Page 20 - SWGas Annual Report 2015

Conservation and Energy Efficiency. As part of the ARA filing, Southwest requested recovery of energy efficiency
and conservation development and implementation costs, including promotions and incentives for various
programs, as originally approved for deferral by the PUCN effective November 2009. While recovery of these costs
was approved as part of the most recent general rate case made effective May 2012, amounts incurred subsequent
to the effective date continued to be deferred. Approved rates became effective January 2016 and will result in
annualized margin increases of $2 million in northern Nevada and $8.7 million in southern Nevada, and also
includes amounts representing expected program expenditures for 2016. There is, however, no anticipated impact
to net income overall from these recoveries as the amounts collected through customer rates will also be reflected
as higher amortization expense.

Expansion and Economic Development Legislation. In February 2015, legislation (“SB 151”) was introduced in
Nevada directing the PUCN to adopt regulations authorizing natural gas utilities to expand their infrastructure
consistent with a program of economic development. This includes providing natural gas service to unserved and
underserved areas in Nevada, as well as attracting and retaining utility customers and accommodating the
expansion of existing business customers. SB 151 was signed into law in May 2015. The draft regulations were
reviewed by the Legislative Council Bureau and final regulations were approved by the PUCN in January 2016.
Southwest is currently assessing and prioritizing potential areas to extend service to based on the legislation and
regulations. The process will require the identification of projects, advance approval requests, and development of
rates for investment in excess of allowable investment.

California Jurisdiction
General Rate Case. In December 2012, Southwest filed a general rate case application, based on a 2014 future
test year, with the California Public Utilities Commission (“CPUC”) requesting an annual revenue increase of
approximately $11.6 million for its California rate jurisdictions. Southwest sought to continue a Post-Test Year
(“PTY”) Ratemaking Mechanism, which allows for annual attrition increases. The application included a request to
establish a Customer-Owned Yardline (“COYL”) program and an Infrastructure Reliability and Replacement
Adjustment Mechanism (“IRRAM”) to facilitate and complement projects involving the enhancement and
replacement of gas infrastructure, promoting timely cost recovery for qualifying non-revenue producing capital
expenditures.

In June 2014, the CPUC issued a final decision in this proceeding (“CPUC decision”), authorizing a $7.1 million
overall revenue increase and PTY attrition increases of 2.75% annually for 2015 to 2018. A depreciation reduction
of $3.1 million, as requested by Southwest, was also approved. The CPUC decision also provides for a two-way
pension balancing account to track differences between authorized and actual pension funding amounts, a limited
COYL inspection program for schools, and an IRRAM to recover the costs associated with the new limited COYL
program. New rates associated with the CPUC decision were effective June 2014.

In November 2015, Southwest made its annual PTY attrition filing, requesting annual revenue increases of
$1.8 million in southern California, $499,000 in northern California and $249,000 for South Lake Tahoe. This filing
was approved in December 2015 and rates were made effective in January 2016. At the same time, rates were
updated to recover, the regulatory asset associated with the revenue decoupling mechanism, or margin tracker.
The rate adjustment is expected to recover approximately $18 million of the associated regulatory asset balance
during 2016. There is no impact to net income overall from margin tracker recoveries; however, there is a favorable
impact to cash flows as the regulatory asset balance is recovered. In addition to the PTY attrition and margin
tracking mechanism approvals, the CPUC also approved an adjustment to recover costs associated with

Southwest Gas Corporation