Property Tax Partners, Lp

PROPERTY TAX PARTNERS, LP

Property Tax Services

July 24, 2014

Mr. Pete Peters, Chairman

Mr. Charles ‘Chord’ Carrico, Member

Ms. Kay Kellogg Katz, Member

Mr. Kenneth P. Naquin, Jr., Member

Mr. Joey Vercher, Member

Louisiana Tax Commission

5420 Corporate Boulevard, Suite 107

Baton Rouge, Louisiana 70808

RE: Submission of Rebuttal Comments for Chapter 13 LTC Rules and Regulations, Tax Year 2016

Dear Chairman and Members,

On behalf of Regency Energy Partnerswe respectively request your consideration of the following information in your deliberations in updating the Chapter 13 Pipelines §1301 Guidelines for Ascertaining the Fair Market Value of Pipelines for the 2016 tax year.

Regency Energy Partners (Regency) is a midstream energy partnership engaged in the gathering and processing, contract compression, treating and transportation of natural gas and the transportation, fractionation and storage of natural gas liquids. Its operations in Louisiana are primarily in the northern half of the state. A significant amount of its property is subject to Chapter 13 Pipeline valuation guidelines. Regency appreciates your consideration of the following information.

Market Conditions

The proposed pipeline schedules indicate a general 6.95% increase from the 2015 pipeline schedules. We believe this increase is unjustified in the current low price environment for the oil and gas industry. Oil and gas prices collapsed in the 2nd half of 2014. Between June 2014 and January 2015, monthly Oil, Natural Gas and Natural Gas Liquids prices decreased 55%, 35% and 50% respectively.

Market conditions have not improved measurably since January and most projections for prices have offered little hope for a return to conditions before this price collapse.

While we understand that product price does not equal infrastructure cost; it does ultimately impact that infrastructure value. Therefore, it is hard to understand an increase in these pipeline schedules in the context of the current state of the market and that anticipated of the market as of January 1, 2016.

Proposed Pipeline Schedule Development

These schedules are based on cost data as reported in the annual Pipeline Economics issue of the Oil & Gas Journal. As noted in the footnote for the ONSHORE PIPELINE supporting documentation, this data represents “either estimated (or "current" per past OGJ nomenclature) or actual costs per FERC filings for the 12-month period ending June 30 of the yearindicated for each segment in the database shown above. Most recent O&GJ report is from their Sept. 1, 2014 issue.”

First, the inclusion of “estimated” costs is troubling especially in the development of a pipeline schedule that will be used to value so much pipeline property throughout the state. The cost data points that represent estimates based on pre-filing reports are identified with the letter “E” in the left hand column. Cost data points with the letter “A” represent actual costs. We presume those without letter designations are unknown as to whether they represent estimated or actual costs.

Secondly, the data that is being used to update these schedules for the 2016 tax year do not include any information after June 30, 2014 which, coincidentally, happens to be the height of the market preceding the downturn. Therefore, there is no consideration of the impact of the price collapse in these proposed pipeline schedules.

We also note that the data used in developing these schedules dates back to 1976. While older cost information is trended to reflect current RCN (reproduction cost new or replacement cost new) by well- regarded valuation services; the magnitude of these trend factors introduce an additional element of uncertainty into these schedules.

Proposed Pipeline Schedule Review

For the ONSHORE PIPELINE schedule, we have noted that an OUTLIER has been deleted for a reported 20 inch pipeline project of 0.5 miles. We agree that pipeline construction projects of minimum mileage are mostly very high cost per mile projects and are poor representation of pipeline costs used to develop a well-supported general cost schedule.

With that being said, the proposed schedules are developed using weighted average cost information for each diameter of pipe that should work to minimize the impact of low mileage projects. Additionally, a curvilinear equation is used to “smooth” the cost information (however, we are unsure of which data points have been eliminated in developing the equation and the rationale for their elimination).

