SUMMARY OF WRITTEN STATEMENT

OF

FLORIDA GAS TRANSMISSION COMPANY.

September 24, 1969

HR 13270, Section 451, bases the ability of a public utility to use accelerated depreciation in the future upon the filing of its Federal income tax return on or before July 22, 1969. The filing of the tax return is an inappropriate event to determine this question. The significant events to which the future use of accelerated depreciation should be related are either (i) the recording of income tax expense on the regulated books of account or (ii) the filing of rates with the appropriate administrative agency, as of the relevant date selected for such determination.

In the case of Florida Gas Transmission Company, the Internal Revenue Service granted the Company an extension of time to September 15, 1969 for filing its tax return for 1968, the first tax return of the Company which uses accelerated depreciation. Accordingly, this return was not filed until August 25, 1969. However, in August 1968, the Company had filed rates with the Federal Power Commission in reliance upon the use and flowthrough of accelerated depreciation on all property acquired subsequent to 1967. These rates, which have been in effect since February 16, 1969, were based upon a cost of service which included Federal income tax expense at a level approximately $1.6 million a year below what it will be unless the Company is permitted to use accelerated depreciation for tax purposes in 1969 and future years.

Several alternative amendments to HR 13270 are suggested at

the end of the Written Statement.

Submitted by E. P. Shanahan, Vice President and Treasurer

WRITTEN STATEMENT

OF

FLORIDA GAS TRANSMISSION COMPANY

Subject:

HR 13270, Section 451

In its bill to reform the income tax laws, the House of Representatives has proposed certain amendments to Section 167 of the Internal Revenue Code which would restrict the right of a public utility to use accelerated depreciation. Section 451 of House Bill 13270 would require the use of straight-line depreciation on public utility property unless a different method had been used on such property for the latest taxable year for which a return was filed on or before July 22, 1969.

In the case of Florida Gas Transmission Company, the proposed requirement of the House Bill that the applicable return be filed on or before July 22, 1969 would have what undoubtedly is an inadvertent result. On June 26, 1969, the Internal Revenue Service granted the Company an extension of time until September 15, 1969 to file its income tax return for calendar year 1968. Thus the Company's 1968 tax return, which will be the first to use accelerated depreciation, was not filed until August 25, 1969. Nevertheless, in August 1968, the Company irrevocably committed itself to the use of accelerated depreciation, with respect to property acquired subsequent to December 31, 1967, by filing rates with the Federal Power Commission in reliance upon the use and flowthrough of accelerated depreciation. These rates have been in effect since February 16, 1969, and will not realize a fair return for the Company without the use and flowthrough of accelerated depreciation on property acquired in 1968 and 1969 (amounting to approximately $90,000,000 of a total plant of approximately $350,000,000). Nevertheless, because for the year 1967 (the latest taxable year for which a tax return was filed on or before July 22, 1969) the Company used solely a straight-line method of depreciation, the Company would be required by the House Bill to remain on straight-line depreciation for all years subsequent to 1968. For the year 1968, however, the Company would be entitled to take accelerated depreciation since the Bill does not apply with respect to taxable years ending before July 23, 1969.

We submit that the crucial determination with respect to its method of depreciation for tax purposes is made by a public utility when it files rates based upon the use and flowthrough of accelerated depreciation and so calculates the income tax expense recorded in its regulated books of account. Once rates have become effective in reliance upon the use and flowthrough of accelerated depreciation for tax purposes, the utility, in effect, has irrevocably committed itself to this method of depreciation

so long as those rates remain in effect. Accordingly, the tax reform bill should base the relevant date for determining the future use of accelerated depreciation upon the recordation of income tax expenses in the regulated books of account or the filing of rates with the appropriate administrative agency, instead of or in addition to the date its Federal income tax return was filed.

The following evidences the fact that Florida Gas Transmission Company had decided to take accelerated depreciation during 1968, a year prior to the June 22, 1969 cut-off date presently in the House Bill. On June 17, 1968, the prepared direct testimony of Mr. W. J. Bowen, President and Chief Executive Officer of the Company, was filed with the Federal Power Commission and was formally introduced into evidence on July 18, 1968 at Volume No. 47, page 5923, in rate proceedings RP68-1 and RP66-4. Mr. Bowen stated that:

"If we are to achieve the rate objectives I have outlined,
that is, to produce rates as low as or lower than the 17.9,
21.9 and 57.0 cents per MMBTU rates which we are collecting
prior to the in-service date of the CP65-393 facilities
exclusive of the surtax and to do so without seriously
impairing the Company's financial integrity and competitive
position, there is but one course open to us. We must
accept the risks inherent in reducing our current revenues
by deferring to a later period a part of our tax costs with
the concomitant lowering of our financial debt coverages.
We must elect to take liberalized depreciation on the CP65-
393 facilities and on future plant additions. Therefore, I
have asked our people to prepare the testimony and exhibits
for the new rate filing on this basis and to request the
necessary authorization to reflect "flow through" accounting
on those facilities."

On August 1, 1968, the Company made the new rate filing based upon the
use of accelerated depreciation with respect to all property acquired
subsequent to 1967. The relevant exhibits filed with the Federal Power
Commission demonstrating this election are attached hereto as Schedule A.
Since August 1, 1968, the Company uniformly has used accelerated depreci-
ation with respect to property acquired subsequent to December 31, 1967
in calculating the income tax expense recorded in its regulated books of
account. Since the rates filed on August 1, 1968 were based upon a cost
of service which resulted from utilizing accelerated depreciation, thus
flowing through the tax reductions to the customers in the form of lower
rates, the rates would not provide the Company a fair return if depreci-
ation based upon a straight-line method is required in determining taxable
income for 1969 and subsequent years.

The rates filed on August 1, 1968 were allowed by the Federal Power
Commission to become effective on February 16, 1969 and have remained

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in effect until the present time. A rate increase to reflect the unavailability of accelerated depreciation could be delayed by the administrative process for up to nine months after the decision to file the increased rates. From February 16, 1969 until new rates are permitted to become effective, the Company would have suffered a nonrecoverable loss of approximately $1,600,000 annually because of its reliance upon the use and flow through of accelerated depreciation as described above.

As further evidence that the Company had elected to take accelerated depreciation during 1968, we attach hereto the following:

1. Annual Report to stockholders of Florida Gas
Company for the year 1968. Note (3) to the
Notes to Financial Statements at page 21 states
that:

"Concurrent with the completion in 1968 of
its 192,000 MCF per day expansion, Florida
Gas Transmission Company elected to claim
liberalized depreciation for Federal income
tax purposes on new facilities and to flow
through the tax reductions to ratepayers,
following an accounting method approved by
the Federal Power Commission. Since there
was a concurrent rate reduction, this change
in accounting had no appreciable effect on
net income for 1968."

In its report on page 22 of the Annual Report, Arthur
Andersen & Co. states that the accounting principles:

"1 . . other than for the flow-through of the
tax reductions from using liberalized depreci-
ation as described in Note 3, were applied on
a consistent basis during the two years 1967
and 19687."

2. Prospectus, dated April 10, 1969, with respect to the
sale of Florida Gas Company's 5-3/4% Convertible Sub-
ordinated Debentures due April 1, 1989 wherein Florida
Gas Company and Arthur Andersen & Co. make similar
representations on pages 8, 14, 29, and 35 to those
made in the Annual Report of Florida Gas Company.

3.

Form 10-K, dated April 30, 1969, filed with the Securities and Exchange Commission, containing statements identical to those in the Annual Report of Florida Gas Company.

*The attachments referred to as made a part of the official files of the Cormittec.

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