BEFORE THE PUBLIC SERVICE COMMISSION OF WYOMING ) ) ) ) PREFILED REBUTTAL TESTIMONY AND EXHIBITS OF JONI JOHNSON-POWE INDEX QUALIFICATIONS...

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1 BEFORE THE PUBLIC SERVICE COMMISSION OF WYOMING IN THE MATTER OF THE APPLICATION OF SOURCEGAS DISTRIBUTION LLC FOR AUTHORITY TO INCREASE ITS NATURAL GAS RATES BY $7.47 MILLION PER ANNUM, TO CONSOLIDATE ITS TORRINGTON, CASPER AND GILLETTE DIVISIONS, AND TO IMPLEMENT A DEMAND-SIDE MANAGEMENT PROGRAM AND SEVERAL RATE ADJUSTMENT MECHANISMS ) ) ) DOCKET NO GR-10 ) ) RECORD NO ) ) PREFILED REBUTTAL TESTIMONY AND EXHIBITS OF JONI JOHNSON-POWE INDEX SECTION I, I1. II1. IV. Vo PAGE QUALIFICATIONS... 1 SCOPE OF TESTIMONY:... 3 ADIT BALANCE AS OF AUGUST 31, 2009, AS FILED... 4 ADIT BALANCE AS OF AUGUST 31, 2009, AS CORRECTED AND UPDATED... 6 ADIT BALANCE AS OF DECEMBER 31, 2009, FOR ELECTION... 7

2 I. QUALIFICATIONS PLEASE STATE YOUR NAME AND BUSINESS ADDRESS. My name isjonijohnson-powe. My business address is 370 Van Gordon Street, Suite 4000, Lakewood, Colorado BY WHOM ARE YOU EMPLOYED AND IN WHAT CAPACITY? I am employed by SourceGas LLC ("SourceGas"). I am Director, Tax, for SourceGas Distribution LLC ("SourceGas Distribution" or the "Company"). In this capacity, I oversee all matters related to federal, state and local taxation for SourceGas and its affiliates~ PLEASE STATE YOUR EDUCATIONAL BACKGROUND AND PROFESSIONAL EXPERIENCE. I graduated from the University of Nebraska-Lincoln with a B.S. in Accounting in I received myj.d, with an emphasis in Taxation from the University of Colorado Law School in I passed the Certified Public Accountant exam and Colorado Bar exam in 1996, and I am a licensed CPA and attorney in the State of Colorado. I began my career in 1996 with Ernst & Young, LLP in its federal and state and local tax practices. While with Ernst & Young, LLP, I provided tax compliance and consulting services to clients in a wide array of industries including high-technology, energy and manufacturing. In 1998, I joined KPMG, LLP s state and local practice in Denver, Colorado, providing compliance and consulting services in the areas of income and sales and use taxes to clients in telecommunications, energy and high-technology. In 2003, I formed my own CPA firm, J.P. Powe & Associates, LLC, and provided federal, state and local tax services to small and large clients. Prior to joining SourceGas in March 2010, I served as the Director of State Prefiled Rebuttal Testimony of Joni Johnson-Powe

3 Go Go and Local tax services for Grant Thornton for two years. While with Grant Thornton, I provided tax services to clients primarily in the energy and telecommunications industries. PLEASE DESCRIBE YOUR RESPONSIBILITIES AS DIRECTOR OF THE TAX DEPARTMENT. As the Director, I oversee all the tax department responsibilities. The tax department prepares all income tax returns and supporting schedules including tax depreciation, contributions in aid of construction ("CIAC"), allowance for funds used during construction ("AFUDC") and interest capitalization. The tax department also handles the compliance and reporting for sales and use tax, property tax and escheatment. HAVE YOU PREVIOUSLY TESTIFIED BEFORE THE WYOMING PUBLIC SERVICE COMMISSION (THE "COMMISSION")? No. HAVE YOU EVER APPEARED BEFORE THE INTERNAL REVENUE SERVICE OF THE UNITED STATES DEPARTMENT OF TREASURY ("IRS"), OR ANY OTHER TAXING AUTHORITIES? Yes. I have appeared before the lrs and other taxing authorities in connection with the following matters: Carustar Industries Appeal of Assessment Hearing - City of Denver (February 2010) Ever-Ready Oil Co. Appeal of Assessment Hearing- State of Colorado (November 2008) Notice No WildBlue Communications, Inc. Appeal of Assessment Hearing- City of Greenwood Village (November 2007) S Phillips Investment Group - Audit of Conoco Peoria Appeal of Assessment Hearing- City of Aurora (May 2007) Prefiled Rebuttal Testimony of Joni Johnson-Powe

