WEST TEXAS GAS
Book Depreciation Accrual Rate Study
At December 31, 2011
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WEST TEXAS GAS DEPRECIATION RATE STUDY
EXECUTIVE SUMMARY
West Texas Gas (“WTG” or “Company”) engaged Alliance Consulting Group to
conduct a depreciation study of the Company’s Gas Distribution and General utility
plant depreciable assets as of December 31, 2011. This study recommends
implementation of the group accounting method. Previously, WTG has used item or
component accounting. Under WTG’s current item-based depreciation rates, WTG’s
property generally has shorter lives than those recommended in this study. However,
the current item-based depreciation accrual rates do not recognize net salvage in the
accrual computations. The recognition of net salvage somewhat offsets the reduction
in depreciation associated with the increasing lives.
In 2012, WTG restated its depreciation expense and depreciation reserves for
2011. Book depreciation was reduced by approximately $20 million and depreciation
expense for 2011 declined by more than $3 million. This study recommends an overall
increase of $355 thousand compared to the restated depreciation expense. Compared
to the original deprecation of $5.7 million, the study recommends a decrease in annual
depreciation expense of $2.7 million.
WEST TEXAS GAS
DEPRECIATION RATE STUDY
AT December 31, 2011
Table of Contents
STUDY RESULTS ..................................................................................................... 5
GENERAL DISCUSSION .......................................................................................... 6
Definition ............................................................................................................. 6
Basis of Depreciation Estimates ....................................................................... 6
Actuarial Analysis ............................................................................................... 9
Judgment ........................................................................................................... 10
Equal Life Group Depreciation ........................................................................ 11
Theoretical Depreciation Reserve ................................................................... 12
Depreciation Study Process ............................................................................ 13
Depreciation Rate Calculation ......................................................................... 15
Remaining Life Calculation .............................................................................. 15
LIFE ANALYSIS ...................................................................................................... 17
NET SALVAGE ANALYSIS .................................................................................... 37
APPENDIX A ........................................................................................................... 38
APPENDIX B-1 ....................................................................................................... 40
APPENDIX B-2 ........................................................................................................ 42
APPENDIX C ........................................................................................................... 44
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PURPOSE
The purpose of this study is to develop depreciation rates for the depreciable
distribution and general utility property as recorded on the books of West Texas Gas
(“West Texas Gas” or “Company”) as of December 31, 2011. The depreciation rates
are designed to recover the total remaining undepreciated investment, adjusted for net
salvage, over the remaining life of West Texas Gas’ property on a straight-line basis.
Non-depreciable and intangible assets were excluded from this study.
West Texas Gas provides local gas distribution service to customers in the
Midland/ Odessa Texas area. West Texas Gas (WTG) headquarters are located at
211 N. Colorado, Midland, Texas 79701. WTG has core businesses in natural gas
distribution operations, natural gas transmission services, gas gathering/processing,
and natural gas liquids transmission services. WTG owns and operates approximately
5,192 miles of Natural Gas Distribution mainlines and serves 28,108 customers within
the states of Oklahoma and Texas. WTG owns and operates approximately 1,680
miles (non-contiguous) of Natural Gas Transmission pipelines within the states of
Kansas, Louisiana, New Mexico, Oklahoma and Texas. WTG owns and operates 528
miles of gathering pipelines within the states of Kansas, Louisiana, Oklahoma and
Texas..
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STUDY RESULTS
Recommended depreciation rates for West Texas Gas Texas depreciable
property are shown in Appendix A. These rates translate into an annual
depreciation accrual for Gathering, Transmission, Distribution and General plant of
approximately $2.990 million. These accruals are based on WTG Texas’
depreciable investment at December 31, 2011. The proposed lives and curves on
which these calculations are based are shown in Appendix C and the remaining
lives based on these parameters are shown in Appendix B. Also shown in Appendix
B-1 are the calculations of Vintage Group amortization rates for General Amortized
Plant assets. The annual depreciation expense for Distribution and General plant,
calculated using the same December 31, 2011 depreciable balances but using the
existing depreciation rates is approximately $2.635 million, as shown in Appendix A.
Appendix C shows the effect of the change in lives and curves on depreciation
expense by account.
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GENERAL DISCUSSION
Definition
The term "depreciation" as used in this study is considered in the accounting
sense; that is, a system of accounting that distributes the cost of assets, less net
salvage (if any), over the estimated useful life of the assets in a systematic and
rational manner. It is a process of allocation, not valuation. This expense is
systematically allocated to accounting periods over the life of the properties. The
amount allocated to any one accounting period does not necessarily represent the
loss or decrease in value that will occur during that particular period. The Company
accrues depreciation on the basis of the original cost of all depreciable property
included in each functional property group. At retirement, the full cost of depreciable
property, less the net salvage value, is charged to the depreciation reserve.
