Bruce E. Warner, CPA, CDP, CFF
Contact Information:
Cell Phone: 801-916-6494
Office Phone: 801-783-3457
Fax Number: 866-406-2607
Web Sites: www.bwmq.com; http://warnerconsultant.blogspot.com/
11131 Prescott Park Circle
Sandy, Utah 84092
March 10, 2009
What is Financial Forensics?
Certification in Financial Forensics (CFF)
The American Institute of CPAs created the CFF credential in 2008 to recognize the professional skill, training and experience of individuals who specialize in financial forensics services. Bruce E. Warner, CPA, became certified in financial forensics in 2008 and provides several CFF services to the energy industry. Bruce practices in the areas of bankruptcy and insolvency, economic damages, litigation support and stakeholder disputes.
Carbon Capture and Sequestration Pipeline Business Opportunity
Carbon Capture and Sequestration (CCS) Pipelines Provide New Business Opportunities to Gas Pipeline Developers
Natural gas pipeline developers should be encouraged to facilitate the development of an interstate CCS pipeline transportation market. The pipelines have the skills and resources needed to provide this infrastructure within our economy. Within the United States somewhere between 3,000 to 4,000 miles of CCS pipelines have been developed over the past 30 years to transport CO2 for enhanced oil recovery. Given the emerging energy policies of the Obama Administration, a much expanded role for CCS pipelines lies in our future.
Pipelines can be built in three basic configurations to deliver CO2 to a “sink” area for injection into a salt cavern, depleted oil/gas field or non-mineable coal seam formation. The associated electric or natural gas power plant(s) that are the carbon source can be built directly over the “sink,” a single line can be built from the electric plant to the “sink” formation, or a network of CO2 pipelines can be built to transport the gas to the underground formations. Since some electric plants, such as peaking plants, do not run continuously, a network configuration may be favored to improve the load factor, and thereby the economics of the pipelines. Obviously, if the electric plant is located directly over the “sink” formation, the pipeline would be very short in length and would not be a major economic consideration. If the carbon capture site configuration and an available “sink” formation were relatively close to each other, single lines will likely evolve whose depreciable life would be tied to the physical and economic life of the power plant. A less extensive CO2 transportation network may evolve regionally in circumstances where power plant “farms” might be constructed due to favorable access to the electric grid, adequate water, and economic coal (including rail transport) or other fuel sources at a particular location. The evolution of a more extensive CO2 interstate transportation network might be more remote in its potential to evolve, and probably would be the last considered option if economics are permitted to prevail, even though improving the scale and volume of CO2 transportation would improve pipeline economics. Another factor that would play into economic evaluations will be the cost of and timing considerations associated with transporting energy by wire.
Before the market-place recognizes an extensive need for CO2 transportation facilities, a number of developments will need to occur. A carbon cap-and-trade law would improve the economics of carbon capture and sequestration facilities, such as those associated with coal power plants. CCS facilities increase the cost of delivered power substantially. Today, renewable electric generation options, such as wind or solar panels, appear be the preferred energy source alternatives by state regulators and national political leaders. Natural gas power plants also seem to be preferred over coal plants, even with potential CCS facilities, due to their relatively low capital cost requirements, shorter construction windows, and with more clarity today that significant additional gas supplies are available from non-conventional gas fields, such as the Barnett Shale fields of North Texas.
CO2 pipeline development requires an environment where CO2 is viewed by policy makers and the public as a commodity (rather than hazardous material) that can and should be safely transported and stored without significant leakage. This will require the evolution of several technologies and safety legislation, eminent domain transportation rights and clarity of CO2 environmental policies. Clarification of CO2 as a commodity, rather than a hazardous material, would facilitate transportation to remote storage sites and sequestration in applications where some economic benefit besides disposal can be realized, such as is currently the case with enhanced oil recovery. Thus, a number of important policy and legal matters need to be resolved before power plant developers and pipeline proponents will get a clear economic signal that an extensive CO2 transportation grid should be constructed.
Development of a pipeline network depends on the ability of electric distribution companies to pay for the facilities. Current state regulatory procurement processes that evaluate the best power source options will remain in place, and a power plant with CCS must be a best, or at least an acceptable, alternative to others in that planning process. The economics in part will depend on the cost of purchasing emissions credits as an alternative to CCS-related facilities once the cap-and-trade market fully evolves. Whether the CO2 transportation facilities are price-regulated or not is important, but not really the central question because the costs of transportation can be recovered by the pipeline developer if a contract with a credit-worthy electric LDC is in place. However, if CO2 transportation facilities were price-regulated, such as is the case today with interstate natural gas transportation facilities, this may help smooth approvals in the state-regulated energy procurement approval processes. Therefore, a jurisdictional transportation scheme would be likely more successful in its evolution. However, in the alternative policy makers could permit market-based or negotiated price options to evolve assuming a demonstrably competitive market for energy supply options.