4 Go CAS IRS - Dept of Justice - US District Court United States of America v. George & Phyllis Radney (September 2006) Civil Action 06-CV-0138-WYD-MJW II. SCOPE OF TESTIMONY DID YOU SPONSOR PREFILED DIRECT TESTIMONY IN THIS PROCEEDING? No. WHAT IS THE PURPOSE OF YOUR PREFILED REBUTTAL TESTIMONY IN THIS PROCEEDING? The purpose of my prefiled rebuttal testimony in this proceeding is to address the prefiled direct testimony of Ms. Denise Kay Parrish, who filed testimony on behalf of the Office of Consumer Advocate COCA"), relating to the current level of the Company s accumulated deferred income taxes ("ADIT"). Although Ms. Parrish correctly concludes on page 20 of her testimony that "the entries made on SourceGas books at the time of the transaction [approved by the Commission in Docket No GA-06] properly conformed to federal tax law and IRS standards," she declines to accept the level of SourceGas s ADIT balance of ($2,490,890) as of August 31, 2009 (the end of the test year in this case), as shown on Schedule 11 of Exhibit 3. My rebuttal testimony provides support for how the Company calculated the ADIT balance as of August 31, 2009, presents a corrected and updated ADIT balance as of August 31, 2009, and updates the ADIT balance as of December 31, 2009 to reflect the Company s decision to elect to opt into accelerated bonus tax depreciation for calendar year 2009 (the "Election"). Asa result, SourceGas s ADIT balance as of December 31, 2009, is ($4,375,688). Mr. James M. Elliott reflects this updated and Prefiled Rebuttal Testimony of Joni Johnson-Powe

5 corrected balance in his rebuttal exhibits presenting the Company s revised revenue requirement. HAVE YOU PREPARED ANY EXHIBITS IN CONNECTION WITH YOUR PREFILED REBUTTAL TESTIMONY? Yes. I will present and explain the following five exhibits, whichwere prepared by me or under my supervision: Exhibit JJP-1 Exhibit JJP-2 Exhibit JJP-3 Exhibit JJP-4 Exhibit JJP-5 ADIT Balance as of August 31, 2009, as Filed ADIT Balance as of August 31, 2009, as Corrected and Updated Company s Response to OCA Audit Information Request No. 20 Company s Supplemental Response to OCA Verbal Data Request No. 7 (Regarding the Election) ADIT Balance as of December 31, 2009, for Election 15 III. ADIT BALANCE AS OF AUGUST 31~ 2009~ AS FILED Go Q, WHAT ADIT BALANCE DID THE COMPANY PRESENT IN ITS RATE CASE APPLICATION? As shown in Exhibit 3, Schedule 11, the ADIT balance for Wyoming as of August 31, 2009, was ($2,490,890). SourceGas Distribution calculated this balance by accounting for the book-tax differences for plant depreciation, intangible amortization, CIAC and AFUDC. HOW DID THE COMPANY CALCULATE THE PORTION OF THE ADIT BALANCE RELATED TO THE DEPRECIATION AND AMORTIZATION? At a high-level, in calculating the portion of the ADIT balance related to depreciation and amortization, the Company took the difference between the book depreciation and tax depreciation reflected on its books as of August Prefiled Rebuttal Testimony of Joni Johnson-Powe 4

6 Go 31, The assets were segregated by location and state for purposes of calculating theaditbalance,inwyoming. SourceGasDistribution determined the net book value ("NBV") for book purposes by taking the difference between the Company s historical cost and accumulated depreciation/amortization. The Company uses the same process for determining NBV for tax purposes. The difference between the booknbv and tax NBV is multiplied by the federal tax rate of 35% to derive the portion of the ADIT balance related to depreciation and amortization. HOW DID THE COMPANY CALCULATE THE PORTION OF THE ADIT BALANCE RELATED TO ClAC? For calculating the portion of the ADIT balance related to CIAC, the Company reflected the difference between the book and tax treatment for CIAC received bysourcegas Distribution. For tax purposes, CIACamounts received from customers are included in income in the year received. However, no income is recognized for book purposes. The Company determined the amount of CIAC associated with Wyoming operations and multiplied that amount by the federal tax rate of 35% to derive the portion of the ADIT balance related to CIAC. HOW DID THE COMPANY CALCULATE THE PORTION OF THE ADIT BALANCE RELATED TO AFUDC? For calculating the portion of the ADIT balance related to AFUDC, the Company reflected the difference between the amounts of AFUDC capitalized for book purposes and deducted for tax purposes. For tax purposes, AFUDC is generally deductible in the year paid. For book purposes, SourceGas Distribution capitalizes AFUDC interest. The net difference between the AFUDC deducted for tax purposes and capitalized Prefiled Rebuttal Testimony of Joni Johnson-Powe

