--Long-term Issuer Default Rating (IDR) at 'A-';
--Senior unsecured rating including industrial development revenue bonds at 'A';
-Short-term IDR at 'F2';
-Commercial Paper at 'F2'.
The Rating Outlook is Stable. Approximately
The ratings reflect strong operational performance at the utility and constructive rate design across SWX's service territory including revenue decoupling and purchase gas agreements (PGAs) in all jurisdictions. The ratings also consider SWX's solid liquidity position, low leverage, minimal long-term debt maturities and improving service territory economics, particularly in
Stable Rating Outlook: The Stable Outlook reflects the relatively predictable earnings and cash flow from SWX's core natural gas distribution utility and, to a lesser extent, its non-regulated pipeline construction subsidiary,
KEY RATING DRIVERS
--Constructive rate design;
--Solid credit metrics;
--Revenue decoupling adopted in all jurisdictions;
--AZ general rate case (GRC) moratorium until
--Large capex program.
Solid Credit Metrics: For the latest 12 months (LTM) ending
Going forward, Fitch expects EBITDAR-to-interest coverage ratios to remain above 6x, and FFO adjusted leverage to remain below 4.0x, through 2016. Fitch's estimated SWX credit metrics reflect a combination of constructive rate design, improved customer growth, a balanced capital structure, and low natural gas prices.
Large Capex Program: SWX's capex program is focused on projects to enhance safety and maintain reliability of its local distribution company (LDC) system and includes significant aging pipe replacement investment. Fitch expects SWX to spend
In light of the large capex program, Fitch estimates that SWX will be modestly FCF negative, funding the vast majority of estimated capex internally. While Fitch conservatively expects SWX's credit metrics to weaken modestly, FFO adjusted leverage is expected to remain below 4.0x through 2016. Fitch anticipates external funding requirements to be financed via a balanced mix of equity and debt.
California GRC : In
Nevada Regulation: In the fourth quarter of 2012, SWX's
As part of its last GRC filing, SWX requested the implementation of an IRM to defer and recover costs associated with up to
AZ Decoupling Adopted: In SWX's last Arizona GRC (2010), SWX's base rates were increased by
Solid Liquidity: As of
The moderation in SWX's
Effective Rate Structures: SWX has been able to minimize its exposure to natural gas price volatility through PGAs in
Fixed Contract Purchases Mitigate Risk: As part of SWX's gas procurement 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 NPL Growth: 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 the LTM ended
NPL contributes a relatively small proportion to consolidated SWX operating results. For the LTM ending
Proposed LNG Facility: In January, SWX filed an application with the ACC seeking preapproval to construct a 233,000 dekatherm liquid natural gas (LNG) facility in southern
Paiute Pipeline Expansion: In February,
What Could Cause Positive Rating Action:
Supportive regulatory outcomes, continued moderate growth, and FFO leverage better than 3.3x-3.5x on a sustained basis could lead to positive credit rating actions from an investor point-of-view.
What Could Cause Negative Rating Action:
An unexpected deterioration in SWX's
Additional information is available at 'www.fitchratings.com'.
--'Rating U.S. Utilities, Power and Gas Companies,
--'Corporate Rating Methodology',
--'Parent and Subsidiary Rating Linkage',
Parent and Subsidiary Rating Linkage
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
Rating U.S. Utilities, Power and Gas Companies (Sector Credit Factors)
Source: Fitch Ratings
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