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HomeMy WebLinkAboutMINUTES - 08171999 - C215 C.215 THE BOARD OF SUPERVISORS OF CONTRA COSTA COUNTY, CALIFORNIA Adopted this Order on August 17, 1999 by the following vote: AYES: Supervisors Gioia, Uilkerna, Gerber, DeSaulnier and Canciamilla LADES: None ABSENT: None ABSTAIN: b=one SUBJECT: Correspondence 0.215 LETTER., dated August 6, 1999, from John D. Cahill, Attorney for Unocal Corporation, 444 South Mower Street, Suite 1700, Los Angeles, California 90071-2901, submitting a claire for refund of property taxes for the 1994, 1995 and 1996 tax years. *****REFERRED TO ASSESSOR AND TREASURER-TAX COLLECTOR ITIS BY THE BOARD ORDERED that the above recommendations as noted are APPROVED. I HEREBY CERTIFY THAT THIS IS A TRUE AND CORRECT COPY OF AN ACTION'TAKEN AND ENTERED ON THE MINUTES OF THE BOARD OF SUPERVISORS ON THE DAVE SHOWN. ATTESTED P' Phil Batchelor Jerk of ti- Board of Supervisors a couny Administrator �f 1 EY ~' ?64 Deputy c.c.Correspondents (1) Assessor TreasuTer••Tax Collector 0 0, JOHN 0 CAHILL ROD POLLOCK,PETTKER, GALBRAITH tar CAHILL KARL S. ROD;(i 9a8-i 982) JOHN L7. PETTKER A LAW CORPORAT[ON DANIEL C. BOND(9942.5977) WILLIAM R. CHRIS`AN PAUL E. SCHWAB(5898-5973) HENRY P. PRAMOV,.JR. JOHN F.CERMAK,JR. 444 SOUTH~LOWER STREET OF COUNSEL ALLAN E. CERAN JOHN P. POLLOCK, ,RosERT A. YAH;RO SUITE 9700 EL!ZABETH B. BLAKELY Los ANGELES,CALIFORN;A 90071-2901 .3AP�ES GALE RA!TH ROBERT C. NORTON TEL: (213)895-4900 TE;ECOPIERS Timo-,Hy G. CEPERLEY CORALIE KUPFER (2 9 3)895-492 i CR15 K. O'NEALL (293)885-4922 SON.iA A. 9tv'GLi;v (21 3)895-4750 SCOTT E.ADAMSON _ Au ust 6, 1999 CUR FILE NUMBER MARGARET RC7SENTHAL Q fl •ga^ W�9CHAEL A ABRAHAMZ®3 t bw 7 &&"i KENNETH A. FRANKLIN � �.a.,... "'I LJ�e"� '� N R iCHARD NES5ARY � ""`^�av 1375-LII DONNA YAWNI f SraANEL K. YANG E. F 1AUG 9 0 a WADE . NORWOOD # 7 �, D EEPA.K NANDA ) yr S9rs6t �s DELIVERED BY F'EI3EI2AI, EXPRESS HONORABLE BOARD OF SUPERVISORS COUNT'OF CONTRA COSTA County Administration Building 651 Pine Street, Room 106 Martinez, California 94553 Re: CLAIM FOR REFUND OF PROPERTY TAXES by Unocal Corporation for Taxes Erroneously and Illegally Assessed and Collected for the 1994 1995 and 1996 Tax Fear Dear Members of the Board: Unocal Corporation ("Unocal"),pursuant to Division 1, Part 9, Chapter 5, Article 1 of the Califomia Revenue and Taxation Code (Sections 5096 and 5097, et seq.),hereby claims a refund of taxes erroneously and illegally assessed against Unocal by the County Assessor of the County of Contra Costa, California(the "Assessor") for the 1994, 1995 and 1996 tax years, which taxes were erroneously and illegally collected from Unocal by the Contra Costa County Tax Collector for those years, 1 o Assessmcnt Reference Numbers. The taxes which were erroneously and illegally assessed and collected, the recovery for which this claim is being filed, were assessed and collected under the following Assessor's Parcel Numbers: 357-010-001 357-310-003 357-010-002 357-310-005 357-300-001 357-310-006 357-300-005 358-010-008 357-300-006 358-020-004 357-310-001 132810-0051 357-310-002 707562-0000 �3rPr�f� nersdrry .�k",o HONORABLE BOARD OF SUPERVISORS COUNTY OF CONTRA COSTA August 6, 1999 Page 2 2. Amount of Tax Levied. The property taxes levied under the aforementioned assessment references for which Unocal claims a refund are as follows: 1994: $2,340,000 1995: $2,250,000 1996: $3,250,000 3. Payment of Taxes. The taxes originally assessed and levied were duly and timely paid by Unocal. 4. Applications for Changed Assessments. Applications for Changed Assessments ("Applications") on the above-referenced Assessor's Parcel Numbers for the 1994, 1995 and 1996 tax years were timely filed by Unocal under the following Assessment Appeal Numbers: 95-3538 96-4243 96-9466 95-3539 96-4244 96-9467 95-3540 96-4245 96-9468 95-3541 96-4246 96-9469 95-3542 96-4247 96-9470 95-3543 96-4248 96-9471 95-3544 96-4250 96-9473 95-3545 96-4251 96-9474 95-3547 96-4252 96-9475 95-3548 96-4253 96-9476 95-3549 96-4258 96-9478 95-3550 96-4259 96-9479 95-3555 96-4260 96-9480 95-3556 96-4261 96-9481 A hearing on the Applications was held before the Contra Costa County Assessment Appeals Board("AAB") on October 28 and 29, 1998,November 4, 5 and 6, 1998 and January 6 and 7, 1999. At the request of the AAB, the Assessor prepared a proposed Final Decision.and Findings and submitted that document to the AAB on March 26, 1999. After making certain changes to the proposed Final.Decision and Findings, the Assessor submitted a final version of that document to HONORABLE BOARD OF SUPERVISORS COUNTY OF CONTRA COSTA .August 6, 1999 Page 3 the AAE on May 24, 1999.' On June 11, 1999, the AAB voted to approve and signed the proposed Final Decision and Findings submitted by the Assessor on May 24, 1999, which Final Decision and Findings purportedly supports the AAB's decision to deny all of Unocal's Applications. The AAVs Final Decision and Findings are the same as the proposed Final Decision and Findings which the Assessor submitted to the AAB on May 24, 1999. As a result of the AAVs Final Decision and Findings, the value of Unocal's property will remain at the original roll values for 1994, 1995 and 1996. 5. Business of Unocal. During the years in issue, Unocal owned and operated an oil refinery, including the land on which such refinery is situated, in Rodeo, California. 6. Qrounds for Refund of Taxes. (a) Violations of Unocal's Due Process Rights. The AAB received and relied on in its Final Decision and Findings additional new facts and information outside the official hearing record and after the equalization hearing had concluded. Those facts and information,which were supplied by the Assessor in his proposed Final Decision and Findings, are incorporated in the AA-B's June 11, 1999 Final Decision and Findings. The additional new facts and information are included in the majority of the elements of which the AAB's income approach cash flow analysis is comprised: charge and yield, gross margins, variable operating costs, initial capital investment, net margins, working capital,residual values, taxes and present values. Unocal notified the AAB that all of this additional new information,which was not in the hearing record, would be incorporated into the AAB's Final Decision and Findings if the AAB signed the proposed Final Decision and Findings as that document was presented to the AAB by the Assessor in March 1999, more than two months after the AAB hearing was concluded. In addition, Unocal filed specific written objections to the inclusion of the additional new facts and information which had been submitted by the Assessor with its proposed Final Decision and Findings. Unocals objections were sent to the AAB on April 9, 1999 (pages 1-2 and Attachment, pages 29 and 31-35), May 6, 1999 and ieiilay 18, 1999 (page 3). Copies of these three letters are attached hereto as Exhibits A, B and C,respectively. Despite Unocal's objections, on June 11, With the exception of Findings 4al.5),4x3.5) and 4a5.5)which were included in a supplement to the proposed Final Decision and Findings by the assessor on May 13, 1999 (and were subsequently incorporated in the assessor's May 24, 1999 submittal),the proposed Final Decision and Findings submitted by the assessor on May 24, 1999 is identical to the proposed Final Decision and Findings which the assessor initially submitted to the AAB on March 26, 1999. HONORABLE BOARD OF SUPERVISORS COUNTY OF CONTRA COSTA August 6, 1999 Page 4 1999 the AAB signed the Final Decision and Findings in the form in which they had been submitted by the Assessor. The AAB has violated Unocal's due process rights to a fair hearing in the following specific ways: 1. By taking additional new facts and information after the conclusion of the AAB hearing and outside the presence of Unocal, and relying upon such facts and information in its Final Decision and Findings. 2. By not allowing Unocal the right to question, cross-examine or rebut such additional new facts and information prior to inclusion of those facts and information in the AAB's Final Decision and Findings. 