94-1152

Centrally Assessed

Signed 9/17/96

BEFORE THE UTAH STATE TAX COMMISSION

____________________________________

XXXXX, )

Petitioner, ) FINDINGS OF FACT,

: CONCLUSIONS OF LAW,

v. ) AND FINAL DECISION

PROPERTY TAX DIVISION OF THE ) Appeal No. 94-1152

UTAH STATE TAX COMMISSION, :

)

Respondent. ) Tax Type: Centrally Assessed

_____________________________________

STATEMENT OF CASE

This matter came before the Utah State Tax Commission for a Formal Hearing on XXXXX, 19YY. G. Blaine Davis, Administrative Law Judge, heard the matter for and on behalf of the Commission. Present and representing Petitioner were Mr. XXXXX from the law firm of XXXXX, together with Mr. XXXXX, Mr. XXXXX, Mr. XXXXX, and Mr. XXXXX. Present and representing Respondent were Mr. XXXXX, Assistant Attorney General, together with Mr. XXXXX, Mr. XXXXX and Mr. XXXXX from the Property Tax Division. Present and representing the affected counties were Mr. XXXXX, from the law firm of XXXXX, together with Mr. XXXXX.

Based upon the evidence and testimony presented at the hearing, the Tax Commission hereby makes its:

3. The subject property consists of the operating property of the XXXXX. There is conflicting testimony as to what property is actually owned and operated by Petitioner. The appraiser of Petitioner stated that there were Aapproximately ##### miles of wholly owned railroad, ##### miles of trackage rights over XXXXX, ##### miles of secondary, auxiliary yard, siding and spur tracks and other miscellaneous appurtenant facilities. Respondent=s appraiser stated, Aaccording to Moody=s Transportation Manual, the company owns ##### miles of main and yard track; owns jointly with XXXXX ##### miles; operates over ##### miles of track owned by coal companies; operates under trackage rights over ##### miles of track owned by XXXXX. The company also jointly owns with XXXXX a terminal facility in XXXXX, Utah.@ Because of the manner in which the valuations have been performed by each appraiser, it is not necessary for the Commission to determine which is an accurate representation of the property owned. It is further apparent that a portion of the difference is merely the way in which portions of the property have been characterized.

4. Petitioner does not own its own locomotives or rolling stock. Petitioner leases locomotives which it uses to haul coal.

5. As was described by Petitioner=s appraiser, Athe operating property is assessed as a single unit under a methodology called the >unit method=.@ This method is described as Athe technique of valuing a group of property items as >one thing.= The focus of the unit method is the valuation of property as a whole, without geographical or functional division of the whole.@ Under this method, the value of the leased locomotives is included in the valuation of the unit.

6. The Property Tax Division initially valued the subject property at $$$$$ less the value of motor vehicles separately assessed at $$$$$, and a valuation notice was sent to Petitioner showing a rounded value of $$$$$.

7. XXXXX is a wholly owned subsidiary of XXXXX, which in turn is a wholly owned subsidiary of XXXXX. XXXXX is a publicly traded company listed on the New York Stock Exchange. XXXXX accounts for approximately %%%%% of the gross revenues for XXXXX, and provides between %%%%% and %%%%% of the net income of XXXXX.

8. XXXXX was incorporated originally in 19YY, and has operated continuously since that date.

9. Petitioner transports coal from mines in XXXXX County, XXXXX, and XXXXX County, Utah, to XXXXX, Utah. Petitioner serves four (4) major customers which are either coal producers or power companies located in Utah and the Western United States. The majority of the company=s business is conducted under long term contracts, although Petitioner maintains that those contracts can be canceled at the end of any given year. The hauling contracts provide for price escalation using industry cost indices.

10. Petitioner submitted an appraisal which had been prepared by Mr. XXXXX, ASA, CMI, of XXXXX. Mr. XXXXX did a cost indicator of value, an income indicator of value, and a stock and debt indicator of value. Mr. XXXXX determined a cost indicator of value of $$$$$. Mr. XXXXX determined the income indicator of value was $$$$$, and the stock and debt indicator of value was $$$$$. Mr. XXXXX reconciled those values to arrive at an estimated system value of $$$$$.

