Iowa Administrative Code › Agency 701 - Revenue Department › Title I - Administration › Chapter 77 - Determination of Value of Utility Companies › Rule 701-77.4 - Stock and Debt Approach to Unit Value

Current through Register Vol. 47, No. 3, July 24, 2024
(1) The stock and debt approach to unit value
				estimates the market value of the operating property by combining the market
				values of the common stock, preferred stock, debt, current liabilities, other
				liabilities, leases, and deferred credits associated with the operating
				property of the utility company, on the basis that the market value of these
				items may be used as a surrogate for the market value of the operating property
				itself.
(2) The market value of the
				long-term debt associated with the operating property shall be calculated by
				first determining a ratio, based on book values, whose numerator shall be the
				operating property and whose denominator shall be the total property of the
				utility company. This ratio shall then be multiplied times the gross market
				value of the long-term debt and the result obtained shall be the market value
				of the long-term debt associated with the operating property. The market value
				of publicly traded debt shall be determined by utilizing an average of the
				monthly high and low value of the debt for the 12 months preceding the
				valuation date. The values to be utilized shall be obtained by reference to any
				acceptable reporter of the market on which the securities are traded. If all or
				some of the securities are not publicly traded, the value of the securities
				shall be determined by appropriate comparable securities. The comparable
				securities shall be publicly traded and shall have a similar maturity date and
				coupon rate, as well as risk indicators similar to the untraded security. In
				each instance, the utility company shall provide the department a statement of
				the market value of all securities and an explanation of how that market value
				was derived, including the identity of any comparable securities utilized. In
				the event that any utility is unable to utilize the foregoing rule to value its
				securities, it may provide the department with its own determination of the
				fair market value of its untraded securities together with a complete
				explanation of why the foregoing rule was not used and a detailed explanation
				of the method used.
(3) The market
				value of the preferred stock associated with the operating property shall be
				calculated by first determining a ratio, based on book values, whose numerator
				shall be the operating property and whose denominator shall be the total
				property of the utility company. This ratio shall then be multiplied times the
				gross market value of the preferred stock and the result obtained shall be the
				market value of the preferred stock associated with the operating property.
The market value of publicly traded shares of preferred stock
				  shall be determined by utilizing an average of the monthly high and low value
				  of the preferred stock for the 12 months preceding the valuation date. The
				  values to be utilized shall be obtained by reference to any acceptable reporter
				  of the market on which the preferred stock is traded. If all or some series of
				  the preferred stock are not publicly traded, the value of such preferred stock
				  shall be determined by appropriate comparable securities. The comparable
				  securities shall be publicly traded and shall have the same or a similar
				  dividend rate, as well as risk indicators similar to the untraded preferred
				  stock. In each instance, the utility company shall provide the department a
				  statement of the market value of its preferred stock and an explanation of how
				  that market value was derived, including the identity of any comparable
				  securities utilized. In the event that any utility is unable to utilize the
				  foregoing rule to value its securities, it may provide the department with its
				  own determination of the fair market value of its untraded securities together
				  with a complete explanation of why the foregoing rule was not used and a
				  detailed explanation of the method used.
(4) The market value of the common equity of
				a utility company associated with the company's operating property shall be
				determined by capitalizing the income available to the common equity holders
				from the operating property, by an appropriate common equity return rate, all
				of which shall be determined as follows:
a.
				The calculation of the income to be capitalized shall begin with the utility
				company's net income after taxes but before interest charges and preferred
				dividends for the 12-month period preceding the valuation date. The net income
				after taxes, but before interest charges and preferred dividends, shall be
				determined from the utility company's regulatory report, or if no regulatory
				report is filed, from the audited financial statements of the utility company.
				In the event that the respondent has no income or has negative income, an
				alternative method may be utilized to estimate the market value of the common
				equity.
b. For rate base regulated
				companies which do not earn a return on construction-work-in-progress, the
				income determined in subrule 77.4(4) shall be increased by the amount of income
				associated with the construction-work-in-progress which will be placed into
				service within one year of the assessment date. The income associated with the
				construction-work-in-progress shall be determined by multiplying the cost of
				said construction by the latest overall cost of capital as determined by the
				regulatory agency.
c. The income
				determined in 77.4(4)
"a"
shall be further reduced by that
				portion of the preferred dividends serviced by the income generated by the
				operating property, which shall be calculated by multiplying the total
				preferred dividend requirement by the ratio determined in 77.4(3).
d. The income determined in 77.4(4)
"a
				"
shall be further reduced by that portion of the debt service
				provided by the income generated by the operating property, which shall be
				calculated by multiplying the total debt service by the ratio determined in
				77.4(2).
e. If there are any other
				interest payments required, a determination shall be made as to whether the
				underlying obligation was used to purchase operating or nonoperating assets. If
				no direct determination can be made, the interest payment shall be allocated in
				the same fashion as the debt service and preferred dividends. If the underlying
				obligation can be shown to be associated particularly, or in some specific
				proportion, to operating or nonoperating property, the interest payment shall
				be allocated either entirely or in such proportion to operating or nonoperating
				property. It shall be the obligation of the utility company, in its reports to
				the department, to identify and detail any interest payments which are
				particularly associated with operating or nonoperating property, and if the
				utility company fails to do so, the department may determine that all such
				payments may be allocated between operating and nonoperating property in the
				same ratio as is the debt service and preferred stock dividends (see subrules
				77.4(2) and 77.4(3)).
f. The income
				determined in 77.4(4)
"a"
shall be adjusted by deducting any
				net income included therein received from nonoperating property and,
				conversely, the referenced income shall be increased to account for any net
				loss created by any nonoperating property.
g. The income determined in 77.4(4),
				paragraph
"a,"
for pipeline companies shall be further reduced
				by deducting the current year net adjustment expense for investment tax
				credits.
h. Any extraordinary item
				affecting the income determined herein shall be eliminated in the calculation
				of the income shown under this rule. Any construction-work-in-progress not
				placed into service within one year of the assessment date shall be separately
				valued by the department.
i. The
				equity rate of return for the utility company shall be determined by the use of
				the capital asset pricing model although where appropriate discounted cashflow
				model (commonly called the Gorden Growth Model - r = D1/po_+ g) may be utilized
				as an alternative.
Only in circumstances where these models are not able to be
				  utilized will reliance be placed on a risk premium model or upon an
				  earnings-price ratio, or other similar model, for determining the expected
				  market rate of return on equity.
j. The income attributable to operating
				property available to the common equity holder as determined in
				77.4(4)
"a"
to
"g"
shall then be divided by the
				equity rate as determined in 77.4(4)
"h, "
and the result shall
				be the market value of the common equity associated with the operating
				property.