3. By failing to make an intelligible audiotape record of the hearing. The actions referred to in items 1. and 2. above are directly contrary to the prohibitions enunciated by the California Supreme Court in Universal Consolidated Oil Cel v B3Tam (1944) 25 Cal.2d 353. In that case the Supreme Court specifically condemned the taking of evidence outside the equalization hearing and the denial of the right to cross-examine evidence as violations of the due process rights of taxpayers. In addition, State Board of Equalization ("SBE")Rules 1, 313(g) and 324(a) mandate that the AAB may only act on the basis of evidence properly before it(and not on the basis of additional new facts and information submitted after the conclusion of the hearing). The action referred to in item 3. above is directly contrary to the provisions of Revenue and Taxation Code Section 1511 which requires the AAB to make a record of the hearing. (b) Methodological Errors by.the AAB. The AAB's Final Recision and Findings is filled with numerous methodological errors relating to the sales comparison, cost and income approaches to value. As a result, Unocal contends that the methodology used by the AAB to determine the value of the subject property was arbitrary, in excess of discretion, and in violation of the standards prescribed by law and, as a result, the value conclusions at which the AAB arrived are incorrect. The specific methodological errors which the AAB committed in reviewing each of the three approaches to value are discussed below. (i) dales Coiiparison Ap roach. In dismissing the sales comparison approach, the AAB's Final Decision and Findings repeatedly demonstrate a lack of understanding of that valuation method, including the adjustments necessary to account for refinery size, complexity, time, effective age and location. The AAB's misapprehension of the HONORABLE BOARD OF SUPERVISORS COUNTY OF CONTRA COSTA August 6, 1999 Page 5 sales comparison approach methodology is farther shown by its continual insistence that income, operating expenses and gross and net margins, concepts which only pertain to the income approach methodology,must be incorporated into a comparable sales analysis. Furthermore, the AAB's refusal to consider any of the substantial comparable sales evidence presented during the hearing before the AAE demonstrates that its decision has completely ignored the legal standard, established by the California Court of Appeal in Midstate Theatres. Inc. v. CoJMty of Stanislaus (1976) 55 Cal.App.3d 864, that sale comparability not be treated as an absolute and that all sales which "shed light" on the value of the subject property can be considered. A detailed discussion of all the methodology errors in the AAB's analysis of the sales comparison approach is set forth in Unocal's April 9, 1999 letter to the AAB and pages 3 through 22 of the Attachment to that letter(see Exhibit A attached hereto). (ii) Cost Approach. Similar misapprehension of valuation methodology concepts is apparent in the AAB's discussion of the cost approach in its Final Decision and Findings and the AAB's determination that the cost approach should not be used in valuing the subject refinery. The language in the Findings shows the AAB lacked any understanding of obsolescence, and how that mandatory element of the cost approach methodology(see SEE Rule 6(e)) is determined. The AAB's error is demonstrated by its reliance on the Assessor's cost approach value, which failed to include any amount for the required obsolescence allowance. There is also a clear misapprehension of the impact of the use restrictions requirement of Revenue and Taxation Code Section 402.1 in the AAB's conclusion that a refinery could not be built in the Bay Area because of political and environmental concerns (no evidence of legal restrictions on refinery construction was presented at the AAB hearing). This conclusion by the AAB shows that the AA-B failed to comprehend the primary theoretical construct underlying the cost approach—the principle of substitution. Moreover, the AAB's refusal to consider any of the extensive cost evidence presented during the hearing before the AAB (including evidence on obsolescence in Hearing Exhibits L, M, and CC), demonstrates that its decision has completely ignored the legal standard, established by the California Court of Appeal in Midstate Theatres Inc. v. County of Stanislaus (1976) 55 Cal.App.3d 864, that cost evidence is to be considered regardless of the quality of the evidence, at least to the extent of checking the valve of a property obtained using the income approach to value (as was the case here). And,just as with the sales comparison approach, the AAB's decision incorrectly asserts on numerous occasions that income approach methodology concepts, including operating expenses and gross and net margin analyses, must be incorporated into the cost approach analysis. A detailed discussion of all the methodology errors in the AAB's analysis of the coast approach is set forth in Unocal's April 9, 1999 letter to the AAB and pages 23 through 27 of the Attachment to that letter(see Exhibit A attached hereto). HONORABLE BOARD OF SUPERVISORS COLT 7T Y OF CONTRA COSTA August 6, 1999 Page 6 (iii) Inane Approach. In connection with the income approach, the AAB's Final Decision and Findings erroneously include the value of certain intangibles (i.e.,permits and franchises, assembled workforce)which are clearly non-taxable under California lava (Revenue and Taxation Code Sections 110 and 212, California appellate court decisions, and AH 502). The AAB's Final Decision and Findings also mishandles taxes and incorrectly includes a deduction for depreciation, thereby violating the requirements of SBE Rule 8. Further, there are several conceptual errors relating to the development of the discount rate which the AAB adopted, such as the inclusion of"off balance sheet financing," and the inclusion of preferred stock, a form of debt, as equity. In addition, the Findings dismiss the build-up method for determining the discount rate, even though that Method is a valid and accepted method for arriving at a discount rate, and evidence relating to that method was introduced. Finally, the derivation of the AAB's discount rate in its income approach analysis did not assume that the refinery would be purchased as a single stand-alone asset. A detailed discussion of all the methodology errors in the AAB's income approach analysis is set forth in Unocal's April 9, 1999 letter to the AAB and pages 28 through 44 of the Attachment to that letter(see Exhibit A attached hereto). In addition to the specific methodological errors described above, there is an overarching error in the AAB's Final Decision and Findings, namely the AAB's reliance solely upon the income approach to value and its decision to ignore the sales comparison and cost approaches to value. The problems which arise when only the income approach to value is used were discussed during the hearing and in Unocal's Pre-Hearing Memorandum Gearing Exhibit A at footnote 2). Moreover, State Board of Equalization Mules 3, 4, 6 and 8 all require, or at least imply, that multiple approaches to value should be used whenever possible. (See also Midstate Theatres. Inc. v. County of Stanislaus (1976) 55 Cal.App.3d 864 at 882 (multiple approaches to value to be used in order to check the value obtained by income approach to value).) The AAB's summary dismissal of the sales comparison and cost approaches in this case does not appear to have any valid support. (See Unocal's April 9, 1999, May 6, 1999 and May 18, 1999 letters to the AAB, copies of which are attached hereto as Exhibits A, B and C,respectively.) (c) The AAB's Final Decision and Findings Ia 1iot Supt�o_ edby Sub tantial Evidence. Unocal also contends that the Board's decision to deny Unocal's Applications and leave the prior roll values intact is not supported by substantial evidence in the record of the proceedings before the AAB. The AAB's Final Decision and Findings ignore the substantial amount of evidence presented by Unocal during the hearing which supported the value conclusions reached by using the sales