Iowa Administrative Code › Agency 701 - Revenue Department › Title I - Administration › Chapter 77 - Determination of Value of Utility Companies › Rule 701-77.5 - Income Capitalization Approach to Unit Value

Current through Register Vol. 47, No. 3, July 24, 2024
(1) The income capitalization approach to
				unit value estimates the market value of the operating property by dividing the
				income stream generated by the operating assets by a market derived
				capitalization rate based on the costs of the various sources of capital
				utilized or available for use to purchase the assets generating the income
				stream. The purpose and intent of the income indicator of value is to match
				income with sources of capital and, therefore, every source of capital used or
				available to be used to purchase assets should be reflected in the
				capitalization rate determination as well as all operating income.
The net operating income to be capitalized for pipeline
				  companies shall be a weighted average net operating income. The weighted
				  average net operating income shall consist of an average of the three 12-month
				  periods immediately preceding the valuation date. Each of the three preceding
				  12-month periods shall be weighted by multiplying the first preceding period by
				  three, the second preceding period by two, and the third preceding period by
				  one. The income stream for pipeline companies shall be further reduced by
				  deducting the current year net adjustment expense for investment tax
				  credits.
If the utility company has no income or has a negative
				  income, the indicator of value set forth in this subrule shall not be
				  utilized.
If the utility company is one which is not allowed to earn a
				  return on assets purchased with sources of capital such as the company's
				  deferred income taxes, the income will not reflect the earnings on those
				  assets, and as a consequence, a separate adjustment to the income indicator of
				  value must be made to account for the value of those assets. In such instances,
				  the income indicator of value shall be increased by an amount equal to the book
				  value of the source of capital involved, such as the accumulated deferred
				  income taxes. The adjustment to the income approach for accumulated deferred
				  income taxes shall not be made for pipeline companies. If any other operating
				  property is clearly not income producing and, therefore, not reflected in the
				  income stream, the value of that asset shall be determined separately and added
				  to the value of the other operating property as determined using the income
				  indicator of value. The capitalization rate shall be adjusted, if necessary,
				  for the market rate of return for the sources of capital utilized to purchase
				  such non-income-producing properties where the sources can be clearly
				  identified. Otherwise, the cost of the sources of capital shall be presumed to
				  be equal to the overall market weighted costs of the identified sources of
				  capital.
(2) If the utility
				company is one which can earn a return on assets purchased with sources of
				capital such as the company's deferred income taxes, the income will reflect
				the earnings on those assets, and as a consequence, a separate adjustment to
				the capitalization rate is required. The capitalization rate shall be
				determined by utilizing, where appropriate, market rates of return weighted
				according to a market-determined capital structure, with the exception of
				deferred credits whose market value shall be equal to its value on the
				company's books and whose cost shall be zero. All sources of capital shall be
				considered in the capital structure as well as market costs associated with
				each source of capital, otherwise, the cost of the sources of capital shall be
				presumed to be equal to the overall market-weighted costs of the identified
				sources of capital. The following is an example of the application of this
				rule:
(1)
(2)
(3)
(4)
Market Value
Market Rate of Return
%to Total
component (Col. 2 X Col. 3)
common Stock
60,000
15%
62.50
9.38
Preferred Stock
5,000
13%
5.21
.68
Debt
25,000
12%
26.04
3.12
Deferred Credits
6,000
-0-
6.25
-0-
96,000
100.00
13.18
This rule is intended to implement Iowa Code sections 428.29,
				  433.4, 437.6, 437.7, and 438.14.