CO2 pipelines are physically very similar to natural gas pipelines in almost all important respects. The pipeline and compression (or pumping) facilities can be built using transferrable, well-developed technology for similar costs per mile, though CO2 pipelines would likely more often be high pressure lines that is the case today for natural gas pipelines. CO2 pipelines would have electric compression or pumping facilities, rather than gas-fired compression which is more typical in the current interstate gas pipeline transportation network. CO2 pipelines do not corrode faster than natural gas pipelines as long as contaminants are controlled; thus, they do not inherently depreciate faster or slower than natural gas transportation facilities. Due to these factors, improving the cost of CO2 transportation would depend most importantly on government economic policies, such as the tax depreciable life, whether investment tax credits would be available and regulatory depreciation policies, such as the possible ability to defer depreciation until the full transportation demands evolve. Given favorable regulatory and tax policies, the facility costs could be recovered with a favorable depreciation scheme, such as levelized depreciation, and with the economics of tax incentives being transferred from the government to consumers. If the CO2 pipelines are non-price regulated facilities, the recovery of costs is simply a matter of negotiation between the electric LDC and the pipeline developer, a matter which is already well evolved for similar natural gas pipelines.
The circumstances that will drive the evolution of an extensive CO2 network are tied to technological developments and to large scale policy initiatives to sort out national energy source priorities.
I believe those interested in promoting CCS pipeline development should promote the following policies:
· CCS transportation as transportation of a commodity rather than as a hazardous material
· Eminent domain rights and certification of CCS transportation facilities
· Jurisdictional status and price regulation of interstate CCS transportation facilities with market-based pricing exceptions permitted for demonstrably competitive markets
· Economic incentives, such as favorable income tax treatment and innovative rate strategies, including negotiated rates and capacity release trading on CCS pipelines
Natural gas pipeline developers should be encouraged to facilitate the development of an interstate CCS pipeline transportation market. The pipelines have the skills and resources needed to provide this infrastructure within our economy. Within the United States somewhere between 3,000 to 4,000 miles of CCS pipelines have been developed over the past 30 years to transport CO2 for enhanced oil recovery. Given the emerging energy policies of the Obama Administration, a much expanded role for CCS pipelines lies in our future.
Pipelines can be built in three basic configurations to deliver CO2 to a “sink” area for injection into a salt cavern, depleted oil/gas field or non-mineable coal seam formation. The associated electric or natural gas power plant(s) that are the carbon source can be built directly over the “sink,” a single line can be built from the electric plant to the “sink” formation, or a network of CO2 pipelines can be built to transport the gas to the underground formations. Since some electric plants, such as peaking plants, do not run continuously, a network configuration may be favored to improve the load factor, and thereby the economics of the pipelines. Obviously, if the electric plant is located directly over the “sink” formation, the pipeline would be very short in length and would not be a major economic consideration. If the carbon capture site configuration and an available “sink” formation were relatively close to each other, single lines will likely evolve whose depreciable life would be tied to the physical and economic life of the power plant. A less extensive CO2 transportation network may evolve regionally in circumstances where power plant “farms” might be constructed due to favorable access to the electric grid, adequate water, and economic coal (including rail transport) or other fuel sources at a particular location. The evolution of a more extensive CO2 interstate transportation network might be more remote in its potential to evolve, and probably would be the last considered option if economics are permitted to prevail, even though improving the scale and volume of CO2 transportation would improve pipeline economics. Another factor that would play into economic evaluations will be the cost of and timing considerations associated with transporting energy by wire.
Before the market-place recognizes an extensive need for CO2 transportation facilities, a number of developments will need to occur. A carbon cap-and-trade law would improve the economics of carbon capture and sequestration facilities, such as those associated with coal power plants. CCS facilities increase the cost of delivered power substantially. Today, renewable electric generation options, such as wind or solar panels, appear be the preferred energy source alternatives by state regulators and national political leaders. Natural gas power plants also seem to be preferred over coal plants, even with potential CCS facilities, due to their relatively low capital cost requirements, shorter construction windows, and with more clarity today that significant additional gas supplies are available from non-conventional gas fields, such as the Barnett Shale fields of North Texas.
