Page 18 - SWGas Annual Report 2015

in production inefficiencies and an increase in total estimated project costs. At the end of the first quarter, total
project costs were estimated to exceed contract revenues by $5.6 million, and by the end of the third quarter the
estimated overrun was $7.7 million. Change orders were being negotiated during the construction period to offset
the additional costs. In situations where losses on a project are possible, accounting rules and adopted policies
require that future costs to complete the project be estimated and recognized currently, but potential incremental
revenue to cover such costs is recognized only if and when change orders are formally approved. In October,
Centuri and the general contractor agreed to mediation to attempt to resolve open change orders. In December, a
final settlement of approximately $4 million was reached and the overall loss on this project was reduced to
$3.4 million.

Depreciation and amortization expense increased $7.8 million between 2015 and 2014 due primarily to the
incremental amortization of finite-lived intangible assets recognized from the acquisition ($3 million) and
incremental depreciation from the acquired companies ($4 million).

Net interest deductions were $7.8 million in 2015 compared to $3.8 million in 2014. The increase was due primarily
to interest expense and amortization of debt issuance costs associated with the $300 million secured revolving
credit and term loan facility entered into coincident with the acquisition.

During the past several years, construction services has focused its efforts on obtaining pipe replacement work
under both blanket contracts and incremental bid projects. For 2015 and 2014, revenues from replacement work
were 68% and 67%, respectively, of total revenues. Governmental pipeline safety-related programs and U.S. bonus
depreciation tax incentives resulted in many utilities undertaking multi-year distribution pipe replacement projects.

2014 vs. 2013
Contribution to consolidated net income from construction services for 2014 increased $3.1 million compared to
2013.

Revenues increased $89.0 million, or 14%, when compared to 2013 primarily due to additional pipe replacement
work in 2014 and the inclusion of the acquired companies’ revenues ($54.3 million) beginning in the fourth quarter
of 2014. Construction revenues include Centuri contracts with Southwest totaling approximately $92 million in 2014
and $88 million in 2013.

Construction expenses increased $74.6 million, or 13%, due primarily to additional pipe replacement work in 2014
and the inclusion of the acquired companies’ construction costs ($49.4 million). General and administrative
expense (included in construction expenses) increased $9.5 million, including $3.7 million from the acquired
companies, acquisition costs ($5 million), and changes that were implemented to match the increased size of the
business and its complexity. Offsetting these increases was approximately $4 million that was recorded in 2013
associated with a legal settlement, which was resolved in February 2014. Gains on sale of equipment (reflected as
an offset to construction expenses) were $6.2 million and $4.1 million in 2014 and 2013, respectively. Depreciation
and amortization expense increased $5.9 million between 2014 and 2013 due to the amortization on finite-lived
intangible assets recognized from the acquisition ($1.5 million) and additional equipment purchased to support
growth in the volume of work being performed.

Net interest deductions were $3.8 million in 2014 compared to $1.1 million in 2013. The increase was due primarily
to interest expense and amortization of debt issuance costs associated with the $300 million secured revolving
credit and term loan facility entered into coincident with the acquisition.

Southwest Gas Corporation