Washington Natural Gas Company - Company Profile, Information, Business Description, History, Background Information on Washington Natural Gas Company

815 Mercer Street
Seattle, Washington 98109-4714

History of Washington Natural Gas Company

Washington Natural Gas Company, the largest natural gas utility in the State of Washington, is one of the fastest growing natural gas utilities in the United States. Serving 425,000 customers in five counties, Washington Natural's customer base is primarily residential, with industrial and commercial clientele composing about ten percent of total customers, but accounting for 61 percent of the total volume of natural gas distributed by the company. In 1978, a holding company, Washington Energy Company, was formed to enable the diversification into energy related businesses. Washington Natural Gas is the largest subsidiary and the primary focus of the holding company's business, which also includes oil and gas exploration and production operations, sales of home energy and security products, a partnership in a railroad company, and a partnership in a coal mining venture.

The roots of Washington Natural Gas may be traced back to the introduction of gas lighting in Seattle, Washington. For the 2,000 residents residing in the young and growing town, New Year's Eve of 1873 was the first time that gas lamps lit 42 private homes and five public streets. The company responsible for this historic moment was Seattle Gas Light Company, a recently formed utility founded by Seattle's first banker, Dexter Horton; one of the town's founders, Arthur Denny; and the city's mayor, John Collins. The gas for the region's first private utility was manufactured from coal and distributed to the company's limited customers through hollowed-out fir logs, a rudimentary system that, nevertheless, effectively carried what was considered to be a quality of gas equal to the fuel distributed by more sophisticated systems in the western United States.

Seattle Gas grew over the years, adding customers who could afford the luxury of gas lighting and collecting revenues from supplying the gas to light Seattle's streets. In 1889, a new form of energy attracted the attention of Seattle Gas' founders, as Seattle became the fourth city in the world to operate an electric streetcar system. Horton, Denny, and Collins foresaw the possibilities in electricity for Seattle and created another utility company, Seattle Gas and Electric Light Company, which generated electricity from steam.

Shortly after the creation of Seattle Gas and Electric Light, an enormous blaze, the Great Seattle Fire of 1889, swept through the city, consuming nearly every building and residence and destroying the electric and gas facilities used by the two utilities. After the fire, the founders of the two companies created a new utility, with the somewhat unwieldy name of Seattle Gas, Electric Light and Motor Company. This newly formed utility operated until 1892, when investors from the East purchased a controlling interest in the utility's stock and reorganized it as Seattle Gas and Electric Light Company. By this time the utility served roughly 1,200 customers and produced 96,000 cubic feet of gas per day--a small amount of fuel compared to the 525 million cubic feet the company's successor would distribute in one day nearly a century later--but as the uses of gas multiplied, Seattle Gas' volume of gas increased. As Seattle's residents celebrated the arrival of a new century, gas was used not only to fuel lamps, but also to power appliances and heat water. Gas was heralded as the energy source of the modern age, and many Seattle residents responded by equipping their homes with machines that relied on gas.

Gas continued to attract customers until the mid-1930s when high manufacturing costs increased the competition between Seattle Gas and alternative energy source utilities. One such energy source, natural gas, had begun to entice utility companies in other parts of the country as a cheaper, more profitable fuel to distribute, the availability of which had been made easier by the development of thin-walled, large-diameter steel pipe. The advent of the steel pipe encouraged business leaders and public officials to initiate a campaign in the early 1950s to bring natural gas to the Pacific Northwest. In anticipation of the fuel's arrival, Seattle Gas and Electric Light Company, which by this time had been renamed Seattle Gas Company, merged with Washington Gas & Electric Co., a utility based in Tacoma, Washington, in 1955, to form Washington Natural Gas Company.

The following year, when the two merged gas manufacturers completed the conversion of their facilities to distribute natural gas, the new fuel was brought to the Pacific Northwest through a pipeline operated by Pacific Northwest Pipeline Co. With 48,500 customers and revenues of $7 million, Washington Natural Gas entered a new era of business, confident that natural gas would generate greater revenues and attract more customers. To this end, Washington Natural Gas' management was not disappointed. In four years, revenues nearly tripled to $20.4 million, earnings more than quintupled to $1.6 million, and the number of customers swelled to 76,000. Natural quickly became the new fuel of the modern age in the Pacific Northwest, attracting many residential, commercial, and industrial consumers impressed by its cheaper cost and the several advantages its usage offered. For industrial users, natural gas required no storage facilities, possessed greater combustion efficiency, and could be utilized in a number of ways. It was also a cleaner burning fuel that could be heated in more compact furnaces, enabling residential customers to convert areas surrounding their furnaces into living space. Washington Natural Gas soon added to its rapidly rising revenues by selling natural gas appliances, a side business that generated significant revenue for the company. With these synergistic sales and rental programs augmenting Washington Natural Gas' burgeoning distribution business, the company had achieved remarkable results in a short time and stood ready to capitalize on what promised to be a lucrative business.

