Transcript LAA.2017 Rebuttal Hearing.ppsx

LAA Rebuttal Hearing Comments
LTC Rules and Regulations
Tax Year 2017
Chapters 3, 9, 11, 13, and 25
Oil and Gas Properties
Drilling Rigs
Pipelines
General Business Assets
Hearing Date:
August 10, 2016
OPENING REMARKS
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Excerpts from
PROPERTY TAX AND LOCAL AUTONOMY
Lincoln Institute of Land Policy
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The property tax is the most efficient and
effective means for raising revenue to fund
local government services. No other
sources of revenue can ensure local
government autonomy. And such
autonomy has been a critical factor in
American government since the beginning
of the republic.
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It remains the most sensible way of
financing local services, including
elementary and secondary education (until
recent years a decidedly local government
function).
Yet the political pressures on the property
tax proceed unabated.
5
Understanding the consequences of a
diminished property tax system is critical
to setting state and local policy in the
twenty-first century.
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If, in fact, the property tax continues to play
a reduced role, local governments will be
forced to rely even more heavily on state
political institutions. If that happens, the
overall system will likely be less efficient and
less politically responsive.
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CHAPTER 9
Oil and Gas Properties
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Issue #1: The oil and gas business is
cyclical.



Volatile swings in annual revenue and expense
are normal and expected, although the direction
is often unpredictable.
LTC’s adoptions for RCN since tax year 2008
began falling way behind actual rise in cost after
CY2004.
A 45% reduction for RCN is not warranted
primarily because the LTC’s tables 907.A-1, 2,
and 3 are still substantially below cost per API
JAS data.
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Percent that LTC’s RCN Tables are
Below Actual
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API Data is Perfect for LTC Use


Please see LAA Supporting Documentation,
“UNDERSTANDING THE JAS DATA” (page 5, 3rd
paragraph).
The portions of the API JAS report used by LAA
covers more than 90% of all wells drilled.




Over 46k wells were drilled in U.S. in 2014.
Less than 4000 wells were not reported to API.
Over 42k wells were reported to API.
API uses estimated cost data only in their Executive
Summary which LAA does not use.
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Issue #2: Property tax is not an income
tax, regardless of valuation approach.



LOGA’s “percent of gross revenue” metric is
unworkable and inappropriate, changing the
basis of tax from value (“ad valorem”) to income.
Income (either gross or net) swings more than
value. Oil and gas investors look at more than
one year’s income by itself.
The percent varies over the years because of
normal production profiles (fairly predictable)
and price swings (notoriously unpredictable).
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Flaws in LOGA’s Exhibit 5 (Examples of
Louisiana Horizontal Well Assessments)



Examples given represent marginal end of
production for given depth interval and
horizontal status.
Gross revenue projections fail to consider or
include any secondary production stream
(condensate for gas wells, casinghead gas for oil
wells).
The analysis should have covered entire life cycle
of well to support LOGA’s assertion the LTC
shouldn’t adopt 100% of RCN.
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LAA’s 2017 Proposal
Shape of curve represents
“grand bargain” underlying
Louisiana’s tax methodology.
Typical beginning
production levels for
region and depth.
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Example calculation for new Caddo Parish well
(horizontal well with extended lateral)
Louisiana
Total Well Depth (feet):
Initial test rate (mcfpd):
Initial prod. rate (mcfpd):
First 12 months prod (mcf):
Gas Price ($/mcf):
First year WI revenue:
LAA proposed RCN ($/foot):
LAA proposed assessed value:
Millage rate (per $1000):
Assessed taxes:
Taxes as a percent of gross revenue:
21,000
38,000
30,400
6,564,482
$3.00
$18,954,942
$500
$1,549,800
$136.6
$211,703
1.12%
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Example calculation for new Caddo Parish well
(horizontal well with extended lateral)
Texas
First year WI revenue:
$18,954,942
Texas proposed WI value:
Tax rate (per $100):
Assessed taxes:
$33,182,600
$2.25
$746,609
Taxes as a percent of gross revenue:
3.94%
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Comparison between states is fraught
with peril.