11. One of the highly contested assumptions which Mr. XXXXX utilized in making his appraisal was that Petitioner would not be able to obtain additional contracts to haul coal as the existing contracts expire. In his estimate of cash flows utilized in the income approach, Mr. XXXXX significantly reduced the projected cash flows as the contracts are projected to expire. Therefore, the projected income from the property is significantly lower than if the contracts are projected to continue so that the income is projected to remain constant. This results in a substantially reduced value for the property of the company.

12. The information regarding the potential reduced reserves was provided to Mr. XXXXX by officials of the company based only upon telephone calls with the officials of three of the companies for which Petitioner hauls coal, and those officials made a verbal estimate of the length of time their reserves would last. The company officials also determined to assume that no future or further contracts would be obtained for the hauling of any additional coal.

13. Respondent presented an appraisal which had been prepared by Mr. XXXXX, the manager of Utility, Communication and Transportation Valuations Section of the Property Tax Division of the Utah State Tax Commission. Mr. XXXXX made six (6) separate analyses and estimates of value, including the cost approach, direct capitalization approach, stock and debt approach, a discounted cash flow with growth income approach, a discounted cash flow approach, and a discounted cash flow based upon equity forecast. Each of those approaches estimated the value of the property between $$$$$ and $$$$$, except for the cost approach which determined an estimated value of $$$$$. Mr. XXXXX assumed that the future cash flows would not be reduced at the time that the present contracts begin to expire, but instead he assumed that the cash flows would remain constant, and would even grow in the future based upon a modest rate of inflation.

14. In XXXXX 19YY, a year and one half prior to the lien date, Petitioner raised $$$$$ through a private placement to pass on to its parent companies. In support of obtaining that money, Petitioner had a Confidential Private Placement Memorandum (Exhibit 4) prepared by XXXXX, a securities firm. That document contained several statements which indicated that, a year and one half before the lien date, the Petitioner was making representations to the public in securities offerings which contradict the representations of Petitioner that its revenues will significantly decline in the future. Some of those representations were as follows:

A. AAt the current shipment rate, the mines that the Utah services should have over 25 years of reserves available to ship to their customer.@ (page 1).

B. AThe company is constantly seeking to secure additional long-term contracts and to renew short term contracts as they come due and, indeed, has been successful in obtaining new and renewal business.@ (page 2)

C. AAt today=s shipment rates, with current mine reserves and/or leases, there is over a 25 year supply of coal to service the utility contract, or 3.5x the average life of the notes.@ (page 6)

D. AExcellent Growth Prospects--the company believes that two major factors will increase demand for coal shipped out of the XXXXX over the next five years. The first is an increase in demand caused by the Clean Air Act described above. The second factor is the anticipated increase in export coal shipments to Pacific Rim countries through the ports of XXXXX and XXXXX, XXXXX. Both ports have announced plans for expanded coal handling facilities with XXXXX=s XXXXX expansion scheduled to be completed by the XXXXX quarter of 19YY. The Company believes that the combination of these two factors will lead to strong Aspot@ demand for XXXXX coal over the near future leading to increased volume of shipments.@ (page 7)

E. AFuture earnings growth for Utah is driven by the expansion of coal mining volumes in the central Utah coalfields.@ (page 13)

F. AOver the next five-years, 19YY through 19YY, Management predicts a slow but steady rise in total tons transported, both under long-term contract and in the spot market. As tonnage levels increase, fixed costs are spread over a broader base, thereby reflecting true incremental profit levels. It is assumed that expiring short-term contracts will be renewed or replaced.@ (Emphasis added) (page 39)

15. All governmental forecasts for coal production in Utah and from the fields from which Petitioner hauls coal are that the production will increase in the future.

16. On XXXXX, 19YY, only three months after the lien date, Petitioner published a Three Year Plan for the future, (Exhibit 15) which contains the following statements. (from page 2)

A. AThis is a dynamic arena with changes occurring continuously. XXXXX prides itself with having the level of market intelligence and customer relations required to maintain and, more importantly, increase its market share of coal shipped by rail in this region.@

B. AXXXXX has formulated a conservative business plan, yet anticipates exceeding said plan once particular mine operations are expanded according to information furnished as follows:@

* XXXXX is scheduled to install long-wall mining machinery in XXXXX 19YY. This will increase production by nearly ##### tons annually from the current ##### tons. It is anticipated that %%%%% of the additional tons will be shipped by rail, the balance by truck to local utilities. XXXXX is active in the export market and has been shipping its export coal from XXXXX on the XXXXX because of production limitations. The increased production from installation of longwall mining machinery will enable XXXXX to shift approximately ##### annual tons of export over to XXXXX beginning in XXXXX 19YY. This will increase our market share of export coal from our service area from %%%%% in 19YY, to an estimated %%%%% in 19YY.