The robust growth the company experienced during its first several years of distributing natural gas continued into the 1960s, invigorated by favorable economic conditions in the Pacific Northwest. The population in the region was rapidly increasing, by far eclipsing the national rate of population growth, as industrial and commercial expansion persuaded many out-of-state residents to relocate within Washington Natural's area of service. Of these new homes, many were connected to Washington Natural Gas' distribution system. By the beginning of 1963, the company had connected its 100,000th customer, adding a minimum of 10,000 customers annually in the first three years of the decade. Revenues also continued their exponential rise, reaching nearly $26 million by the end of 1962, which represented a 132 percent increase since the utility had converted to natural gas. To keep pace with the growing demand for natural gas, Washington Natural Gas had increased the mileage of its distribution network by 52 percent since 1956, requiring 2,806 miles of transmission line by 1962, the same year in which over $10 million were spent on capital expenditures.

With projections for the remainder of the decade calling for a similar rate of population growth, future demand for natural gas appeared secure. However, some uncertainties concerning the supply of natural gas to the Pacific Northwest were beginning to develop by the mid-1960s. Washington Natural Gas' primary supply of natural gas came from the pipeline owned by Pacific Northwest Pipeline Co., which by this time had been purchased by El Paso Natural Gas Co. The relationship between Washington Natural Gas and Pacific Northwest Pipeline had always been mutually beneficial, before and after El Paso assumed control. Pacific Northwest Pipeline had access to ample supplies of natural gas from Canada and the San Juan Basin fields in New Mexico and Colorado, which had proven sufficient to meet Washington Natural Gas' needs and those of other utilities in the region. However, when the U.S. Supreme Court ordered El Paso Natural to relinquish control of Pacific Northwest Pipeline, some doubts were raised as to whether the pipeline would be allocated a sufficient supply of fuel. Although Washington Natural Gas never suffered from the change of the pipeline's ownership, as did several utilities operating in the Pacific Northwest, the anxiety evoked by the uncertainty of supply led the company's management to seriously consider developing ancillary sources of natural gas. Some efforts had been directed toward this objective before the El Paso Natural divestiture, including a joint venture with Washington Water Power Company and El Paso Natural to develop an underground storage facility for natural gas in the southern end of Washington Natural's service area, but the incident did serve as a reminder of Washington Natural's vulnerability. In 1965, the utility completed a propane air gas plant, which, combined with the underground storage facility, provided a supplementary source of natural gas to be utilized during periods of heavy demand.

While the issue of natural gas availability was being debated, the full ramifications of which were not decided until the end of the decade, Washington Natural Gas continued to add customers and increase its profits at the same vigorous rate as the late 1950s and early 1960s. By 1968, Washington Natural Gas served 164,183 customers, and its earnings had reached $4.5 million, a twelvefold increase in ten years. A large part of this growth was still attributable to the booming population within the company's service area, which increased 32 percent from 1965 to 1970 compared to a national increase of six percent over the same span of time. However, the company's growth was also attributable to the utility's success in persuading customers to use natural gas for a multitude of energy needs. Three of its competitors in the energy market--Seattle City Light, Tacoma City Light, and Puget Sound Power and Light--sold fewer BTUs of energy to their 600,000 customers than Washington Natural Gas sold to customers representing only one-fourth the combined total of the other utilities. Encouraged by this success, Washington Natural Gas management allocated over $75 million to be spent by 1972 for capital expenditures in anticipation of increasing the number of its customers by 90,000.

As it entered the 1970s, Washington Natural Gas initiated a more concerted effort toward developing supplementary supplies of natural gas and began diversifying into non-utility ventures. Its supply of natural gas from Pacific Northwest Pipeline was still ample and stable, enough for a 20-year supply, compared to a national average among utility companies of ten years. However, the utility's dependence on the pipeline and particularly its reliance on Canadian gas prompted it to invest in natural gas exploration and mining ventures to ameliorate its position.

Washington Natural Gas received nearly 70 percent of its natural gas from Canada, a source that had proven advantageous for several reasons, including Canada's large supply of gas and its geographic proximity. Canada had enough natural gas to supply users for a projected 25 years, and this supply was expected to increase since Canada paid producers of newly acquired natural gas a higher price than the United States did, which encouraged natural gas exploration. However, water seepage into key Canadian natural gas fields in 1973, as well as increased Canadian demand, demonstrated to Washington Natural Gas the inherent danger of depending on one source for a majority of its gas.