Basis of Depreciation Estimates
Annual and accrued depreciation were calculated in this study by the straight-
line, broad group, remaining-life depreciation system. In this system, the annual
depreciation expense for each group is computed by dividing the original cost of the
asset group (less allocated depreciation reserve less estimated net salvage) by its
respective average remaining life. The resulting annual accrual amounts were
divided by the original cost of the depreciable property in each account to determine
the depreciation rate. The calculated remaining lives and annual depreciation
accrual rates were based on attained ages of plant in service and the estimated
service life and salvage characteristics of each depreciable group, and were
computed in a direct weighting by multiplying each vintage or account balance times
its remaining life and dividing by the plant investment in service at December 31,
2011. The computations of the annual depreciation rates are shown in Appendix B,
and the weighted remaining life calculations are also shown in Appendix B.
Actuarial Analysis was used with each account within a function where
sufficient activity occurred within the account, and judgment was used to some
degree on all accounts.
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Survivor Curves
To fully understand depreciation projections in a regulated utility setting, there
must be a basic understanding of survivor curves. Individual assets within a group
do not normally have identical lives or investment amounts. The average life of a
group can be determined by comparing actual experience against various survivor
curves. A survivor curve represents the percentage of property remaining in service
at various age intervals. The most widely used set of representative survivor curves
are the Iowa Survivor Curves (Iowa Curves). The Iowa Curves are the result of an
extensive investigation of life characteristics of physical property made at Iowa State
College Engineering Experiment Station in the first half of the twentieth century.
Through common usage, revalidation, and regulatory acceptance, these curves
have become a descriptive standard for the life characteristics of industrial property.
An example of an Iowa Curve is shown below.
There are four families in the Iowa Curves which are distinguished by the
relation of the age at the retirement mode (largest annual retirement frequency) and
the average life. The four families are designated as “R”— Right, “S” — Symmetric,
“L” — Left, and “O” — Origin Modal. First, for distributions with the mode age
greater than the average life, an "R" designation (i.e., Right modal) is used. The
family of “R” moded curves is shown below.
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Second, an "S" designation (i.e., Symmetric modal) is used for the family
whose mode age is symmetric about the average life. Third, an "L" designation (i.e.,
Left modal) is used for the family whose mode age is less than the average life.
Fourth, a special case of left modal dispersion is the "O" or origin modal curve
family. Within each curve family, numerical designations are used to describe the
relative magnitude of the retirement frequencies at the mode. A "6" indicates that
the retirements are not greatly dispersed from the mode (i.e., high mode frequency)
while a "1" indicates a large dispersion about the mode (i.e., low mode frequency).
For example, a curve with an average life of 30 years and an "L3" dispersion is a
moderately dispersed, left modal curve that can be designated as a 30 L3 Curve.
An SQ, or square, survivor curve occurs where no dispersion is present (i.e., units of
common age retire simultaneously).
For Distribution and General property accounts, a survivor curve pattern was
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selected based on analyses of historical data, as well as other factors, such as
general changes relevant to the Company's operations. The blending of judgment
concerning current conditions and future trends, along with the matching of historical
data permits the depreciation analyst to make an informed selection of an account's
average life and retirement dispersion pattern. Iowa Curves were used to depict the
estimated survivor curves for each account.
Actuarial Analysis
Actuarial analysis (retirement rate method) was used in evaluating historical
asset retirement experience where vintage data were available and sufficient
retirement activity was present. In actuarial analysis, interval exposures (total
property subject to retirement at the beginning of the age interval, regardless of
vintage) and age interval retirements are calculated. The complement of the ratio of
interval retirements to interval exposures establishes a survivor ratio. The survivor
ratio is the fraction of property surviving to the end of the selected age interval, given
that it has survived to the beginning of that age interval. Survivor ratios for all of the
available age intervals were chained by successive multiplications to establish a
series of survivor factors, collectively known as an observed life table. The
observed life table shows the experienced mortality characteristic of the account and
may be compared to standard mortality curves such as the Iowa Curves. Many
accounts were analyzed using this method. Placement bands were used to illustrate
the composite history over a specific era, and experience bands were used to focus
on retirement history for all vintages during a set period. Matching data in observed
life tables for each experience and placement band to an Iowa Curve requires visual
examination. As stated in Depreciation Systems by Wolf and Fitch, “the analyst
must decide which points or sections of the curve should be given the most weight.
Points at the end of the curve are often based on fewer exposures and may be
given less weight than those points based on larger samples” (page 46). Some
analysts chose to use mathematical fitting as a tool to narrow the population of
curves using a least squares technique. Use of the least squares approach does
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not imply a statistical validity, however, because the underlying data does not meet
criteria for independence between vintages and the same average price for property
units through time. Thus, Depreciation Systems cautions, “… the results of
mathematical fitting should be checked visually and the final determination of best fit
made by the analyst” (page 48). This study uses the visual matching approach to
match Iowa Curves, since mathematical fitting produces theoretically possible curve
matches. Visual examination and experienced judgment allow the depreciation
professional to make the final determination as to the best curve type.
Detailed information for each account is shown later in this study and in
workpapers.
Judgment
Any depreciation study requires informed judgment by the analyst conducting
the study. A knowledge of the property being studied, company policies and
procedures, general trends in technology and industry practice, and a sound basis of
understanding depreciation theory are needed to apply this informed judgment. In
this depreciation study, judgment was used in areas such as survivor curve
modeling and selection, depreciation method selection, simulated plant record
method analysis, and actuarial analysis.