7 Q. A. Q. A. Q. for book purposes is multiplied by the Wyoming percentage of gross plant and the federal tax rate of 35% to derive the portion of the ADIT balance related to AFUDC. ARE YOU SPONSORING AN EXHIBIT THAT SUPPORTS HOW THE COMPANY CALCULATED THE ADIT BALANCE AS OF AUGUST 31, 2009, AS FILED? Yes. ExhibitJJP-1 supports how the Company calculated the ($2,490,890) ADIT balance for Wyoming as of August 31, 2009, as shown in Exhibit 3, Schedule 11. IV. ADIT BALANCE AS OF AUGUST 31~ 2009~ AS CORRECTED AND UPDATED ARE YOU SPONSORING AN EXHIBIT THAT CORRECTS AND UPDATES THE ADIT BALANCE AS OF AUGUST 31, 2009? Yes. Exhibit JJP-2 calculates the Company s ADIT balance for Wyoming as of August 31, 2009, as corrected and updated, to be ($2,231,214). HOW DID THE COMPANY CORRECT THE ADIT BALANCE AS OF AUGUST 31, 2009? The Company made one correction, as described in the Company s Response to OCA Audit Information Request No. 20, which I have provided with my rebuttal testimony as Exhibit JJP-3. In response to OCA s request, the Company recalculated the test period ADIT balance to include the ADIT associated with all pro forma plant adjustments. The ADIT associated with all pro forma plant adjustments was ($31,693), which increased the total ADIT balance to ($2,522,583) from ($2,490,890). HOW DID THE COMPANY UPDATE THE ADIT BALANCE AS OF AUGUST 31, 2009? Prefiled Rebuttal Testimony of Joni Johnson-Powe 6

8 The Company updated its plant ADIT calculation to account for the tax basis difference related toclacandafudc. For tax purposes, the Company includes the CIAC in the asset basis and depreciates it over the life of the asset since the IRS requires CIAC to be included as income. The Company s accounting system does not include ClAC in the tax basis of the asset. For book purposes, CIAC is excluded from the asset s basis. Accordingly, the updated calculation increases the tax cost basis and accumulated depreciation to reflect the net balance of CIAC that is excluded from SourceGas Distribution s book basis. For purposes of AFUDC, the Company s accounting system includes AFUDCin book basis and tax basis. However, for tax purposes AFUDC is excluded from tax basis since it is deductible in the year accrued. Accordingly, the Company decreased the tax cost basis and associated accumulated depreciation by the net amount of AFUDC deducted for income tax purposes. The ClAC and AFUDC updates result in a $291,369 net decrease in the ADIT balance. V. ADIT BALANCE AS OF DECEMBER 31 v 2009v FOR ELECTION PLEASE EXPLAIN ACCELERATED BONUS TAX DEPRECIATION AND THE ABILITY TO OPT INTO IT. The 2009 Recovery Act (H.R.1, P.L ) extends the bonus depreciation provisions of the 2008 Economic Stimulus Act to qualifying property purchased and placed into service by December 31, This provision allows businesses to recover the costs of capital expenditures made in 2009 faster than the ordinary depreciation schedule would allow by permitting businesses to immediately write off 50% of the cost of depreciable property acquired in 2009 for use in the United States. Prefiled Rebuttal Testimony of Joni Johnson-Powe