Although Washington Natural customers connected to firm, or consistent, supplies of fuel did not experience any interruption of service, those users connected to interruptable lines did suffer from a reduced supply as a consequence of the production difficulties in Canada. From 1974 to 1977, sales to interruptible consumers were curtailed for an average of approximately 80 days per year, further underscoring the need for Washington Natural Gas to develop alternative sources of natural gas. Accordingly, through its newly formed subsidiary, Thermal Exploration Inc. (now Washington Energy Resources Co.), Washington Natural Gas engaged in several joint ventures to explore and develop new natural gas reserves in the United States, specifically in Colorado and Montana, where the utility held an interest in a total of 345,000 acres. Washington Natural Gas also became involved in coal mining ventures in Montana to explore the possibility of converting coal to gas. The technology for the gasification of coal had been available for a considerable length of time, but the process was prohibitively expensive. However, Washington Natural Gas' management believed that energy prices would rise sufficiently within the next decade to make the gasification of coal an economically feasible substitute for natural gas.

By 1977, Washington Natural Gas investments in ventures unrelated to natural gas distribution led the utility to form a holding company to reorganize its operations and separate its other interests into distinct subsidiaries. In addition to Washington Natural Gas, operating within the holding company, named Washington Energy Company, were Thermal Energy, Inc., Thermal Exploration, Inc., and Thermal Efficiency. These three wholly owned subsidiaries were involved in the distribution of energy conservation equipment, oil and gas exploration, and the development of coal reserves--businesses that would add revenues to the company and help mitigate the cyclicality of the company's distribution operations. Although natural gas usage per customer had decreased during the 1970s, and the price of Canadian gas had risen, Washington Natural continued to increase its revenues during this period, albeit at a slower rate than in the 1960s. By the end of the decade, revenues had swelled to over $300 million, representing a 17 percent compounded annual increase since the beginning of the decade. Moreover, the utility's number of customers had topped 240,000, finally reaching the level forecasted by Washington Natural's management in 1968.

Washington Natural Gas' dependence on Canadian gas began to diminish in the 1980s. As Canadian natural gas became increasingly expensive, the company began to rely more on the alternative sources created by its subsidiaries, and by 1982, only half of the utility's supply came from Canada. In 1979, the Washington Utilities and Transportation Commission withdrew its permission for Washington Energy Co. to fund oil and natural gas exploration by charging expenses to customers. Nevertheless, the holding company continued to direct its subsidiary to explore for oil and gas through joint ventures. By 1985, Washington Natural Gas had become the 47th largest natural gas distributor in the United States, with 266,349 customers. Although revenues sagged after the record year of 1985, by the end of the decade the utility had once again returned to posting enviable financial figures. In 1989, the utility added customers three times faster than the national average, largely due to the enormous price advantage natural gas had over electricity. Through aggressive marketing, Washington Natural Gas served 96 percent of the single-family market within its distribution area, reaching a total of 324,222 customers.

In 1990, Washington Natural Gas recorded $292 million in revenues and $20.6 million in net income. The following year, revenues climbed to $303 million, and net income increased to nearly $31 million. Anticipating similar results in 1992, Washington Natural's management was disappointed by a year of unusually warm weather, which impeded revenue growth. For the year, revenues dropped to $277 million and net income plummeted to $14 million.

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Further Reference

"The Executive's Corner," Wall Street Transcript, June 17, 1968, pp. 13,605-606."The Fair Is Officially Over But Its Effects Linger On," Investment Dealers' Digest, March 4, 1963, p. 30.Holland, Sidney M., "Washington Natural Gas Co.," Investment Dealers' Digest, August 12, 1963, p. 17.Neurath, Peter, "Washington Energy Keeps Stretching Its Energy Base," Puget Sound Business Journal, February 19, 1990, p. 2.----. "WECO Bucking a Trend in Oil, Gas Exploration," Puget Sound Business Journal, March 13, 1989, p. 11.Warren, Gail, "Gas Showed the Way," Puget Sound Business Journal, April 3, 1989, p. 6."Washington Energy Company," Wall Street Transcript, March 16, 1981, p. 60,854."Washington Energy Venture," The Wall Street Journal, April 16, 1980, p. 20."Washington Natural Gas Company," Capital Changes Reports, 1990, p. 2,074."Washington Natural Gas Company," Wall Street Transcript, August 23, 1976, p. 44,528."Washington Natural Gas Company," Wall Street Transcript, January 27, 1969, pp. 15,623-15,624."Washington Natural Marks Growth," Investment Dealers' Digest, July 24, 1961, p. 42."Washington Natural Realigns, Forms Washington Energy Co.," Pipeline & Gas Journal, October 1976, p. 7.

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