Page 81 - SWGas Annual Report 2015

discussion of operating results. Additionally, see Note 16 – Construction Services Noncontrolling Interests regarding
allocation of earnings and Note 17 – Acquisition of Construction Services Businesses regarding the acquisition in the last
quarter of 2014.

Note 16 – Construction Services Noncontrolling Interests
Associated with the agreement reached in conjunction with the acquisition of the Canadian constriction businesses, the
previous owners of the acquired companies initially retained an approximate 10% equity interest in the Canadian-specific
businesses. The agreement, associated with that approximate 10% equity interest, provided special dividend rights which
entitled the sellers, as holders, to dividends equal to 3.4% of dividends paid at the level of Centuri, and subject to certain
conditions, such interests could become exchangeable for a 3.4% equity interest in Centuri. In consideration of the underlying
exchange rights of the original agreement, earnings attribution by Centuri to the previous owners also occurred in an amount
equivalent to 3.4% of Centuri earnings since October 2014. During the third quarter of 2015, the sellers formally exercised their
exchange rights under the terms of the original agreement. No new rights were conveyed to the noncontrolling parties as a
result of the exchange and no new consideration was involved. The previous owners continue to be able to exit their investment
retained by requiring the purchase of a portion of their interest commencing July 2017 and in incremental amounts each
anniversary date thereafter. The shares subject to the election cumulate (if earlier elections are not made) such that 100% of
their interest retained is subject to the election beginning in July 2022. Due to the continued ability of the noncontrolling parties
to redeem their interest for cash, their interest continues to be presented on the Company’s Consolidated Balance Sheet at
December 31, 2015 as a Redeemable noncontrolling interest, a category of mezzanine equity (temporary equity), in accordance
with SEC guidance. However, that interest, previously associated with the Canadian businesses, is now formally an interest in
Centuri.

Significant changes in the value of the redeemable noncontrolling interest are recognized as they occur, and the carrying value
is adjusted as necessary at each reporting date. Guidance by the SEC indicates that downward adjustments in the value of
redeemable noncontrolling interests are only permitted to the extent that upward adjustments in value were previously
recognized. A floor for the noncontrolling interest was originally set at the acquisition date (in October 2014). However, U.S.
GAAP generally views changes in ownership interest, where the parent retains its controlling interest, as an equity transaction,
whereby the carrying amount of the noncontrolling interest is adjusted to reflect the change in ownership interest in the
subsidiary. In connection with the exchange rights being exercised during the third quarter, an updated valuation was
conducted. A significant decrease in the value of the redeemable noncontrolling interest was recognized, due in part to the
exchange option no longer being subject to probability estimates. In light of the U.S. GAAP requirement to adjust the carrying
amount, a new floor was set for the redeemable noncontrolling interest at the exchange date (July 31, 2015), with a
corresponding adjustment made to additional paid in capital of the Company. Future adjustments to the redemption value are
not permitted below the new floor. The following depicts impacts to the balance of the redeemable noncontrolling interest
between the indicated periods.

Redeemable
Noncontrolling

Interest

(Thousands of dollars):

Balance, December 31, 2014 $20,042
Net Income (loss) attributable to redeemable noncontrolling interest 939
Foreign currency exchange translation adjustment (66)
Centuri distribution to redeemable noncontrolling interest (99)
Adjustment to redemption value
(4,708)
Balance, December 31, 2015
$16,108

The redemption value of the redeemable noncontrolling interest utilizes a market approach to determine a construction services
enterprise value. Publicly traded “guideline” companies are identified by using a selection criteria, including actively

Southwest Gas Corporation