comparison and cost approaches to value. Furthermore, Unocal asserts that the values found by the AAB were derived in a manner which was either contrary to applicable and controlling law or rule, or arbitrary and without any rational basis or substantial evidentiary support, for the reasons described below. HONORABLE BOARD OF SUPERVISORS COUNTY OF CONTRA COSTA August 6, 1999 Page 7 (i) During the hearing before the AAB, the Assessor attempted to present a sales comparison analysis and a cost analysis of the subject refinery, but in fact did neither because he made no adjustments to the sales in his sales comparison approach and no allowance for obsolescence in his cost approach. The AAB's Final Decision and Findings adopt the same jaundiced view that the Assessor had towards the sales comparison approach and the cost approach, and completely ignores the substantial body of evidence which Unocal presented at the hearing to support a fully developed sales comparison approach and a fully developed cost approach analysis of the subject property. There was no evidence presented at the hearing to support the statements in the AAB's Final Decision and Findings that the adjustments to Unocal's comparable sales lacked validity. Mor was there any evidence presented that Unocal's obsolescence analysis lacked validity. To sum up, there was no evidence presented at the hearing before the AAB which justifies the wholesale dismissal by the AAB of the substantial body of sales comparison approach and cost approach evidence introduced at the hearing. (ii) At the hearing before the AAB, the Assessor failed to present sufficient evidence to support his charge and yield analysis. Furthermore, there was a substantial amount of evidence presented by Unocal (primarily through the testimony of witnesses Rand Swenson and John Vautrain)which called into question the validity of the Assessor's charge and yield analysis and showed that such analysis was erroneous and incorrect. The AAB adopted the Assessor's erroneous and unsupportable charge and yield analysis (with the new evidence referred to above) in its Final Decision and Findings. The evidence supporting the AA.B's charge and yield differs from the actual prior experience of Unocal's Rodeo refinery and, as a result, the projected charge and yield relied upon by the AAB is only hypothetical and is subject to question. Based on the contradictory evidence presented by Unocal at the hearing, as well as the other concerns set forth above, it is apparent that the charge and yield analysis relied upon by the AAB in reaching the conclusions set forth in its Final Decision and Findings was not supported by substantial evidence. (iii) The AAB determined in its Final Decision and Findings that the only approach to value which prospective refinery purchasers rely upon is the income approach. However, no testimony or other evidence from market participants was provided to support that assertion. Therefore, there is no substantial evidence in the record to support the AAB's decision to rely solely upon the income approach to reach its conclusion of value. (iv) The AAB's discount rates were not based on substantial evidence. The capital structure relied upon by the AAB to develop its discount rates were shown at the hearing to have been incorrectly calculated. Further, the investment time horizons used by the AAB in developing its discount rates were far too short for an investment in a refinery property. Finally, State of California ss Qounty of Orange � The undersigned, Janes L. Cook, hereby avers: I ars.the Manager of Tax Administration for Unocal Corporation, and am authorized to make this verification on its behalf I have read the foregoing Claire. for Refund of property Taxes and know the contents thereof and the same is true of my own knowledge, except as to those matters which are stated on information and belief, and as to those matters, I believe them to be true. I declare under penalty ofpedury under the laws of the State of California that the foregoing is true and correct. executed on August , 1999 at Brea, California. �' es lrr,. hook 0R IG- I N A L jOH?N C. CAHiLL Roos,POLLOCK,PETTK.ER, ALBRAI T H&CAHILL KARL B. Rom(9908-1993 JOHN C. PE ;KEP DANIEL C.BOND(1942-197 WILLIAM R. CHRISTIAN A LAW CORPORATION PAUL E.ScFiwAa(1896-197 t'ENRY"d_ PRAMOV,..1R. JOHN F.CEfRMAK,JR801 SOUTHGRAit30 AVENUEOF COUNS ALLAN E.C€RAN JOHN P. POLLO ROBERT A.YAH;RO SUITE 400 IAM E5 M.GALS RAI' ELIZABETH. B. BLAKELY LOS ANGELES,CALIFORNIA 99097-4623 Roa EqT C. NORTON TIMOTHY G. CEPE€tLEY TEL:(293)89:5.4909 '3)895© (2 9 3)895-49,5-49� 49; C0RAL:9 K,1jPrER (213)895-49; CRIS K.OWEALL (2I3)895-47 SONJA A. INGLINScoT MARC E. ROSENN May 18, 1999 MARGARET+@C75EhdTNAL Jr"i FILE Ntl'rA6 MICHAEL A.ABRAHAM KENNETH A. FRANKLIN - 1376-L10 RICHARD NF SSARY DONNA YAM INi SHANEL K.YANG WADE E. NORWOOD D).EPAK NANDA J. Daniel Dunlap, Chairman BYFACSIMILE E A FEDERAL, EXPRESS Assessment Appeals Board CONTRA COSTA COUNTY 651 fine Street, Room 146 Martinez, California 94553 Re: UNOCAL's Respgnse to Assessor's May 13, 1999 Further Findings and Dear Chairman Dunlap: We were somewhat, surprised when., on May 13, 1999,we received the Assessor's letter of the same date regarding the above-captioned matter, since we had understood that the matter was closed upon the filing of[NLIC9CAL's reply letter on May 6, 1999. However, in view of the points raised in the.Assessor's letter,we feel it necessary to reply. We are hopeful that this will. prove to be the last letter in this matter. No matter how the Assessor attempts to sugar coat the facts,he is still asking this Board to rely upon new evidence set forth im his proposed findings which was nQt introduced into the record during the Board,hearing. This is apparent on the May 131 letter itself where the Assessor refers to the 14 items as "changes" (p. 1, 3'�,) and acknowledges that the new figures in the proposed findings are "material increases" (p. 2, 2"d or"reduce ... items of yield of tile supplemental appraisals" (p. 2, l'4D. UNOCAL reiterates that evidence taken outside the hearing and outside the presence of the parties,with no right,to cross-examine such evidence,is a violation of 1, C3CAL's due process rights to a fair hearing before the Board. (Universal Consolidated Coil Co,v. vram(19 •4) 25 Cal.2d 353 at 364µ361.) The Assessor's tetter focuses on minutiae and fails to address the broader concerns previously raised by UNOCAL. A.major concern remains as to why the Assessor has attempted to introduce new evidence on the particular ten items in the material balance. The Assessor has not answered that threshold question, and neither the ward nor UNOCAL w-.111 ever nosy the J. Daniel Dunlap, Chairman Assessment appeals Board COINTRA COSTA COUNTY May 18, 1999 Page 2 answer to that question now that the hearing has concluded. Furthermore,UNOCAL has no recollection of any significant testirnony on most of the items in the material balance whop the Assessor has adjusted, including sour gas and petroleum cope. It is possible (and probably likely)that the assessor is attempting to introduce new evidence on these items at this time in order to "fix" the.Assessor's data so that his cash flours give the results found by the Board. If that is the case,then there are probably a myriad of"fixes" which could be made to the assessor's material balance to achieve the desired result. and so the question again arises as to why the assessor's has decided to introduce neve evidence on these ten elements in the material balance. Why did the assessor select these parldicular items? Or, even more broadly,why did the assessor decide to alter the material balance at all? Why didn't the Assessor modify his discount rate? Or Fahy didn't by change his revenue stream or operating expenses? U,N'OC.AL and.the Board have no way ofanswering these questions at this stage of the proceeding, Igor do the,Assessor's proposed findings and explanatory letters answer these questions. The Assessor also now contends thaat the Board may rely upon the new evidence in the proposed findings because that new evidence is "reasonably inferable" using"any mathematical or appraisal analysis that may be appropriate°' (p. Z, 3'ID. 