Where there are multiple factors, activities, actions, property characteristics,
statistical inconsistencies, property mix in accounts or a multitude of other
considerations that affect the analysis (potentially in various directions), judgment is
used to take all of these considerations and synthesize them into a general direction
or understanding of the characteristics of the property. Individually, no one
consideration in these cases may have a substantial impact on the analysis, but
overall, the collective effect of these considerations may shed light on the use and
characteristics of assets. Judgment may also be defined as deduction, inference,
wisdom, common sense, or the ability to make sensible decisions. There is no
single correct result from statistical analysis; hence, there is no answer absent
judgment. The establishment of appropriate average service lives and retirement
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dispersions for the Gathering, Transmission, Distribution and General accounts
requires judgment to incorporate the understanding of the operation of the system
with the available accounting information analyzed using the SPR semi-actuarial
methods. The appropriateness of lives and curves depends not only on statistical
analyses, but also on how well future retirement patterns will match past
retirements.
Current applications and trends in use of the equipment also need to be
factored into life and survivor curve choices in order for appropriate mortality
characteristics to be chosen.
Equal Life Group Depreciation
Currently the WTG is using item based depreciation for its assets. The
Railroad Commission of Texas has approved the Equal Life Group depreciation
system in numerous proceedings.1 Based on Commission precedent, , this study
uses the ELG depreciation procedure to group the assets within each account. After
an average service life and dispersion were selected for each account, those
parameters were used to estimate what portion of the surviving investment of each
vintage was expected to retire. The depreciation of the group continues until all
investment in the vintage group is retired. ELG groups are defined by their
respective account dispersion, life, and salvage estimates. A straight-line rate for
each ELG group is computed and accumulated across each vintage. The resultant
rate for each ELG group is designed to recover all retirements less net salvage as
each vintage retires. The ELG procedure recovers net book cost over the life of
each ELG group rather than averaging many components. It also closely matches
the concept of component or item accounting found in all accounting textbooks.
1 GUD Docket 8664, 8976, 9145-9148, 9400, 9760, 9902, 10000, 10038, and 10041.
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Theoretical Depreciation Reserve
This study used a reserve model that relied on a prospective concept relating
future retirement and accrual patterns for property, given current life and salvage
estimates. The theoretical reserve of a group is developed from the estimated
remaining life, total life of the property group, and estimated net salvage. The
theoretical reserve represents the portion of the group cost that would have been
accrued if current forecasts were used throughout the life of the group for future
depreciation accruals. The computation involves multiplying the vintage balances
within the group by the theoretical reserve ratio for each vintage. The equal life
group method requires an estimate of dispersion and service life to establish how
much of each vintage is expected to be retired in each year until all property within
the vintage is retired. Estimated average service lives and dispersion determine the
amount within each equal life group. The equal life group-remaining-life theoretical
reserve ratio (RRELG) is calculated as:
Ratio) SalvageNet-(1* Life(ELG
Life) Remaining(ELG -1=RRELG
)
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DETAILED DISCUSSION
Depreciation Study Process
This depreciation study encompassed four distinct phases. The first phase
involved data collection and field interviews. The second phase was where the
initial data analysis occurred. The third phase was where the information and
analysis was evaluated. After the first three stages were complete, the fourth phase
began. This phase involved the calculation of depreciation rates and documenting
the corresponding recommendations.
During the Phase I data collection process, historical data was compiled from
continuing property records and general ledger systems. Data was validated for
accuracy by extracting it and comparing to multiple financial system sources: Fixed
Asset System (continuing property ledger) and the General Ledger. This data was
validated against historical data from prior periods, historical general ledger sources,
and through field personnel discussions. This data was reviewed extensively so that
it could be put in the proper format for a depreciation study. Further discussion on
data review and adjustment is found in the Salvage Consideration section of this
study. Also as part of the Phase I data collection process, numerous discussions
were conducted with engineers and field operations personnel to obtain information
that would be helpful in formulating life and salvage recommendations in this study.
One of the most important elements in performing a proper depreciation study is to
understand how the Company utilizes assets and the environment in which those
assets are used. Understanding industry and geographical norms for mortality
characteristics are important factors in selecting life and salvage recommendations;
however, care must be used not to apply them rigorously to any particular company
since no two companies would have the same exact forces of retirement acting upon
their assets. Interviews with engineering and operations personnel are important
ways to allow the analyst to obtain information that is helpful when evaluating the
output from the life and net salvage programs in relation to the Company’s actual
asset utilization and environment. Information that was gleaned in these
discussions is found both in the Detailed Discussion portions of the Life Analysis and
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Salvage Analysis sections and also in the workpapers. In addition, Alliance
personnel possess a significant understanding of the property and its forces of
retirement due to years of day-to-day exposure to gas utility property and its
operation. Phase 2 is where the SPR was performed. Phase 2 and Phase 3 (to
be discussed in the next paragraph) overlap to a significant degree. The detailed
property records information was used in Phase 2 to develop observed life tables for
life analysis and SPR graphs and statistics. Net salvage analysis consists of
compiling historical salvage and removal data by account to determine values and
trends in gross salvage and removal cost. This information was then carried forward
into Phase 3 for the evaluation process.
