Page 12 - SWGas Annual Report 2015

Management’s Discussion and Analysis of Financial Condition and Results of
Operations

About Southwest Gas Corporation
Southwest Gas Corporation and its subsidiaries (the “Company”) consist of two business segments: natural gas
operations (“Southwest” or the “natural gas operations” segment) and construction services.

Southwest is engaged in the business of purchasing, distributing, and transporting natural gas for customers in
portions of Arizona, Nevada, and California. Southwest is the largest distributor of natural gas in Arizona, selling
and transporting natural gas in most of central and southern Arizona, including the Phoenix and Tucson
metropolitan areas. Southwest is also the largest distributor of natural gas in Nevada, serving the Las Vegas
metropolitan area and northern Nevada. In addition, Southwest distributes and transports natural gas for customers
in portions of California, including the Lake Tahoe area and the high desert and mountain areas in San Bernardino
County.

As of December 31, 2015, Southwest had 1,956,000 residential, commercial, industrial, and other natural gas
customers, of which 1,045,000 customers were located in Arizona, 720,000 in Nevada, and 191,000 in California.
Residential and commercial customers represented over 99% of the total customer base. During 2015, 55% of
operating margin was earned in Arizona, 34% in Nevada, and 11% in California. During this same period, Southwest
earned 85% of its operating margin from residential and small commercial customers, 4% from other sales
customers, and 11% from transportation customers. These general patterns are expected to remain materially
consistent for the foreseeable future.

Southwest recognizes operating revenues from the distribution and transportation of natural gas (and related
services) to customers. Operating margin is the measure of gas operating revenues less the net cost of gas sold.
Management uses operating margin as a main benchmark in comparing operating results from period to period.
The principal factors affecting changes in operating margin are general rate relief (including the impact of
infrastructure trackers) and customer growth. All of Southwest’s service territories have decoupled rate structures,
which are designed to eliminate the direct link between volumetric sales and revenue, thereby mitigating the
impacts of weather variability and conservation on margin, allowing the Company to aggressively pursue energy
efficiency initiatives.

Centuri Construction Group, Inc. (“Centuri” or the “construction services” segment) is a full-service underground
piping contractor that primarily provides utility companies with trenching and installation, replacement, and
maintenance services for energy distribution systems, and develops industrial construction solutions. In October
2014, the Company acquired three privately held construction businesses, primarily based in Canada. The financial
information contained herein only includes the results of the acquired entities since October 2014. Centuri operates
in 20 major markets in the United States (primarily under the NPL name) and in 2 major markets in Canada (under
the Link-Line and W.S. Nicholls names). Construction activity is cyclical and can be significantly impacted by
changes in weather, general and local economic conditions (including the housing market), interest rates,
employment levels, job growth, the equipment resale market, pipe replacement programs of utilities, and local and
federal regulation (including tax rates and incentives). During the past few years, utilities have implemented or
modified pipeline integrity management programs to enhance safety pursuant to federal and state mandates.
These programs, coupled with recent bonus depreciation tax deduction incentives, have resulted in a significant
increase in multi-year pipeline replacement projects throughout the U.S. Generally, revenues are lowest during the

Southwest Gas Corporation