CO2 pipeline development requires an environment where CO2 is viewed by policy makers and the public as a commodity (rather than hazardous material) that can and should be safely transported and stored without significant leakage. This will require the evolution of several technologies and safety legislation, eminent domain transportation rights and clarity of CO2 environmental policies. Clarification of CO2 as a commodity, rather than a hazardous material, would facilitate transportation to remote storage sites and sequestration in applications where some economic benefit besides disposal can be realized, such as is currently the case with enhanced oil recovery. Thus, a number of important policy and legal matters need to be resolved before power plant developers and pipeline proponents will get a clear economic signal that an extensive CO2 transportation grid should be constructed.
Development of a pipeline network depends on the ability of electric distribution companies to pay for the facilities. Current state regulatory procurement processes that evaluate the best power source options will remain in place, and a power plant with CCS must be a best, or at least an acceptable, alternative to others in that planning process. The economics in part will depend on the cost of purchasing emissions credits as an alternative to CCS-related facilities once the cap-and-trade market fully evolves. Whether the CO2 transportation facilities are price-regulated or not is important, but not really the central question because the costs of transportation can be recovered by the pipeline developer if a contract with a credit-worthy electric LDC is in place. However, if CO2 transportation facilities were price-regulated, such as is the case today with interstate natural gas transportation facilities, this may help smooth approvals in the state-regulated energy procurement approval processes. Therefore, a jurisdictional transportation scheme would be likely more successful in its evolution. However, in the alternative policy makers could permit market-based or negotiated price options to evolve assuming a demonstrably competitive market for energy supply options.
CO2 pipelines are physically very similar to natural gas pipelines in almost all important respects. The pipeline and compression (or pumping) facilities can be built using transferrable, well-developed technology for similar costs per mile, though CO2 pipelines would likely more often be high pressure lines that is the case today for natural gas pipelines. CO2 pipelines would have electric compression or pumping facilities, rather than gas-fired compression which is more typical in the current interstate gas pipeline transportation network. CO2 pipelines do not corrode faster than natural gas pipelines as long as contaminants are controlled; thus, they do not inherently depreciate faster or slower than natural gas transportation facilities. Due to these factors, improving the cost of CO2 transportation would depend most importantly on government economic policies, such as the tax depreciable life, whether investment tax credits would be available and regulatory depreciation policies, such as the possible ability to defer depreciation until the full transportation demands evolve. Given favorable regulatory and tax policies, the facility costs could be recovered with a favorable depreciation scheme, such as levelized depreciation, and with the economics of tax incentives being transferred from the government to consumers. If the CO2 pipelines are non-price regulated facilities, the recovery of costs is simply a matter of negotiation between the electric LDC and the pipeline developer, a matter which is already well evolved for similar natural gas pipelines.
The circumstances that will drive the evolution of an extensive CO2 network are tied to technological developments and to large scale policy initiatives to sort out national energy source priorities.
I believe those interested in promoting CCS pipeline development should promote the following policies:
· CCS transportation as transportation of a commodity rather than as a hazardous material
· Eminent domain rights and certification of CCS transportation facilities
· Jurisdictional status and price regulation of interstate CCS transportation facilities with market-based pricing exceptions permitted for demonstrably competitive markets
· Economic incentives, such as favorable income tax treatment and innovative rate strategies, including negotiated rates and capacity release trading on CCS pipelines
Bruce E. Warner, CPA, CDP, CSS
March 2009
Author’s note: For more information on this topic, see the excellent article: “Carbon Dioxide (CO2) Pipelines for Carbon Sequestration: Emerging Policy Issues” by Paul W. Parfomak and Peter Folger” at http://assets.opencrs.com/rpts/RL33971_20080117.pdf
March 5, 2009
Bruce Warner – Energy Consultant Credentials
Bruce E. Warner, CPA, CFF, CDP is an energy industry financial consultant and regulatory litigation expert.
Since 2006, Mr. Warner has worked as a vice president with Brown, Williams. Moorhead & Quinn, Inc., an energy industry consulting firm with offices in Washington, D.C. and Houston, Texas. He provides the following services to his clients: regulatory litigation and settlement services; depreciation rate studies; accounting and income tax advice; expert forensic accounting services; financial modeling services; and training services. Mr. Warner is an expert on cost of service, depreciation, rate base and rate design issues pertaining to natural gas and oil pipelines.
Mr. Warner owned a local CPA firm specializing in income tax services for fifteen years. For 25 years, Mr. Warner served in regulatory, strategic planning and accounting management capacities for Williams Gas Pipelines-West and Kern River Gas Transmission Company.