Phase 3 is the evaluation process, which synthesized analysis, interviews,
and operational characteristics into a final selection of asset lives and net salvage
parameters. The historical analysis from Phase 2 was further enhanced by the
incorporation of recent or future changes in the characteristics or operations of
assets that were revealed in Phase 1. The preliminary results were then reviewed
and discussed with accounting and operations personnel. Phases 2 and 3 validated
the asset characteristics as seen in the accounting transactions with actual
Company operational experience.
Finally, Phase 4 involved the calculation of accrual rates, making
recommendations and documenting the conclusions in a final report. The
calculation of accrual rates is found in Appendix B. Recommendations for the
various accounts are contained within the Detailed Discussion of this report. The
depreciation study flow diagram shown as Figure 12 documents the steps used in
conducting this study. Depreciation Systems3 on page 289 documents the same
basic processes in performing a depreciation study.
2 Public Utility Finance & Accounting, A Reader (Modified) 3 Depreciation Systems, by Dr. Frank K. Wolf and Dr. W. C. Fitch, Iowa State Press, 1994, p. 289,
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Depreciation Rate Calculation
Annual depreciation expense amounts for the depreciable property accounts of
West Texas Gas were calculated by the straight-line, equal-life group, remaining-life
system. With this approach, remaining lives were calculated according to standard
ELG group expectancy techniques, using the Iowa Survivor Curves noted in the
calculation. For each plant account, the difference between the surviving
investment, adjusted for estimated net salvage and the allocated book depreciation
reserve, was divided by the average remaining life to yield the annual depreciation
expense. These calculations are shown in Appendix B-1.
Remaining Life Calculation
The establishment of appropriate average service lives and retirement
dispersions for each account within a functional group was based on engineering
judgment that incorporated available accounting information analyzed using the SPR
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semi-actuarial methods. After establishment of appropriate average service lives
and retirement dispersion, remaining life was computed for each account. The
theoretical depreciation reserve with zero net salvage (used in calculating remaining
life) was calculated using theoretical reserve ratios as defined in the theoretical
reserve portion of the general discussion section. The difference between plant
balance and theoretical reserve was then spread over the ELG depreciation
accruals. After accumulating the ELG accruals across each vintage, the annual
accrual was divided into the net balance to compute remaining life. Details of the
theoretical reserve computations, ELG accruals, and remaining life are found by
account within each function in the study workpapers.
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LIFE ANALYSIS
Actuarial analysis was available from 1998-2011. No history was available
prior to that period, so historic life analysis proved of limited value for the longest
lived accounts. Under the component accounting method, assets would remain in
service after those items were fully accrued. To move to group accounting, the
Company retired its fully accrued assets in 2012 and those retirements were
included as a known change in this depreciation study. More than $12 million
dollars was retired for fully accrued assets in 2012. The acquisition of assets a
portion of the way through their lives and the recording of the vintages of those
assets as the year of acquisition affect the life of the asset groups. In other words,
assets acquired that are 30 years old will appear to be new in the Company’s
accounting system. As such a 60 year total life for the assets will only carry a 30
year life for depreciation purposes.
These results are used in conjunction with all other factors that may influence
asset lives.
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Intangible Function Account 301 Organization (20 SQ)
This account includes organization costs that originated when WTG acquired
assets from various entities. Currently those assets are being depreciated as
individual components, each with a 5 year life. There is approximately $58 thousand
in this account after retirement of fully accrued assets. This account is fully accrued.
In the event that future assets are added to this account, this study recommends a
20 SQ life and dispersion curve for this account.
Account 302 Franchises and Consents (20 SQ)
This account includes the franchise agreements. Currently those assets are
being depreciated as individual components, each with a 5 year life. There is
approximately $200 thousand in this account after retirement of fully accrued assets.
This account is fully accrued. In the event that future assets are added to this
account, this study recommends a 20 SQ life and dispersion curve for this account.
Account 303 Intangible Plant (12 SQ)
This account includes the acquisition cost premiums and intangible assets
such as software. All acquisition premium assets are excluded from the scope of
this depreciation study. Currently those assets are being depreciated as individual
components, with an average life of 7.61 years. There is approximately $401
thousand in this account after retirement of fully accrued assets and exclusion of
acquisition costs. Given the mix of assets in this account this study recommends a
12 SQ life and dispersion curve for this account.
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Gathering Function
Account 332 Field Lines (20 R3)
This account includes the cost of field lines used in conveying natural gas
from the wells to the point where it enters the transmission or distribution system.
There is approximately $3.1 million in this account after excluding fully accrued
assets. Currently, the component life for this account is 20 years. Based on life
analysis, judgment and the fact that acquisitions were recorded on the Company’s
books with a vintage of the year of acquisition, this study recommends a 20 R3 life
and dispersion curve for this account. A graph of the proposed curve versus actual
data is shown below.
