Page 75 - SWGas Annual Report 2015

Income Tax Regulations. In September 2013, the United States Department of the Treasury and the Internal
Revenue Service (“IRS”) issued regulations for the tax treatment of tangible property. The regulations include
standards for determining whether and when a taxpayer must capitalize costs incurred in acquiring, maintaining, or
improving tangible property. The regulations are generally effective for tax years beginning on or after January 1,
2014, and were eligible for adoption in earlier years under certain circumstances. Regulations were also released
that revise the rules for dispositions of tangible property and general asset accounts. The Company expects the IRS
to issue natural gas industry guidance which will facilitate its analysis regarding the regulations’ impact on natural
gas distribution networks. Based upon preliminary analysis of the regulations, and in anticipation of specific
guidance for the natural gas industry, the Company expects the regulations could result in a modest acceleration of
tax deductibility and the deferral of tax payments.

Early Adoption of ASU No. 2015-17. As permitted, the Company adopted FASB ASU No. 2015-17 Income Taxes
(Topic 740) as of December 31, 2015. This ASU simplifies the presentation of deferred income taxes in that deferred
tax liabilities and assets will now be classified as noncurrent in the Consolidated Balance Sheets instead of current
and noncurrent. The adoption of this ASU is considered a change in accounting principle. The Company chose to
apply the content of the update prospectively as permitted. Prior periods were not retrospectively updated.

Note 13 – Derivatives and Fair Value Measurements
Derivatives. In managing its natural gas supply portfolios, Southwest has historically entered into fixed- and
variable-price contracts, which qualify as derivatives. Additionally, Southwest utilizes fixed-for-floating swap
contracts (“Swaps”) to supplement its fixed-price contracts. The fixed-price contracts, firm commitments to
purchase a fixed amount of gas in the future at a fixed price, qualify for the normal purchases and normal sales
exception that is allowed for contracts that are probable of delivery in the normal course of business, and are
exempt from fair value reporting. The variable-price contracts have no significant market value. The Swaps are
recorded at fair value.

The fixed-price contracts and Swaps are utilized by Southwest under its ongoing volatility mitigation programs to
effectively fix the price on a portion (up to 25% in the Arizona and California jurisdictions) of its natural gas supply
portfolios. The maturities of the Swaps highly correlate to forecasted purchases of natural gas, during time frames
ranging from January 2016 through March 2018. Under such contracts, Southwest pays the counterparty a fixed
rate and receives from the counterparty a floating rate per MMBtu (“dekatherm”) of natural gas. Only the net
differential is actually paid or received. The differential is calculated based on the notional amounts under the
contracts, which are detailed in the table below (thousands of dekatherms):

December 31, 2015 December 31, 2014

Contract notional amounts 7,407 5,105

In late 2013, the Company suspended using swaps and fixed-price purchases pursuant to the Volatility Mitigation
Program (“VMP”) for its Nevada service territories. The Company, along with its regulators, will continue to evaluate
this strategy in light of prevailing or anticipated changing market conditions.

Southwest does not utilize derivative financial instruments for speculative purposes, nor does it have trading
operations.

Southwest Gas Corporation