* XXXXX reportedly has increased its production and, in turn, its sales forecast from ##### tons to ##### for the year 19YY and beyond.

* XXXXX (jointly owned by XXXXX and XXXXX) continues to ship coal through XXXXX=s loadout with the potential of expansion. Agreement has been reached between XXXXX and XXXXX for a $$$$$ expansion at XXXXX=s loadout at XXXXX to accommodate increased shipments. (In 19YY, XXXXX shipped ##### tons to XXXXX through XXXXX, 19YY forecast is #####. If the improvements are made, up to ##### tons could be shipped under the above referenced agreement.

16. While the above referenced Confidential Private Placement Memorandum was being prepared by XXXXX, a Memorandum was submitted to them by XXXXX. Representatives of Petitioner had provided information to XXXXX for the preparation of that memorandum. Copies of that memorandum were provided to Petitioner, and Petitioner, agreed with the contents of that memorandum. That memo contained the following statements : (at pages 2 & 3)

A. AXXXXX--XXXXX is a non-union mine owned jointly by XXXXX, an affiliate of XXXXX, and the XXXXX (AXXXXX@). XXXXX purchased its ##### percent interest in 19YY. XXXXX began production in late 19YY and has grown steadily since. Its 19YY production was nearly ##### tons. The joint venture partners are both strong players in the coal market. Current shipments on the Utah are approximately ##### tons moving under contract to XXXXX. The working relationship between XXXXX and the XXXXX is very good and discussions have taken place concerning additional potential new business.@ (Emphasis added)

B. AQuestion 2 Please address potential growth in the area and prospects for loading for other producers. As shown in Exhibit 1, ACoal Mines in Utah@ the Company has transported coal from nine of the eleven active producers in the XXXXX during the past XXXXX year period. Additionally, the XXXXX transported approximately ##### thousand tons of coal for XXXXX=s XXXXX mine in the mid 19YY=s. While the Company believes that most of its growth will come from the mines it presently serves, the following is a list of other mines from which new business might result:

XXXXX

*******

XXXXX

*******

XXXXX

*******

Other Producers . . . . A

CONCLUSIONS OF LAW

1. The Tax Commission is required to oversee the just administration of property taxes to ensure that property is valued

for tax purposes according to fair market value. (Utah Code Ann. '59-1-210(7).)

2. AAll tangible property in the state, not exempt under the laws of the United States, or under this Constitution, shall be taxed at a uniform and equal rate in proportion to its value to be ascertained as provided by law.@ (Utah Const. Art. XIII, Sec. 2).

3. A[E]very person and corporation shall pay a tax in proportion to the value of his, her or its tangible personal property.@ (Utah Const. Art. XIII, Sec. 3).

4. AAll tangible taxable property shall be assessed and taxed at a uniform and equal rate on the basis of its fair market value, as valued on January 1, unless otherwise provided by law.@ (Utah Code Ann. '59-2-103(1).)

5. ABy May 1 of each year,@ all taxable property of companies which operate across county lines Ashall be assessed by the Commission at 100% of fair market value, as valued on January 1.@ (Utah Code Ann. '59-2-201(1)).

6. AFair market value@ Ameans the amount at which [the] the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of the facts.@ (Utah Code Ann. '59-2-102(8)).

7. The original appraisal mailed to Petitioner by the Property Tax Division is entitled to a Apresumption of correctness.@ Petitioner has the burden of proof to establish that the value of the subject property is other than that originally determined by Respondent, and also has the burden of proof to establish the correct fair market value of the subject property if it is other than the amount of the original tax notice. If the Respondent desire to increase the value of the property to an amount higher than the amount of the original tax notice, the Respondent has the burden of proof to establish that the amount set forth on the original tax notice was in error, and also has the burden of proof to establish the correct fair market value of the subject property.

