Fitch Affirms Southwest Gas Corp. & Southwest Gas Capital II's Ratings

Business Wire, Feb 1, 2008

NEW YORK -- Fitch Ratings has affirmed Southwest Gas Corp.'s (SWX) and Southwest Gas Capital II's ratings as follows:

Southwest Gas Corporation (SWX)

--Long-term Issuer Default Rating (IDR) 'BBB';

--Senior unsecured rating 'BBB';

--Short-term IDR 'F2';

--Commercial paper 'F2'.

Southwest Gas Capital II

--Trust Securities 'BBB-'.

The Rating Outlook for the above securities is Stable.

SWX serves over 1.8 million customers in Arizona, Nevada and California including the major metropolitan areas of Las Vegas, Phoenix and Tucson. SWX also owns Paiute Pipeline, an intrastate gas pipeline in northern Nevada, and Northern Pipeline Construction Co., a wholly owned construction subsidiary.

SWX's ratings reflect the strong cash flow, effective purchased gas cost adjustment (PGA) mechanisms, and increased operating efficiencies that the company possesses. The ratings also recognize the operating, regulatory, and financial characteristics associated with SWX's dynamic service territory. Historically, SWX has been faced with escalating operating and capital costs associated with a high growth rate in its major service territories, which require periodic rate relief and can result in moderate regulatory lag. SWX's credit measures can be affected over the short term due to the recovery lag associated with gas supply acquisitions. Gas costs that are incurred in excess of amounts embedded in customer rates are generally deferred and recovered under PGAs. The company uses its bank lines for borrowings to fund gas purchases. In periods of under-recovery, there may be some near-term negative effect on coverage ratios and capital structure.

In August 2007, SWX filed a general rate case in Arizona seeking a $50.2 million revenue increase and rate design changes. SWX's current filing requests rate design changes to separate the recovery of fixed operating costs from the volume of gas sold through increased basic service charges, increased differences in block rates, and margin trackers. If adopted, these rate design changes would minimize the effect of customer conservation on revenues.

Growth in SWX's main service areas is slowing but should continue to be relatively strong, averaging 2% to 3% customer growth in the coming years. Fitch believes that capital expenditures will go down accordingly. The high rate of growth at SWX has exposed the utility to some regulatory risk, particularly in Arizona where regulators have been slower to raise rates to keep up with the growth. A slowdown in growth coupled with a favorable rate decision in SWX's currently pending rate case could be financially beneficial to SWX and allow the company's earnings to catch up somewhat with the amount of capital spent to service its higher than expected growth.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.