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Account 333 Field Compressor Station Equipment (25 R3)
This account includes the cost of compressor station equipment and
associated assets used to raise the pressure of natural gas before it is conveyed to
the terminus of the field lines. There is approximately $130 thousand in this
account. Currently, the component life for this account is 10 years. Insufficient data
exists to perform a life analysis on this account. Based on judgment and the fact
that acquisitions were recorded on the Company’s books with a vintage of the year
of acquisition, this study recommends a 25 R3 life and dispersion curve for this
account.
Account 334 Field Measuring and Regulating Equipment (20 R3)
This account includes the cost of meters, gauges, and other equipment used
in measuring and regulating natural gas collected in field lines before the point
where it enters the transmission or distribution system. There is approximately $100
thousand in this account. Currently, the component life for this account is 10 years.
Insufficient data exists to perform a life analysis on this account. Based on
judgment and the fact that acquisitions were recorded on the Company’s books with
a vintage of the year of acquisition, this study recommends a 20 R3 life and
dispersion curve for this account.
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Transmission Function
Account 365.2 Land Rights (45 SQ)
This account includes the cost of land rights used in the transmission system.
There is approximately $181 thousand in this account after retirement of fully
accrued assets. Currently, the component life for this account is an average 20
years. Insufficient data exists to perform a life analysis on this account. Based on
the proposed life for Account 367 Transmission Mains and the fact that acquisitions
were recorded on the Company’s books with a vintage of the year of acquisition, this
study recommends a 45 SQ life and dispersion curve for this account.
22
Account 367 Transmission Mains (45 R2)
This account includes transmission mains and related assets. There is
approximately $13.6 million in this account after retirement of fully accrued assets.
Currently, the component life for this account is 20 years. WTG’s assets have been
have been acquired from a variety of sources. When an asset has been acquired it
is booked with the vintage as acquisition date rather than the true age of the asset.
This impacts the life of WTG’s assets and makes life analysis a difficult task. Based
on life analysis, judgment and the fact that acquisitions were recorded on the
Company’s books with a vintage of the year of acquisition, this study recommends a
45 R2 life and dispersion curve for this account. A graph of the proposed curve
versus actual data is shown below.
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Account 368 Transmission Compressors (15 R2)
This account includes the cost of gas and air compressors, electrical,
odorizers, and controls used in transmission compression and related assets. There
is approximately $45 thousand in this account after retirement of fully accrued
assets. Currently, the component life for this account is an average of 11.42 years.
Based on life analysis, judgment and the fact that acquisitions were recorded on the
Company’s books with a vintage of the year of acquisition, this study recommends a
15 R2 life and dispersion curve for this account. A graph of the proposed curve
versus actual data is shown below.
24
Account 369 Measuring and Regulating Equipment (20 R3)
This account includes transmission metering and regulating station equipment.
There is approximately $534 thousand in this account after retirement of fully
accrued assets. Currently, the component life for this account is an average of
19.25 years. Based on life analysis, judgment and the fact that acquisitions were
recorded on the Company’s books with a vintage of the year of acquisition, this
study recommends a 20 R3 life and dispersion curve for this account. A graph of
the proposed curve versus actual data is shown below.
25
Account 371 Other Equipment (15 R2)
This account includes miscellaneous equipment used in transmission
operations not booked in the other transmission accounts. There is approximately
$143 thousand in this account after retirement of fully accrued assets. Currently, the
component life for this account is an average of 8.22 years Based on life analysis,
judgment and the fact that acquisitions were recorded on the Company’s books with
a vintage of the year of acquisition, this study recommends a 15 R2 life and
dispersion curve for this account. A graph of the proposed curve versus actual data
is shown below.
26
Distribution
Account 376 Mains (45 R3)
This account includes all mains of all material types- steel, bare steel, and
poly. The account balance of approximately $74.2 million after retirement of fully
accrued assets Currently, the component life for this account is an average of 20.19
years WTG’s assets have been have been acquired from a variety of sources.
When an asset has been acquired it is booked with the vintage as acquisition date
rather than the true age of the asset. This impacts the life of WTG’s assets and
makes life analysis a difficult task. Based on life analysis, judgment and the fact that
acquisitions were recorded on the Company’s books with a vintage of the year of
acquisition, this study recommends a 45 R3 life and dispersion curve for this
account. A graph of the proposed curve versus actual data is shown below.
27
Account 377 Compressor Equipment (18 R5)
This account consists of compression equipment used in connection with
distribution system operations. The account balance is approximately $401
thousand, after retirement of fully accrued assets. Currently, the component life for
this account is an 10 years. Based on life analysis, judgment and the fact that
acquisitions were recorded on the Company’s books with a vintage of the year of
acquisition, this study recommends an 18 R5 life and dispersion curve for this
account. A graph of the proposed curve versus actual data is shown below.