Difficult and highly complex because each state
employs a different combination of taxes with
different tax bases and different tax rates.
Corporate income (or franchise) tax
 Severance (production) tax
 Property tax
 Sales tax


These taxes often interact with each other, by
legislative design.

Various deductions, exemptions, credits based on age,
production level, and price
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
Texas: Property tax is reserve-based and uses
an income approach for the subject mineral
interest.
 Discounted
cashflow based on forecasts of
production, price, and expense.
 The value of leasehold equipment is de minimis, by
design.
 A property’s ad valorem tax burden as a percent of
gross revenue is not a direct appraisal
consideration, although it’s often estimated to be
~5% (many royalty owners withhold one month’s
paycheck, or ~8.3% of annual income, as a “rule of
thumb”).
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
Arkansas: Bifurcated methodology, oil vs.
gas, for valuation of mineral interests using
heavily modified income approaches.
 Assessed
value is equal to less than one year’s net
income.
 No additional valuation of leasehold equipment.
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
Kansas: Property tax is reserve-based and uses a
very unique income approach focused on a detailed
and prescribed “payout” methodology for the subject
mineral interest.





Much like Texas, the value of leasehold equipment is de
minimis, by design.
The resulting property tax burden as a percent of gross
revenue is not a direct appraisal consideration.
A 100% exemption applies to oil wells producing at very
marginal levels (3-5 bbls per day, depending on depth), or
any wells not capable of producing in economic quantities.
A 40% reduction applies to any portion of the prescribed
January 1 value attributable to wells that are less than 6
months old.
A 30% assessment ratio applies to this whole category (25%
if production is very marginal).
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
Conclusion:
There is no meaningful way to
equate or correlate Louisiana’s
property tax rules in Chapter 9 with
methodologies used in other states.
 Different
property being appraised
 Cost Approach vs. Income Approach
(differences in how EO is handled)
 Other considerations such as targeted
exemptions, credits against other types of
taxes, etc.
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END OF LAA REBUTTAL FOR
CHAPTER 9
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CHAPTER 11
Drilling Rigs and
Related Equipment
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Issue #1: Offshore Rigs (Tables 1103.B
and 1103.C)

The market for overwater jack-up rigs and
semi-submersible rigs is not as fluid as for
onshore rigs.
 Very
long lead-times for bringing fields online
 Extremely large investments required
 Barriers to entry quite high (competitive pressures
to lower day rates are not as prevalent as for
onshore drilling and completion activities)

Values are more stable and can be reliably
trended with M&S “Petroleum” industry data.
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END OF LAA REBUTTAL FOR
CHAPTER 11
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CHAPTER 13
Pipelines
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Issue #1: Resulting Curve Fit of RCN
Cost Data from OGJ

OGJ data used by LAA represents pipelines
constructed in Louisiana, whereas MVS data
recommended by PTP covers 20 states.

PTP proposal will change the curve fit and
result in increases in RCN for all smallerdiameter pipelines.
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Curve-Fitting Basics
y-axis
Large
RCN
Some points end up above
the curve, some below.
$/mile cost increases with
increasing diameter size.
Small
RCN
Small
Diameter
x-axis
Large
Diameter
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Issue #2: Outliers in the OGJ Database?

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For 42” diameter size, the OGJ database is evenly split with
some pipelines’ cost “below the norm” and some above.
PTP focuses only on the “high” data points. A uniform level of
scrutiny must be exerted on all data points before deciding to
delete individual points.
Every data point can potentially be deemed as not fitting the
norm – because “nothing fits the norm.”
PTP’s attack similar to “equity-based” challenges of appraisals
where the highs in the database are continually thrown out as
non-representative of the subject property. But every time
the high point is removed, some remaining point becomes
the NEW high, so then it can or should be removed too.
And so on, and so on…
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Issue #3: Depreciable Life


Current Rules promulgate use of Marshall & Swift’s
“Life Expectancy Guidelines” and “Depreciation –
Fixtures and Equipment” tables.
Vast majority of lives shown in M&S table are from
IRS federal income tax tables.
 Modified and accelerated depreciation highly
inappropriate for FMV calculations.

