Page 48 - SWGas Annual Report 2015

The Company acts as an agent for state and local taxing authorities in the collection and remission of a variety of
taxes, including sales and use taxes and surcharges. These taxes are not included in gas operating revenues. The
Company uses the net classification method to report taxes collected from customers to be remitted to
governmental authorities.

Construction Revenues. The majority of Centuri contracts are performed under unit-price contracts. Generally,
these contracts state prices per unit of installation. Typical installations are accomplished in a few weeks or less.
Revenues are recorded as installations are completed. Long-term fixed-price contracts use the percentage-of-
completion method of accounting and, therefore, take into account the cost, estimated earnings, and revenue to
date on contracts not yet completed. The amount of revenue recognized on fixed-price contracts is based on costs
expended to date relative to anticipated final contract costs. Revisions in estimates of costs and earnings during
the course of work are reflected in the accounting period in which the facts requiring revision become known. If a
loss on a contract becomes known or is anticipated, the entire amount of the estimated ultimate loss is recognized
at that time in the financial statements. Some unit-price contracts contain caps that if encroached, trigger revenue
and loss recognition similar to a fixed-price contract model.

Construction Expenses. The construction expenses classification in the income statement includes payroll
expenses, job-related equipment costs, direct construction costs, gains and losses on equipment sales, general
and administrative expenses, acquisition and acquisition-related costs, and office-related fixed costs of Centuri.
During 2015, construction expenses were impacted by a loss reserve on an industrial construction project in
Canada recognized earlier in the year, in the amount of $7.7 million. Delays in delivery of critical equipment to the
job site resulted in production inefficiencies and an increase in total project costs. Work commenced on this project
in March 2015 and was completed in the third quarter. In situations where losses on a project are possible,
accounting rules and adopted policies require that future costs to complete the project be estimated and a loss
recognized currently, but potential incremental revenue to cover such costs is recognized only if and when change
orders are formally approved. In October, Centuri and the general contractor agreed to mediation to attempt to
resolve open change orders. In December 2015, a final settlement of approximately $4 million was reached and the
overall loss on this project was reduced to $3.4 million.

Net Cost of Gas Sold. Components of net cost of gas sold include natural gas commodity costs (fixed-price and
variable-rate), pipeline capacity/transportation costs, and actual settled costs of natural gas derivative instruments.
Also included are the net impacts of PGA deferrals and recoveries.

Operations and Maintenance Expense. For financial reporting purposes, operations and maintenance expense
includes Southwest’s operating and maintenance costs associated with serving utility customers, uncollectible
expense, administrative and general salaries and expense, employee benefits expense, and legal expense
(including injuries and damages).

Depreciation and Amortization. Utility plant depreciation is computed on the straight-line remaining life method at
composite rates considered sufficient to amortize costs over estimated service lives, including components which
compensate for removal costs (net of salvage value), and retirements, as approved by the appropriate regulatory
agency. When plant is retired from service, the original cost of plant, including cost of removal, less salvage, is
charged to the accumulated provision for depreciation. Other regulatory assets, including acquisition adjustments,
are amortized when appropriate, over time periods authorized by regulators. Nonutility and construction services-
related property and equipment are depreciated on a straight-line method based on the estimated useful lives of
the related assets. Costs and gains related to refunding utility debt and debt issuance expenses are deferred and

Southwest Gas Corporation