in the 2003-2006 timeframe.

We also have an allowable investment we can make under our tariffs that will not cause our performance to erode. (The company in Nevada is allowed about a 10 percent return on equity).

The (Public Utilities) commission establishes that based on the filings we make. We’re fairly consistent in our application of that tariff. By doing that, we haven’t put more capital out there than we should.

You need to work very closely with the regulatory bodies in each of the states to make sure you’re filing rate filings on a periodic basis to assure your costs are trued up. That would go both ways. If we realize savings through efficiencies, those savings go back to the consumer, all of them.

Similarly if we have cost increases, if the commission deems those to be just and reasonable, will include those in rates. So you’ve got costs that may be going up and down at the same time. By making regular rate filings you true those costs, which are actual costs of service. The worst thing you can do is file a rate case with a massive increase and rate shock to the customer. We never want that to occur. We want to keep our costs as low as we can. And when we do incur cost increases, we want that to be a controlled process. And not everything is under our control.

It’s interesting your board has raised the dividend again for shareholders, understanding that that’s money that could be used to pay down debt, or reduce rates or give everyone a raise.

If you look at our company, in our industry our payout ratio on our dividend is one of the lowest -- we’re near the bottom. Our yield is at the bottom. Where that becomes problematic is if we have to go out to the markets to attract capital we have to compete with all those other utilities for that capital. We went for 13 years without increasing the dividend. You don’t want to be in a position where you are at a disadvantage when you need to attract capital.

It is the responsible thing to do to increase that dividend. We didn’t do it all it once, we did it gradually. But the shareholders need to have a return or they’re not going to give you the money you need to provide the service you need to provide. Remember, pipe needs to be replaced on a regular basis and we still have some growth.

You have to be able to attract capital. That’s something people may ignore from time to time, but it’s the reality and that’s why you’ve seen our dividend increase.

We still remain relatively low relative to our peers.

Do you see it increasing again?

Absolutely. In order to provide safe and reliable service, the responsible thing to do is gradually increase that dividend to where it becomes competitive with other utilities so you’re able to attract capital.

You have a solid debt rating. So it sounds like you have a good relationship with Wall Street.

That’s very important to the customer. It’s very important we have solid credit ratings because the cost of debt -- which we pass through to the customer -- is based on your credit rating.

The 2010 natural gas explosion in San Bruno, Calif., raised awareness of measures needed to maintain the natural gas system. What’s the age of your system and how do you maintain it? We understand you have no cast iron pipe, subject of recent safety concerns; and that your system includes PVC and steel pipe.

Given the fact we are on a relative basis a newer utility, much of the pipe in our system is relatively new. We have a very robust pipe assessment program where we go through the various vintages of the pipe. Every gas utility tests its system, they do leak survey work. You’re always looking at the performance of your pipe so you can determine whether any needs to be replaced. So in our regular and routine capital expenditure program, there will always be pipe replacement costs. That will happen no matter what. We can’t stop -- even if the economy goes down, we have to replace pipe as it ages.

The federal government, which oversees pipeline safety, has been very active recently enacting rules and regulations and laws we’ll have to comply with.

We are doing everything in our power to operate a safe system by testing our pipe and replacing it in a timely fashion. We may have to do it more -- like all other utilities -- if the laws change.

One of the issues is whether leaks or suspected leaks are dealt with promptly.

We do. We respond inside of code requirements. We are very aggressive. We have people on the road all the time that respond to those leaks. We have a very robust dispatch department that can reach our employees. They can redirect them because of the systems we have in place.

There is no natural odor with natural gas. We have to odorize it. If anyone ever smells something with a rotten egg smell, they should immediately call us so we can get somebody out there to take a look at it.

We have a limited amount of (large) transmission pipe. Most of our pipe is (small) distribution related, it operates at a lower pressure. What transmission we do have, we have very robust testing of that pipe.

What’s been the fallout of the San Bruno investigation?

It’s caused the federal government to get very aggressive with any types of rules and regulations that may come forward. Those are being shaped as we speak.

Your company offers services to help people and businesses save energy?

I would invite everyone to call our Energy Services Department. They can point you to incentives to help you use our product more efficiently.

We have energy audits and information that people can find out about and do -- weatherize their home for instance. There are good tips on the website (swgas.com).

We have employees whose job it is to meet with business customers to help them analyze their energy use and maybe save some money.

Have you had to slow down on corporate giving in the communities you serve?

Of any entity that’s out there, your utilities are approached as much or more than any other industry because you’re a little more stable by the nature of your business.

We feel a responsibility to the community at a time like this. We’ve been as generous as we can be while maintaining a balance of earnings and all other factors. All of our officers participate on charitable boards -- I do personally. We all raise money for those organizations. We have a foundation at Southwest Gas that we use to help those organizations in the community. I wouldn’t say we’ve seen any appreciable decrease in our assistance to the community.

And your employees continue to give? We understand when it celebrated its 80th Anniversary in March, the ``Blue – Building Lives Up Everywhere’’ volunteer team held food drives to stock local pantries.

Our employees are very generous. We provide incentives for our employees to participate in things like the United Way and they have been very generous. Even being at the top of the various companies in various pacesetter campaigns with United Way.

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