Page 24 - SWGas Annual Report 2015

Gas Price Volatility Mitigation
Regulators in Southwest’s service territories have encouraged Southwest to take proactive steps to mitigate price
volatility to its customers. To accomplish this, Southwest periodically enters into fixed-price term contracts and
Swaps under its collective volatility mitigation programs for a portion (up to 25% in the Arizona and California
jurisdictions) of its annual normal weather supply needs. For the 2015/2016 heating season, contracts contained in
the fixed-price portion of the supply portfolio ranged from slightly under $3 to approximately $4.40 per dekatherm.
Southwest makes natural gas purchases not covered by fixed-price contracts under variable-price contracts with
firm quantities, and on the spot market. The contract price for these contracts is determined at the beginning of
each month to reflect that month’s published first-of-month index price. The contract price of commitments to
purchase gas at daily market prices is based on a published daily price index. In either case, the index price is not
published or known until the purchase period begins. In late 2013, the Company suspended fixed-for-floating-
index-price swaps and fixed-price purchases pursuant to the Volatility Mitigation Program (“VMP”) for its Nevada
service territories. The Company evaluates, on a quarterly basis, the suspension of Nevada VMP purchases in light
of prevailing market fundamentals and regulatory conditions.

Holding Company Reorganization
In 2015, the Board of Directors (“Board”) of the Company authorized management to evaluate and pursue a holding
company reorganization to provide further separation between regulated and unregulated businesses, and to
provide additional financing flexibility. Regulatory applications for preapproval of the reorganization were filed with
the ACC, the CPUC, and the PUCN in October 2015. In January 2016, approval was received by the CPUC, but
approvals by the ACC and the PUCN are still pending. The reorganization is subject to approval by the
aforementioned state regulatory commissions, consents from various third parties, and final Board approval.
Subject to such conditions, the reorganization could become effective in the second half of 2016. In this event,
each outstanding share of Southwest Gas common stock would automatically convert into a share of stock in the
holding company, on a one-for-one basis.

Capital Resources and Liquidity
Over the past three years, cash on hand and cash flows from operations have generally provided the majority of
cash used in investing activities (primarily construction expenditures and property additions). Certain pipe
replacement work was accelerated during these years to take advantage of bonus depreciation tax incentives and
to fortify system integrity and reliability. During the same three-year period, the Company was able to establish
long-term cost savings from debt refinancing and strategic debt redemptions. In addition, in March 2015, the
Company filed an automatic shelf registration statement for the offer and sale of up to $100 million of its common
stock for general corporate purposes and for the noted investment activities, refer to Note 6 – Common Stock and the
discussion below. The Company’s capitalization strategy is to maintain an appropriate balance of equity and debt
to maintain strong investment-grade credit ratings which should minimize interest costs. In December 2015, the
Protecting Americans from Tax Hikes Act of 2015 (“PATH Act”) was enacted extending the 50% bonus depreciation
tax deduction provided for by earlier legislation for qualified property acquired or constructed and placed in-service
during 2015 (and additional years as noted below) as well as other tax deductions, credits, and incentives through
2016. See Bonus Depreciation for more information.

Cash Flows
Operating Cash Flows. Cash flows provided by consolidated operating activities increased $200.7 million
between 2015 and 2014. The improvement in operating cash flows was primarily attributable to temporary
increases from working capital components overall (notably the collection of deferred purchased gas costs).

Southwest Gas Corporation