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Southwest Gas looking to close gap between actual, allowed returns on equity

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Essential Energy Insights - February 2021

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Six trends shaping the industries and sectors we cover in 2021

Six trends shaping the industries and sectors we cover in 2021


Southwest Gas looking to close gap between actual, allowed returns on equity

Southwest Gas Holdings Inc. executives expect recent rate hikes and ongoing capital spending to push return on equity from the company's gas operations closer to maximum allowed returns, officials said on an Aug. 9 earnings call.

For the 12 months that ended June 30, the Southwest Gas Corp. gas operations earned an 8.1% return on equity, even though the company had a 9.5% authorized ROE in Arizona, a 10.1% authorized ROE in California, and 9.3% and 10% authorized ROEs in its Nevada service territories.

Roy Centrella, Southwest Gas Holdings' senior vice president and CFO, said on the call that the utility is working to close the gap between allowed and actual returns. Centrella said Southwest Gas has already seen positive impact from recently updated rates in Arizona and rate mechanisms that cover the company's infrastructure upgrades should help in the coming years.

"We would expect to see ... the return grow more closely to our authorized, particularly with the infrastructure tracker mechanisms," Centrella said. "While we still might be challenged to reach the overall authorized return in the short period of time, in the long run certainly our goal is to shrink that gap between authorized and [actual] rate of returns, and these kind of mechanisms have a direct impact on that."

When parent company Southwest Gas Holdings reported earnings for the first quarter, it said gas operations had earned a 7.7% ROE for the 12 months that ended March 31. The 8.1% 12-month ROE that Southwest Gas was able to report at the end of the second quarter is already an improvement, Centrella said, and he expects that to continue.

The company's rate base was worth about $2.9 billion in 2016. With aggressive capital spending planned in the next few years, Southwest Gas is targeting a rate base value of $3.8 billion by the end of 2019, representing a compound annual growth rate of about 9%. Bolstering rate base should also help boost earnings, Centrella said.

Southwest Gas has a few rate cases coming up, with plans to file in Nevada in the first half of 2018 and in California in September 2019. These should turn the company's capital spending into earnings growth by allowing the company to update its rate base figures with the commissions and collect earnings based on the updated values.

"When you look at the rate base growth, that will ultimately translate into rate relief and earnings growth," Centrella said. "As you can imagine, there's not a certainty to the timing as to when that'll happen. ... I think what you would see is a trend that should over time equate to 9%, but it's hard for us to put the timing out there."

Southwest Gas Holdings on Aug. 7 reported consolidated net income of $17.9 million, or 37 cents per share, in the second quarter, up from $8.9 million, or 19 cents per share, in the prior-year period.