28
Account 378 Measuring and Regulating Station Equipment (25 R3)
This account consists of meters, gauges, and other equipment used in
measuring and regulating gas in connection with distribution system operations
other than the measurement of gas deliveries to customers. The account balance is
approximately $5.3 million after retirement of fully accrued assets. Currently, the
component life for this account is an average of 18.59 years. Based on life analysis,
judgment and the fact that acquisitions were recorded on the Company’s books with
a vintage of the year of acquisition, this study recommends a 25 R3 life and
dispersion curve for this account. A graph of the proposed curve versus actual data
is shown below.
29
Account 387 Other Equipment (20 R2)
This account includes the cost of other equipment. This account contains
$483 thousand in plant after retirement of fully accrued assets. Currently, the
component life for this account is an average of 10.45 years. Based on life analysis,
judgment and the fact that acquisitions were recorded on the Company’s books with
a vintage of the year of acquisition, this study recommends a 20 R2 life and
dispersion curve for this account. A graph of the proposed curve versus actual data
is shown below.
30
General Plant Function
Account 389 Land Rights (40 SQ)
This account includes the cost of land rights associated with general plant
facilities. This account contains $6.3 million in plant after retirement of fully accrued
assets. Currently, the component life for this account is an average of 5.08 years.
Based on life analysis and judgment, this study recommends a 40 SQ life and
dispersion curve for this account.
Account 389.1 Fee Land (Non Depreciable)
This account includes the cost of fee land. This account contains $179
thousand in plant. This account is non-depreciable and is excluded from the
analysis.
31
Account 390 Structures & Improvements (25 R2.5)
This account includes the cost of structures and improvements used for utility
service. This account contains $637 thousand in plant after retirement of fully
accrued assets. Currently, the component life for this account is an average of
14.43 years. Based on life analysis, judgment and the fact that acquisitions were
recorded on the Company’s books with a vintage of the year of acquisition, this
study recommends a 25 R2.5 life and dispersion curve for this account. A graph of
the proposed curve versus actual data is shown below.
32
Account 391 Office Furniture and Equipment (20 L2)
This account consists of miscellaneous office furniture such as desks, chairs,
filing cabinets, and tables. This account contains $134 thousand in plant after
retirement of fully accrued assets. Currently, the component life for this account is
an average of 9.82 years. Based on life analysis and judgment, this study
recommends a 20 L2 life and dispersion curve for this account. A graph of the
proposed curve versus actual data is shown below.
33
Account 392 Transportation Equipment (9 L2)
This account consists of motor cars, trucks, and other transportation
equipment that can be licensed on roadways. This account contains $2.6 million in
plant after retirement of fully accrued assets. Currently, the component life for this
account is an average of 5.29 years. Based on life analysis and judgment, this
study recommends a 9 L2 life and dispersion curve for this account. A graph of the
proposed curve versus actual data is shown below.
34
Account 394 Tools, Shop, and Garage Equipment (20 L2)
This account consists of various items or tools used in shops and garages
such as air compressors, grinders, mixers, hoists, and cranes. This account
contains $702 thousand in plant after retirement of fully accrued assets. Currently,
the component life for this account is an average of 9.96 years. Based on life
analysis and judgment, this study recommends a 20 L2 life and dispersion curve for
this account. A graph of the proposed curve versus actual data is shown below.
35
Account 397 Communication Equipment (17 L2)
This account consists of miscellaneous communication equipment, such as
microwave equipment, radio equipment, and mobile computing equipment. This
account contains $54 thousand in plant after retirement of fully accrued assets.
Currently, the component life for this account is 5 years. Based on life analysis and
judgment, this study recommends a 17 L2 life and dispersion curve for this account.
A graph of the proposed curve versus actual data is shown below.
36
Account 398 Miscellaneous Equipment (15 SQ)
This account consists of miscellaneous equipment such as tools, ice
machines, security equipment, and kitchen equipment. This account contains $657
thousand in plant after retirement of fully accrued assets. Currently, the component
life for this account is an average of 15.01 years. Based on life analysis and
judgment, this study recommends a 15 SQ life and dispersion curve for this account.
A graph of the proposed curve versus actual data is shown below.
37
NET SALVAGE ANALYSIS
When a capital asset is retired, physically removed from service and finally
disposed of, terminal retirement is said to have occurred. The residual value of a
terminal retirement is called gross salvage. Net salvage is the difference between
the gross salvage (what the asset was sold for) and the removal cost (cost to
remove and dispose of the asset). Salvage and removal cost percentages are
calculated by dividing the current cost of salvage or removal by the original installed
cost of the asset. Currently, WTG is booking any removal cost to the cost of a new
installation. Alliance Consulting Group recommends that the Company move to
tracking gross salvage and removal cost in the accumulated depreciation consistent
with the practice for other regulated natural gas utilities.
