Southwest Gas Corporation (SWX) participates in the purchase, distribution and transportation of natural gas in a number of southwestern states in the United States including Nevada, Arizona and California. Their principle business is transporting and distributing natural gas to a wide array of commercial, industrial and residential customers. SWX also has a wholly-owned subsidiary that operates as a contractor for underground piping and provides utility companies with installation, replacement and maintenance services. Southwest Gas was founded in California in 1931 and is based in Las Vegas. 
As of December 31st 2010, Southwest had purchased and distributed natural gas to over 1,870,000 customers in the residential, industrial and commercial industries. They are the largest provider of natural gas to Nevada and Arizona (serving the Phoenix and Tucson metropolitan areas) and provide gas to a small portion of eastern California. Distribution has historically counted for around 90% of operating margin in this segment while transportation accounts for the difference. The company netted 13,000 new customers in the year 2010, an increase of less than 1%. Southwest’s strategy to increase their customer base is to take part in acquisitions, taking over an entire gas grid and becoming the sole supplier of natural gas in that geographical area . They also aim to remain competitive through special long-term contracts with electric generation customers and use negotiated transportation contract rates in order to manage costs.
NPL Construction Co. is Southwest’s wholly-owned subsidiary specializing in the trenching and installation, replacement, and maintenance services for energy distribution systems. Primarily, NPL will contract with local distribution companies to install/maintain the energy grid. These local distribution companies supply communities with gas by diverting it from the large inter/intrastate pipelines. The primary focus of business operations is main and service replacement as well as new business installations. The construction industry is prone to two factors that can inhibit business; the fact that it is seasonal and that the industry is very cyclical. NPL has encountered a slowdown in work over the past few years due to prevailing economic trends and management expects 2011 to be a slow year as well. 
Southwest’s natural gas operations segment is subject to regulation by an alphabet soup of commissions and agencies: the Arizona Corporation Commission (“ACC”), the Public Utilities Commission of Nevada (“PUCN”), the California Public Utilities Commission (“CPUC”), and the Federal Energy Regulatory Commission (“FERC”), to name a few . All rates charged by Southwest to customers for natural gas usage are strictly regulated by the aforementioned regulatory bodies and are derived by using rate base, cost of service, and cost of capital from a historical test year. The set rate levels are intended to allow for the recovery of all prudently incurred costs as well as pay off outstanding debt. Even priority systems for delivery of gas are set regulations.
Southwest’s natural gas operations are truly at the mercy of weather conditions. Historically rising temperatures over the last few decades in the southwestern United States have been increasing and therefore meaning milder winters. According to Southwest, “on cold days, use of gas by residential and commercial customers can be six times greater than on warm days because of increased use of gas for space heating”. When these extremely cold temperatures do arrive, natural gas must be withdrawn from storage areas or service interrupted for those customers with a lower priority. Southwest came into considerable controversy in February of 2011 when service was cut off to nearly 4,500 customers during near record-low temperatures in Arizona.
Environmental issues could potentially help or harm Southwest. With new legislation regarding emissions and other pollution measures, more advanced and in-depth reporting techniques are necessary to comply with all EPA regulations. Of course, these new methods can significantly add to costs. Other such factors as storm water management, hazardous material management, protection of endangered species and archaeological finds directly impact the ability and ease of gaining new construction contracts. On the plus side, natural gas’ reputation as one of the cleanest-burning fossil fuels will help consumers adhere to stricter environmental air quality standards. Southwest is poised to capitalize on this trend in the near future.
Even small fluctuations in the price of energy could have a huge impact upon Southwest’s earnings. Southwest utilizes a number of methods in order to mitigate this risk, such as entering into short-term (one year or less) fixed price contracts, storing natural gas, and using derivatives such as swaps.
Macroeconomic trends have adversely affected both natural gas operations and the construction segments. After the collapse of the housing bubble, many homeowners (and consumers of Southwest’s services) were left in foreclosure. A large number of homes were disconnected from service and remain vacant years later. Other than this trend, Southwest is confident they’ll remain profitable since demand for natural gas in very inelastic. Many local distribution companies have postponed efforts to build or maintain infrastructure, adversely affecting Southwest in the construction segment. The company is exposed to interest rate risk as well, as they had $100 million of variable-rate debt outstanding as of December 31st, 2010.
In the natural gas operations side of the business, Southwest Gas has a very favorable outlook in regards to competition. The gas utility industry is very attractive if we look at it through the lens of Porter’s Five Forces.
What makes gas utility industry attractive for Southwest Gas Corp. to remain in is the fact that utility companies essentially act as natural monopolies. The area in which they serve customers has an established infrastructure for deliverance of natural gas, and it wouldn’t make economical sense for another firm to come in the same area and install the same equipment. The expensive infrastructure needed for these firms is owned solely by Southwest Gas in their market, which makes the threat of new firms taking customers very low. Essentially the only way to gain new customers is building natural gas systems in previously undeveloped areas (which would hardly be profitable) or mergers and acquisitions.
There are a few acceptable substitutes for natural gas such as propane, electricity, or firewood. However, natural gas is one of the most economical ways to heat areas. Propane tanks can eventually run out of fuel and firewood must constantly be burned to achieve the same effect as natural gas. The opportunity costs of these other methods far outweigh the advantages.
One of the major aspects of the power of buyers is the ratio of buyer concentration to firm concentration. This ratio is exorbitantly high; Southwest Gas is the sole provider of natural gas to millions of customers. This is why the industry is regulated so heavily. Buyers could be charged an excessive amount of money since there are no other firms providing the same service.
The number of suppliers of natural gas isn’t very high, so traditionally this would mean that supplier power is high. However, since this industry is regulated so highly, suppliers are essentially price-takers and not price-makers.
Natural gas suppliers don’t often compete head-to-head. Each supplier will have their own area and infrastructure that is exclusive to their market. Competing in this industry in the classical sense (trying to take customers from other firms) doesn’t exist. Once again, the regulation in this industry prohibits one company from being a price leader or extorting its customers using monopolistic tactics.