Lykes Energy, Inc. and Subsidiaries - Page 13

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          its products, and, in this setting, the subsidies relate                    
          primarily to the income from that sale as opposed to income that            
          is intended to be generated in the future.  People's may deduct             
          the subsidies as an ordinary expense of its business.                       
               As to the remaining expenditures, those amounts are                    
          promotional or selling expenses unrelated to a specific sale.               
          Given our finding that these expenditures primarily helped                  
          People's increase its customer base, we now decide whether                  
          gaining new customers yielded a future benefit to People's that             
          was more than incidental.  We conclude it did.  While People's              
          made substantial investments to induce its customers to use                 
          natural gas, its customers also made substantial investments to             
          become gas customers.  That is the point of many of the FEECA               
          programs.  New gas customers must generally buy new appliances.             
          Often they have to install gas piping within the walls of their             
          homes or commercial structures.  As a result, both People's and             
          its new customers have a strong incentive to continue their                 
          business relationships beyond the initial years.  These upfront             
          costs tend to discourage People's new customers from switching to           
          other energy sources and essentially assure People's that it will           
          receive revenue from these customers in the future.  This                   
          projected revenue stream, which is the direct object of People's            
          promotional expenditures, is a significant future benefit.  The             
          expenditures connected thereto must be capitalized.  See Houston            

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Last modified: May 25, 2011