His management experience includes the following functions: rates and governmental affairs, property and inventory accounting, financial reporting, regulatory research, tariffs, nominations and strategic planning. While serving as director of regulatory and governmental affairs and manager of rates and strategic planning in those organizations, he managed the litigation or settlement of six complete natural gas pipeline rate cases, two "postage stamp" vs. zone rate hearings, a storage service unbundling proceeding and a reliability of services settlement.
Mr. Warner served Williams Gas Pipeline-West in a strategic planning role where he facilitated effective strategies for the business unit. During that period, Mr. Warner developed financing, financial models, and cost of service and rate strategies for over $2 billion of incremental and rolled-in mainline and lateral pipeline expansion projects, including several expansions of Northwest Pipeline Corporation and Kern River Gas Transmission Company and the Georgia Straight Pipeline Project, a project to deliver gas from Washington State to Vancouver Island in British Columbia.
Mr. Warner has testified as an expert witness before the Federal Energy Regulatory Commission, British Columbia Utilities Commission, Regulatory Commission of Alaska, Nebraska Public Service Commission and the State Tax Commissions of Utah and Idaho.
Mr. Warner graduated Magna Cum Laude with a Bachelor of Science degree in accounting from Brigham Young University in 1975. He became a certified public accountant in Illinois in 1975. While working for Arthur Andersen & Co. in Chicago and San Francisco during the 1970s, his audit clients were primarily in the natural gas, electric utility and banking industries. He worked for that firm in its income tax division. Mr. Warner received a MBA degree from the University of Utah in 1981.
Mr. Warner is a licensed CPA in Utah. He is certified in financial forensics (CFF) by the American Institute of CPAs. He is a Certified Depreciation Professional with credentials from the Society of Depreciation Professionals. Mr. Warner has held a Series 7 registered representative (stockbroker) license and formerly worked with HD Vest, an investment firm, in that capacity.
Mr. Warner teaches accounting, auditing and finance courses at the University of Phoenix. He helped the University to develop a corporate financial management course for energy industry MBA students.
Mr. Warner is a member of Rotary International, the American Institute of CPAs, Utah Association of CPAs, Energy Bar Association (non-attorney member) and the Society of Depreciation Professionals.
Energy Business Tips – February 2009
Bruce's Energy Business Tips
February 2009
Integrity and the Energy Patch
Memories of the Enron fiasco that rocked the energy sector in the early 2000s, other financial scandals and current economic and political events probably cause us to pause and wonder, "What went wrong?" And more importantly, "How can we prevent the same thing from happening in our own organizations?"
While the answers to these questions are complex, an understanding of psychological tendencies of individuals and groups can help to shed some light on the vulnerabilities we all have as human beings. For an excellent and easy book to read on this topic, I highly recommend Influence, The Psychology of Persuasion by Robert B. Cialdini, Ph. D. The book is readily and cheaply accessible from internet booksellers.
I believe that without understanding human psychological tendencies and providing specific policies and training to combat them, business organizations can easily fail in meeting their obligations to shareholders and to other interested stakeholder groups, such as to important regulators (the SEC and FERC).
The AICPA, the Institute of Internal Auditors and the Association of Certified Fraud Examiners and recently jointly issued a new publication to help organizations manage the business risks of fraud. The publication is called, "Managing the Business Risk of Fraud: A Practical Guide" The publication assists organizations to evaluate their own risk of experiencing fraud and helps in establishing relevant policies, detection measures and prevention strategies in this important area. See the following link to access your own copy of this guide: http://www.acfe.com/documents/managing-business-risk.pdf
Modeling Energy Projects for Success
Energy projects are complex, long-lived business endeavors that involve a host of risk factors that are evaluated during the processes of project development, construction and financing. Many organizations do not have comprehensive models to confront these challenges. Additionally, they may not have personnel fully trained to model and evaluate their projects.
For example, does your company know what its cost of capital is, and how that cost of capital varies across different types of energy projects? (Projects should not be pursued if they may earn less than the firm's cost of capital.) How does your company decide which projects to pursue?
Do you have quality control procedures in place to ensure quality in your modeling efforts, such as reviewing the reasonableness of key input assumptions and approaching modeling in a standardized, documented fashion?
Do your models robustly include the elements of a comprehensive project business plan? Do they incorporate the theory of examining the firm's real options, or alternatives to the contemplated projects? Do you evaluate alternatives for negotiated, market-based and regulated pricing and implementation strategies? Do you consider how each project will impact your company's overall financing strategy?
Do the models contain complete pro forma financial schedules, such as rate base, cost of service, balance sheets, income statements and cash flow statements? Do the cash flow calculations contain the impacts on cash flows of special income tax provisions and other energy incentives? Do your models evaluate a range of outcomes that may be experienced for the financial strategy you have selected, such as by using a range of inputs and displaying the results with tornado diagrams?
