Approximately $2.0 billion of debt securities affected
New York, January 29, 2021 -- Moody's Investors Service, ("Moody's") downgraded
the senior unsecured rating of Southwest Gas Corporation (Southwest Gas)
to Baa1 from A3 and the Issuer Rating of Southwest Gas Holdings,
Inc. (Southwest Holdings) to Baa2 from Baa1. The rating
outlook for both issuers is stable.
RATINGS RATIONALE
"The ratings downgrade of both Southwest Gas and Southwest Holdings
reflects weakening credit profiles driven by rising debt to fund sustained
high capital expenditures at Southwest Gas and slowly growing operating
cash flow due to tax reform and regulatory lag associated with the recovery
of investments" stated Nana Hamilton, AVP-Analyst.
Southwest Gas' capital expenditures remain robust, with approximately
$700 million planned annually over the next two years, close
to the annual average of about $720 million over the last three
years. The utility intends to finance this capital spending with
operating cash flow and a mix of debt and equity. However,
largely debt financed cash shortfalls over the 2018-2019 period,
together with cash flow that has not kept pace with this higher debt,
have resulted in a deterioration in financial metrics that we expect to
persist. The utility's CFO pre-W/C to debt ratio has
fallen from 20% in 2017 to below 15% in both 2019 and 2020,
and we do not expect it to recover materially in coming years.
The downgrade also reflects regulatory lag in the recovery of costs,
which the utility continues to experience in Arizona, it's
largest regulatory jurisdiction, where rate cases are based on a
historic test year. While the Arizona Corporation Commission (ACC)
allows for post-test year plant (PTYP) adjustments, the application
of PTYP is not consistent. Southwest Gas' most recent rate
case in Arizona [1], filed in May 2019 and finalized in December
2020, was fully litigated and based on a test year ending 31 January
2019 with a six-month PTYP period. The rate proceeding,
delayed due to the coronavirus pandemic, resulted in a rate increase
of $36.7 million and a 46% increase in authorized
rate base to $1.93 billion. However, the utility's
allowed return on equity (ROE) was lowered to a below-industry
average 9.1% from 9.5% and equity capitalization
was lowered to 51.1% from 51.7%, both
credit negatives. Furthermore, while Southwest Gas received
approval to continue its decoupling mechanism, the ACC discontinued
the utility's vintage steel pipe (VSP) replacement surcharge program
first approved in 2016, which we had viewed as a credit positive.
Southwest Gas also had a $23 million rate increase approved in
Nevada [2] in September 2020 based on a 9.25% ROE and
49.26% equity capitalization and has a rate case pending
in its smaller California jurisdiction. These recent and pending
rate increases will not grow the company's cash flow sufficiently,
relative to the forecasted increase in debt, to restore the utility's
credit metrics to levels characteristic of A3 rated utilities.
Over the next few years, we expect Southwest Gas to produce a ratio
of operating cash flow excluding working capital changes (CFO pre-WC)
to debt in the mid-teens.
The downgrade of parent Southwest Holdings is driven by the financial
weakness at Southwest Gas, it's primary subsidiary.
The downgrade also maintains the one-notch rating differential
between the two entities, reflective of the structural subordination
to utility level debt of any debt that may be incurred at Southwest Holdings
as well as the higher risk operations of subsidiary Centuri Construction
Group (Centuri, not rated). Over the next two years,
we project a ratio of CFO pre-WC to debt at Southwest Holdings
of around 18%, higher than the utility due to the additional
cash flow provided to the parent by Centuri.
Outlook
The stable outlooks at Southwest Holdings and Southwest Gas reflect our
expectation that Southwest Gas' regulatory jurisdictions will remain
generally supportive of its credit quality despite the recent credit negative
regulatory developments, and that the utility will reverse the recent
decline in financial metrics and consistently generate a ratio of cash
flow from operations pre-working capital (CFO pre-WC) to
debt in the mid-teens. The stable outlook also assumes that
Southwest Holdings will not increase the overall organization's
business or financial risk with a material expansion of non-utility
operations or the addition of a significant amount of holding company
debt.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Factors that could lead to an upgrade
For Southwest Gas, a rating upgrade could be considered if there
a significant improvement in its regulatory environments that meaningfully
reduces regulatory lag and if key credit metrics improve to levels closer
to historical results, including a ratio of CFO pre-WC to
debt sustained above 17%.
