We follow these steps:
- Estimate the market value of the company
- Allocate a portion of the value to Minnesota
- Remove locally-assessed and nonoperating property
- Apportion the remaining value to all parcels in Minnesota with operating property
- Apply equalization, if necessary
Step 1: Estimate the market value of the company
We use one of two methods to estimate a company’s market value:
- Cost less depreciation
- Unit value
Unit Value
The unit value is the value of the entire company’s property, functioning as a single unit. We consider all approaches of value to determine their validity relating to the specific property being valued.
Cost approach: Based on the principle of substitution, a buyer will not pay more for a property than the cost of a satisfactory replacement.
To calculate this, we take the original cost less depreciation of the system plant, plus the costs of:
- Improvements to the system plant
- All types of construction work in progress that are installed by the assessment date
- Property held for future use
- Contributions in aid of construction
Income approach: Using the capitalization process, this approach converts future anticipated income into present value, based on the assumption that investors will buy and sell property for its future expected income potential.
To calculate this, we:
- Take the weighted average of the net operating income for the three years prior to the assessment.
- Apply the capitalization rate, computed using the Band of Investment method. This method considers equity and debt financing aspects and is a combination of the weighted rates for each aspect.
The table shows an example:
- This company used debt for 50% and equity for 50% of its financing.
- The company’s cost of debt financing is 10% and the company’s cost of equity financing is 12%.
- Adding the weighted rates of those costs gives the company’s capitalization rate of 11%.
Band of Investment Method| | Financing | X | Cost of Financing | = | Weighted Rate |
|---|
| Debt | 50% | X | 10% | = | 5% |
|---|
| Equity | 50% | X | 12% | = | 6% |
|---|
| | | | Capitalization Rate = | = | 11% |
|---|
Additional approaches: We will consider additional approaches to value if there is available information.
Cost less depreciation
It’s the original cost of the company’s operating property less a deduction for depreciation of 2.5% each year (not to exceed 75%).
We use the cost less depreciation method for companies that are:
- Cooperative associations, not electing unit valuation
- Do not operate in the traditional profit-making mode
- Not common carriers
- Nonregulated
Step 2: Allocate a portion of the value to Minnesota
We use an allocation formula, which is specific to the type of utility or pipeline being valued.
- Electric utility:
- Original cost of utility property located in Minnesota divided by the total original cost of property in all states weighted at 90%.
- Gross revenue from Minnesota operations divided by total gross revenue from all states weighted at 10%.
- Gas distribution utility:
- Original cost of utility property located in Minnesota divided by the total original cost of property in all states weighted at 75%.
- Gross revenue from Minnesota operations divided by total gross revenue from all states weighted at 25%.
- Pipeline utility:
- Original cost of utility property located in Minnesota divided by the total original cost of property in all states weighted at 75%.
- Throughput of product from operations in Minnesota divided by the total throughput of property from operations in all states weighted at 25%.
Step 3: Remove locally-assessed and exempt property
We remove locally-assessed property, such as land, and exempt property, such as office equipment.
Step 4: Apportion remaining value to all parcels in Minnesota with operating property
After we determine the taxable Minnesota portion of the unit value, we distribute it among the various counties and taxing districts where the company operates. We do this using the original cost of the property at each parcel.
Step 5: Apply equalization, if necessary
We apply equalization to structures, if necessary. If a county’s commercial/industrial sales ratio is out of compliance with the level accepted by the State Board of Equalization, we apply an equalization factor to the apportioned value of structures within that county.
