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Southwest Gas Corp. Reports Operating Results (10-Q)
Posted by: gurufocus (IP Logged)
Date: November 8, 2011 02:28PM

Southwest Gas Corp. (SWX) filed Quarterly Report for the period ended 2011-09-30. Southwest Gas Corp. has a market cap of $1.84 billion; its shares were traded at around $40.02 with a P/E ratio of 15.4 and P/S ratio of 1. The dividend yield of Southwest Gas Corp. stocks is 2.6%. Southwest Gas Corp. had an annual average earning growth of 1.9% over the past 10 years.

Highlight of Business Operations:

On a seasonally adjusted basis as of September 30, 2011, Southwest had 1,836,000 residential, commercial, industrial, and other natural gas customers, of which 987,000 customers were located in Arizona, 667,000 in Nevada, and 182,000 in California. Residential and commercial customers represented over 99% of the total customer base. During the twelve months ended September 30, 2011, 54% of operating margin was earned in Arizona, 35% in Nevada, and 11% in California. During this same period, Southwest earned 86% of its operating margin from residential and small commercial customers, 4% from other sales customers, and 10% from transportation customers. These general patterns are expected to remain materially consistent for the foreseeable future.

The items discussed in this Executive Summary are intended to provide an overview of the results of the Company’s operations. As needed, certain items are covered in greater detail in later sections of management’s discussion and analysis. As reflected in the table below, the natural gas operations segment accounted for an average of 86% of twelve-month-to-date consolidated net income over the past two years. As such, management’s discussion and analysis is primarily focused on that segment. Natural gas sales are seasonal, peaking during the winter months; therefore, results of operations for interim periods are not necessarily indicative of the results for a full year.

After several weeks of negotiations, a majority of the parties agreed to a settlement, which was filed with the ACC in July 2011. In addition to Southwest, parties supporting the settlement include the ACC Staff, the Arizona Community Action Association, the Arizona Investment Council, the Natural Resources Defense Council, and the Southwest Energy Efficiency Project. The Residential Utility Consumer Office and Tucson Electric Power Company are not parties to the agreement. Two options were presented in the settlement: one providing for partial decoupling (Alternative A) and one with a full decoupling provision (Alternative B). Alternative A would include a $54.9 million revenue increase, or 6.95%, with a 9.75% return on common equity. Rate design improvements would include adoption of a weather normalization provision along with a “lost fixed-cost recovery mechanism” which would hold the Company financially harmless from reduced sales associated with conservation and energy efficiency programs. Alternative B would include a $52.6 million revenue increase, or 6.66%, with a 9.5% return on common equity. This option would allow for monthly weather normalization and an annual true-up for any non-weather margin variances from authorized amounts per customer. If approved, Alternative B would also require a rate case moratorium, preventing Southwest from filing a general rate case prior to April 2016. Hearings on the proposed settlement were held during the summer and a decision from the ACC is expected by the end of the year. The settlement recommends that new rates be placed in effect by January 2012. Management cannot predict whether either settlement alternative will be approved by the ACC or the timing of rate relief.

Investing Cash Flows. Net cash used in consolidated investing activities increased $128 million in the first nine months of 2011 as compared to the same period in 2010. The increase was primarily due to additional construction expenditures, including routine and accelerated (to take advantage of bonus depreciation tax incentives) pipe replacement, and equipment purchases by NPL due to increased replacement construction work of its customers. In addition, 2010 included a draw-down of funds, restricted for construction activities, associated with an industrial development revenue bond issuance in 2009. Similar draw-downs to fund construction did not occur in 2011.

The following table sets forth the ratios of earnings to fixed charges for the Company. Due to the seasonal nature of the Company’s business, these ratios are computed on a twelve-month basis:

Read the The complete Report

Stocks Discussed: SWX,
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