I recommend the following text book for materials that may help with improving your modeling efforts: Corporate Financial Management, Third Edition, by Emery, Finnerty and Stowe, published by Prentice Hall in 2007.
Transition Help for Office 2007
Here is a link I found that will help smooth your transition to Microsoft Office 2007. The get started tabs for Excel, Word and PowerPoint provide a number of resources to help unlock the power of the software. http://office.microsoft.com/en-us/help/HA102146851033.aspx
Energy Industry Developments – February 2009
Energy Industry Developments
Obama Administration Proposes Changes to Energy Priorities and Taxes As Reflected in the Recent Budget Proposal and Economic Stimulus Package
Summary of Proposed Tax Changes As Reflected in Obama Administration 2009 Budget Proposal
- Proposals to eliminate "oil and gas company preferences" worth $31.48 billion over 10 years
- Expensing of intangible drilling costs
- Repeal of the manufacturers' tax deduction for oil and gas companies ($13.29 billion over 10 years)
- Repeal of the percentage depletion allowance, important to small independent producers ($8.25 billion over 10 years)
- Repeal of the enhanced oil recovery credit
- Repeal of the marginal well tax credit
- Repeal of the deduction for tertiary injectants
- Repeal of the passive loss exception for working interests in oil and gas properties
- Expensing of intangible drilling costs
- Proposals to increase taxes on oil and gas
- Excise tax on Gulf of Mexico production ($5.28 billion over 10 years)
- Reduction to Gulf of Mexico royalty relief beginning in 2011 (related to an apparent government error to not include a provision in leases that would raise royalty payments in times of high oil prices).
- A new 13 percent tax on all oil and gas production in the Gulf would affect companies not currently paying any royalties due to a "loophole".
- Increase the geological and geophysical amortization period for independent producers from 5 to 7 years ($1.19 billion over 10 years), reversing a provision in the 2005 Energy Policy Act
- Reinstate the "Superfund" tax on refiners and petrochemical manufacturers (projected taxes of $1.2 billion in 2011, phasing to $2.3 billion in 2019 and totaling $17.2 billion in 2011-190)
- Excise tax on Gulf of Mexico production ($5.28 billion over 10 years)
- Proposals to increase fees on producers
- Charges to producers for user fees for processing permits to drill on Federal lands
- Increases to "reform royalties and adjust rates"
- Imposing a new fee, $4 per acre, on nonproducing Gulf leases that would raise $1.2 billion over ten years
- Charges to producers for user fees for processing permits to drill on Federal lands
Summary of Proposed Changes in Energy Policy Priorities
- $19 million in the EPA budget to be used to upgrade greenhouse gas reporting measures.
- Elaborate carbon "cap and trade" program to put a price(tax) on emitting pollution
- Starting in 2012 the government would sell pollution permits, generating a projected $646 billion of revenue through 2019, or $78.7 billion per year starting in 2012.
- The number of available permits would gradually decline, forcing businesses to buy increasingly scarce and costly rights on an open equities-style market.
- The Administration hopes this will encourage businesses to invest in clean technologies as a cheaper alternative.
- The goal is to double renewable energy production in three years and to have 10 percent of electricity generated from clean energy by 2012. Along with this the goal is to cut greenhouse gas production 14% below 2005 levels by 2020 and 83 percent by 2050.
- The initial estimated carbon credit price is about $20 per ton.
- Of the $646 billion, $120 billion, or $15 billion per year, would be invested in low carbon technologies starting in 2012.
- The remainder of the $646 billion would be directed to disadvantaged communities and businesses to "help the transition to a clean energy economy." The plan aims to help finance Obama's tax credit for workers and to help with clean-up costs for small businesses.
- The CBO estimates the revenue generated from a cap and trade system could ultimately range from $50 billion to $300 billion per year.
- Starting in 2012 the government would sell pollution permits, generating a projected $646 billion of revenue through 2019, or $78.7 billion per year starting in 2012.
- The Administration rejected permitting nuclear waste to be stored at Yucca Mountain in Nevada, after 20 years of plans and a cost of $9 billion.
- The budget would end federal funding for ultra-deepwater oil and gas research and development.
Fifty Percent Business Bonus Depreciation Extended Through 2009
The 50 percent bonus tax depreciation provision included in the 2008 economic stimulus legislation was extended in the most recent economic stimulus package for expenditures made during 2009. The estimated cost of the extension was $5.07 billion over 10 years.
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