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 

4

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..

5

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.

8

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

14

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,

15

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

16

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.

17

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.

18

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.

19

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.

20

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.

21

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.

23

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