OREANDA-NEWS. August 04, 2015. Fitch Ratings has affirmed Southwest Gas Corporation's (Southwest Gas) Long-Term Issuer Default Rating (IDR) at 'A-' and Senior Unsecured Debt rating at 'A'. The Short-Term IDR has been affirmed at 'F2'. A complete list of rating actions follows at the end of this press release.

The Rating Outlook is Stable.

These rating actions affect \\$1.25 billion of long-term debt and Southwest Gas' \\$300 million credit facility.

Southwest Gas' ratings and Stable Outlook primarily reflect the constructive rate design across Southwest Gas' service territory, including revenue decoupling and purchased gas adjustment mechanisms (PGAs) in all jurisdictions, and the company's strong financial metrics. The ratings also consider the riskier construction services business and an elevated capex program at the utility.

KEY RATING DRIVERS

Constructive Rate Design

The regulatory environment for Southwest Gas' natural gas distribution business has improved over recent years, particularly in Arizona and Nevada, which account for 56% and 34%, respectively, of the utility's operating profit. Management has focused on working with the regulatory commissions to implement mechanisms that reduce regulatory lag.

The Arizona Corporation Commission (ACC), the Public Utilities Commission of Nevada (PUCN), and the California Public Utilities Commission (CPUC) have authorized Southwest Gas to implement revenue decoupling, separating the recovery of utility operating margin from customers' natural gas consumption. Southwest Gas has also been authorized to use PGAs throughout its service territory, enabling the utility to file for rate adjustments when its cost of purchased gas changes. These constructive rate mechanisms provide for more timely recovery of costs and increase the stability and predictability of earnings and cash flows.

Recent general rate case (GRC) outcomes have been constructive. The CPUC authorized a \\$7.1 million base rate increase effective June 2014, based on a 10.1% return on equity (ROE) and a 55% equity ratio. The utility was also granted post-test year attrition increases of 2.75% annually for 2015-2018. The CPUC subsequently approved \\$2.5 million in new rates in December 2014, effective Jan. 1, 2015, as a part of Southwest Gas' 2015 post-test year attrition filing.

In Arizona, Southwest Gas is subject to a GRC moratorium, preventing the utility from filing its next GRC application before April 30, 2016, and new rates cannot become effective earlier than May 1, 2017. Southwest Gas' most recent GRC in Arizona was settled a few years ago, with rates effective January 2012. Fitch considers the settlement to be supportive of Southwest Gas' credit quality. Base rates were increased \\$52.6 million, representing 72% of the utility's requested amount, based on a 9.5% ROE and a 52.3% equity ratio. In addition, the ACC approved full revenue decoupling with a monthly weather adjuster.

Strong Financial Metrics

The constructive regulatory environment has enabled Southwest Gas' financial metrics to remain strong. For the LTM ended March 31, 2015, FFO fixed-charge coverage was 6.6x, FFO-adjusted leverage 3.0x, and adjusted debt/EBITDAR 2.8x. Fitch forecasts FFO fixed-charge coverage to average 6.1x - 6.4x, FFO-adjusted leverage 3.3x-3.5x, and adjusted debt/EBITDAR 2.9x - 3.0x, over 2015 - 2017, continuing to provide headroom at the existing ratings. The relatively weaker projections for the FFO metrics reflect the end of bonus depreciation.

Moderate Risk of Construction Services Business

The positive credit attributes associated with Southwest Gas' solid financial profile are slightly diminished by the greater business risks at the company's unregulated construction services subsidiary, Centuri Construction Group Inc. (Centuri; not rated by Fitch). Centuri is a full-service contractor that works with natural gas utility local distribution companies (LDCs) to install, repair, and maintain pipeline distribution systems in the U.S. and Canada.