'tae gist of these comments is Haat such "mathematical or appraisal analysis" is not open to discussion or crass-examination. But such analysis underlies the new evidence proposed by the assessor,and UTTCC.AL must be,given the opportunity to cross-examine that analysis as well as the figures resulting from.that analysis. .An even more ominous element in the Assessor's May 131 letter is the implication that the Board can.simply choose a figure without any support in the evidentiary record.. Consider, for example, the following statements in the.Assessor's letter: [a]s a general rule the Board would be safe to pick any number lower than the highest value that appears in the record; [t]he Board can also find a number that is higher than any specific number in the record., the Board meed not be limited to drawing conclusions based only upon specific numbers in evidence (p. 2, 31 These statements are blatant invitations to the Board to arbitrarily select any figures, including the assessor's figures,in reaching its decision! Such arbitrariness has been I Daniel Dunlap, Chairman Assessment Appeals Board CONTRA.COSTA COUNTY May 18, 1999 Page 3 st=uck drawn by California appellate courts on more than one occasion. { fadonna v. fou-nty of San Lexis Obispo (1974) 39 Cal.A.pp.3d 57 at 61, County of Los Angeles v. Tax repeals Bcsa�d ' o._2 (1965) 267 Cal.App.2d 830 at 835-836.) Specifically, in the context of the discussion of sour,gas,the,Assessor states that the historical figures show a yield of 6.5%, the proposed new evidence indicates a yield of 5.9%, and the figure actually in evidence is 4.9%, well below that amount. The,Assessor's suggests that the Board simply"pick" 5.9%because it is nearer to the historical average of 6.5%than 4.9%. But why pick 5.9% instead.of 5.5%? Or 6.2%? There is no reasoning behind the "selection" of 5.9% (nor has there been an opportunity to ask questions as to what reasoning there might be). It is just an a*bitr ry selection.of a fig�xre which the Assessor now requests be included in the new evidence upon which his proposed findings are based. These sande concerns arise for petroleum coke, where the Assessor asks the Board to "pick" a number(5.9%) at the upper enol of the range(5.2% to 6.1 UNOCAL renews its objections to the proposed findings set forth in its.April 9, 1999 letter to the Board. In addition,UNOCAL objects to Finding 4al.5),which is attached to the Assessor's May 13, 1999 letter, to the extent it includes new evidence which was not introduced during the hearing before the Board. These objections are rnade in order to protect L OCAL's rights to a fair hearing and to cross-examine all evidence upon which the Board's decision may be based. In view of the many flaws in the Assessor's proposed findings,we request that the Board put aside the proposed findings and prepare its own findings in accordance with the evidence actualay submitted at the hearing. Respectfully submitted, A John D. Cahill cc; Dennis C. Graves Deputy County Counsel Contra Costa County 651 fine Street, 9'door Martinez, CA 94553 JOHN 0.CAHILL RomPUiLCC9C,PG t I v4GR,.GALiii�AiTFf&L.+AT31LL KARL B.RO01(#909-19921 J014M 0, PEI I KE R DANIEL C.BOND(1942-1 1a771 WfLUAer.R. C1 RiSTAN A LAW CORPOPATION PAUL E.Sc wA$(1890-1973) HENRY P.i`RAM OV.JR. - JOHN F.CERMiAK,JR. v - OF COUNSEL ALLAN E.CERAN 801 SOUTH GRAND AVENUE Je7HN R. POLLOCK ROBE&",'A. YAKRO SUITE 400 JAMES M.GALBRAITH ELIZABETH S. BLAKELY LOS ANGELES,CALIFORNIA 9W 17-4623 ROBERT G. NORTON TiMOTHY G- CEPERLEY TEL.:(213)895-49W TELECOPiORS CoRAuE KUF-FER (213)3954.921 CR'IS K.ONE.AL.L (2 1 5)1395-4922 So?jA A. tNGLIN (213)89r-4750 SCOTT E.,ADAM SON M1ARGARLT RCSrN;`RAL May 6, 1999 Dues FILE:NUMBER A4YGHAEL.A.ABRAHAM - KENNETH A° I°RANKLJN RICHARD NESSARY 1.376-LIO DONNA YAM8Ni ShANEL-K.YANG WADE E- NORWOOD DEEPAK NANO& J. Daniel Dunlap, Chairman 3—E-NE ' U EX Assessment Appeals Board CONTRA COSTA COTj= 651 line Street, Room 106 Martinez, California 94553 Re; LTNOCA.La's Response to Assessor's Reply on LM ALN ,=mems to'Proposed Findings Dear Chairman Dunlap: We have reviewed the Assessor's April 23, 1999 Reply toUNOCAL's initial responses to the Proposed Findings for the 1994-96 UNOCAL applications. The Assessor's Reply continues to maintains that this Board can and should rely upon evidence set forth in the proposed findings which was=introduced into the record at the hearing. As UNTOCAL previously advised the Board,doing so will be a gross violation of UNOCAL's due process rights as it w R constitute taking evidence outside of the record, which evidence UNOCAL,has had no opportunity to cross-examine. if the Assessor's suggestion is followed, the Board will be in direct violation of State Board of Equalization(SBE) Rules 313(8) and.324(x) as well as the prohibitions set forth by the California Supreme Court in-Universal Carwji&Agd Oil Co. v. % (1944)25 Cal.2d 353 at 360-361 and subsequent appellate court decisions. I order to demonstrate that the Assessor is in fact asldng the Board to consider and rely upon new evidence in adopting his proposed findings,UNOCAL has analyzed all of the'fables contained in the Assessor's initial appraisal reports(Hearing Exhibits 9, 16 and 17), the Assessor's supplemental appraisal reports(Hearing Exhibits 40,41 and 42),and the new cash flows which were included with the Assessor's proposed findings (Exhibits Al, A2 and As). UNOCA-L's analysis shows many of the"changed" numbers which the Assessor has included in his proposed findings were not even within the range of numbers presented by the Assessor at the hearring. The following example shows this: 1. Daniel Dunlap, Chairman Assessment Appeals Board. CONTRA COSTA COUNTY May 6, 1999 Page 2 1994 e Refm_ - Charlie and Yield Proposed Findin g Revised(New) Original Supplement Supplement Table TV Table 11 Table II �hibit 17) Exhibit 42� 0EXWbitAIII Catalytic cracking stocks Not shown 8,500 B/CD 6,80�1131CD Aviation.Fuel Jet A 6,750 BICC 6,400 4,800 CARB b°F3 19,250 25,540 25,700 450 Neutral Oil 1,378 1,300 1,10€1 Sour Gas 1,103 4,600 5,500 Petroleum Coke Not shown 4,900 5,600 The third column above shows the new evidence which.the Assessor now seeks to introduce through the proposed findings. Note that all of the new yield information has changed from Exhibits 17 and 42, and that in most cases the new Meld information is o4IdLe_flIQ_raUZe of eNridence which was presented during the hearing. Complete listings of the new evidence which the Assessor has asked the Board to rely upon are set forth in the enclosed tables(four each of the yeas in issue).' 'early all of the Notes attached to the Assessores Exhibits Al, A.2 and A3 (which the Assessor contends justify his introduction of new evidence after the close of the hearing) are based on the Assessor's supposition that the revery yield perewtage must be reduced"eased on testimony that revery yield of 110% is too high." While vi.NOCAL acknowledges that there was testimony concerning excessive refinery yield,there was absolutely no testimony on the new figures in Exhibits Al,A2 and A3 for cific eery products. For example, in the numbers shown above for 1994 product yields,there was no testimony supporting the reduction of Aviation Fuel Jet A to 4,800 BfCD,the increase in.Sour Gas to 5,600 B1C13, or the increase in. Petroleum Coke to 5,6030 B/CD. The Assessor°s statements that these entirely new numbers are n addition to the items listed on the enclosed tables, the Board should be aware that the "Gross Margin Calculations" tables on page 9 of Exhibits Al,A2 and A3 were nearer presented during the Board hearing. As explained in this letter,the Board.must:ignore these new doc;nnents entirely. 