Opinion ID: 2509156
Heading Depth: 1
Heading Rank: 17

Heading: The audit of Barrett

Text: 5. In early 2001, the DOA commenced an audit of Barrett. Barrett had produced natural gas from coal bed methane wells in Campbell County, Wyoming, and paid severance and gross products taxes on that natural gas production. The period covered by the audit was 1999. Barrett commenced production in February 1999. [Transcript Vol. IV, p. 824; Exhibit 505]. 6. Valerie Simmons, a principal auditor for the DOA, contacted Barrett in early 2001 to request documentation for an initial pre-audit review. William McGuire of Barrett sent the requested information to Simmons on January 10, 2001. [Exhibit 512]. McGuire's transmittal included three folders of material related to accounting, transportation, marketing, and gas purchase contracts, together with a map of the [c]oalbed methane area showing well locations, PODS [central delivery points for the collection of gas from individual wells], Compressors and Pipelines. [Exhibit 512]. The transmittal made no reference to a dehydrator or processing facility. 7. McGuire's January 10, 2001, letter refers to agreements between Barrett (and a subsidiary) and a number of entities, including Western Gas Resources, Fort Union Gas Gathering, L.L.C., and MIGC. [Exhibit 512]. 8. Barrett was a party to a Gas Gathering Agreement with Western Gas Resources, Inc., dated February 1, 1999. [Exhibit 144]. Under this Agreement, Western provided certain Gathering Facilities, defined as including, but not limited to dehydration, pigging equipment, pipelines, metering facilities and compressors... [Exhibit 144, Article I Definitions]. Western took custody of the Barrett gas at a custody transfer meter located between Barrett's Central Delivery Points and a screw compressor owned by Western. [Transcript Vol. III, pp. 397-398]. Western was obliged to redeliver Barrett's gas to points of interconnection of the facilities of [Western] and those of MIGC or of Fort Union, as applicable. [Exhibit 144, Article I Definitions; Transcript Vol II, p. 398]. 9. MIGC is a pipeline that is regulated by the Federal Energy Regulatory Commission (FERC). The pipeline provides service from the terminus of Western's facilities to Glenrock, Wyoming. [Transcript Vol. III, pp. 435, 442]. On February 1, 1999, Barrett entered into an agreement with MIGC for service on a firm basis. [Exhibit 530]. On February 25, 1999, Barrett entered into an agreement with MIGC for service on an interruptible basis. [Exhibit 530]. 10. Fort Union Gas Gathering, L.L.C. (Fort Union) is a pipeline, but it is not regulated by FERC. [Transcript Vol. III, p. 437] The record includes a Firm Gathering Agreement between Fort Union and Bargath, Inc., dated March 1, 1999. [Exhibit 531]. Bargath was a subsidiary of Barrett. [Transcript Vol. III, p. 614]. Fort Union provided only limited service to Barrett during 1999. [Exhibit 507; Exhibit 140, showing Fort Union charges only in September 1999]. 11. On February 9, 2001, Elwood Soderlind, Audit Supervisor for the DOA, sent a formal engagement letter to McGuire of Barrett. [Exhibit 505; Transcript Vol. IV, p. 824]. McGuire had been designated Barrett's audit contact. [Transcript Vol. IV, p. 825]. The engagement letter identified Simmons as DOA's contact. [Exhibit 505]. Among other things, the engagement letter requested, by February 28, 2001, comprehensive documentation for Barrett's 1999 coalbed methane production from Campbell County. The request encompassed volumes of gas produced, prices received, costs (allowances) of processing, gathering, dehydrating, and transporting, gas sales contracts, tax workpapers, a listing of actual government royalties paid, and all gathering and transportation agreements and field schematics. [Exhibit 505]. 12. On March 2, 2001, McGuire sent an e-mail to Simmons, explaining how Barrett calculated the volumes of production associated with each coalbed methane well. [Exhibit 502]. Simmons responded with a specific question about the presence of dehydrators at the wellhead, the pod, or the compression station because she knew the statute was pretty clear about needing to know where that was. [Transcript Vol. IV, p. 833]. 13. Tom Piecuch of Barrett responded to Simmons' request on March 5, 2001. [Exhibit 502]. He stated that, There are no dehydrators at the wells, the pods or compressor stations. However, there is a water knock-out at the compressor stations. [Exhibit 502]. We find that a water knock-out is synonymous with a separator. [Transcript Vol. II, pp. 261-262; Vol. IV, pp. 689-690]. 14. Representatives of Barrett and DOA, including McGuire and Simmons, met on May 1, 2001, for an opening conference. They discussed the tax audit and an audit of state and federal royalties. [Exhibit 507; Transcript Vol. IV., pp. 826-827]. The purpose of the conference was for the auditors to make sure that necessary information was available and to gain an understanding of the company, including deductions that were taken and who purchased production. [Transcript Vol. IV., p. 826]. Simmons made notes that are included in the audit file. [Transcript Vol. IV, pp. 828-829; Exhibit 507]. 15. During the conference, Barrett employees described the sequence of the equipment between the wellheads and Glenrock, Wyoming. Four to twelve of Barrett's wells are served by a pod. At the pod, the gas is measured. From the pod, the gas goes to a Western screw compressor. From the screw compressor, the gas goes on to a booster compressor before entering a transportation pipeline to Glenrock. Simmons' notes state that, [t]he dehydrator is located at the booster station and occurs prior to the booster compression. [Exhibit 507]. (This note was incorrect. The dehydrator is located after the booster compressor. [Transcript Vol. IV, p. 837].) Western owned the metering equipment and pipeline from the screw compressor to the main transportation line. [Exhibit 507]. 