Ultimately, we have compared the proposed ONSHORE PIPELINE cost schedules with those of a highly respected valuation service known as Marshall Valuation Service (MVS). As per their website, MVS offers A complete, authoritative appraisal guide for developing replacement costs and depreciated values of buildings and other improvements, the Marshall Valuation Service is an industry standard throughout the United States, U.S. territories, most major cities in Canada, and selected foreign cities worldwide. With time-honored methodology, regularly updated cost data and full-time technical support, you’ll be able to project construction costs or value any commercial building in the field. Reference more than 30,000 component costs and more than 300 building occupancies. The company has been in business over 70 years and serves over 100,000 customers.

Marshall Valuation Service

MVS Section 62, page 6 details Pipeline Costs and defines these costs as follows: “Normal operating pressure, long-run (over 5 miles in length), cross-country, welded steel, underground oil & gas transmission lines, not including compressors, pumping stations, bridges, etc. Costs are smoothed averages of contract costs excluding extremes. The normal range is from 75% to 150% of the listed costs, depending on length and type of pipe and pipe protection, terrain, and geology, climate, location, etc.: e.g., the shorter the run, the more difficult, complex or urbanized the site, the higher the costs. Right-of-way costs are not included.”

In addition, MVS Section 62, pages 2–3 details Utility Piping costs that include the cost for pipe, fittings and valves for pressure lines that generally carry water, gas, steam, etc. under constant pressure. The cost are reported per linear foot for underground utility lines, including fittings, an allowance for trenching and backfill and contractors’ overhead and profit.

The most recently updated cost information for MVS’s Pipeline Costs and Utility Piping Costs (steel pressure pipe) are reported in their June 2014 release. We have adjusted the Pipeline Costs to include Right-of-way (ROW) costs at 5% of construction cost. This is consistent with ROW costs reported in the Oil & Gas Journal Pipeline Economics articles reported for the four previous years.

We have also adjusted this cost information for the Central Region current cost multiplier of 0.98 (Section 98, page 3) to bring these June 2014 cost estimates to current costs (July 2015 release). This cost information is shown below.

The MVS cost information details a wide range of cost estimates by pipeline diameter. Comparing the Proposed Onshore Pipelines 2016 RCNs with the low and high end of the MVS cost information shows that, for the most part, these Proposed RCNs fall within the MVS cost range. Notable exceptions are the 4, 36, and 42 inch diameter proposed RCNs.

The ONSHORE pipeline schedule cost for 4 inch pipe was developed with only 1 data point and then that cost was changed considerably with the smoothing equation.

The ONSHORE pipeline schedule cost for 36 inch pipe had numerous data points shown ranging from installation dates between 1978 and 2011. The smoothing equation actually lowered the proposed 36 inch pipeline schedule cost considerably from its Weighted Average RCN/MILE. While it remains a concern that the proposed costs still exceeds MVS’s high cost estimate, we have not endeavored a detailed analysis of these cost data.

Pipeline Cost Review – 42 inch

The proposed pipeline cost schedule for 42 inch pipeline is $4,646,940 and is the result of the smoothing equation. The data as reported for the proposed 42 inch pipeline schedule value actually supports a Weighted Average RCN/MILE of $4,531,465. Both of these costs greatly exceed the MVS High Cost estimate of $3,461,556.

In trying to reconcile the disparity in these proposed costs and the MVS high cost estimate, we began analyzing this information and found the following for the more recently included data points. We appreciate your consideration of this information.

KMLP – Kinder Morgan Louisiana Pipeline:

The 132 mile project installed in 2010 is, in all likelihood, the Kinder Morgan Louisiana Pipeline project (KMLP). KMLP (Docket CP06-449) was originally granted authorization to construct and operate this pipeline in June 2007. However, due to unexpected increases in labor, project delays caused by two hurricanes and a tropical storm, construction disruptions caused by project relocation and right-of-way issues, KMLP requested permission and increased its original amended cost estimate by $390.4 million. Further research has lead us to believe that this project was the subject of a lawsuit brought by Kinder Morgan against the original construction contractor. Kinder Morgan ultimately settled its claim against the construction contractor in 2012. Kinder Morgan claimed issues with the construction contractor and pipe manufacturer resulted in millions of dollars of cost overruns and delays. Kinder Morgan claims to have paid the construction contractor an additional $240 million due to the contractor’s “mismanagement and inefficiency”. In addition, Kinder Morgan indicated that the pipe provided by the manufacturer did not meet design specifications (it had to be buried 40 to 80 feet underground); and, Kinder Morgan had to repair the pipe at its own expense when the manufacturer refused to do so. Kinder Morgan’s Order Amending Certificate CP06-449-003 is attached as is a brief article downloaded from Law 360 FERC regarding litigation involved in the project. We do not believe this pipeline cost is representative of most large diameter projects throughout the state and should be excluded from the sample.

