Estate of H.A. True, Jr. - Page 145




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              Mr. Gustavson estimated net revenue per barrel by dividing              
          Belle Fourche’s historical net revenue69 by its historical                  
          throughput.  He averaged the values for years 1990 through 1993             
          to derive an average net revenue per barrel of .24, and applied             
          this to projected throughput in year 1.  Mr. Gustavson                      
          established a 4-percent annual decline rate for net revenue per             
          barrel by consulting a survey conducted by the Society of                   
          Petroleum Evaluation Engineers (SPEE).  This assumed that                   
          increasing operating costs would decrease the profit margin on              
          each barrel transported by the pipeline.                                    
              In his report, Mr. Gustavson applied a 14-percent discount              
          rate to the projected net cash-flows.  He computed this rate by             
          taking 10 percent, the regulated maximum tariff over cost of                
          service that a pipeline operator was allowed to charge, and                 
          adding 2 percent, for the risk that new competition might                   
          undercut Belle Fourche’s prices, and another 2 percent, to                  
          account for the risk that Belle Fourche’s throughput might drop             
          below the average decline rate.  Mr. Gustavson cited industry               
          personnel as confirming that a 10- to 15-percent discount rate              
          was typically used to analyze cash-flows of a pipeline company.             
              Mr. Gustavson stated that he did not conduct site visits or             
          discuss his DCF projections with Belle Fourche’s management.  He            


               69Historical net revenue was composed of gross operating               
          revenue minus operating expenses, rent/lease payments, State and            
          local property taxes, other taxes, and interest expense.                    




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