Page 16 - SWGas Annual Report 2015

Other income, which principally includes returns on COLI policies (including recognized net death benefits) and
non-utility expenses, decreased $4.9 million between 2015 and 2014. The current year reflects a loss of $500,000
associated with COLI policy cash surrender value decreases, while the prior year included $5.3 million of COLI-
related income.

Net interest deductions decreased $4.2 million between years. The decrease primarily resulted from the
redemptions of $65 million 5.25% Series A IDRBs in November 2014, $31.2 million 5.00% 2004 Series B IDRBs in
May 2015, and $20 million 5.25% 2003 Series D IDRBs in September 2015, partially offset by increased interest
expense on PGA balances.

2014 vs. 2013
Contribution to consolidated net income from natural gas operations decreased by $7.3 million between 2014 and
2013. Increases in net interest deductions, as well as a decrease in other income, offset improved operating
income.

Operating margin increased $13 million between years including a combined $8 million of rate relief in the
California jurisdiction and Paiute Pipeline Company. New customers contributed $8 million of the increase during
2014. Operating margin associated with customers outside the decoupling mechanisms and other miscellaneous
revenues declined by $3 million.

Operations and maintenance expense decreased $1.2 million, or less than 1%, between years primarily due to
declines in employee-related costs, partially offset by a $5 million legal accrual in the first quarter of 2014 and
higher general costs. A $9 million reduction in pension costs and a $3 million reduction in employer-sponsored
medical costs, due to positive claims experience between years, resulted in a favorable impact to 2014 operations
and maintenance expense of approximately $9.5 million.

Depreciation and amortization expense increased $10.3 million, or 5%. Average gas plant in service for 2014
increased $297 million, or 6%, as compared to the prior year. This was attributable to pipeline capacity
reinforcement work, franchise requirements, scheduled and accelerated pipe replacement activities, and new
business, partially offset by depreciation rate decreases resulting from the most recent California general rate case
decision. Amortization primarily associated with software-related intangible assets increased approximately $1.3
million. Amortization associated with the recovery of regulatory assets increased approximately $1.2 million overall
(primarily due to Arizona demand-side management, or “DSM,” programs).

Taxes other than income taxes increased $1.7 million between years due to higher property taxes in Arizona and
Nevada.

Other income decreased $5.1 million between 2014 and 2013. Cash surrender values of COLI policies (including net
death benefits recognized) increased $5.3 million in 2014, while COLI-related income was $12.4 million in the prior
year. Interest income increased $2.1 million between years, as under-collected PGA balances and the associated
interest thereon rose significantly in 2014.

Net interest deductions increased $5.7 million between years, primarily due to the issuance of $250 million of long-
term debt in the fourth quarter of 2013. The increase was mitigated by higher interest expense in 2013 associated
with PGA balances, which were in an over-collected status for the majority of 2013.

Southwest Gas Corporation