Opinion ID: 1188758
Heading Depth: 1
Heading Rank: 6

Heading: Discussion of the annuity technique used by the defendant

Text: The defendant pursued a theory of indirect capitalization under an annuity approach. Defendant's appraiser first determined the estimated annual income prior to depreciation to be $187,252,000. He then determined the average future life of the plaintiff's depreciable assets to be 19 years. He also determined the salvage value of such assets at the expiration of 19 years and the value of nondepreciable assets under a cost analysis. Using standard present value tables, and assuming a discount rate of 10 percent, he (1) ascertained the present value of the salvage and nondepreciable assets after the expiration of 19 years and (2) added to that the present value of annual payments of $187,252,000 over a 19-year term. Appended to this opinion as Appendix A and Appendix B are copies of Richard Green's submissions showing how he determined value under the Income approach. [5] We reject the defendant's annuity approach. We do not believe that it comports with reality when viewing the facts of this case through the eyes of a reasonably prudent investor. The approach assumes, to a substantial degree (based upon the average remaining life of the depreciable assets), the noncontinuation of this business enterprise beyond 19 years. Burlington Northern and the subsidiaries involved in this case are regulated industries. They are required by law to provide reasonably adequate service, equipment and facilities. ORS 760.015. Federal law prohibits their discontinuation of rail service or the abandonment of all or portions of their lines absent governmental determination that such abandonment or discontinuance is in the public interest. 49 U.S.C. § 1(18). A prospective purchaser would be subject to these same regulatory requirements. We doubt that a purchaser would buy such an operating company assuming that operations could terminate at the conclusion of 19 years, which is implicit in the defendant's analysis. In the defendant's brief, the defendant argues: Plaintiffs are wrong to suggest that a valuation method should make provision for replacement of plaintiffs' property. Future capital expenditures for additional property or expenditures to replace properties are not the subject of this case.    We cannot agree with that statement. The plaintiffs have an obligation, under the law, to continue operations, and the defendant's approach makes no provision for this requirement. We also question whether the operating entity under the defendant's analysis could continue to generate an annual income flow of $187,252,000 for 19 years under the assumptions contained in the defendant's analysis. Operating equipment requires maintenance and repairs, and we are not convinced that the defendant's analysis makes adequate provision for maintenance and repairs of equipment which would be progressively deteriorating over a 19-year term. The defendant's valuation technique assumes a level income during the entire 19-year period, following which the property is liquidated and salvaged. We have serious reservations as to the assumption that the income stream would continue at a constant level, and we are persuaded that the annuity method of appraisal is more appropriate to wasting assets such as a mine or quarry or to long-term net leases of real property in which an income stream projection at a reasonably constant level is assured.