1.Daniel Dunlap, Chairman Assessment Appeals Board CONURA COSTA COUNTTY May d, 1999 Page 3 "only interpretations of the evidence" (Reply,p>-4, top)or"are reasonably derived frown.the evidence in the record" (Reply,p. 5,top) are disingenuous,to say the least.? The Board must bear in mind that UNOCAL has had abscsluteI orta itv to cross- examine r oss- e a ine or Igst,the validity of the evidence on the qhgaos in snecificc setfQ12Lin the.p�ra oaed fin °u (Exhibits Al, a2 and a3)or the basis for such chances. UNTOCAL has .never been given a chance to question the assessor befQxe the Bo.ard during the h to��ne reasons for the Assessors decision to adjust only ten(10)out of the forty(40)revery yield categories. Many questions arise here. For example, achy did the assessor select these 10 categories for adjustment? Why didn"t he adjust fewer or more categories? Why did he adjust each of the 10 categories by the specific mounts indicated? How can these specific numbers be ""interpretations" or "derivations" from evidence in the hearing record if they are outside the range of the prior evidence? What is the evidence that supports those "interpretations" or "deri,viations"? Neither the Board nor UNOCAL will ever know the assessors reason(s)for these "changes," other than the blanket explanation that"revery yield of 110% is too high." This is one sof the most attempts to deny the due process ruts of a taxpayer to a fair hearing and to cross-examine evidence that we have ever encountered! The overriding fallacy in the assesso-es proposed fundings is his assumption as to how the Beard arrived at its decision to deny UNOCAL's applications. The Board has not given any indication that its denial of 1 "OCAL's applications was based on an overstated refinery yield.3 1n fast, the Fare 4(bottom) of the assessor's Reply states "[r]e arrdless of whether a witness has made a specific statement,the Board is free to interpret the evidence, ... ." UNTIOCAL regards the assessor's statement that the Board can interpret evidence where none exists in the record as a veiled request for the Board to rely on evidence outside the record. To do so would be a direct violation of SEE Rules 313(g) and 324(a), and11,;yersal Consolidated trail Co. v B , all of which mandate that the Beard must only rely on evidence properly admitted into the record at the hearing. 3 The simplistic statement in the assessor's Reply that"[b]ecause the Board has found the values to be the enrolled values,rather than the higher values shown by the assessor's supplemental appraisals, it is entirely logical to reduce revery yield" (Reply,p. 3)has no basis in the hearing record. 'Nor is it set forth in the Board"s 3anuay 20, 1999 wnitten announcement of its decision. The assessor is simply speculate about the basis car the Board"s decision. I Daniel Dunlap, Chairman Assessment Appeals Board C0��COSTA COUNTY May 6, 1999 Page 4 Board has never even stated that its decision should rely on the income approach to value,which undermines the entire premise on which.the Assessor's proposed findings are based. It is entirely possible that the Board intended to rely, at least in part,on the comparable sales approach or the cost approach in supporting its denial ofUNOCAL's applications. Moreover,the enrolled values,which the Board ostensibly upheld in denying the applications,was done by a cost approach according to the Assessor's own admission. The bottom line here is that the Assessor failed to provide any information to the Board dig the hearing which supports the enrolled values. Because the Board has decided to leave the enrolled values in place,the Assessor has decided to fabricate evidence, using his valuation approach,to support the Board's decision. The Assessor's counsel has advised.the Board that adoption of the Assessor's proposed findings "can readily be defended" (Reply,p. 5,middle). U-NI TOCAL disagrees. The pro os diUg § are sMio ly fla ed. If the Board,adopts the Assessor's proposed findings,it will violate UNOCAL's due process rights to a fair hearing and to cross-examine evidence and,therefore, UNOCAL strongly urges alae Board not to sign the proposed findings. In addition,UNOCAL, respectfully suggests that the Board consult with its own independent legal counsel as to the issues raised by the applications and the evidence in the record, and prepare its own findings based thereon, so that the Board does not violate the due process rights of UNOCAL in this matter. Respectfully submitted, John D. Cahill Enclosures (3) cc; Bennis C. Craves (w enclosures) Deputy County Counsel Contra.Costa.County 651 Pine Street, 9'Floor Martinez, C.A. 94553 COMPARISON OF ASSESSOR'S EECE WrM NEW DMIE-N-fE LN PROPOSED 4 RefitCh a and Yiel& Proposed Findings (Barrels per calendar day) Revised(New) Orginal Supplement Supplement Table IV Table 11 Table 11 MbhitlD Mxbibit 1 -xhibit Al) Catalytic cracking stocks Not shown 8,500 B/CD 6,800 B/CD ,k.viation Fuel Jet A 6,754 B/CIS 6,400 4,800 CAS TF3 19,250 2.5,500 25,700 4541��eutral Oil 1,378 1,30€1 1,100 Scour Gas 1,103 4,500 5,600 Petroleum Coke Not shown 4,900 5,600 Y a 1e eratin_C ts; Propos dings; (000s of dollars) Revised(New) Original Supplement Supplement Table IX Table IV Table IV (Exhibit 17) ��hl'�it 42) it A,1) 1995 37,530 62,685 68,160 1997 37,5€30 62,685 68,160 : 1.998 37,500 62,685 68,160 1999 37,603 62,857 68,347 2030 37,530 62,585 68,160 2001 37,540 62,685 68,160 2002 37,540 62,685 68,160 2003 37,603 62,857 68,347 Estir=te of Working CMitale (€300s barrels-per day or barrels) Proposed Findings' Revised (New) Original Supplement Supplement Table XH Table VZI Fable VH (Exhibit 1711.71 t-42) (Exhibit°bit M1� Avg. lefned Products 92.91 /D 95.0/104.2 / 3 95.1/1 31.7.L /D Refined/gods. Inventory 1,858 /D 1,9€30 /D 1,902 /11 NOTE: Bolded fig-es in right coli represent new evidence which is outside fhe mage of evidence presented by the Assessor dig the hearing before the Board TABLE IV M4 F4WVEM CHAR= AND YURM Cho" 4 vftw co t3$ (i) wo&N Hawy ckwmA us m in 34AHO A%Wmft0a*b" 29M 9 in st cluft MelMl 2%Ml 2"94 Yaaaai TOM 899 10" Wks" ICA" t,9 B3 I'm I'm Clhw araC 39 3 626 426 420 TMW SMW4Wbud PmdwA FoodablWo Wo 799E 2, wix 9 L, t 1,1,1 Naptdhn) 3 30 39 Oka* 303 an ass 8.M 006, 4AW z10 VW z 9.30 s= I'M 20,= 79. 7 3,wo - - maw i.= t.m 7,AW T. z6ft tow am 4013M 40m AW@dm FuMAtA 41M CAM Mow $, CAM 10% 2ffs CAM`tom id$,496 98,750 23$9 am 20,30 coir mbda eiwq c alw an C =0 A LM Wmq t. , mm a paw 09 746 7w g dfw!*tet of 889 589 541 submwstead an 2AM '3,988 M95 Cs+ba� IM MWAM C]M To 796 70 lon labiwitmak I'm I.Wo , 4M tUU&M CM t'm 1,378 1.378 693 fONSig Sig 51ffi Lubar Mo 3,600 3.+99$8 U umfrwgbw VAMM 254 238 388 vvajm6aam am Law3wrwcoin Cm 9.m LaoSi 31 54 am ME 31 38 36 aaw t,96m t,Ste, t t 7.M 7.9 3 r9 rax TABLE A CONTRA `t'x COUNTY C3 EY VALUATION o HMTCRMAL AND PROJ GE AND YISM A y Iss"a" asr 3= 30 3W crads dN" 31.7m amt 31633 Xu 31AM :tda 31AM 253 31AN cadh"Naft 483 Ad tms 1.4 883 €.4 am €.L ow 1.2 Xboma.6 as A lis aO tis TOW Cftwo S, t !L4 sk= 8i4 'sm q82 8tt.7A8 02 J0,7SL as >r • P41 A0 i, 22 9 tI '.3Am I.� 3,7'M Aa Aa aA A Aa as 8m as Aa A0 a A8 As 4.0 ftd* Aa c.a a a.8 Aa 2AX2.4 $df#A7 iA.778 I2D tib 27 !I= ti4 11.3 €ata ll= I€.s oam 16 u 430 as 400 0.4 4Offi A4 cacs _ a.Q bib Av 4= AS 4W C6 AD Wamw010 2. u i as A# Aa 31 Rt Aa 28 Aa Aa Aa AO as as 0.O Aa oubdife am L's 59 Al AD 32 Aa Aa 200 a2 swmmftamcs i5.%S 17a %M 2AA 16-4" €87 Mm +.5.4 " �.m 11.4 7101 AS as 2 Aa Aa A® Aa as $ AD Aa Aa Othwiitrm AD as A as 0a Aa Oftorunfinhoodd 2,W, la aa IAW 1A &A AD 78]Yd66� >97. Ia" 71017 1048 Issas 778.3911 Istaa Wsm vasa 3„182 a3 4,282 4.7 M 2,M kl 31500 4.4 8N 4.7 453 AS AS am atl a3 cawftwd Dbuskm AA 571 A4 t85 AI 2W A2 Aa a AA us 3 AD AB itis AI gkntftskldm AA Aa 349 AA &W " I-AW 15 OWN 3AMd to 5.135 SA 4,m ds 4= 4.S Aa cmw tai vAck 2,173 2.4 Aa 1,088 •tae 1.100.0 1.2 Mo Q,04.4--lo AvWCdftftxk a a8 1 Aa a a.8 Aa Aa cuawsbckR 4AM 'd4 31185 %2 4477 AS 4,10.0 48 A+5 5B0ffia AC 8S A.1 43 a.8 Ad iOa G9 $WNW 14x48'8 IA€ *AAM €A 14NS Iie 14,308 IS.a 1407 04.7 UN 70.7 .Wva 23S savx 21.1 AX2 22,7 apes 31.6 28.076 2&.7 18.4]'0 iib zAn 2d2 2MM 33.4 49M E2 U.lWWMdPAqLdW Origove0ed 0 Aa 15= K.5 8= 73 9= 1.2 Imm 1.7 Aa Aa A Aa IWO I.1 2M 22 CARNZY Aa Aa a A0 Aa 2300 26.0 TMa8 t" 11,I9a 13.2 TLIW IMA 9aiae 11.5 ?me IIA M142 248 8.1722 S.7 X857 '47 77W Aa 22W 2,3 3uWUrAwdsd0cWdnplad 6 aF 00 ti,4 2.471 2.7 2m 11 iet suporU itm Aa A4q a Aa Aa ia0 I.7 WM 02 AD C.A 0 Cs AO 7000 7A =All 4&3 4"., da7 410" 44.8 4x,.. Itnt3dA axe 14.0 WOW 1.4 8.342 22 4= 47 -Fuel tam IB2 irgya ta$ wow 17.4 edea 2€.9 vim2'Y,s C:avblz% A0 Aa 6 ria AD AO cwbTF3 A6 C.3 A Aa i7.8Aa M7 28= 27.0 .00 A €3,705 05.3 17.ffi4 443 16.7 6 174 2„AWUblob6m AO 2 91:2 MA14 1Y.s 2421es 2" 22,W8 34'.7 31,990 224 int�i :aw$a48e Faa1F 058 054 1..070 1.012 I'am Z= . a Fuld m 814 405 8m am 12 Ram ON `„788 9A 104 24 7,$28 23 1,ob 2.0 3,zff " 90SOLMAial W4 m . 