1. Presented by the Louisiana Mid-Continent Oil & Gas Association
Rebuttal to the Louisiana Assessor’s Association’s Proposed Revisions to the 2017 LTC Rules & Regulations
Presented by the Louisiana Mid-Continent Oil & Gas Association
August 10, 2016
Information included in this presentation is based on information as submitted in writing July 29, 2016 to the Louisiana Tax Commission. This presentation is prepared only to facilitate the verbal rebuttal on August 10, 2016 as indicated in the LTC Docket Number RR-2017, Notice of Hearing.

2. Discussion Items LAA’s Proposal for Table 1307.C Physical Depreciation
LMOGA’s Proposal for
Table 1307.C Physical Depreciation
Table 1303.F Other Forms of Depreciation
Definitions: Regulated vs. Non-Regulated Pipeline
Reasons for Objections to LAA Proposal

3. LAA’s Proposal for Change
Table 1307 C.- Physical Depreciation LAA is proposing to extend the service life of locally assessed pipelines to 35 years and raise the depreciation floor to 30%

4. LMOGA Proposal
LMOGA recommends that the LTC take the following actions: Recommendation #1: Adopt the current depreciation schedule for Chapter 13, Table 1307C-Allowance for Depreciation, that reflects a 26.5 Year Economic Life and a 20% floor rate that would be applied in year 27 that would be consistent with prior years actions by the LTC
Recommendation #2: Adopt changes In Section 1303.F to include additional language identifying functional and/or economic obsolescence as follows: “Evidence of functional and/or economic obsolescence can be in the form of system inutility due to mechanical deficiency, due to oil and gas production decline, due to external economic factors such as low oil and/or gas prices, excess operating cost, and obsolete equipment”

5. Definition: FERC Regulated Interstate Pipeline Definition
LAA’s proposal could apply to Federal Energy Regulatory Commission (FERC) Regulated (Public service) (State Assessed) Interstate pipelines
What are FERC regulated pipelines?
Pipelines that are typically Interstate systems rather than Intrastate
Larger diameter lines that transport gas, natural gas, fuels, and intermediate feed stocks for the end user market
Pipelines that are income producing assets
Pipeline owners must file proposed rates, tariff, and service agreements with certified filings to FERC
Barriers to Entry: construction and operation of pipeline require FERC authorization
Barriers to Exit: termination and abandonment of pipelines must be approved by FERC
Pipelines that typically have longer lives due to adherence to continuous maintenance programs
Products are not allowed in an Interstate pipeline system that do not meet FERC regulation specifications
FERC regulated pipelines are Common Carriers meaning the pipeline is open to all shippers that will pay a tariff to the pipeline owner

6. Definition: Non-Regulated Intrastate Pipeline System
LAA’s proposal should not apply to non-regulated Intrastate pipeline systems
What are non-regulated pipelines?
Pipelines that are not regulated by FERC or other regulatory agencies
Pipelines that are typically proprietary owned and operated
Pipelines that are not income producing assets that service oil and gas fields
Pipelines that are typically small in diameter
Typically lease and gathering pipeline systems that connect production facilities to larger diameter pipeline systems

7. Reasons for Objection to LAA Proposal
The LAA proposed economic life expectancy and depreciation floor formula is not appropriate for locally assessed gathering/transportation pipelines.
The LAA proposed formula is very complex, bringing in many subjective factors including annual company stock returns, bond returns, inflation, maintenance expense, and economic life which are FERC related
The proposal does not recognize other forms of obsolescence such as low through-put utilization
The proposal does not recognize that Locally Assessed pipelines are exposed to corrosive impurities that accelerate physical deterioration
The proposal does not recognize that Locally Assessed Pipelines are dependent on the productive life of producing oil and gas fields that have a much shorter economic life (15 to 25 years depending upon economic health)

8. Reasons for Objection to LAA Proposal (Continued)
The Proposal does not recognize that Locally Assessed Pipelines have little or no salvage value due to accelerated physical deterioration
The Proposal does not recognize that Locally Assessed Pipelines are generally abandoned in place, rather than salvaged
The Proposal does not recognize that the cost to remove and re-condition Locally Assessed Pipelines and to restore the right-of-way is a liability and exceeds any salvage value

9. Reasons for Objection to LAA Proposal (Continued)
The Proposal does not recognize that the Oil & Gas Industry has been in continuing decline since 2015
Lower Oil and Natural Gas Prices
Lower Steel Prices (inherent value of locally assessed pipelines are lower)
Projects stopped or slowed down
Company Layoffs
The Proposal is not aligned with other States valuation methodology and valuation publications that reflect an average economic life of 22 years and a depreciation floor of 20% (See Exhibit A)
The Proposal would cause additional economic HURT that will be inflicted upon all operators especially small operators that are under capitalized (See Exhibit B)

12. Support for LMOGA Recomendations
Recommended Economic life of 26.5 years
Promulgated by Marshall & Swift World Wide Guidelines
Marshall & Swift supported by IRS Code 946
Economic Life more than reasonable when compared to average economic life of other states (22 years)
Economic Life more than reasonable when compared to economic life of oil & gas fields (15 to 25 years) that are serviced by locally assessed pipelines
Recommended Depreciation Floor of 20%
Depreciation Floor is more than reasonable when compared to the average depreciation floor of other states (16%)
Depreciation Floor recognizes accelerated physical deterioration and recognizes the inutility due to the economics of older depleting oil and gas fields