Friday, May 11, 2001 | 11:08 a.m.
Rate increase?
Southwest Gas Corp. will request a rate increase from Nevada regulators within six months, Chief Executive Michael Maffie said at Thursday's annual shareholders meeting.
Maffie indicated that Southwest believed the rate increase was necessary because Southwest's rate of return was "falling behind growth." He did not indicate the size of the increase the company will seek.
"Sometimes your biggest success is your biggest problem," Maffie said. "That continues to be the case with our rapid growth."
The huge price increases seen by Nevada natural gas customers in recent months are based purely on the wholesale cost of fuel. Southwest is permitted to pass along increased fuel costs to its customers , but can't derive an increased profit from these increases . A general rate increase would generate a greater profit for the company; Maffie said that profit has been shrinking because of the infrastructure investments the company's been making in the Las Vegas area. Southwest had sought a similar increase in Arizona, but recently saw its proposal rejected by the Arizona Corporation Commission. Maffie indicated Southwest will continue to press for a rate increase there as well, butsaid every month without relief there "will cost the company several million dollars."
Southwest Gas Corp.'s board of directors and top executives came under fire Thursday, as numerous shareholders angrily criticized management for a failed merger and sinking stock price.
Much of the criticism at Southwest's annual shareholders meeting came from a group of Phoenix-based employees who have been engaged in contentious contract negotiations with the Las Vegas-based natural gas utility. But the concerns spread beyond that group; in a surprise vote, Southwest shareholders went against their board's recommendation and voted to remove a "poison pill" provision that had been in place since 1996.
However, shareholders denied an effort by Mario Gabelli, a New York investor who has been critical of Southwest management in the past, to place a second Gabelli nominee on Southwest's board. Gabelli is one of Southwest's largest shareholders, holding 9.65 percent of the company's stock.
A "poison pill" is a provision designed to make it very difficult to consummate an unsolicited takeover for a company. If a single shareholder acquires a certain number of shares without the board's blessing, the poison pill vastly increases the number of outstanding shares, making a takeover attempt prohibitively expensive.
Jeff Carpenter, an employee of Southwest Gas in Phoenix, introduced the measure to revoke the pill. The International Brotherhood of Electrical Workers is currently trying to negotiate a contract with Southwest to represent employees in Phoenix; Carpenter is one of the employees designated by IBEW to participate in those negotiations, though Carpenter and IBEW officials insisted their efforts were motivated by their concerns as shareholders. About 20 other Phoenix-area employees and IBEW members also attended the meeting.
In its proxy statement, Southwest had urged shareholders to vote down the proposal, saying the poison pill "protect(s) the company and its shareholders against coercive and abusive takeover tactics (and ensures) that each shareholder would be treated fairly in the event of an unsolicited offer to acquire the company."
Thomas Hartley, chairman of Southwest, said the board will address the poison pill issue at its July meeting. The board isn't obligated to revoke the pill, as the shareholder resolution is worded as a "request" to the board.
"The board understands its fiduciary responsibility, and they understand they are an extension of the shareholders," said Thomas Sheets, Southwest vice president and general counsel. "They'll take what they believe to be the appropriate action. Beyond that, I don't think any of us will speculate as to what they'll do."
Southwest officials merely said a majority of shareholders voted for Carpenter's proposal, and did not have a breakout of the vote available Thursday afternoon.
Carpenter said he was motivated by the failed attempts of the company to find a merger partner, and growing frustration with Southwest's management.
"The major trigger (for the proposal) was the ONEOK-Southern Union debacle and the lawsuits that followed because of it," Carpenter said after the meeting. "That showed me the decisions being made at the top weren't in our best interest as shareholders. It's a great victory for shareholders across the nation."
ONEOK Inc. of Tulsa, Okla., had agreed to acquire Southwest for $1.8 billion, or $30 a share. Southern Union Co. of Austin, Texas, made a unsolicited bid of $1.88 billion, or $33.50 per share, but was denied by Southwest's board, who argued Southern Union didn't have the financial wherewithal to consummate the merger.