Per Marshall & Swift instructions, depreciation
considerations should be based on property’s
effective age, which can be either newer or older
than actual age.
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Summary of Depreciable Life Estimates:
Indicator
Life (yrs)
Recent Accounting
35.0
P&A Clients (Tx)
32.2
Marshall & Swift
34.5
Average
33.9
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Issue #4: Throughput Formula Is Not A
“Cure-All” for Measuring EO
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Assessors have difficult if not impossible task
of verifying both input parameters in the
formula: Throughput and Capacity of the
pipeline.
Formula equates the level of use with
profitability  Not always true!
Rules do not prohibit the use of a throughput
(“inutility”) formula by an assessor.
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Income Shortfall Method
Of Measuring
Economic Obsolescence
Economic Munificence (Obsolescence) Calculations
Projected AFIT NOI from Plant in Service (excludes CWIP)
RCNLD Plus Oil Inventory and M&S, Less CWIP
$34,880,000
$326,159,449
= 10.69%
Indicated Rate of Return
Avg Rate of Return, Prev 5 Years (AFIT and RCN Basis)
9.85%
Avg Rate of Return, Prev 3 Years (AFIT and RCN Basis)
8.95%
Avg Rate of Return, Prev 5 Years Excluding Min & Max
10.87%
Median Rate of Return, Prev 5 Years (AFIT and RCN Basis)
Projected Typical Rate of Return
Say
9.92%
10.50%
Required Rate of Return from Cap Rate Study
11.75%
ROR “Shortfall” (projected vs. required)
-1.25%
Munificence (+), or Obsolescence (-)
-10.64%
END OF LAA REBUTTAL FOR
CHAPTER 13
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CHAPTER 25
General Business Assets
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Issue #1: More Delay Needed?


Salt dome cavern property being used for
brining purposes is largely indistinguishable
from similar property being used for storage
purposes.
There are many brine wells and caverns in
Louisiana (more than half?) already being
assessed under Chapter 25 provisions.
 Potential
non-uniformity issue results with
appraisal of only some salt dome cavern property
under Chapter 9 provisions.

LAA has met with LCA several times this year.
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Issue #2: Solution Mining (Brine) Wells
are Not Oil, Gas, or Service Wells

Chapter 9 is entirely wrong chapter for
appraisal of salt dome brine wells.
 RCN
tables are built with API costs for oil and gas
wells. No injection wells of any kind are
included in these costs.
 Brine wells are typically constructed with much
larger diameters of casing strings and therefore
have much higher RCN.

Solution mining wells are NOT service wells
as contemplated by Chapter 9.
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Issue #3: LTC’s Previous Rulings


The Jefferson Island case (Iberia Parish) was
exclusively about salt dome hydrocarbon
storage caverns and associated injection
wells. No appraisal of solution mining wells
was under LTC consideration.
The LTC’s ruling did not speak to the merits
of any party’s appraisal, but instead chose to
dismiss the P&A appraisal on a technicality
(cleared up later by legislation that clarified
the legitimacy of P&A’s involvement).
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
In the PBGS v. Duplechain case (St. Landry
Parish), the LTC ruled that the service wells
(not the cavern wells) should be appraised
using Chapter 9.
 The
service wells in question disposed offsite the
brine caused by the leaching process.
 St. Landry did not appeal the LTC’s ruling
concerning the service wells.

Leaching a cavern for eventual storage
purposes is exactly the same process as
solution (brine) mining, just accelerated. A
salt dome cavern is still the result, which
might or might not have any value.
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END OF LAA REBUTTAL FOR
CHAPTER 25
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