316 sm 5w lwNrdvdis 897 wo ws 707 sm 450 lom 1,201 1.140 %= _ - 196849 t[ .W 9 7W 1,5Oa Mwwwck 8 G 3 E.utau 2.41 S3 2.104 3A 2A= A,4 2,880 3.90 a,a F wFF wwm sm 311 507 am 506 ullonktudwamme 297 2u 2W 3050 3� -$Wbtawvmm 745 is 7Z£ ns so 2A ffimB s i ONW.Mb " sowcm atm S.8 5,747 a.a S= AS SAMa,if 4,869 4.1 LPG 92 6M iCL? Al $7 A€ !ACE 3.1 '.tQ AI choldcaft 451 'A 530 AS 490 s.E 406 SA 5th as porainum Ccift 5.188 z8 5702 as SAN 4.1 !AM 2w 4 � omwIi,a rss 12,17'0 to 11,E tea 11;.03 =I ia,1 €S.7 •3'OML PkeVM MWWS 9BB„'€r88 IAess 97= '.Apel 96AW €arts SkM -0%A 104210 €4aa RQ-w aIF°(of 7t EX% 7 "% 1944% lit.1% m . :3 Ybid aa'% €M7% 41X% 71.210 7skn+b t7B.�a,1aR SUPPIMMMV Tim 4 CONM COSTA COUNTY LWOCAL RODEO REMNERY VALUATION 1994 CHARGE AND YflaD 9iRi'4dmevq a1.72ffi a4:8 31,1�a 34.9 .4,408 aR6 31.400 3!,400 05.2 A �i320a4 bi�4 2r.4167 38„1N It0 =AD 38.8 2NAM 34.4 OWAMP man 422 0Y f,28>} 1.4 as 1.0 9473 1A on T.a Nbcaft to OA 0 ae 318 98 Tod Chute 68,1 1 aas ss,w 6" 3s,m na Mtn to a,16e is almdecooks and mm da MW 22 996 U 4.300 is 'I'm as to 4sm as coal"MUNIfts awkim 8.9 $ 4,0 4.0 2a ' am"mAtfe 1417W 1Z0 (8.818 7 14,2F@ 12.4 sl2w 128 1t..9 fd105114 M 1.9 118 470 0,01 4e0 14 400 14 cam20 846 0.m 4w am 400 0.4 649 VW4181021 OWNING, 0.6 2 0.0 1 " 494 a0 61 21 0.0 28 affi s.0 ae a &I 8.0 a4 04 4T 20 1 32 4A0.5 B"8 d.2 S 9bstdri t Mm TY.3 98.'285 2&8 18„'" 18.7 16',800 18.m Is,= 17.0 aitt 20 a4 0 4.0 3A t0 e S0 0.a 0 ca *A1 CO 00offirUlbaskeks 0.0 a0 0 ae ae 50 fit' .2."1 as a0 1,483 1.0 AH RO 74844- 22 54.7 3Y,TY4 $s 3#.866 au 2000 UA 29.440 17.9 T�1 mm tat 41$,167 roma AM 108.0 65,7016 400n 66,209 IMA 3.197 2.5 4= 4.7 $790 dT 2,$00 4T 3,600 sa 5.7 439 a0 f0a " sm ita i!+ aawk"mminwasus 1.0 374 a4 f88 32 7.Se e:3 CA 3 0.0 Ike 3 0.0 &3 Im 9.1 &V 948 aA 243 OA 400 a4 p�=8Mi LO $ 3.1255 40 744 9A 4,3U 4.3 44M 4A dG 2,173 14 as 1.= Ta 4.90 1.3C]R 7.;t a Rom C 9 30 ! to 3 t.0 to a0 oJewslaw 4„0W 1A 3,413 3.0 4.477 4s 4.100 4A 3e QVwtk ad3ow*0 0.0 67 &1 43 ae 4.0 !0a 0.1 subtaw so"Awwad pnoemets, "An 101 14AN 150 16.478 %A UAW TSA 11,2vb T8.4 ambable '. »s 247 am Ate MW 11.1 sAm =7 mm 81.6 7146M 317 96.475 1a.0 21.377 Sts MM 49.4 4400 5;% a sdRw*ia7 0 40 /7= 14.11 kam 7.2 am 0.2 16m ?.7 UMmadod ROWAw RM a0 ae a $.8 1o0 ti 20 CAM 9? 4.6 as 6 as Cao zm 280 a1u T40 'Cabe 123 ea.W 14.4 » 1TR Mm 1114 13,14.2 94.8 6.462 6.7 9.867 10.7 7800 4.0 2200 28 - 0 4A 4.949 1.4 7.474 2.7 22M 0.1 ea *ApwLWftdmdRM 0.6 to 0 5.s ca '18110 1.7 CARA 22 to 0.6 a ma om 7000 7.4 23,912 48..3 46.6011 447 40,24t 0 61,9 Ai1vM 48,8 owdualaw aF%mAJ4tA 9}000 11.0 8.710 7.4 6.34+1 5.7 d.9 dA _ "A" 15,2 Vow 10.3 "J'a 17A mAw 11.8 272 3 ob te% to 3L0 0 0.0 O b 63 4 'f87 a6 ae a &3i f7.80® 187 2Y7 5 k�A 13315. ;52 47634 lies f9.758 17.4 2. 23 9 s subbaw- - 27,09% au 2014 27A Z4,168 2a,8b8 AA #.4" road CM LOWS6"Aeei4J5 am l,Lm 1.012 IAA to X44#97 694 U2 8m we .100 8 an 1,708 2A 1,774 2.1 1,621X4 e 1 SA &3 Lob" 90 NWUNW at 6" an 318 See we Ism Nem a4 371 07 8n 851. 700 8 450 No"09 f,07C 4.r^!3 I'M 4.000 i 1.100 1 165 Z8 aftit 753 690 70Q '" 9 Lebo Oft 4 3 subbrw Saabs 2A03 3.2 3,164 1A 30a 1z 2,M Ll a.1a1 xr Y Pbd% VVNM 319 488 sm am 2##7 734 285 3w 300 8.11 749 0A 77.7 as 3811 OA 508 0a athw,abts. 3marsA93 S3 1.74796 03 3 0' 1S LPQ 92 ax 4m 0.1 67 a1 900 ttt !. ri.T chunkaft 481 a.0 w O.a 465 a.5 4e0 34 3s Cara 6.1 4.3 1,768 &a 3k043 9.1 .4,44Ct 0.0 3 - 31& 11 ✓t9omw 1#,61,'9 13.1 '!2.174 n a 48.-16 U& 1%7M 11.9 ?0TA3,. PfWWV'd its Taos s7,7a 14$! S I'M 1ffi93 88.480 T94.0 T81.78•a W.A _ . m4t5'raw 25 K of FeWsksmis 1oLm 507.416 TO T86.IA �f07; - 12 Notes to 1994 Appeals Board Findings 1 Based on testimony that refinery yield of 110% is to® high, refinery yield of serni-refined distillate blendstocks was reduced. 2 Based an testimony that refinery yield of 110% is too high, refinery yield of semi-refined catalytic cracking stock was reduced. 3 Yield of aviation jet fuel in 1995 was increased to match refinery yield with preceding three year average 4 Based on testimony that refinery yield of 110% is too high, refinery yield of aviation Jet fuel in 1996- 2004 was reduced. Based on testimony that refinery yield of 110% is too high, refinery yield of CARR Diesel was reduced. 6 Based on testimony that refinery yield of 110% is too high, refinery yield of fuel coil was adjusted to match 1995 production. 7 Based on testimony that lubes production was increasingly difficult after 1994, yield of 150 Neutral Oils was reduced. 6 used on testimony that lubes production was increasingly difficult after 1994, yield of 450 Neutral Oils was reduced. 9 Based on testimony that lubes production was increasingly difficult after 1994, yield of 190 Bright stock was reduced. 10 used an testimony that refinery improvements did not significantly reduce produced fuel make, - refinery yield of sour gas was increased. 11 used on testimony that refinery yield of 110% is too high, refinery yield of petroleum coke was Increased. 12 used on testimony that refinery yield of 110% is too high and that capital projects implemented in 1996 improved yields over previous yields, cv a 11 refinery yield of was reduced to 107.6%. 13 'variable operating costs changed to reflect the change in the amount of produced fuel yieided by the refinery (Table M. 14 Working capital requirement charged to reflex the charge in he refinery yield Crable V11). TA13LE IX UNOCAL ROOM REFRYERY VALUA71OU IM PRO FORMA AFTER-TAX CASH FLOW 9 i E R� $.iii _a - _i -ism law -law ism 2m mo f cwwaw 3" 30 m 3w 30 3 3 coast& Mom 318.7w mm owm 91'1F1„= m7w 6*= 6 814,9 ,'9W ftwwfv ft" W :3mov mw V,m 37,-= 37,9m 37,wo VAW V,= 57 dm # ) a, x'7,5 TOW apmftu 121AM 127 2 IUAW 13"M CAI= 13k= 1 11911,1 W*On*OMT104 WAW 151,1= ! 1 12UM 1 125= 125,= MJM IMAM *dw bftvxkrmt 48= =ft f, 4ZOO 30,,12D == 30,E 5. 13,Ma 2Z7 24,E Z VIM am ism TOW 49=4 97,2A7 SkS4 7012 aS Sk7W NAW 57= ak451 kwom Befam Tam 3k,455 57,7W M14 MM 937. akin Tat um cww FwAwd a a o a a a a a 0 a -owhwbwwm UW 35,E 41kW OW 67,7 V4= ffi,196 Odww7' ABi 14,95 ';,M 1i,M 15 'iW4 21.404 2t= 21,7'5.3 21,E 21.!135 bs=vei AftrTsws 41.W% AM Z3= 21.515 21kBW 3SM2 MA17 U.732 UA= 4=4 21,217 78,e 2 GF4= •x,7995 WM 57,Wo 51,451 srom cash +ct 75.135 WWG 110 IMM !®1,254 93VM 927,50 27,754 gk= p�� � 2:3'% 3rW3 96'3,730 32.125 21,91',1 2Z4Z '27.547 2AM. Yb. 2'3°.4121 27.50 fft-14) a ® 41 0 V A 5 a 0 mn cam pbra PK114) IZAWS 70= UJW 7am sun oxy 77r,m 71,E `Jm {410 mob } 2W7W M114) 4SA42 124M X= UW 79 77,Mb 74.1= 71.E T ffi1 ! 1 i;i4 Wmm (1) an ,Vw=lM11ptw4o PubmM 118164,spot M Na vommdoducftdhum91"vuhm g4} ara tlng of x99 vests ix 199 6oew ae !ate Yom. 9pu�SEs } w Lb=mL to lw C) 0 too to a to as � = V- � to 03 as a~ 03 to 0 d ot to to M cc to = to V- to a as C w cit cs %- IRF to cn e I Iq get OCLI---- V 04 toc a as �- sex V. cc c 40 0 en ca as W3 LU C.) U2 N co uj zCL, y` C LU EU M ok _ � � co zc � w co Iq ul 0 r CL 0w m co win CD am w o u CD cocc 0 IL M C [�- cc � aeacm re� 0 so cqCrA � m 40 C1 40 m .ems tR W w dk C L CL cf s ® 8 e w� C a e co C. %p a cr8 �i7 co to do 'r to M to CM 0 to a- 1 to 0 vs vi co 0 ai _ 94 tcc o w t � m to 0 Cp3If ar c M W C�8 tea i ds �Iq al 02 go 40 w w Cm to o cp to to 03r. C� a � CSA 0 to + t 0 go > _ 14It co 0 fl- to f w 0 0 to LU o 0 coto UJ ul 0, CL CLU W C3 il..ca w to CL to cm V � r- LU s , 14 tid M � m V ca to0 to cm 0 00 M to co � cc #a o M ?.- r w Ull to C13 m a co to �- �s sus � to iff 0 C$ > ta. ti a > m a. GR 9 t� _ q q IL ds Sit OA iL It Al i e� �S 4 . %go a� w oll 45 It fa ca ip ob 1. 