Page 21 - SWGas Annual Report 2015

Southwest’s Natural Gas Transmission Pipeline Comprehensive Pressure Testing Implementation Plan
(“Implementation Plan”), effective January 2016. The Implementation Plan involved replacing 7.1 miles of
transmission pipeline in its system, in addition to installing a remote control shut-off valve. This adjustment is
expected to result in an annualized margin increase of $1.7 million during 2016.

Greenhouse Gas (“GHG”) Compliance. California Assembly Bill Number 32 and the regulations promulgated by
the California Air Resources Board (“CARB”), require Southwest, as a covered entity, to comply with all applicable
requirements associated with the California GHG emissions reporting and the California Cap and Trade Program.
The objective of these programs is to reduce California statewide GHG emissions to 1990 levels by 2020.
Southwest must report annual GHG emissions by April of each year and third-party verification of those reported
amounts is required by September of each year. Starting with 2015, the CARB will annually allocate to Southwest a
certain number of allowances based on Southwest’s reported 2011 GHG emissions. Southwest received its
allocation for 2015 in the third quarter of 2014 and for 2016, in the third quarter of 2015. Of those allocated
allowances, Southwest must consign a certain percentage to the CARB for auction. The Company can use any
allocated allowances that remain after consignment, along with allowances it can purchase through CARB auctions
or reserve sales, or through over the counter (“OTC”) purchases with other market participants, to meet its
compliance obligations. The CPUC has issued a decision that provides for the regulatory treatment of the program
costs and there is no expected impact on earnings.

Arizona Jurisdiction
General Rate Case Status. The most recent general rate case decision from the Arizona Corporation Commission
(“ACC”) in Southwest’s Arizona rate jurisdiction was made effective in January 2012 and authorized a return on
common equity of 9.50%, a fair value rate of return of 6.92% and a capital structure consisting of 47.7% long-term
debt and 52.3% common equity, relative to an authorized original cost rate base of $1.07 billion. That ACC decision
also approved a full revenue decoupling mechanism with a monthly weather adjuster. At that time, Southwest
agreed not to file a general rate case prior to April 30, 2016. Given the period covered by the moratorium,
Southwest is currently preparing its rate case filing and intends to request approval to continue its decoupled rate
design, expand its currently approved infrastructure recovery program, and update its cost of service, including an
increase in rate base of approximately 22-24% to reflect various investments Southwest has made since its last rate
case to enhance its distribution system. Southwest also intends to include a depreciation study in compliance with
the most recent general rate case decision to update depreciation rates. Southwest anticipates filings its general
rate case in the second quarter of 2016, shortly after the “stay-out” period has expired.

LNG (“Liquefied Natural Gas”) Facility. In January 2014, Southwest filed an application with the ACC seeking
preapproval to construct, operate and maintain a 233,000 dekatherm LNG facility in southern Arizona and to
recover the actual costs, including the establishment of a regulatory asset. This facility is intended to enhance
service reliability and flexibility in natural gas deliveries in the southern Arizona area by providing a local storage
option, operated by Southwest and connected directly to its distribution system. Southwest requested approval of
the actual cost of the project (including those facilities necessary to connect the proposed storage tank to
Southwest’s existing distribution system). In December 2014, Southwest received an order from the ACC granting
pre-approval of Southwest’s application to construct the LNG facility and the deferral of costs, limited to
$50 million. The authorization to defer costs expires on November 1, 2017 (from which point, expenditures incurred
would not be eligible for deferral) and also requires any unquantified cost savings to be deferred. Any gas costs
incurred that are not related to the initial construction and placement of the facility are to be recovered through the
PGA mechanism. The Company purchased the site for the facility in October 2015 and is preparing the construction

Southwest Gas Corporation