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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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