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TEXT-Fitch revises Southwest Gas Corp outlook
May 30, 2012 / 5:32 PM / 5 years ago

TEXT-Fitch revises Southwest Gas Corp outlook

May 30 - Fitch Ratings has upgraded the senior unsecured ratings of Southwest Gas Corporation (SWX) including industrial development revenue bonds one-notch to ‘A-’ from ‘BBB+’ and affirmed the long-term Issuer Default Rating (IDR) at ‘BBB+'. Additionally, the Rating Outlook is revised to Positive from Stable. Fitch affirms the short-term IDR and commercial paper at ‘F2’. Approximately $1.4 billion of debt is affected by this rating action. The ratings upgrade reflects strong operational performance at the utility for 2011 and Fitch’s expectations for continued strong performance for 2012 due in part to $53 million of new rates effective Jan. 1st. Fitch notes that recent rate design changes including the adoption of revenue decoupling in all jurisdictions have decreased regulatory lag and have resulted in stronger credit metrics and a lower business risk profile. The Positive Rating Outlook reflects the expectation of a constructive outcome of SWX’s pending 2012 General Rate Case (GRC) in Nevada, resulting in modestly improving credit metrics in 2012 and 2013 and the improving economic conditions in the company’s service territories, particularly in Arizona. SWX is a natural gas distribution utility whose ratings are primarily supported by the stable earnings and cash flows from their regulated LDC operations and to a lesser extent, the improving earnings and cash flows of its nonregulated construction subsidiary, NPL Construction Co. (NPL). Pending Rate Case in Nevada: On April 4, 2012, SWX filed their 2012 GRC with the Public Utilities Commission of Nevada (PUCN) requesting an increase of revenue of $27 million for rates effective Nov. 1, 2012 predicated on a return on equity (ROE) of 10.65%. SWX is requesting a revenue increase of $1.5 million in Northern Nevada and $25.4 million in Southern Nevada. Fitch expects a decision by November of this year. Constructive Settlement, Decoupling Adopted: In SWX’s last settled rate case (2010 GRC in Arizona), SWX’s base rates were increased by $53 million based on a 9.5% ROE and represented 72% of SWX’s requested rate increase for rates effective Jan. 1, 2012. Per the terms of the settlement, SWX agreed to a GRC moratorium until April 30, 2016. Notably, the ACC authorized a full revenue decoupling mechanism which includes a monthly weather normalization provision. Fitch notes that this is the ACC’s first approval of revenue decoupling in Arizona. As of January 2012, all of SWX’s service territories have decoupled rate structures which mitigate weather risk. Strong Liquidity: As of March 31, 2012, SWX had total available liquidity of $518 million including $218 million of cash and cash equivalents. SWX maintains liquidity through their five year $300 million unsecured credit facility which matures on March 15, 2017. Fitch notes that the credit facility contains a maximum debt to capitalization covenant of 70%. Debt maturities are modest with $18 million in 2013, and $1 million in 2014 and 2015. Fitch notes that above maturities relate solely to the debt obligations of SWX’s non-regulated construction subsidiary, NPL. Improving Credit Metrics: SWX’s credit metrics have improved due to a combination of favorable rate decisions, constructive rate design, cooler than normal weather during 2011, improvements in capital structure, and low natural gas prices. For the latest 12 months (LTM) period ending March 31, 2012, EBITDA coverage improved to 6.6 times (x) as compared to 6.4x for 2011 and leverage, as measured by debt to EBITDA, was low at 3.0x. The improvement in EBITDA coverage was largely due to new rates effective Jan 1st. For 2012, Fitch expects debt to EBITDA coverage below 3.0x and EBITDA interest coverage above 6x, respectively. Since 2007, leverage has declined in recent years along with a slowdown in service area growth that has lessened the burden of large capital expenditures to meet infrastructure growth. The common equity portion of SWX’s capital structure has improved to 48.2% to total capital as of March 31, 2012 from 36.2% in 2005. SWX has been successful in raising equity through its Dividend Reinvestment Program and increased retained earnings with a conservative dividend payout ratio. Effective Rate Structures: SWX has been able to minimize its exposure to natural gas price volatility, which can be weather driven, through progressive purchase gas agreements (PGAs) in all of its service territories including Nevada (quarterly adjustments), California (monthly price adjustments), and Arizona (monthly price adjustments within pre-established limits). Fixed Contract Purchases Mitigate Risk: As part of SWX’s risk management program, SWX utilizes fixed-price contracts and swaps to effectively fix the price on a portion of its natural gas supply portfolios, currently ranging from 25% to 35% depending on the jurisdiction. Gas costs that are incurred in excess of amounts embedded in customer rates are generally deferred and recovered under PGAs. Strong Growth at NPL: Growth at SWX’s unregulated construction subsidiary NPL has been strong the last few years as NPL has benefited from the current low interest rate environment, a regulatory environment focused on federal and state pipeline safety-related programs and bonus depreciation incentives that have spurred utilities to invest in large multi year distribution replacement projects. For 2011, NPL’s operating income increased 69% to $35 million as compared to $21 million last year due to the increased demand of pipeline replacement construction; however, Fitch notes that NPL remains less than 10% of SWX’s overall operating income. Largest Distributor in AZ and NV: As of March 31, SWX has approximately 1.9 million customers of which 54%, 36% and 10% were located in Arizona, Nevada, and California. Accordingly, for the 12 months ending March 31, 2012, operating margin contributions by State approximated: 55% in Arizona, 34% in Nevada, and 11% in California, respectively.

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