Page 22 - SWGas Annual Report 2015

requirements bid package for potential contractors. The contract to construct the facility is currently expected to be
in place in the second half of 2016 and construction is expected to take approximately two to three years to
complete. The Company anticipates including a proposal for the ratemaking treatment of facility costs as part of its
next Arizona rate case filing.

Customer-Owned Yardline (“COYL”) Program. The Company received approval, in connection with its most recent
Arizona general rate case, to implement a program to conduct leak surveys, and if leaks were present, to replace
and relocate service lines and meters for approximately 100,000 Arizona customers whose meters were set off
from the customer’s home, which is not a traditional configuration. Customers with this configuration were
previously responsible for the cost of maintaining these lines and were subject to the immediate cessation of
natural gas service if low-pressure leaks occurred. To facilitate this program, the Company was authorized to
collect estimated leak survey costs in rates commencing in 2012. Effective June 2013, the ACC authorized a
surcharge to recover the costs of depreciation and pre-tax return the Company would have received if the
additional pipe replacement costs themselves (incurred to replace and relocate service lines and meters) had been
included in rate base concurrent with the most recent Arizona rate case. The surcharge is revised annually as the
program progresses, with the undepreciated plant balance to be incorporated in rate base at the time of the next
Arizona general rate case. In January 2014, the Company received approval to add a “Phase II” component to the
COYL program to include the replacement of non-leaking COYLs, which was subsequently revised effective June
2014. Resources continue to be focused on contacting customers within replacement project areas to participate in
the Phase II meter relocation. In February 2015, the Company filed to increase the surcharge revenue from
$1.5 million to $2.5 million to reflect additional costs incurred for both Phase I and Phase II. This request was based
on total capital expenditures of $16 million, $6.3 million of which was incurred during 2014. In May 2015, the ACC
issued a decision approving the surcharge application, effective in June 2015.

Federal Energy Regulatory Commission (“FERC”) Jurisdiction
General Rate Case. Paiute Pipeline Company (“Paiute”), a wholly owned subsidiary of Southwest, filed a general
rate case with the FERC in February 2014. The filing fulfilled an obligation from the settlement agreement reached
in the 2009 Paiute general rate case. In September 2014, Paiute reached an agreement in principle with the FERC
Staff and intervenors to settle the case. In October 2014, Paiute requested, and was granted, the authority to place
the settlement rates into effect on an interim basis effective September 2014. In February 2015, the FERC issued a
letter order approving the settlement as filed. Tariff charges in compliance with the settlement were filed in
March 2015. In addition to agreeing to rate design changes to encourage longer-term contracts with its shippers,
the settlement resulted in an annual revenue increase of $2.4 million, plus a $1.3 million depreciation reduction.
The settlement implies an 11.5% pre-tax rate of return. Also, as part of this agreement, Paiute agreed not to file a
rate case prior to May 2016, but no later than May 2019.

Elko County Expansion Project. During the second and third quarters of 2013, Paiute notified present and
potential shippers of its plans to expand its existing transmission system to provide additional firm transportation-
service capacity in the Elko County, Nevada area. This additional capacity is required to meet growing natural gas
demands caused by increased residential and business load and the greater energy needs of mining operations in
the area. Through the “open season” process, shippers responded with substantial interest. A certificate
application for the project was filed in June 2014. In May 2015, the FERC issued an order authorizing a Certificate of
Public Convenience and Necessity to Paiute to construct and operate the Elko County Expansion Project, and
subsequently provided a formal Notice to Proceed. Construction began in the second quarter of 2015 and the
project was placed in service in January 2016 as authorized by the FERC. Rates to begin recovering the cost of the

Southwest Gas Corporation