38
APPENDIX A
Comparison of Depreciation Accrual at Existing versus Proposed Rates
Appendix A
Page 1 of 1
Item Proposed Proposed
Acct Description Plant Expense 2011 Rate Expense Difference
301 Organization 57,872.17 0 0.00% (1) 0 0
302 Franchise and Consents 200,000.00 0 0.00% (1) 0 0
303 Intangible Plant 400,610.46 4,864.94 17.60% 70,500.84 65,635.90
332 Field Lines 3,089,712.74 112,816.92 3.32% 102,499.57 ‐10,317.35
333 Field Compresssor Station Equipment 0 0 0.00% (2) 0 0
334 Field Measuring and Regulating Eqiupme 100,000.00 0 0.00% (1) 0 0
365.2 Land Rights 180,671.56 755.99 0.50% 902.51 146.52
367 Transmission Mains 13,622,526.43 235,265.97 2.12% 288,525.24 53,259.27
368 Transmission Compressors 44,995.91 1,397.95 7.84% 3,526.76 2,128.81
369 Measuring and Regulating Eqiupment 534,050.56 20,847.69 5.92% 31,618.49 10,770.80
371 Other Eqiupment 143,369.55 8,193.38 7.31% 10,482.39 2,289.01
376 Distribution Mains 74,229,085.07 1,339,953.55 2.36% 1,749,763.37 409,809.82
377 Compressor Station Equiment 400,738.77 12,117.09 5.85% 23,425.49 11,308.40
378 Distribution Measuring and Regulating E 5,266,008.36 178,303.33 3.56% 187,560.07 9,256.74
387 Other Eqiupment 482,599.31 11,546.94 4.18% 20,152.66 8,605.72
389 General Plant Land Rights 6,256,000.00 179,131.41 2.45% 153,135.65 ‐25,995.76
390 Structures and Improvements 637,322.30 18,871.28 2.49% 15,850.80 ‐3,020.48
391 Office Furniture and Euqipment 133,650.20 4,526.67 2.89% 3,859.00 ‐667.67
392 Transportation Equipment 2,555,708.79 459,261.33 9.93% 253,843.04 ‐205,418.29
394 Tools, Shop, and Garage Equipment 701,651.48 34,823.65 4.94% 34,640.37 ‐183.28
397 Communication Equipment 54,358.23 3,680.98 10.84% 5,893.94 2,212.96
398 Miscellaneous Equipment 656,612.31 8,528.98 5.12% 33,607.19 25,078.21
109,747,544.20 2,634,888.05 2,989,787.37 354,899.32
(1) If additional assets are added to this account, an accrual rate of 5% is proposed.
(2) If additional assets are added to this account, an accrual rate of 4% is proposed.
West Texas Gas
Comparison of Depreciation Accrual Rates
Using Equal Life Group Depreciation
As of December 31, 2011
40
APPENDIX B-1
Computation of Proposed Depreciation Accrual Rates
Appendix B‐1
Page 1 of 1
Average Annual Annual
Net Salvage Net Salvage Unaccrued Remaining Accrual Accrual
Account Description Plant Balance Book Reserve % Amount Balance Life Amount Rate
(a) (b) (c) (d) (e) (f)= (e)/100*(c) (g)=(c)‐(d)‐(f) (h) (i)=(g)/(h) (j)=(i) /(c))
301 Organization 57,872.17 57,872.17 0.00% 0.00 0.00 4.5 0 0.00%
302 Franchise and Consents 200,000.00 200,000.00 0.00% 0 0 2.5 0 0.00%
303 Intangible Plant 400,610.46 169,785.58 0.00% 0 230,824.88 3.27 70,500.84 17.60%
332 Field Lines 3,089,712.74 2,542,222.64 0.00% 0 547,490.10 5.34 102,499.57 3.32%
333 Field Compresssor Station Equipment 0.00 0.00 0.00% 0.00 0.00 0 0 0.00%
334 Field Measuring and Regulating Eqiupme 100,000.00 100,000.00 0.00% 0.00 0.00 6.01 0 0.00%
365.2 Land Rights 180,671.56 161,587.74 0.00% 0.00 19,083.82 21.15 902.51 0.50%
367 Transmission Mains 13,622,526.43 5,601,884.63 0.00% 0.00 8,020,641.80 27.8 288,525.24 2.12%
368 Transmission Compressors 44,995.91 23,974.48 0.00% 0.00 21,021.43 5.96 3,526.76 7.84%
369 Measuring and Regulating Eqiupment 534,050.56 224,776.72 0.00% 0.00 309,273.84 9.78 31,618.49 5.92%
371 Other Eqiupment 143,369.55 54,560.28 0.00% 0.00 88,809.27 8.47 10,482.39 7.31%
376 Distribution Mains 74,229,085.07 16,478,858.54 0.00% 0.00 57,750,226.53 33 1,749,763.37 2.36%
377 Compressor Station Equiment 400,738.77 225,023.04 0.00% 0.00 175,715.73 7.5 23,425.49 5.85%
378 Distribution Measuring and Regulating E 5,266,008.36 3,026,430.39 0.00% 0.00 2,239,577.97 11.94 187,560.07 3.56%
387 Other Eqiupment 482,599.31 285,787.60 0.00% 0.00 196,811.71 9.77 20,152.66 4.18%
