While second quarter results were essentially flat when excluding nonrecurring items, the continuing moderation of growth in Nevada and Arizona challenges Las Vegas, NV-based Southwest Gas Corp. to fine tune its strategy for maximizing its regulatory climate and gaining rate changes that minimize weather and seasonal impacts on its rates. Southwest reported a loss of $337,000, or 1 cent/share, for the second quarter Monday, compared with profits of $3.7 million, or 9 cents/share for the same period last year.
With rate cases pending or expected to be filed later in the year in the three states where Southwest operates — Arizona, California and Nevada — CEO Jeff Shaw said for the 12 months ended last June 30, the natural gas-only utility added 57,000 customers, or an increase of 3%, compared with 71,000 and 81,000 new customers in the comparable period for 2006 and 2005, respectively.
“We expect this more moderate level of growth to continue through the second half of 2007,” said Shaw, although he reminded financial analysts on a conference call Wednesday that Southwest remains one of the fastest growing utilities in the United States with a total of more than 1.8 million meters served. “We remain well above industry growth averages; in fact, as of June 30, we have 61,700 builder commitments, indicating they have met with us and contractually signed obligations to build with gas some time in the near future.”
And every census survey confirms that the greater U.S. Southwest will be a growth area, Shaw said. As an example, he said the current growth and planned new developments along the Las Vegas Strip call for 40,000 added hotel rooms in the “near term” and the company doesn’t see anything dissimilar in the Arizona region.
With growth being a given, and continued capital expenditures in the $250 million to $350 million range annually, including completion of a total transition to the use of electronic meters, Southwest’s major strategic focus will be on what Shaw called “improving the adequacy of design of rates.” Ideally, the utility would like to see Nevada and Arizona shift away from “historic” ratemaking (based on past, actual costs) to the forward-looking “test year” ratemaking as it exists in California.
“Filing rate cases in a timely fashion is something this company is going to have to focus on on an ongoing basis,” Shaw said, “and this should help both ratepayers and investors.”
In Arizona, Southwest could file for a general rate case as early as this (third) quarter, Shaw said, noting that an ongoing analysis of the potential case is proceeding. In California, the utility received its attrition allowance for this year, boosting rates by $2.7 million effective last January, and it will file a general rate case later this year.
In Nevada, Southwest has not received rate relief since 2004, and expects “sometime in the not too distant future” to file a general rate application, but Shaw said the timing cannot be determined right now.
Changes in regulators and laws in Nevada have given Southwest reason to pause, according to Shaw. A new Nevada law mandates the Nevada Public Utilities Commission (PUC) to “promote and take action on energy conservation while removing any financial disincentives for the utilities that might keep them from supporting conservation measures,” Shaw said. The PUC has opened a proceeding on the new law, and Southwest will have to work through that before it files any new rate cases at the PUC.
“We’re hopeful we can make additional progress in Nevada in improving our rate design,” said Shaw, noting that the PUC members have changed with long-time member and Chairman Don Soderberg resigning last month, and Gov. Jim Gibbons appointing Samuel Allen Thompson, a Nevada Transportation Authority member, to the PUC and elevating existing Commissioner Jo Ann Kelly to the chair of the commission. A third appointee of former Gov. Kenny Guinn’s, Rebecca Wagner, remains on the three-member panel.
Shaw said that in past years Southwest Gas has been asked by regulators in each of the states in which it operates to improve the utility’s financial position, and he contends that has been done, with improvements in debt-to-cash flow (56% in June 30, 2006 vs. 53.3% for this past June 30) and in credit ratings. “All our credit metrics have improved,” he said.
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