Centuri primarily operates under unit-price contracts that establish prices for each of the various services performed and often have annual pricing reviews, minimizing the risk of cost overruns for multiyear projects. However, 12% of Centuri's revenue in 2014 was earned under fixed-price contracts, and some of its unit-price contracts have revenue caps. Fixed-price contracts and unit-price contracts with revenue caps expose Centuri to the possibility of losses, particularly for longer-term projects, due to the necessity of estimating costs far in advance.

The October 2014 acquisition of a 90% interest in the Link-Line construction services companies expanded the scale of Centuri's operations and established a presence in Canada. In addition, Centuri's construction services business has realized strong growth the last few years, benefiting from low interest rates, a regulatory environment more focused on pipeline safety, and bonus depreciation incentives. Centuri's EBITDA grew 19% in 2014, to \\$92 million, from \\$77 million in 2013.

Fitch expects Centuri to contribute almost 20% of consolidated EBITDA going forward. Growth that results in Centuri's contributions approaching 25% of consolidated EBITDA on a sustained basis or an increase in risk associated with the existing operations could lead to a ratings downgrade.

Elevated Capex Program

Southwest Gas is undergoing a period of increased capex, primarily focused on projects to enhance safety and maintain reliability of its LDC system. Fitch expects Southwest Gas' utility to spend \\$1.3 billion over 2015-2017, peaking at \\$445 million in 2015. Concerns regarding the relatively large capex program are mitigated by various infrastructure replacement cost recovery mechanisms authorized by the ACC, PUCN, and CPUC. Construction capex at Centuri has been self-funded and is expected to remain so going forward.

KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for Southwest Gas include:
--Net customer growth averaging 1.5% per year through 2017;
--Capex of \\$1.3 billion during the three-year period 2015 -2017;
--No reinstatement of bonus depreciation;
--Normal weather;
--No asset divestitures or acquisitions.

RATING SENSITIVITIES

Positive: Given Southwest Gas Corporation's strong IDR, there is limited room for a positive rating action. However, a combination of the following factors could result in an upgrade:
--Further improvement in the regulatory environment that results in reduced regulatory lag;
--Continued moderate growth; and
--Expectations for FFO adjusted leverage to be less than 3.25x and adjusted debt/EBITDAR to remain less than 3.0x on a sustained basis.

Negative: A negative rating action could result from the following:
--A significant deterioration of the regulatory environment in Arizona or Nevada that results in increased regulatory lag;
--A material expansion of non-regulated business activities that reduces the natural gas distribution segment's share of consolidated EBITDA to the lower end of the 75%-80% range; and
--Expectations for FFO adjusted leverage to be greater than 4.0x and adjusted debt/EBITDAR to be greater than 3.75x on a sustained basis.

LIQUIDITY

Liquidity is adequate, supported by sufficient availability under Southwest Gas' \\$300 million five-year revolving credit facility maturing in March 2020. Southwest Gas also has an uncommitted \\$50 million commercial paper (CP) program, which is backstopped by the revolving credit facility. As of March 31, 2015, there were no borrowings or CP outstanding, leaving a full \\$300 million of availability.

Southwest Gas keeps sufficient cash on hand to fund its daily business needs and had \\$38 million of unrestricted cash at March 31, 2015.

Upcoming debt maturities are manageable with \\$25 million of unsecured 7.59% medium term notes (MTNs) maturing in January 2017 and \\$125 million of unsecured 4.45% debentures maturing in December 2020.

Centuri is self-funding and maintains access to liquidity through its \\$300 million secured revolving credit facility, which expires in October 2020. Centuri had \\$220 million of borrowings outstanding as of March 31, 2015, leaving \\$80 million of availability. Centuri assets securing the facility at March 31, 2015 totalled \\$447 million.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following ratings:

Southwest Gas Corporation
--Long-Term IDR at 'A-';
--Senior Unsecured Debt at 'A';
--Industrial Development Revenue Bonds at 'A';
--Short-Term IDR at 'F2';
--Commercial Paper at 'F2'.

The Rating Outlook is Stable.