Current through Register Vol. XLI, No. 38, September 20, 2024
5.1 Yield capitalization model. -- A yield
capitalization model shall be developed for each producing property. The model
shall use as a beginning point and include for each producing well, the gross
receipts (both working interest and royalty interest) based upon the total
production amounts from the most recent production year preceding the July 1
assessment date. This total gross proceeds amount will be apportioned to the
working interest model and royalty interest model.
5.2. The total amount determined under
section 5.1 shall be apportioned to the working interest and to the royalty
interest:
5.2.1. Working interest model. --
In order to determine the working interest gross receipts income series, the
total gross receipts referenced in section 5.1 of this section heading shall be
reduced by the actual annual operating expenses as set forth in this rule to
yield a net working interest income series. The net working interest income
series shall be discounted by applying, on an annual basis, a decline rate and
a mid-year life Inwood factor reflecting the capitalization rate referenced in
section 5.4 of this section heading. The total of the annual discounted income
stream shall be the market value estimate for the working interest of the
producing oil or natural gas wells, including personal property. The minimum
appraised value for any producing well will not be less than the machinery and
equipment value. This minimum rate will not apply to home-use only wells or
farm-use wells.
5.2.2. Royalty
interest model. - In order to determine the royalty interest gross receipts
income series, the total gross receipts referenced in section 5.1 of this
section heading shall be discounted by applying, on an annual basis, a decline
rate and a mid-year life Inwood factor reflecting the capitalization rate
referenced in section 5.4 of this section heading. This amount will then be
proportionally distributed to each royalty owner based on the royalty
percentage received during the most recent calendar year to the July 1
assessment date. The summation of the annual discounted income streams shall be
the market value estimate for the royalty interest of the producing oil or
natural gas well for an area of up to one hundred twenty-five (125) acres per
producing natural gas wells and up to forty (40) acres per producing oil
wells.
5.3. Decline
Rate. -- The net working interest receipts and the net royalty interest
receipts will be multiplied by the applicable decline rates. The amounts
determined under section 5.2 of this section heading will be adjusted by an
appropriate production decline rate of 18 months that is derived and applied
based upon the age of the well and typical of the producing area and strata.
Net receipts and production amounts shall then be proportionately reduced by
application of the appropriate annual rate to yield a declining terminal income
series typical of the producing area and strata. Where the well did not produce
during the entire calendar year, the net receipts and royalties paid will be
annualized prior to the process of applying a yield capitalization procedure.
This net amount is then multiplied by the applicable capitalization rate.
Nothing shall prohibit a taxpayer from supplying information concerning
additional actual gross receipts and actual operating expense information that
may be supplemented or used in lieu of the annualization
calculations.
5.4. Capitalization
Rate. -- A single state-wide capitalization rate for oil, natural gas, and
natural gas liquids shall be determined annually. The declining terminal series
for the working interest and royalty interest, for each well, as set forth in
section 5.3 of this section heading will be multiplied by the capitalization
rate in order to determine the value of the well for property tax purposes.
5.4.1. Oil and gas reserves that are actively
being produced represent depleting assets. The valuation of the reserves must
take the rate of depletion into account by calculating the present worth of the
likely future income related to the ongoing production. The present worth of
the future income stream is calculated by discounting the annual amounts of
production income estimated. The Tax Department will use an annual calculation
to be applied when valuing natural gas and oil producing properties based on a
"Build-up-Model" of the Weighted Average Cost of Capital (WACC). The WACC
provides an estimate of the overall expected rate of return required by
industry equity participants and financial investors to continue to invest in
the relevant ongoing industry, and in comparison to other investment options.
The rate is converted to a table of annual multipliers known as the Inwood
Table.
5.4.2. On an annual basis,
the Tax Commissioner will use published information as described below to
determine the proportion of equity and debt generally used by the industry to
support its ongoing exploration, development, and production activities. The
WACC is developed annually by the Tax Commissioner using the following factors:
5.4.2.a. Equity Portion:
5.4.2.a.1. Risk Free Rate: Also known as the
"safe rate" represents the rate of return on a low-risk investment. Examples of
investments with safe rates include U.S. Treasury securities and investment
grade bonds.
5.4.2.a.2. Equity Risk
Premium: This factor represents the historical premium over the risk-free rate
commanded by market participants to invest in the overall or broad portfolio of
marketable securities. This premium is added to the risk-free rate.
5.4.2.a.3. Industry Risk Adjustment: This
adjustment is related to the difference between the expectations of one
specific industry to those of the overall market. It is typically measured as
"beta." It is a measure of the risk inherent in an investment that cannot be
diversified away in a portfolio. The beta coefficient is mathematically
converted to a rate premium and added to the risk-free rate.
5.4.2.a.4. Size Premium: This premium is
based on research which shows that, generally, there is a relationship between
the size of a company or an industry and the expected returns on investment.
Smaller companies and industries, especially less established ones, generally
command higher rates of returns. This risk is added to the risk-free
rate.
5.4.2.a.5. Real Estate Tax
and Management Component: This factor represents the average cost to maintain
the investment as real estate. It is based on an annual survey of costs as a
percentage of net income. The factor is added to the above risk
components.
5.4.2.b.
Debt Portion:
5.4.2.b.1. Borrowing Rate: Based
on surveys of published bank and bond rates applicable to the
industry.
5.4.2.b.2. Income Tax
Rate: Based on surveys of published effective tax rates applicable to the
industry. This rate is used to modify the debt rate.
