preliminary estimate unit valuation method

8/6/2019 Preliminary Estimate Unit Valuation Method

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--wMontana DepartmentofREVENUEValuation of Centrally Assessed Properties

Revenue and T ransportation Interim Com mitteeDecember 2,200 5

Prepared by the Department of R evenue

Central Assessment and Unit ValuationMontana law p rovides the criteria for determiningcentrally assessed p roperty (15-23-101, MCA)Unit valuation m ethodology is used to determine themarket value of cen trally assessed propertyUrrit valuation invo lves "appraising the w hole pie andthen taking Montana's slice"- appraising as a going concern and a single entity, the entire

operating property of a company, wherever the company islocated in the U.S.

- allocating a part of that overall appraised value to the state

Deparlment of Revenue 2 December 2,2005

Revenue & Transportation Committee MeetingDecember 2, 2005

Exhibit #2


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Central Assessment and Unit Valuation"Going-concern value includes an intangible enhancement ofthe value of an operating business enterprise which is producedby the asse mblag e of the land, bu ilding, labor, equipm ent andmarketing operation. This p rocess creates an economicallyviable business that is expected to continue. Going -concernvalue refers to the total value of an p roperty, including both realproperty and intangible personal property attributed to businessvalue." T& ~ p p m a ~lRea; Estate. iuh dmThe unit value conce pt is superior to fractional or summationappraisals for valuing cen trally assessed properties because itcorrectly captures the "going-con cern value." Without thisconcep t, only the salvage value of the properties would remain.

Depaftment of Revenue 3 December 2,20 05

Case H istory of Unit ValuationJames C. Bonbright, in his landmark textbook on app raisal,explained the rea sons for cen trally assessing certain properties.He stated:"The difficulty of distinguish ing between the value of a p arcel of rea lproperty and the value of the entire business located on the premiseshas proved serious even in the assessment of ordinary forms of realestate. But it becomes critical with respect to those uniquecom bination s of land and structure s used by railroads, other publicutilities, and large manu facturing companies. In the first place,properties of this nature are p hysically and functionally integrated overwide area s, extending beyo nd the jurisdiction of a local assessor oreven of a state board. In the seco nd place, the physical plants of manypublic utilities and of some industrial companies ha ve no value, overand abo ve their salvage value, excep t as integral parts of the veryenterprise by which they are now exploited. In effect, they are worth nomore and no less than the bu siness is worth ...."James C. ambright, me VeluafiaI olProperty - A Treat;= on he Appraisal of Property f01Djfferenf Legal Purposes 51 1 (1965).

Department of Revenue 4 December 2.2 005


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Case History of Unit ValuationThe Montana Supreme Court described the theory behind the"unit metho d" as:Where property is pa rt of a continuous system w hich extends throughma ny taxing districts, the prope r way to find the true cas h value of anypart of this property require s that the system as a unit be evaluated.The rationale of this theory is that, where a system is involved, the sumof the value of the parts of the system does not truly represent the totalvalue there of, and therefore, in order to get a true reflection of theeconom ic value, the system as a w hole must be valued as a unit.Vebwstone Pipe Line Co. v. Sate Ed. of Equalization, 138 Mont 603. 677. 358 P.2d 55. 60 (7960).

Department of Revenue 5 December2,2005

Case History of Unit ValuationInitially, property was administered and taxed locally- Livestock, short line railroads, telegraph1871 Kansas court stated:"A railroad is an entire thing and should be asse ssed (valued)as a whole. It would be almost as easy and as reasonable

to divide a hou se or a locomo tive into portions, and assesseach po rtion separately, as to divide a railroad into portionsand assess ea ch portion of it separately."

Department of Revenue 6 December 2,2005


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Case History of Unit ValuationState railroad tax cases (1876) and Indiana railroadtax cases- Both U.S. Suprem e Court decisions upheld state statutesproviding for unit valuation for railroads

Adams Express Company Case (1880)- Cost approa ch $4,000,000 (each individual piece value)- Market based approach $1 6,000,000 (assembled propertyoperation value)

Departmentof Revenue 7 December2,2005

Central Assessment CriteriaCentrally assessed com panies are appraised annually and include:

Properties Specifically Lis ted - MCA 15-23-101(1) hrough (3); ARM 42.22.102 (1)Railroad; railroad car; microwave; telecommunications; elephone cooperatives;gas; electric; electric cooperatives; ditch; canal; flume; natural gas pipeline; oilpipeline; and airlines.

ANDPhysically Connected - Companies that actually have physically connected propertythat crosses a county or state boundary.

ORUnity of Operation - Companies that have operating characteristics that exhibits unitywhere the properly is functionally operated as a single entity but may not have aphysical connection.



