Page 19 - SWGas Annual Report 2015

Rates and Regulatory Proceedings

General Rate Relief and Rate Design
Rates charged to customers vary according to customer class and rate jurisdiction and are set by the individual
state and federal regulatory commissions that govern Southwest’s service territories. Southwest makes periodic
filings for rate adjustments as the costs of providing service (including the cost of natural gas purchased) change,
and as additional investments in new or replacement pipeline and related facilities are made. Rates are intended to
provide for recovery of all prudently incurred costs and provide a reasonable return on investment. The mix of fixed
and variable components in rates assigned to various customer classes (rate design) can significantly impact the
operating margin actually realized by Southwest. Management has worked with its regulatory commissions in
designing rate structures that strive to provide affordable and reliable service to its customers while mitigating the
volatility in prices to customers and stabilizing returns to investors. Such rate structures were in place in all of
Southwest’s operating areas during all periods (2013—2015) for which results of Natural Gas Operations are
disclosed above.

Nevada Jurisdiction
General Rate Case Status. The most recent general rate case decision was received from the Public Utility
Commission of Nevada (“PUCN”) in November 2012, and was amended in a Rehearing Decision in March 2013. The
Rehearing Decision addressed issues raised by Southwest regarding capital structure. Ultimately, the Company
was authorized an overall rate of return of 6.56%, and a 10% return on 42.7% common equity in southern Nevada;
and an overall rate of return of 7.88%, and a 9.30% return on 59.1% common equity in northern Nevada, while
retaining an alternative capital structure rather than what was initially proposed by Southwest.

General Revenues Adjustment. As part of the Annual Rate Adjustment (“ARA”) filing in June 2015, Southwest
requested recovery of amounts associated with its revenue decoupling mechanism (General Revenues Adjustment,
or “GRA”). The ARA, including amounts to recover the regulatory asset associated with this mechanism, was
approved in December 2015, with rates effective January 2016. The rate adjustment is expected to recover
approximately $19 million of the associated regulatory asset during 2016. There is no impact to net income overall
from these recoveries, but there is a favorable impact to cash flows as the regulatory asset balance is recovered.

Infrastructure Replacement Mechanisms. In January 2014, the PUCN approved final rules for a mechanism to
defer and recover certain costs associated with accelerated replacement of non-revenue producing infrastructure.
The regulations provide for the establishment of regulatory assets that recover the depreciation expense and
authorized pre-tax rate of return of infrastructure replacement investments between rate cases, which also allows
Southwest to develop rates to recover the associated amounts in a future general rate case proceeding, at which
time the plant will be “rolled into” rate base. Southwest made a filing in May 2014, referred to as a Gas
Infrastructure Replacement (“GIR”) Advance Application, identifying early vintage plastic pipe (“EVPP”) and vintage
steel pipe (“VSP”) projects for replacement beginning in 2015. In October 2014, the PUCN approved EVPP
replacement expenditures of $14.4 million for 2015. In June 2015, Southwest filed its GIR Advance Application with
the PUCN proposing $43.5 million of accelerated pipe replacements for 2016 (subject to the GIR mechanism). Once
completed, the annualized revenue requirement associated with the accelerated replacement is estimated at
$4.6 million. In October 2015, the PUCN approved the GIR Advance Application, granting Southwest the authority
to replace the $43.5 million of infrastructure under the GIR mechanism. Also in October 2015, management filed a
rate application to reset the GIR surcharge, based upon project costs deferred through August 2015. In December,
the PUCN approved new rates, effective in January 2016, which are expected to result in approximately $4 million
in annualized revenues.

Southwest Gas Corporation