16. During the conference, Barrett employees stated that Barrett paid Western a fee of approximately $0.43 per thousand cubic feet of gas (MCF) for all services necessary to move Barrett gas from Western's screw compressor to Glenrock, including the services of MIGC and Fort Union. [Transcript Vol. IV, p. 830; Exhibit 507]. The next day, Piecuch told Simmons that only $0.294 of the total fee paid to Western was for services provided by Western. [Transcript Vol. IV, p. 830; Exhibit 507]. The remainder of the total fee was for pipeline services. There was charge of $.014 per MCF for gas sent on the Fort Union pipeline. [Transcript Vol. IV, p. 830; Exhibit 507]. Barrett's price to Glenrock was essentially equal via either Fort Union or MIGC, however, because Western provided a rebate against MIGC's FERC-tariffed rate to match the Fort Union rate. [Transcript Vol. IV, p. 830; Exhibit 507]. 17. Barrett deducted from its taxes all of the charges billed by Western. [Exhibit 507]. Barrett deducted these charges as transportation expenses against Barrett's total revenues from the Powder River Basin, allocated to the well level based on the production volume of each well. [Transcript Vol. II, pp. 391-392]. 18. During the conference Barrett employees told the auditors that Barrett sold its gas to Western at the screw compressor, then Barrett repurchased the gas at Glenrock, where Barrett marketed the gas. [Exhibit 507; Transcript Vol. IV, p. 831]. However, the auditors could see that the sale to Western was not the ultimate sale. [Transcript Vol. IV, p. 831]. Sales invoices provided by Barrett did not give a specific detailed location of where sales occurred. [Transcript Vol. IV, p. 831]. 19. Barrett later represented that the point of sale for its coalbed methane gas was Glenrock, and the auditors were able to tie invoices to sales summaries that Barrett provided. [Transcript Vol. IV, p. 831]. The auditors accepted Barrett's representation of the point of sale [Transcript Vol. IV, p. 932], and so do we. We find that the point of sale was Glenrock, Wyoming. This finding is supported by Barrett's deduction of the charges billed by Western, which implicitly reflects Barrett's position on (a) the point of valuation, i.e., the custody transfer meter between Barrett's pod and Western's screw compressor, and on (b) the point of sale, i.e., Glenrock. 20. On May 7, 2001, Barrett accepted a bid from Williams to acquire Barrett. [Transcript Vol. II, p. 359]. Simmons received notice of the pending merger on May 14, 2001. [Transcript Vol. V, p. 878]. The merger closed in two steps. Williams bought fifty percent of the stock of Barrett in a transaction that closed on June 11, 2001. Williams acquired the balance of Barrett stock in a stock trade which closed on August 1, 2001. [Transcript Vol. II, pp. 359-360]. 21. On June 14, 2001, Simmons and three other auditors took a field tour of Barrett facilities in Campbell County. [Transcript Vol. IV, p. 836]. The auditors had requested the tour because they were new to coalbed methane audits. The tour was arranged through an audit contact at Barrett and as part of the audit process. [Transcript Vol. IV, pp. 832, 844]. Nathan Lopez conducted the tour; Lopez was an operations superintendent for Barrett. [Transcript Vol. IV, p. 836]. Simmons was specifically interested in learning where the initial [dehydrator] was because that was key in the point of valuation decision. [Transcript Vol. IV, p. 837]. 22. Simmons took notes of the trip. Her notes memorialize the terms Lopez used to describe the equipment. [Exhibit 537; Transcript Vol. IV, pp. 837-838, 840]. Lopez showed the auditors several wells, and three different pods. [Transcript Vol. IV, pp. 839-840; Exhibit 537]. Lopez showed the auditors two booster compressor stations. [Transcript Vol. IV, pp. 839-840; Exhibit 537]. Lopez stated that there were two different equipment configurations. With three stage compressors, the gas went from the wellhead to a pod, from the pod to a screw compressor, from the screw compressor to a booster compressor, from the booster compressor to a dehydrator, and from the dehydrator to the pipeline. With four stage compressors, the gas went directly from the pod to a booster compressor, but the sequence was otherwise the same. [Transcript Vol. IV, pp. 839-841; Exhibit 537]. 23. Lopez showed Simmons a dehydrator in a building. The dehydrator came after a booster compressor. [Transcript Vol. IV, pp. 840-841]. Lopez described the dehydrator to Simmons as a glycol dehydrator. [Transcript Vol. IV, p. 841]. 24. Once the merger with Barrett closed on August 1, 2001, Williams decided to consolidate Barrett's accounting functions from Denver to the Williams home office in Tulsa. [Transcript Vol. II, p. 360]. Williams did not offer McGuire a position after the merger. [Transcript Vol. II, p. 362]. Piecuch accepted a job with Williams, but Williams severed Piecuch in November of 2001. [Transcript Vol. II, p. 363]. At the hearing of this matter, Williams did not provide testimony from McGuire, Piecuch, Lopez, or any other former Barrett employee having personal knowledge of Barrett's policies or practices with respect to accounting, contracts administration, sales, or operations. 25. In August 2001, Williams Exploration and Production gave Greg Storts the responsibility to report Wyoming severance, conservation, and gross products taxes, as well as Wyoming state royalty. [Transcript Vol. II, pp. 385, 387]. 26. On October 11, 2001, Simmons entered a memorandum in the audit file. She memorialized her preliminary conclusion that Barrett had deducted both a gathering charge, paid to Western, and a transportation charge, paid to MIGC. [Exhibit 517]. Generally speaking, gathering charges relate to services provided prior to the point of valuation, and cannot be deducted. Wyo. Stat. Ann. งง 39-14-203(b)(iv), 39-14-203(b)(vi).