Southwest Gas Holdings, Inc. -- Moody's downgrades Southwest Gas Corporation and Southwest Gas Holdings; outlooks stable

Rating Action: Moody's downgrades Southwest Gas Corporation and Southwest Gas Holdings; outlooks stableGlobal Credit Research - 29 Jan 2021Approximately $2.0 billion of debt securities affectedNew 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.OutlookThe 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 RATINGSFactors that could lead to an upgradeFor 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 downgradeA 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 Baa1Outlook Actions:..Issuer: Southwest Gas Corporation....Outlook, Changed To Stable From Negative..Issuer: Southwest Gas Holdings, Inc.....Outlook, Changed To Stable From NegativeSouthwest 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 DISCLOSURESFor 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-2020Please 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 © 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.CREDIT RATINGS ISSUED BY MOODY'S CREDIT RATINGS AFFILIATES ARE THEIR CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY’S (COLLECTIVELY, “PUBLICATIONS”) MAY INCLUDE SUCH CURRENT OPINIONS. MOODY’S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT OR IMPAIRMENT. SEE APPLICABLE MOODY’S RATING SYMBOLS AND DEFINITIONS PUBLICATION FOR INFORMATION ON THE TYPES OF CONTRACTUAL FINANCIAL OBLIGATIONS ADDRESSED BY MOODY’S CREDIT RATINGS. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS, NON-CREDIT ASSESSMENTS (“ASSESSMENTS”), AND OTHER OPINIONS INCLUDED IN MOODY’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY’S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY’S ANALYTICS, INC. AND/OR ITS AFFILIATES. MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY’S ISSUES ITS CREDIT RATINGS, ASSESSMENTS AND OTHER OPINIONS AND PUBLISHES ITS PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS, AND PUBLICATIONS ARE NOT INTENDED FOR USE BY RETAIL INVESTORS AND IT WOULD BE RECKLESS AND INAPPROPRIATE FOR RETAIL INVESTORS TO USE MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS OR PUBLICATIONS WHEN MAKING AN INVESTMENT DECISION. IF IN DOUBT YOU SHOULD CONTACT YOUR FINANCIAL OR OTHER PROFESSIONAL ADVISER.ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW, AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY’S PRIOR WRITTEN CONSENT.MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS ARE NOT INTENDED FOR USE BY ANY PERSON AS A BENCHMARK AS THAT TERM IS DEFINED FOR REGULATORY PURPOSES AND MUST NOT BE USED IN ANY WAY THAT COULD RESULT IN THEM BEING CONSIDERED A BENCHMARK.All information contained herein is obtained by MOODY’S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided “AS IS” without warranty of any kind. MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY’S is not an auditor and cannot in every instance independently verify or validate information received in the rating process or in preparing its Publications.To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability to any person or entity for any indirect, special, consequential, or incidental losses or damages whatsoever arising from or in connection with the information contained herein or the use of or inability to use any such information, even if MOODY’S or any of its directors, officers, employees, agents, representatives, licensors or suppliers is advised in advance of the possibility of such losses or damages, including but not limited to: (a) any loss of present or prospective profits or (b) any loss or damage arising where the relevant financial instrument is not the subject of a particular credit rating assigned by MOODY’S.To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability for any direct or compensatory losses or damages caused to any person or entity, including but not limited to by any negligence (but excluding fraud, willful misconduct or any other type of liability that, for the avoidance of doubt, by law cannot be excluded) on the part of, or any contingency within or beyond the control of, MOODY’S or any of its directors, officers, employees, agents, representatives, licensors or suppliers, arising from or in connection with the information contained herein or the use of or inability to use any such information.NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY CREDIT RATING, ASSESSMENT, OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY’S IN ANY FORM OR MANNER WHATSOEVER.Moody’s Investors Service, Inc., a wholly-owned credit rating agency subsidiary of Moody’s Corporation (“MCO”), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by Moody’s Investors Service, Inc. have, prior to assignment of any credit rating, agreed to pay to Moody’s Investors Service, Inc. for credit ratings opinions and services rendered by it fees ranging from $1,000 to approximately $5,000,000. MCO and Moody’s Investors Service also maintain policies and procedures to address the independence of Moody’s Investors Service credit ratings and credit rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold credit ratings from Moody’s Investors Service and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys.com under the heading “Investor Relations — Corporate Governance — Director and Shareholder Affiliation Policy.”Additional terms for Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY’S affiliate, Moody’s Investors Service Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody’s Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intended to be provided only to “wholesale clients” within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY’S that you are, or are accessing the document as a representative of, a “wholesale client” and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to “retail clients” within the meaning of section 761G of the Corporations Act 2001. MOODY’S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors.Additional terms for Japan only: Moody's Japan K.K. (“MJKK”) is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody’s Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody’s SF Japan K.K. (“MSFJ”) is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally Recognized Statistical Rating Organization (“NRSRO”). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any credit rating, agreed to pay to MJKK or MSFJ (as applicable) for credit ratings opinions and services rendered by it fees ranging from JPY125,000 to approximately JPY550,000,000.MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements. ​