Page 28 - SWGas Annual Report 2015

The Company’s senior unsecured long-term debt rating from Moody’s Investors Service, Inc. (“Moody’s”) is A3 with
a stable outlook as reaffirmed in January 2016. Moody’s debt ratings range from Aaa (highest rating possible) to C
(lowest quality, usually in default). Moody’s applies an A rating to obligations which are considered upper-medium
grade obligations with low credit risk. A numerical modifier of 1 (high end of the category) through 3 (low end of the
category) is included with the A to indicate the approximate rank of a company within the range.

The Company’s senior unsecured ratings including IDRBs from Fitch Ratings (“Fitch”) is A (with a stable outlook) as
reaffirmed in July 2015. Fitch debt ratings range from AAA (highest credit quality) to D (defaulted debt obligation).
The Fitch rating of A indicates low default risk and a strong ability to pay financial commitments. The modifiers “+”
or “-” may be appended to a rating to denote relative status within major rating categories. Such suffixes are not
added to the ‘AAA’ obligation rating category, or to corporate finance obligation ratings in the categories below
‘CCC’.

A securities rating is not a recommendation to buy, sell, or hold a security and is subject to change or withdrawal at
any time by the rating agency. The foregoing securities ratings are subject to change at any time in the discretion
of the applicable ratings agency. Numerous factors, including many that are not within the Company’s control, are
considered by the ratings agencies in connection with assigning securities ratings.

No debt instruments have credit triggers or other clauses that result in default if Company bond ratings are lowered
by rating agencies. Certain Company debt instruments contain securities ratings covenants that, if set in motion,
would increase financing costs if debt ratings deteriorated. Certain debt instruments also have leverage ratio caps
and minimum net worth requirements. At December 31, 2015, the Company is in compliance with all of its
covenants. Under the most restrictive of the covenants, the Company could issue approximately $2.2 billion in
additional debt and meet the leverage ratio requirement. The Company has at least $1 billion of cushion in equity
relating to the minimum net worth requirement.

Certain Centuri debt instruments have leverage ratio caps and fixed charge ratio coverage requirements. At
December 31, 2015, Centuri is in compliance with all of its covenants. Under the most restrictive of the covenants,
Centuri could issue over $75 million in additional debt and meet the leverage ratio requirement. Centuri has at
least $15 million of cushion relating to the minimum fixed charge ratio coverage requirement. Centuri’s revolving
credit and term loan facility is secured by underlying assets of the construction services segment.

Inflation
Inflation can impact the Company’s results of operations. Natural gas, labor, employee benefits, consulting, and
construction costs are the categories most significantly impacted by inflation. Changes to the cost of gas are
generally recovered through PGA mechanisms and do not significantly impact net earnings. Labor and employee
benefits are components of the cost of service, and construction costs are the primary component of utility rate
base. In order to recover increased costs, and earn a fair return on rate base, general rate cases are filed by
Southwest, when deemed necessary, for review and approval by regulatory authorities. Regulatory lag, that is, the
time between the date increased costs are incurred and the time such increases are recovered through the
ratemaking process, can impact earnings. See Rates and Regulatory Proceedings for a discussion of recent rate case
proceedings.

Southwest Gas Corporation