Southern Union sued, and this lawsuit brought allegations that ONEOK and Southwest officials had improper dealings with Arizona regulators and Southwest shareholders. These allegations caused ONEOK to call off the merger in January 2000, and since that time, all three companies have sued each other.
Southwest stock sank below $17 this summer, but has recovered somewhat since then. It closed at $21.15 Thursday, well below both ONEOK's and Southern Union's bids.
Carpenter said the episode has spawned widespread discontent among Southwest employees across the company, since many hold shares in the company.
"I really don't know how much longer we can let them (Southwest management) prove themselves," Carpenter said. "I think it is time for a change in upper management. If the shareholders unite, we can get our point across."
That discontent among some shareholders became quickly apparent during the meeting's question and answer period.
Ruth Nichols, a Southwest employee and shareholder from Phoenix, pointed out that Southwest's stock had fallen in value last year while other natural gas utilities saw their share prices soar.
"What assurances can you give to shareholders that this management team is qualified to maximize our investment?" employee Ruth Nichols asked, drawing applause from many audience members.
Michael Maffie, chief executive of Southwest, pointed to the pending litigation with ONEOK and Southern Union as the chief cause of the depressed stock price.
"I don't know what more I can say about that," Maffie said. "Once that overhang is gone, the share price should recover."
"We are doing everything we can to move this litigation along and get it behind us," Hartley said, calling its resolution "the No. 1 issue on the minds of the board."
After the meeting, Sheets said it is likely the first of the lawsuits could go to trial in Phoenix federal court by year's end, possibly as a single consolidated case.
Sheets wouldn't rule out a settlement, but said no active negotiations are underway.
"I don't think there's any question that Southwest would be quite interested in seeing these cases resolved so long as the resolution provides fair value to company shareholders for what they lost because of the misdeeds of ONEOK and Southern Union," Sheets said.
But some shareholders weren't convinced the company was blameless for those lawsuits. One Phoenix employee and shareholder pointed out that Southern Union had successfully acquired two companies since it was spurned by Southwest Gas, despite Southwest's statements that Southern Union didn't have the financial resources to execute a merger.
"What are you going to do to prevent that mistake from happening again?" the employee asked Maffie.
"The board didn't make a mistake," Maffie shot back. "Let's dispose of that notion."
Maffie then pointed out that Southern Union's last two acquisitions have been equity deals, while Southern Union's Southwest proposal was debt financed -- and said Southwest's concerns revolved around the Texas company's debt levels.
"You're mixing apples and oranges," Maffie said.
John McCafferty, a Las Vegas shareholder, suggested Maffie was motivated by a rich severance package from ONEOK in selecting that company over Southern Union. He asked for assurances that management wouldn't put "personal interest ahead of shareholder value" in considering future offers.
Maffie denied any conflict of interest, saying Southern Union had offered the same packages to executives as ONEOK did.
"There was reason to favor Southern Union (personally) ... because as a shareholder I would have made more with Southern Union," Maffie said. "(The higher offer) meant $700,000 to me personally.
"(The board and management) knows what their fiduciary duty is. What greater assurance is there than that?"
A consistent critic of Southwest in the past has been Gabelli, who has urged the company to settle its lawsuits and find a buyer. Last year, Gabelli nominee Mark Feldman was elected to Southwest's 11-man board; on Wednesday, Gabelli nominated attorney Michael Melarkey to join Feldman on the board, and announced he had increased his stake in Southwest to 9.
But this nomination may have come too late, as a majority of ballots had already been sent to Southwest by Wednesday. No one changed their votes at the meeting, and Melarkey was not elected, though Feldman was re-elected to a one-year term.
Karyn Nappi, assistant vice president of Gabelli Asset Management, nominated Melarkey on behalf of Gabelli at the meeting. Reading a statement, Nappi said Gabelli was pleased with management's efforts on behalf of shareholders over the past year, but added more work needed to be done.
"We are neither for or against management, but for what is in the best interest of shareholders," Nappi said.
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