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Centrally Assessed Companies'FactsThe classes of property include

Class 5 Rural Cooperatives (3%)Telephone Cooperatives - 10Electric Coo peratives- 34Class 9 Pipelines and Non-electric Gene rating Portion of Utilities (12%)Pipelines - 20Electric and ElectriclGas Utilities - 9Class 12 Railroads and Airlines (Calculated annually, 2005 was 3.74%)Railroads - 5Airlines - 21(Private railroad compa nieslrail car) 250-300Class 13 Electric Generation and Telecommunications (6%)

Telecommunications - 28Electric Generation - 8Departmentof Revenue 9 December 2,2005

Centrally Assessed Cornpan es'FactsReappraised annually- March 3Ist f each year for the rural electric and telephonecoope ratives, telecomm unications and electric utilities- April 15th f each yea r for the pipelines, railroads and airlinesThe appraisal process takes place from April through

JuneThe properties account for approximately 15% ofMontana 's market value and 2 5% of the taxablevalueStaff consists of 3 appraisers, 1 auditor and a u nitmanager

Departmentof Revenue 10 December 2.2005


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Centrally Assessed Companies'Facts

lnformation Sources:- Montana Department of Revenue Annual Report- Federal Energy Regulatory Comm ission (FERC ) Report- Public Service Comm ission (PSC) Report- Securities and E xchange (SEC) R eport- Compa nies Report to S hareholders- Independent Auditors Report- Other sources such as independent sources, other states

information and other tax or financial data

Depariment of Revenue 11 December 2,2005

Three Approaches to Determine theSystem ValueCost Approach:

- Original or historic cost less depreciation- lnformation is derived from the balance sheet and otheraudited records

Income Approach:- Discounting an income stream- lnformation is derived from income statement and financialmarkets

Market Approach:- Market value of the stock and debt- Com parable sales data- lnformation is derived directly from the m arket

Depariment of Revenue 12 December 2,2005


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DefinitionsSystem or unit market value - he market value of all assetsowned by the company being appraisedAllocation - process of assigning system or unit market valueto MontanaAllocated or state mark et value - he market value of theMontana assetsApportionment - he process of assigning the Montana marketvalue to the proper taxing jurisdiction

Situs property - eal and personal property other than atransmission or distribution system (machinery, equipment,buildings)Department of Revenue 13 December 2.2005

Central Assessment ExampleWestern Pipeline Company:

- Owns gathering and transmission assets in 10 westernstates

- Files reports with the Montana Department of Revenue:Montana Annual, FERC, SEC and Independent AuditorsReports

- Appraisal is for tax year 2005

Department of Revenue 14 December 2.2005


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Cost ApproachOriginal Cost Less Depreciation:Plant in service $750,000,000Materials and supplies $ 1,000,000Construction work in progress $ 5,000,000Less accrued depreciation $(I20,000.000)Cost indicator before intangible personal property $636,000,000Less intangible personal property (5% reduction) $ (31,800,000)Cost indicator after intangible personal property $604,200,000


lncome ApproachCap italization of lncom eNet operating income:

Year-end 2004 $48,000,000Year-end 2003 $60,000,000- Average net operating income $ 54,000,000

Capitalization rate t9%Income indicator before intangible personal property $600,000,000Less intangible personal property (5% reduction) $(30,000,000)lncome indicator after intangible personal property $570,000,000



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Market ApproachComparable sales approach - information comes from the salesdocument, company recordsStock and debt approach - information comes from the stock and bondmarkets and other market sourcesStock (equity):

Shares outstanding 30,000,000Average price per share x $ 18.00- Market value of common stock $540,000,000

Debt (bonds):Long term debt $1 50,000.000

Market indicator before intangible personal property $690,000,000Less intangible personal property (5% reduction) $(34,500,000)Market indicator after intangible personal property $655,500,000

Deparimentof Revenue 17 December2,2005

Allocation FactorMontana 1 System = Factor

Gross installed cost $151,2oo,ooo I $756,ooo,ooo = 0.2 or 20%Gross revenues $19,ooo,ooo I $~oo,ooo,ooo= 0.19 or 19%Miles of pipe 3,675 miles / 17,500 miles = 0.21 or 21%

Average Montana allocation factor = 0.20 or 20%

Deparimentof Revenue 18 December 2,2005


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Correlated Unit ValueCost approach (40%) $604,200,000Income approach (50%) $ 570,000,000Market approach (10%) $ 655,500,000System m arket value $ 592,230,000Montana allocation factor x 20%Montana m arket value $ 118,446,000

Departmentof Revenue 19 December 2,200 5

Department's House Bill 569 SuggestionsFor Senate Ta x C omm ittee, the de partment draftedlanguage to illustrate how a bright-line distinction couldbe formulated. It is not an interpretation of existing law.Marketable cond ition- oil sufficiently free from impurities and otherwise in a condition apurchaser will accep t under a sa les contract typical for the field o r area- gas products, which a re sufficiently free from impurities and otherwisein a co ndition that they will be accepted by a purchaser under a salescontrac t typical for the field or area

Departmentof Revenue 20 December 2,20 05


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I h o i l o t ~ ~ d D s s r m w n l M % d h d u g s , i n b ~ ~ h ~ e p o l I t w h w b ~ i f h ~& ~ M d ~ , i ~ W m t ~ M b b ~ m p o p s r l y , i s ~ a r s s s r e d .


Definition: (c )

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~ b o l u ~ ~ w ~ y ~ d p o p s r l y d o m ~ h h p c l ~ ~ h s ~ ~ k m ~ m n d i ~ m ~ db ~ l s ~ b ~ ~

Departmentof Revenue 24 December2.2005

preliminary estimate unit valuation method

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