9 1 Q. 2 3 A Q. 8 9 A DID THE COMPANY NOTIFY PARTIES IN THE PROCEEDING THAT IT IS MAKING THE ELECTION? Yes. As stated in the Company s Response toocaverbaidata Request No. 7, which I have provided with my rebuttal testimony as Exhibit JJP-4, the Company is proceeding, before the September 15, 2010 deadline, to take bonus depreciation for calendar year WHAT IS THE IMPACT OF THE ELECTION ON SOURCEGAS S TAXABLE INCOME? Making the Election effectively decreases anticipated 2010 taxable income of the collective SourceGas companies as a result of increased net operating loss carry-forwards Go DOES THE COMPANY S ELECTION IMPACT THE COMPANY S REVENUE REQUIREMENT IN THIS PROCEEDING? Yes. SourceGas Distribution filed its Application before deciding to make the Election for calendar year The Election does not materially impact the Company s ADIT calculation as of August 31, 2009 because most of the assets for which bonus depreciation was elected, such as the current billing system, were not placed into service until September 2009 or later. Consequently, the Company is proposing to use its ADIT balance as of December 31, 2009, to accurately reflect the Election for calendar year The bonus depreciation increases the Company s plant-related ADIT as of December 31, 2009 to ($5,559,753) and, therefore, increases the Company s overall ADIT as of December 31, 2009 to ($4,375,688). Exhibit JJP-5 reflects the calculation of the ADIT balance as of December 31, Prefiled Rebuttal Testimony of Joni Johnson-Powe

10 1 2 3 DOES THIS CONCLUDE YOUR PREFILED REBUTTAL TESTIMONY? Yes. SourceGas Distribution offers Exhibits JJP-1 throughjjp-5. Prefiled Rebuttal Testimony of Joni Johnson-Powe

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18 Exhibit JJP-3 Page 1 of 1 SOURCEGAS DISTRIBUTION LLC 2010 WYOMING RATE CASE DOCKET NO GR-10 RESPONSE TO OFFICE OF CONSUMER ADVOCATE S AUDIT INFORMATION REQUESTS DATE OF REQUEST: DATE RESPONSE DUE: REQUESTOR: ANSWERED BY: DATE RESPONDED: SUBJECT: June 2, 2010 June 16, 2010 Wyoming Office of Consumer Advocate Olga S. Odell June 30, 2010 ADIT AUDIT INFORMATION REQUEST NO. 20 Please provide the test period ADIT balance shown in rate ba~e recalculated to include the ADIT associated with all pro forma plant adjustments. RESPONSE: SourceGas Distribution LLC responds as follows: The ADIT associated with all pro forma plant adjustments is ($31,693), This would result in a total ADIT credit of ($2,522,583) increased from ($2,490,890) included in Exhibit 3, Schedule 11, ATTACHMENT: None

19 Exhibit JJ P-~, Page 1 of 1 SOURCEGAS DISTRIBUTION LLC 2010 WYOMING RATE CASE DOCKET NO GR-10 RESPONSE TO OFFICE OF CONSUMER ADVOCATE S VERBAL DATA REQUESTS DATE OF REQUEST: REQUESTOR: ANSWERED BY: DATE RESPONDED: DATE SUPPLEMENTED: SUBJECT: March 4, 2010 Office of Consumer Advocate James M. Elliott April 1, 2010 July 15, 2010 Accelerated Bonus Tax Depreciation VERBAL DATA REQUEST NO. 7 Has the Company explored opting into accelerated bonus tax depreciation, in connection with the federal stimulus package? RESPONSE: Yes, the Company explored opting into accelerated bonus tax depreciation in connection with the federal stimulus package. The Company determined that doing so would not be beneficial because it would increase net operating loss for tax purposes. SUPPLEMENTAL RESPONSE: Subsequent to the initial response, the Company s Accounting, Tax and Finance departments engaged in a process of re-exploring opting into accelerated bonus tax depreciation in connection with the federal stimulus package, and now are proceeding to elect, before the September 15, 2010 deadline, to take bonus depreciation for calendar year Doing so would effectively decrease anticipated 2010 taxable income of the collective SourceGas companies as a result of increased net operating loss carry-forwards. If bonus depreciation is elected, the Company would reflect the resulting additional accumulated deferred income tax in an updated revenue requirement submitted during this case. ATTACHMENT: None.)

20 Wyoming ADIT at December Accumulated Deferred Income Taxes Allocators Intangible Plant Percentages Tangible Plant Percentages CIAC Percentages Exhibit JJP-5 Page I of 4 Co Federal Deferred Tax Assets - Intangibles Deferred Tax Assets - Capitalized Interest Property Related CIAC Deferred Tax Liabilities Sub-total 190 S 57, ,~ 13, S (4,535,506) 282 ~; 1,181, (3,283,124) Pro-Forma adj. Property Related Sub-total 282 (31,693) (3,314,817) Co Federal Deferred Tax Assets Property Related Property Related(excluding Gross Plant) CIAC Deferred Tax Liabilities Sub-total S (1,024,247) S (36,623) 283 $ (1,060,871) Total ADIT (4,375,688)

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