90 con ral j t� t 7 a S IM 9 � ° t� a �- 17 its i lit lk py o 3 4 i COMPARISONEOF ASgSESSOR' EVIDENCE WITH MPOSED 5 &flory Charge and Yield. Proposed Findings' (Barrels per calendar days) Revised(New) Original Supplement Supplement `able IV Table Il Table H fExl bit 1 lb t 4j) (Exhibit ) Catalytic cracIdng stocks Not shown 8,700 B/CD 8,200 B/Cly Aviation Fuel Jet A 6,750 B/CD 6,600 5,000 CARE T73 Not shown 26,000 24,000 450 Neutral Oil 1,391 1,300 1,200 Sour Gas 4,578 4,700 6,100 Petroleum Coke Not shown 5,200 6,€100 Vaniable Cate , Costs: Proposed Findings' (000s of dollars) Revised(New) Original Supplement Supplement 'fable IX Table IV Table IV Xhibit 1 Mabit 413 x.ht2 1996 37,500 63,233 70,898 1997 37,500 63,233 70,898 1998 37,500 63,233 70,898 1999 37,603 63,406 71,092 2000 37,500 63,.233 70,898 2001 37,500 63,233 70,898 2002 37,500 63,233 70,898 2003 37,603 - 63,406 71,092 2004 37,500 53,233 10,898 NOTE: Bolded figures In right column resent new evidence which is outside the range of evidence presented by the Assessor during the hearing before the Board. TAR'LE N COMM A COUNTY VALUATM =5 IMS fnSaM sus - a subbod saw cru" Asa codin"Now cm" 3 an 23.960 2100 Tom Tcw 2" 259 Gm 01 9�011 sas�c 71 71 MME V34 1,734 ai Ice me mwc3nt*eaiwvjbqst "'1 2,047 T somwissned CoMW Sbxk',He" 5t�4 s�4 3 731 7'31 4,0" 4.0" 3ml-� Pmmbmft am* son g, .'M 10,725 3,°IM M7 kew 3,0 v CAM a ow 3,0W am 38,E AvimOmF"J4A 615 750 CAMICS 5,M CAMTF39ffi SPA 01*W 2.534 3kW7 r € om 475 4M .3 FhsW 09 I'M 1,024 Law Sus r F%W C 8 1, 112" t""FOr#am 2.7ft x,70 L. $t5 deeadxas}i]el 710 750 `• sdc 374 4 Bag C35 I'M 9, go 53� LA"unp F# 3 a OWW Lames Oft3 3 OVA ZAN 3,498 sumalw 4zi4 404 7 7 Lava 52•4= SAW i-5 S&v M7 LPG 74 74 533 sm riourcas 414, subtow ovw II.M7 Twat 92.W4 51. 8ae�r E - r e TAmE u A COWN VAUJATM I CHARGE Iro ' . 3 fasA1t -- in age sm i 33,728 aas 31xn sae =M ats 32.2C U.3 3= 361 aad 27.482 us 26,tffi X76 28,711 27,443 2740 US 21AW VA cawkwNtmoo 4n QA 1MV IA 40 CA 711 as 7w AM 7w 9i Moxa 93r t6 9A $ 2A u TOW CAW" N;m W.2sA1Mm sas OUN aim OkAUS VA and Swed4taffirowl kmnmm u 9.100 22 tom$ 4.7 3M4 1.3 I,m IA Aloft9S 461 dA 9 La 4A s m MoMmAim4J1 a3 Za'3 as 4l s.1 628 tjoluffmal"'No 9A Cg ata a t.6 9132AW z7 lc,770 12A 11'sm w "":l8 =2 11-W sa,A t3,Ei132 tis II= tis cawmaple -moodow an 16 AM 213 &x W 6,A 4w 966 40C A.e 98 42 722 3s 7W m3 gs aY 2. a& 1 Ld 66 931 51 9a AB all 37 67i fi e>2 ss is as a 968 an aa1 G&f9 84 4.1 u la 9.2 78 8A Im as aim st1 Suftitmtaamscl 35,E 671 18, 2" 17$4 t" 17= Y876 f7, 9 'r88 1713M 172 awwftL2q%mOR aa1 &9 m gat w 9.a n2s as coiftakckas on ea &Z 921 COWL&Mmi3dm s6 66 sa to as AD ml an 313 " t= 5.5 as 36 F3ma =2 Srp,7'a'4 2w 39,E z9,44 3xm Bu :",me ma.1 Am VA 5011 aaess 21,1.67 Side 5$,183 tma8 2;47M a61„s 01.70 I"m 3°32 4=2 4.7 4,7738$ 436 QW " 4 W 4d :km 4&8 am 43 435 U 403 9d Bit 9.m am 66 9mm O as 373 sd 216 n2 1% d2 2W a2 9s mkwbwdcbdkms $ stirs 30 an 36 88m sa Im U tz m W 2A 346 9.8 4W CA 1,480 tk 01*4111160 3AX 48 5,333 S61= IS 6,671 as VW u � 2,175 211 9s 06 7283 U 7w as CA I CA 311 124 m 24 4 8d 34483 ae 2,4m Is 3, 3.4 $ ss as - ae 57 &5 08 29 tffi 9.g tcBa £ submw>asses8 xwfiraA Pmdtkd 1402 ml 14vae to 18,7;7 57.91 Ww IMA 39,100 ms 54,mafteafts a�xa . -w um MY 2kxd on Wyn =7 am VA avm =3 SLOW 313 tk*mmdm�cm"*wfld =AM 2u 384$61 its =w 2161 23.183 no 2%IW 222 fi= as 5 AA 13= us $382 ss 7,357 za SAM 9.1 1,7W t.3 f 4.8a6 t, t to 34tS su 1,1383 a3 2M 42 CMW&7 ae to &6 a 926 e& 23,7M 2" l3 4+66 tt,Sa7 5r;-2 161702 4i.A 1129 asa MAN SIA :177 t1.a t3,t42 141A 8,152 B2 7AW ss Vm 37 7,706 a,A 2, 22 a 186 4.547 sc 2AM as ZW 22 2= sa as 'u*mgdmdRF]2 a SB as tum 13 X82 sas &s as a an s6a mm rs 3km aca 447 ANM 4ts Ad382 4$8 Skm 438 41 sal Adalm Fog.3aaA SAM is a 8.788 re 4AM 9.5 7, ra 4MO 4s tsm am 49.2 Am 1®76 202 w xm US sma 2" 3m 38 9s 4im 42 1, tai Aa 19 0016M 631 aA M124 tax 4= aia Ug SlA 33,7113 562 17,834 Sas 283 ?.a tl 122 2,3885 is tae eubbAwwwbdm =003 1u 2GA4 2T2 2818 11,1M V A" 262M 27A SAWS4Y Fan LOPM 854 3xa $ol 5Zma rnFag cm 114 788 1, 6,7878 ss 1,a7� s 1 ! ae 1 is 3 58 Al Lail" SONOMMICK 814 429 ale sag ma 1131 NotAnd CO 797 8e 70 MIS 4 FaAr t lxm 1,211 a 37O 1 ffi 13371 ll&a 755 I= 754 awf L' r'daiaaA8, 8 a 3 8 3 lt9A subtlow Labe aft 2m ae 3.3871 3a SAN � 6233 ss 3 8s as WOMBS saa urmmwnd 257 294 276 292 3w vrawn sm 7m an La 105 aR SOak )39am. acKrGan 8.906as 8Y4i s2 6,773 am ss oe 4 4.s LOG 92 4.1 132 ss4 s.3 84 apt t;a3 W chwaicak 491 96 Me t6 MIS a6 Sm9m SM 316 ma9A 3,188 &A 5,7132 as Cm as 5,782 as 5.7w s2 SA ^^" ami 5a ml 12,173 w vim as 12m =2 ws13 Yss -low m 5 3E$ W&A a7;m 18341 lu,?w imse uu Wk aria IMAM 1162 awfNiary View asIof Fousimbown Ice^ arae1% % 1 !ffi IONAM 11421 & s381t Y9®3d 8 8M Ma 53l% B�ara ale SUPPLEMENT TAME d COMM A COUMW UNOCAL RODEO REORMY VALUATION i HMTCMCAL AND PROJECTED 1ERY CHMGE AND 1vMM a4 �sk7�BPA6�0.'38A - a 804' 14Aae' no 3" 3w A8 - 3 14aeamy 38.TX18 as.8 31,3373 2ka 33,:176 au 52,242 3x 8[2 3z= 28.4 A4w aC.DAdt46Le4 27,482 =0 28,955 ma 19.711 2" 27,442 20.8 271490 3" 28,400 21,4 Atoa 438 33 1.20 1.4 403 44 711 68 709 4aa 70 a.7 Rkam 2.A 22 011 6 rxa @.a n9 TOAD 881 Aw 0.9 ams 8[,4 saow 2" 66AM13 WA WINE 2e1 7.9076 %2 I m 1.7 1.204 1.3 1,200 1.4 $am s3 A8ry4Am ba 2A 22 a 22 29 sm d;3 Ashmulft6.6 273 29 99 ill A3 ata @8 C.a 44 5 aA 2s I,BW 27 UNIX ple 10780 .6 91,6:8 12.7 92,1$6 ffi! 54,307 124 71,6?70 1x3 11,= ms 01w - ma to SA 213 e2 867 44 4604 3A 40 24 cSm 0.6 Be A.A 1 1.4' 718E 0.0 7w aA M"Rmw ax 2 to 6.o 1 66 66 as S1 a.4 G.90 xa 18 a3A CA C.6 9.6 ab 8,a a C6 A.A 2A c4uea COMM 84 0.1 AS 162 A2 76 0.1 100 &T 100 3.1 Sia 86a*A amcc 1.5,s" 17.8 41g,M 2L6 17,M sA3 17,278 it4 18,3a4B ma 17.200 ITA {Sp LC3t19475 10 AD 322 2.4 12T 4.9 0.9 2A R 4..1 0.6 060 0 as 3.8 0.0 Cl9ooarLsA� a3 AA to 0 a.8 22 U r - 7,961 2.Z 4.6 30 20 1.099 1.1 ata a.a TAW im MW 7x,7 3$774 28.6 8008 36.1 3.883 F4.9 8$.$69 '54.4 34,190 37A '8MAL 89.948 96eB 81,207 101A 88,1s3s INA 8$179 9AA.0 Ifsm 9465 Km 1+865 3,102 is 4,254 4.7 4,730 to 4,t1 W 44 4,aw 4.4 3.905 4.0 080010 swcuft as58 27 435 63 4496 24 484 " 50® 0.0 &0 othwm2pnowak"We4.6 371 9.4 241 92 188 A.o 29'3 942 A.A 11 6.6 6.5 30 an 15 a.0 GA _ 5410 11,11 4D i 3380dm &A 69$ a$ 340 64 346 CA 4w 2.4 1.6 $ 52,Ng 4.6 3,133 A.8 SX0 d8 5,$71 A.i 5,790 A2 - S.A 2,173 a4 &a do 726 6.6 T56 ars d, 1.6 2 8asid Sb#a % 2.6 1 24 381 D4 124. al as Le Cubwabolm 4.80 3.4 3,483 16 2,402 26 3AM 2A 39S0o 22 26 OfiverUrAnWead3badw 8.9 67 QJ 40 24 A6 0.a 400 M -wAd-W GoodRsAfer" 14,462 46.1 14478 93.9 16,87'3 177 I"" *A 169160 I" 11,300 its ammebw um -S7 30M 38..7 a 9x.8 avi*sr SM7 34.6 XLI Sanas 21.7 0 33.'3 16,470 %& 29,3;87 Iia 21.181 228 r,%iw Z..8 U= 8.3 Sdsgasor a ma 13,226 14.E 6 4.6 71116 7:9 6.78334 A.1 1,700 4.1 Cla d RawArm,RM 6.2 0.6 1.021 t1 30 *A 1,M 1.1 = 41 CARS a'8 916 4a c.2 a 22 to 23,700 24.S 4F. %saa 1.4.9 xa,sas 123 "A" 11.0 ssxm tLs oRma 4i,$ 1sA4 11.4 19,145 14A 8,795 8.8 ?AM to 9=8 x7 7.7M 8.4 2,290 22 8s - 0 6A 4,686 A.4 2,648 2A 2,807 2A 2.$0'3 L1 9.0 BUWLWWAMNFG 0.0 10 0 a.a 26 I'm 1.7 CARD 62 u Q6 20 8 4.6 2A 7= 73 '.km 4d2 .Q*jm 4cy 40.+m "A 46 354M 49S 4$,268 41 Ao1>d'm Pima id A Cam 11.6 9.769 1.4 4.321 L.9 TX# 7.A 4.=' 4.3' 9,m00 8.2 3 Ok9wrVal rasa 16,.^x WAW 126 -am 2366 >a3a 46.7 VVM IL4 214 Cab 10% AA 2A 4,096 47 tw 1.8 2a as Ca bT43 G.6 a.0 19,168 15.7 a.= a.6 19�r1 � 24 2aa 4 Mukeo 13,705 15.2 97.934 163 2,1" 2B 11,51;8 422 2,1W ZZ A.6 '.e1.ffi}3 =2 ±gW4 X9,9 3:,156 898 25,4'8 VA Wm 893 286598 9&6 f � .. LAma 3 254 101 541 655 4m 200 967 .002 814 on 730 722 8941 a FRW 09 $.766 2.0 $,574 ti 1,3'8 1.3 1A47 1.3 9.780 13 4,196 22 90A ca W4 A06 615 316 100 No IN We61rw QB 651 No 785 700 7810 9 490 ADSL al 1,078fd 9.2'8$ 9$18 1=0 7 IsaawAsaxt w m 9aaw 764 °` a 9 Submaw Lufift Oft 2,9022,8. 5,104 t,4 IAW S8 Xs 1x0 u tM SA VOWAS 9 WAw" me 611 um no 500 m v 207 234 280 2" 3033 SIMIA�Vvavmm9160 " 748 a3 m CA A09 05 Am Zs no A.A oftw,WA& ffia8a9G&5 km A.A 3,747 9.1 5,773 8,8 5,672 S.4 5.9x4 s.3a 5,100 &1 10 4.89 a 0.f 1932 0.1 So A.1 34 21 Im C 4 1 2.4 cbmefftla 481 9z 3W CA Sm as 302 C.6 No 0-2 of 3+46 aEaaxii caim 3,958 SA 1 iafi2 5276 MR 5 752 9: 5,700 L211 s.'2 1$ 15 14.1 M171 to UAW 9x5 13,810 1sz 1XISM 4121 IX= 1sa TOTAL REMM PR=LCIS 85,368 =A 87,798 1M.1 14 ,795 46916 19,m INA ama 1668 103,!05 Mm YWM as%aFeadwift4a 1ULM 107.:"x" 54 Lr% 108&$6 107LM 107.8°!4 12 td>«"View as% ALL 33.5% VZ.V% 53.5'56 59.856 a4.m fesfo0aseeoaee aSsmar #'. 14 Notes 1995 Appeals Board Findings 1 Based on testimony that refinery yield of 11 g is too high, refinery yield of seri-refined distillate blendstocks was reduced. Based on testimony that refinery yield of 110% is too high, refinery yield of semi®refrned catalytic cracking stools was reduced. 