Estimated versus Actual Cost

The Oil & Gas Journal reports on the accuracy of the Estimated Costs by comparing them with Actual Costs when they are able to compile the information. Reviewing this information from the 2011 – 2014 periodicals reveals the following:

In the 2011 periodical, the 172 mile pipeline installed in 2011 was estimated to cost $417.5 million ($2.4M/mile) when it actually cost $707.3 million ($4.1M/mile). In this same periodical, the 20.6 mile pipeline installed in 2012 was estimated to cost $123.4 million ($5.99M/mile) when it actually cost $78.3 million ($3.8M/mile).

In the 2012 periodical, the 174 mile pipeline installed in 2012 was estimated to cost $829.5 million ($4.8M/mile) when it actually cost $641 million ($3.7M/mile).

This wide range of variability between estimated and actual costs is a concern, especially since the proposed 42 costs are outside the MVS cost range and estimated costs are a major factor in this analysis.

Of the two most recent estimates added to this analysis, we have been able to identify the 21 mile project indicated to have been installed in 2013. The Oil & Gas Journal’s Pipeline Editor, Christopher Smith, indicated that this is the Cameron Interstate Pipeline (CIP). Relying primarily on the Abbreviated Application of Cameron Interstate Pipeline, LLC for a Certificate of Public Convenience and Necessity (Docket CP13-27-000), we find that Cameron Interstate Pipeline (CIP) has requested the authorization to construct 21 miles of 42 inch pipeline to support the proposed liquefaction and export capabilities of the Cameron LNG terminal (Docket CP13-25-000). This Terminal is designed to receive, process, liquefy and export domestically produced gas.

Noteworthy for this project are the following:

• The pipeline route will require the use of six horizontal directional drills to cross major water bodies and avoid wetland impacts:
• 29 water bodies are identified to be crossed over the 21 mile route;
• Over 85 wetlands are identified to be impacted by construction and operation of the pipeline;

In addition, a breakdown of the cost associated with this project as reported in Oil & Gas Journal is shown below:

Please note that 71% of this project as reported by the OGJ represents “Surveys, engineering, supervision, interest, administration, overheads, contingencies, allowances for funds used during construction, and FERC fees”.

Water crossings add an inordinate amount of cost to any project and this project crosses 29 water bodies in only 21 miles. In addition, 71% of this project’s estimated cost is identified as miscellaneous (surveys, engineering, supervision, interest, administration, overheads, contingencies and allowances) cost. We do not believe this project is representative of most large diameter projects throughout the state and question any cost estimate that assigns 71% of its cost estimate to a miscellaneous category.

Summary

In light of the current market conditions in the Oil & Gas industry, we believe the 6.95% increase in the pipeline schedule cost is unjustified. The evidence used in support of these pipeline schedules rely on pipeline project costs that all precede the advent of the downturn in the market. The source data for these proposed pipeline schedules do not include any projects that reflect current market conditions and those very likely to be anticipated for January 2016.

Comparison with the wide range of pipeline cost estimates as detailed by a highly respected and widely used resource, Marshal Valuation Service, indicate that 4 inch, 36 inch and 42 inch pipeline costs fall outside that range. Our analyses of the data supporting these proposed pipeline costs have identified concerns with the underlying support.

We request that the KMLP pipeline project be excluded from the 42 inch pipeline sample as it is not representative of most large diameter projects throughout the state. Based on a comparison of recent estimated and actual project costs, we request that the two most recent estimated 42 inch project costs be excluded from the sample because the proposed cost falls outside the MVS cost range and there is good reason to doubt the accuracy of these cost estimates.

We appreciate your time and consideration of this information.

Sincerely,

Mike Smith

Property Tax Partners

512.818.0779

San AntonioAustinFt. Worth-Dallas