Page 30 - SWGas Annual Report 2015

Bonus Depreciation
In December 2015, the PATH Act was enacted extending the 50% bonus depreciation tax deduction 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. The bonus depreciation tax deduction will be phased out over five
years. The PATH Act provides for a 50% bonus depreciation tax deduction in 2015 through 2017, 40% in 2018, 30%
in 2019, and no deduction after 2019. Based on forecasted qualifying construction expenditures, Southwest
estimates the bonus depreciation provision of the PATH Act deferred the payment of approximately $55 million of
federal income taxes for 2015.

Recently Issued Accounting Standards Updates
The Financial Accounting Standards Board (“FASB”) recently issued Accounting Standards Updates related to
revenue recognition, going concern, recognition and measurement of financial instruments, the presentation of
deferred taxes in the balance sheet, net asset value (“NAV”) used as a practical expedient, and the presentation of
debt issuance costs in the balance sheet. See Note 1 – Summary of Significant Accounting Policies for more information
regarding these accounting standards updates and their potential impact on the Company’s financial position,
results of operations, and disclosures.

Application of Critical Accounting Policies
A critical accounting policy is one which is very important to the portrayal of the financial condition and results of a
company, and requires the most difficult, subjective, or complex judgments of management. The need to make
estimates about the effect of items that are uncertain is what makes these judgments difficult, subjective, and/or
complex. Management makes subjective judgments about the accounting and regulatory treatment of many items
and bases its estimates on historical experience and on various other assumptions that it believes to be reasonable
under the circumstances, the results of which form the basis for making judgments. These estimates may change
as new events occur, as more experience is acquired, as additional information is obtained, and as the Company’s
operating environment changes. While management may make many estimates and judgments, many would not
be materially altered, or provide a material impact to the financial statements taken as a whole, if different
estimates, or means of estimation were employed. The following are accounting policies that are deemed critical to
the financial statements of the Company. For more information regarding the significant accounting policies of the
Company, see Note 1 – Summary of Significant Accounting Policies.

Regulatory Accounting
Natural gas operations are subject to the regulation of the Arizona Corporation Commission, the Public Utilities
Commission of Nevada, the California Public Utilities Commission, and the Federal Energy Regulatory Commission.
The accounting policies of the Company conform to generally accepted accounting principles applicable to rate-
regulated entities and reflect the effects of the ratemaking process. As such, the Company is allowed to defer as
regulatory assets, costs that otherwise would be expensed, if it is probable that future recovery from customers will
occur. It is also permitted to recognize, in its regulatory assets, amounts associated with its various revenue
decoupling mechanisms, as long as it continues to meet the requirements of alternative revenue programs
permitted under U.S. Generally Accepted Accounting Principles. The Company reviews its regulatory assets to
assess their ultimate recoverability within the approved regulatory guidelines. If rate recovery is no longer
probable, due to competition or the actions of regulators, the Company is required to write-off the related
regulatory asset (which would be recognized as current-period expense). Regulatory liabilities are recorded if it is
probable that revenues will be reduced for amounts that will be credited to customers through the ratemaking
process. The timing and inclusion of costs in rates is often delayed (regulatory lag) and results in a

Southwest Gas Corporation