8. The Commission will review all evidence presented under a simple Apreponderance of the evidence@ standard.

The Commission has carefully reviewed each of the appraisals, other documents, and testimony presented by the parties. The Petitioner has premised almost its entire case upon its projection that its revenues will begin to decrease at the expiration of its existing contracts, and further based upon the assumption that Petitioner will not be able to replace any of its existing contracts with either new contracts or new reserves to fulfill any other contracts. The Commission simply finds this premise unacceptable, unproven, and too speculative. The only testimony presented by Petitioner that its revenues would decrease is based upon speculation that no further contracts and no further reserves will be available many years in the future. Instead, this company has operated since 19YY, and has not presented sufficient evidence that it will not continue to operate beyond the existence of its current contracts. As with any business, there are always ups and downs in revenues, but Petitioner has instead estimated that it will no longer be able to operate at the conclusion of its present contracts and reserves. That assumption was based only upon verbal representations from the three major companies with which Petitioner has contracts, and the only representations were as to the estimated length of the reserves.

It was undisputed that there are very substantial reserves of coal in the XXXXX County and XXXXX County area that will last for many years into the future, including many years beyond the forecasts contained in the appraisals. Petitioner has argued that even though there is plenty of coal in the area, there is no assurance that it will be able to obtain shipping contracts for any portion of that coal. However, Respondent does not have the burden of proof to establish that Petitioner will be able to get future contracts, but Petitioner has the burden of proof to establish that it will not be able to get a reasonable amount of those contracts in the future. Petitioner presented no evidence on that fact. There is a presumption that Petitioner will remain a going concern, until contrary evidence is presented. No such evidence has been presented.

Not only has Petitioner presented insufficient evidence that its revenues will decline in the future, but it has made very Arosy@ and positive representations to its prospective security holders, and very negative and gloomy representations to the Atax assessor.@ After reviewing the evidence, the Commission believes that the picture which was painted for the investors was more accurate than the picture that was painted for the Atax assessor.@ The Commission therefore finds that the claims of future declining revenues made by Petitioner are not credible.

Regarding the individual appraisals, Petitioner=s appraiser had some negative comments to make about the appraisal of Respondent, and the appraiser of Respondent had negative comments to make about the appraisal of Petitioner. Most of the negative comments were what could clearly be deemed to be differences in appraisal judgment, with no clear cut determination that such methodologies are either clearly correct or clearly erroneous. There were some negative comments made about each appraisal which could place in question the determination and precise correctness of each of those appraisals. However, since the information given to the appraiser of Petitioner by the company was not sustained, the assumptions upon which that appraisal was prepared cannot be validated. The Commission therefore determines that the appraisal of Petitioner does not correctly determine the fair market value of the subject property, primarily because the information provided by the company which the appraiser used, the Commission finds is not credible or verifiable, and is too speculative for an appraisal of value to be based upon that premise.

Regarding the appraisal of Respondent, it has suggested that the value of the property be increased approximately %%%%% beyond the original tax notice which was sent by Respondent. The Commission does not specifically find that any matter in the appraisal was erroneous, but Petitioner did raise issue with some of the methodologies used by Respondent=s appraiser, and, in fact, stated that some items had been deducted when they should have been added. That testimony was unrebutted. Therefore, the Commission cannot determine that the slight increase proposed by Respondent=s appraiser is sufficiently proven to justify an increase to the value of the property of Petitioner for ad valorem tax purposes. Respondent did not sustain its burden of proof to establish that the value should be increased to a higher amount.

The Commission accordingly finds that both parties have failed to sustain their burden of proof to establish that the value should be increased or decreased, and the original value as sent on the original tax notice should be sustained and remain the value of the subject property for ad valorem tax purposes for the lien date of XXXXX, 19YY.

DECISION AND ORDER

Based upon the foregoing, the Tax Commission finds that the market value of the subject property as of XXXXX, 19YY, is $$$$$, less the amount for motor vehicles taxed at the local level of $$$$$, for a net rounded fair market value of $$$$$. It is so ordered.

DATED this 17th day of September, 1996.

BY ORDER OF THE UTAH STATE TAX COMMISSION.

W. Val Oveson Roger O. Tew

Chairman Commissioner

Joe B. Pacheco Alice Shearer

Commissioner Commissioner

NOTICE: You have twenty (20) days after the date of a final order to file a Request for Reconsideration with the Commission. If you do not file a Request for Reconsideration with the Commission, you have thirty (30) days after the date of a final order to file a.) a Petition for Judicial Review in the Supreme Court, or b.) a Petition for Judicial Review by trial de novo in district court. (Utah Administrative Rule R861-1A-5(P) and Utah Code Ann. ''59-1-601(1), 63-46b-13 et. seq.)