Southwest Holding's rating could be upgraded with an upgrade of
Southwest Gas. Also, if Southwest Holdings meaningfully reduces
business risk associated with unregulated operations and maintains a CFO
pre-WC to debt ratio consistently above 19%, a rating
upgrade could be considered.
Factors that could lead to a downgrade
A rating downgrade could be considered for Southwest Gas if there is a
decline in the supportiveness of its regulatory environments, or
if key credit metrics do not stabilize and improve from recent levels,
including a ratio of CFO pre-WC to debt sustained below 14%.
Southwest Holdings' rating could be downgraded with a downgrade
of Southwest Gas or if its ratio of CFO pre-WC to debt is sustained
below 16%. Furthermore, if the growth of Southwest
Holdings' riskier unregulated operations outpaces utility growth
or if there is a significant increase in parent debt, a rating downgrade
could be possible at Southwest Holdings.
Downgrades:
..Issuer: Southwest Gas Corporation
....Senior Unsecured Medium-Term Note
Program, Downgraded to (P)Baa1 from (P)A3
....Senior Unsecured Regular Bond/Debenture,
Downgraded to Baa1 from A3
....Underlying Senior Unsecured Regular Bond/Debenture,
Downgraded to Baa1 from A3
..Issuer: Southwest Gas Holdings, Inc.
.... Issuer Rating, Downgraded to Baa2
from Baa1
Outlook Actions:
..Issuer: Southwest Gas Corporation
....Outlook, Changed To Stable From
Negative
..Issuer: Southwest Gas Holdings, Inc.
....Outlook, Changed To Stable From
Negative
Southwest Holdings is a diversified utility holding company, conducting
business through regulated natural gas utility operations and unregulated
utility infrastructure services. Its principal subsidiary,
Southwest Gas, is a natural gas local distribution company (LDC),
serving over two million customers in central and southern Arizona,
southern Nevada (including the Las Vegas metropolitan area), northern
Nevada, and Lake Tahoe and areas in San Bernardino County in California.
Southwest Holdings' utility infrastructure services company,
Centuri, not rated, is a full-service underground piping
contractor primarily serving investor owned gas and electric utilities
in the US and Canada.
The principal methodology used in these ratings was Regulated Electric
and Gas Utilities published in June 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1072530.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
ratings in accordance with Moody's rating practices. For ratings
issued on a support provider, this announcement provides certain
regulatory disclosures in relation to the credit rating action on the
support provider and in relation to each particular credit rating action
for securities that derive their credit ratings from the support provider's
credit rating. For provisional ratings, this announcement
provides certain regulatory disclosures in relation to the provisional
rating assigned, and in relation to a definitive rating that may
be assigned subsequent to the final issuance of the debt, in each
case where the transaction structure and terms have not changed prior
to the assignment of the definitive rating in a manner that would have
affected the rating. For further information please see the ratings
tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated
agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that issued the credit rating is available on www.moodys.com.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the UK and is endorsed
by Moody's Investors Service Limited, One Canada Square,
Canary Wharf, London E14 5FA under the law applicable to credit
rating agencies in the UK. Further information on the UK endorsement
status and on the Moody's office that issued the credit rating is
available on www.moodys.com.
REFERENCES/CITATIONS
[1] Arizona Corporation Commission, Docket G-0155lA-19-0055
17-Dec-2020
[2] Public Utilities Commission of Nevada, Docket 20-02023
25-Sep-2020
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Nana Hamilton
Asst Vice President - Analyst
Infrastructure Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Michael G. Haggarty
Associate Managing Director
Infrastructure Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
