CEO: Area’s growth helped drag SW Gas earnings down

Kevin Rademacher

Friday, May 6, 2005 | 10:53 a.m.

Growth isn't cheap.

And Las Vegas-based Southwest Gas Corp. knows a little bit about growth.

In the 12 months ending March 31, the company added 82,000 customers in its service territory, which includes Nevada, Arizona and parts of California, Southwest Gas Chief Executive Jeffrey Shaw said Thursday at the company's annual shareholders meeting.

Five times in the past decade, the company has reported record annual customer growth, Shaw said. Additionally, U.S. Census Bureau statistics are pointing to 114 percent growth in Nevada between 2000 and 2030. Arizona is expected to experience 109 percent growth and California could see 37 percent.

"Those projections, at least as we see them, have some merit," Shaw said.

That growth means a massive construction effort in order to meet the demand of new homes and new residents. The problem, Shaw told shareholders, is that the current regulatory structure does not allow the company to quickly recover fixed costs, such as construction and maintenance. The resulting "regulatory lag" has dragged down the company's balance sheet to a point that its credit rating -- BBB- -- sits just above junk status.

"Regulatory agencies have historically favored rate design that permits cost recovery based on the quantity of natural gas consumed," Shaw said, adding that unusually warm weather like that during the first quarter of 2005 drags down earnings even more.

"We know that we are going to get harmed when you see 70 degree days in January," he said.

Recent rate-case decisions in California and Nevada helped insulate the utility from weather-related issues. In 2004, the Public Utilities Commission of Nevada increased by 50 cents the fixed charge that all customers pay, regardless of usage. The company also received a declining block rate mechanism that makes the first units of natural gas used by customers more expensive in order to cover a larger share of fixed costs.

Shaw said the company also needs similar rate relief in Arizona, where a case is currently pending.

Should rate relief be denied and the company's credit rating fall to junk status, the result will be a higher cost of capital when the company seeks money to meet the growth.

Still, Shaw conceded that asking for rate adjustments when natural gas prices are soaring is a difficult balancing act for regulators. He also pointed out that Southwest Gas does not make money on the cost of gas, only distribution services.

"It is a tough time," he said. "we are sensitive to our customers' total service, including gas costs ... We think all the steps we are taking right now in the regulatory process have both customer and shareholder benefit."

Also at the meeting, shareholders re-elected 12 members of the company's board of directors.

In what has become an annual event, New York investor and frequent critic of Southwest Gas management Mario Gabelli attempted to place a representative on the company's board of directors.

Gabelli, through several entities, controls more than 8 percent of the company's stock. Michael Smith, a representative of GAMCO, a Gabelli-owned investment firm, nominated Salvatore Zizza from the meeting floor, but the nominee failed to win a seat.

Also approved by shareholder vote was the Audit Committee recommendation of PricewaterhouseCoopers LLP as the company's independent accounting firm.