389 General Plant Land Rights 6,256,000.00 820,076.20 0.00% 0.00 5,435,923.80 35.5 153,135.65 2.45%
390 Structures and Improvements 637,322.30 497,034.18 0.00% 0.00 140,288.12 8.85 15,850.80 2.49%
391 Office Furniture and Euqipment 133,650.20 82,942.36 0.00% 0.00 50,707.84 13.14 3,859.00 2.89%
392 Transportation Equipment 2,555,708.79 1,191,034.58 0.00% 0.00 1,364,674.21 5.38 253,843.04 9.93%
394 Tools, Shop, and Garage Equipment 701,651.48 299,269.05 0.00% 0.00 402,382.43 11.62 34,640.37 4.94%
397 Communication Equipment 54,358.23 15,413.83 0.00% 0 38,944.40 6.61 5,893.94 10.84%
398 Miscellaneous Equipment 656,612.31 575,791.15 0.00% 0 80,821.16 2.4 33,607.19 5.12%
Total 109,747,544.20 32,634,325.16 77,113,219.04 2,989,787.37
West Texas Gas
Computation of Depreciation Accrual Rate
At December 31, 2011
42
APPENDIX B-2
Computation of Remaining Life
Appendix B‐2
Page 1 of 1
Remaining
Theoretical Annual Life
Account Plant Balance Reserve Balance Accrual (e)/(f)
(a) (b) (c) (d) (e) (f) (g)
301 Organization 57,872.17 44,850.93 13,021.24 2,893.61 4.5
302 Franchise and Consents 200,000.00 175,000.00 25,000.00 10,000.00 2.50
303 Intangible Plant 400,610.46 291,308.14 109,302.32 33,384.21 3.27
332 Field Lines 3,089,712.74 2,371,045.24 718,667.50 134,546.93 5.34
333 Field Compresssor Station Equipment 0.00 0.00 0.00 0.00 0.00
334 Field Measuring and Regulating Eqiupme 100,000.00 72,062.20 27,937.80 4,649.17 6.01
365.2 Land Rights 180,671.56 95,774.59 84,896.97 4,014.92 21.15
367 Transmission Mains 13,622,526.43 4,257,617.19 9,364,909.24 336,882.35 27.80
368 Transmission Compressors 44,995.91 28,644.51 16,351.40 2,743.27 5.96
369 Measuring and Regulating Eqiupment 534,050.56 266,743.16 267,307.40 27,328.06 9.78
371 Other Eqiupment 143,369.55 56,923.05 86,446.50 10,203.51 8.47
376 Distribution Mains 74,229,085.07 13,420,456.63 60,808,628.44 1,842,429.32 33.00
377 Compressor Station Equiment 400,738.77 231,154.97 169,583.80 22,608.01 7.50
378 Distribution Measuring and Regulating E 5,266,008.36 2,744,240.79 2,521,767.57 211,192.87 11.94
387 Other Eqiupment 482,599.31 248,952.06 233,647.25 23,924.45 9.77
389.1 General Plant Land Rights 6,256,000.00 704,200.00 5,551,800.00 156,400.00 35.50
390 Structures and Improvements 637,322.30 395,817.57 241,504.73 27,287.00 8.85
391 Office Furniture and Euqipment 133,650.20 60,971.28 72,678.92 5,531.06 13.14
392 Transportation Equipment 2,555,708.79 830,730.43 1,724,978.36 320,863.21 5.38
394 Tools, Shop, and Garage Equipment 701,651.48 238,582.97 463,068.51 39,864.73 11.62
397 Communication Equipment 54,358.23 20,238.25 34,119.98 5,163.80 6.61
398 Miscellaneous Equipment 656,612.31 554,765.70 101,846.61 42,350.03 2.40
109,747,544.20 27,110,079.66 82,637,464.54 3,264,260.51
West Texas Gas
Computation of Remaining Life
At December 31, 2011
44
APPENDIX C
Comparison of Depreciation Parameters
Appendix C
Page 1 of 1
Iowa Net
Account Life Curve Salvage %
(a) (b) (c) (d) (e)
301 Organization 20 SQ 0%
302 Franchise and Consents 20 SQ 0%
303 Intangible Plant 12 SQ 0%
332 Field Lines 20 R3 0%
333 Field Compresssor Station Equipment 25 R3 0%
334 Field Measuring and Regulating Eqiupme 20 R3 0%
365.2 Land Rights 45 SQ 0%
367 Transmission Mains 45 R2 0%
368 Transmission Compressors 15 R2 0%
369 Measuring and Regulating Eqiupment 20 R3 0%
371 Other Eqiupment 15 R2 0%
376 Distribution Mains 45 R3 0%
377 Compressor Station Equiment 18 R5 0%
378 Distribution Measuring and Regulating Eq 25 R3 0%
387 Other Eqiupment 20 R2 0%
389.1 General Plant Land Rights 40 SQ 0%
390 Structures and Improvements 25 R2.5 0%
391 Office Furniture and Euqipment 20 L2 0%
392 Transportation Equipment 9 L2 0%
394 Tools, Shop, and Garage Equipment 20 L2 0%
397 Communication Equipment 17 L2 0%
398 Miscellaneous Equipment 15 SQ 0%
West Texas Gas
Proposed Depreciation Parameters
At December 31, 2011