3 Based on testimony that refinery yield of'I 1€ % is too high, refinery yield of aviation jet fuel was reduced. 4 Based on testimony that refinery yield of 110 is too high, refinery yield of CARR Diesel was reduced. 5 Based on testimony that refinery yield of I 1'0% is too high, refinery yield of fuel oil was adjusted to match 1995 production. 6 Based on testimony that lubes production was increasingly difficult after 1994, yield of 150 Neutral Oils was reduced. y Based on testimony that lubes production was increasingly difficult after 1994, yield of 460 Neutral Oils was reduced. 3 Based on testimony that lubes production was increasingly difficult after 1994, yield of 190 Bright stock was reduced. 9 Based on testimony that lubes production was increasingly difficult after 1994, yield of Other lubes was reduced. 10 Based on testimony that refinery improvements did not significantly reduce produced fuel make, refinery yield of sour gas was increased. 11 Based on testimony that refinery yield of 110% is too highs, refinery yield of petroleum coke was increased. 12 Based on testimony that refinery yield of 1`10% is toss high and that capital projects implemented in 1995 improved yields over previous yields, overall refinery yield of was e 13 Variable operating costs clanged to reflect.the change in the amount of produced fuel yielded by the reffnery (Table N). 14 Working capital requirement changed to reflect the change in the refinery yield (TableVII). e 5 a t ` t' TABLE IX CONTRA CWTA COUNTY UNOCAL RCOM REIVEM VALUATION 1"S PRO FORI" AX CASH FLOW Asw 1 ZM IS" f8wi8 &ZORi3p9 mhmdh lag !Als6 30 3w 30 30 04,612 S9kW W i87 84ds,W7 842,491 M19Y Bbi W7 899.iW OX40 VA 187 1 «71,7 1 571.70 671,7 33"4,72 8471,726 87ti,F� RIMS 03`. 8 M17? Xlk4ft 200,4U MOSAft 2ftI7 S 890 37m 33 �7- S7,wo Waw MAW wat aum YOfmomCo�o4a 713.E ! twom 13i8.1tl8 12.9 . 12.193 MAW i6aC8tliYe 178s8t88 1 1 ' 163,978; ingm 58,986 "JU 73,388 4,712 46,W S7,S81 33.E �# 371 21,1 41 16381811 82.1471 78.7143 W,02 61,E %Off 47347 0,M }4 440 32.8 1 48.47"8 AM 74,M SOW "SM 84M a4zVra '(doe Low Owmed Fammod Talsbaw Now* 8E8,401 32.Si1 48,471 skm 74 m = 84.9 7ff,897 swealam" At Sm 3.00 4A" kW Ssm 7,,m -rM 7.773 7,su 7,4m Federal—WASS0 IS= 193.422, i£s,-M 0. s'BAu 4128$4: 36,M %Aw also 375n 43.740 a AM 4@.88$1 4S,2rX 4CS12 97,18348 54,18{8 195,911 8'34871 744,718 S8.6S2 61.60 67.03 M&M &3,73[7 SAX Gmm cash ftw 84.811 122.12 115.= 1 2,821 1=jZ9 107,714 I.Ok134 M3W •IM 131% 81.898 31AM 21;413 31,513 27; 8 148547 0,411 ??,8'21 ZX.M m _ _ _ - _ . _ _ 834,2&1 Sp - (1.746) E 8mm 89,4086 19@.7'4!8 84 79.9A9 8'1,718 StT,m 11,728 88.8 `latAW(Ax o"10i3 - 30.111 Polut Cob 98,8'46 1998,7184 84. F men *km $7.7w 54 7= Moll Mwx s. S: } 15,000 m ENAMMA{ij O eea 1213 .9 ,app Caput Oft afS PhV*Mi IMISIt WAM QtSl E39 Rf�tae�+�+a ttt�aw 8ir�ea°,Cbz aa8lco�t. (4} �b �d tb t8isa�. ware aoa tt.+�sKs 4Soae>$'9b��te8� a 7a�. g3j 8a gamr i�r`?tid 110(ti�l8�st'( + ,�fl�g1E4, +�a1st:( tag Dspapraas W*At!"4r soca,nates► 40C spmft m UMICML .SkOw4 stn win so Octvi U3 go so cc CD0 wat =. Scl ia co 40 _ (zcl a to i IN co co gn lu UJ a w uj 0F cm 43 V I lu LU LU at C2 pa r a cn to N LU 0 40 a Wt p W to an as CD " V) as 9 can At on _ as C3 _ " CL m 40 C14 M le ca 'too to Icr to 0 a to s � e� 0 r- c I as 44 s etaCst r- co 0 cl � C4 tv co 40 cq V'W 0 co w cn a s . a g In 04 0 < 4 a � ! CO w r cc N CL ca3 � q c cis l k to V. VIn C CLulz CL Ul CL Z �' � co gel; t UJ � 0 do V 0 C6 � co cc rca �- so w im Cb m y a it I to co 0 W W to 454 to C) 0 r ca cs LL d COMPARISON OF ASSESSOR'S EVIDENCE WITH 1996 Ra- e aud-Yield. Proposed Findings' (Barrels per calendar day) Revised (New) Original Supplement Supplement Table M Fable H Fable H Mxhibit- it 4 (Exhibit X, Cataly4,4c cracking stocks Not show. 8,600 B/CD 8,100 B/CD Aviation Fuel Jet A 7,911 B/CD 6,600 5,300 450 Neutral Oil 1,306 1,400 1,200 Sour Gas 4,666 4,700 4,800 Petroleum Cole Not show 5,301 6,200 Var€ab Brat . Costs: Proposed Findings' (000s of dollars) Revised (New) Original Supplement Supplement Fable VM Table IV Table IV i 4 :" tit 3) 1996 37,000 62,733 635280 1997 37,000 62,733 63,28€1 1998 37,000 62,733 63,280 - 1999 r"101 62,904 63,453 2000 37,000 62,733 63,280 2001 37,0€10 6.2,733 63,280 2002 37,000 62,733 63,280 2003 37,1.01 62,904 63,453 20€14 37,000 62,733 63,280 2005 37,001 62,733 63,280 NOTE: Bolded figures in right column represent new evidence which is outside the range of evidence presented by the Assessor during the hearing before the Board, C3I3°bi1�TA� 4f:.�i��S1328s�3\I TABLE 2 CONTRA COSTA CGUWN UNOCAL RODEO REMERY VALUATION ISM REFINERY GE AND YIELD ISMS. Ream SNHOWYMMt 29,448 woa SN y SubfiftSOWOUde 30,310 Abokon Crx*k'" 2111M 2%333 Tom Crvdm MkM CAS SmftdFOES 3w TowNwoutowsafts, 4.228 Meet Pam" P for SftlAft St a Gas co cmdav Mads 020-1 Femo IZ e M 26 5 M 3,352 Zvo TOW Total Raffmay U Ica 4,728 on 115 Tao Wooded -CW lsw Weeded Ruguw-CWB =372 -RFG Iss Swer Wooded-RFM �. - � Swor Unleaded-CARB x,2W 41,419 Aviodw i .tet A CARE IQ% T - IP 2 34,349 Na 5 Fuel 09 9,314 &&xm Heavy Fusi on 3,32 ISO mobli cd rw ISO !DID 450 Nauft OR cm so Nmuftw CA sis Wm m Fkxh&Other Usbe Oils 90 Luba 016 3,M umvismed Waxes 257 4w 782 Low SUftr Cake 5.540 LPG 53 sufur 5m sew Gas Mom TOW urnwtumnad&Refined Ff*ducft 99,412. oww, w Isd#G om$ SUPPLEIMff TABLE I UNOCAL VALUATM t H s HME—ft nim No law 1WAUX 3w ass� Am M crude 310eels 33= an 324WO IL7 astB ' V.7as Akt6MCo*kW 20MG w 28,711 SU 27A =a 27= as.7 1A 405 aA 6o sv 774 as No Qa U as a SA a U nowatooks and MIME IJM 1? 1,7498` is 1.734. 1,a 3AW I* Aft4M6lt 24 3 " wofi$ phomwMAN $73 a8 82 S.1 11ffi at U U 9,# 738 iia 2AW 27 8 a.Hk 1d 11.,E t'9a8 1'2,1'?§ 12A AM 11a iIAY 113 c5m !$8 2a I'm 1A 88 at 7w 4a Sa 3 u as 71 W 24 a.6 as M U iga a " as 81a asv 21:2 42 71 M an G7aCE &a 183 0.2 M 214 = , 200 22 .. kap 10 east 1760 1m8 f46 iat7 18�4f iS1 115 s78 *Mftucvdscg an 30 GA M81 CA 259 a3 � 0"WEsmt a9 est 1 mA § OA1 4a 30 U 107" a.1 45 4B PS Tow 32xm 3u Am =t xaa 3X41 us 300 ase IWAL, 889„'1 11" 87;141 loco MM MA *:kw tM,6 11" wAndomace mnaal 4=2 <a 4,730 6a 41M4 6s 42 341 1 as 4M U 409 m.► 221 d3 ob 331 8A 211 as 841 U 4M46 as C,Q .32 Asv 13 aa1 1w at Ga 30 aA as 453 a4 4. 1.3 iSS Lrk km MA sa 4.471 as as Sa BA $187 st7 =08 ` '2.2 u E 1 as 3491 € 7 QA In &S osa 3AM &a Z4= 2A 454 " Z1a3 z,2 � ' - 87 U as U 20 U UM a1 Sumood Swal Named product 94„470 Ua 18$Yt1 1793 IIAW tea 1 %a 14 %2 amenum Lib$ Am W am 342 am 364E X9812 2$$ x7tlt 91.7 18,470 1114 2AW 21X IMM a.3 1W4 tat S= 8.€ 13= 16#. 83ZAN 143 IMM 11.1 1,700 18 1.021 U I= i3 748 a8 2W bk U _ Mt a 1= cleat IIsi Mat 192 IC8A= �111 it" 11.4 018 2 97 'rim to Ll 80" 7a 2=0 as 12 3AW 3.3 ZAN "M14 4 as 2)M an 2077 as M as 138661 1.7 CAFM 92C.g as 818 a am 7= 7A 4+69' MAU 618 44,W 4a.s 418848 4S 4 81,70 M -MA, 6,7861 7A 4AI NA as 5.313 4.7 1 � Dh"FW 17,88'.4 ISA 2V", 21M 271 2ZO14 288 va owt 10% C.9 One 42 Mm 3.07 9.9 M. cat T" a4 18.1314 182 #4,11817 2u 11.786 las 2.100 via 17,1134 1!8 Z3M 24 = a8 4783 72 est XIM VA 2& 4374 26,34M 443 X= 2m X784 us 1 LaoP 1.079 561 Umo 1.984 2,61140 8 f 8 751 1'M W4 1,300 and 09 21 1 13 ZM 12 2AW 83 86 Label 8348M 0 515 618 Sal am 110HO&MAck an 7289 710 705 4wH 1cx 1,211 i'va I XC 1=3 18a1 wakKk 7W 87.6 478 lifts a a a a 1M 2904 U &M as 9,U 3a 3A= 37 Zan U VAUM 611 am 614 WO M LWWWWAVAnm 24 M 205 22 M 83 Si 7M 83 ?M 8 6a 0014K We, 5.747 83 4773` sin 4.734 U 6;418 Ss 8.71ffi LM im M M " 74 ai 78 M at Chwicaft am as = DA as U MI ffia 24 pookum cow 5732 as fi= as '...312 SA 6494 4A SA SLAbabli Was, 1 179 = 12AN 11, 1861 1 4 132 1�, tit TcrM4tMqMpRoM=M x73'3 -0.1 MIN tis i W.%W 9.1FA&MO #�y60 t9ata {�,...�, VWd as%s# 1071% 187 , 107..3% W 4'8 11483 ams WjPPLMIMTABLEN CONM COSTA C0U?M UNOrAL RODEO REFINERY VALUATM IM HWMRCAL AND PROJECTED FJ34NERY CHARGE xxi A02 im m 3999 an imat Am 31,075 its at= 5a.s 36.m 5aT :mm sa,2 3270if a� aim 2" M711 2u 26.848 344 XT.9w 24.r 77 ear ! 4R 405 U 122 a7 TM � 89 a5 a an a *A 5 as TOW cma 39AM a0.1 aTiA+68' 588 at". 01.1 81,2 M&A 9t,8a4 Gas Y 1.30 22 1,S7S 1.7 1.707 t.5 1.704 11 3AMyg Gia a5 a5 0 as smas 270 a3 62 at i48 2i 4.5 mai GA SAEZZU 2,4 736 as Z.r so"U" 74.1 12.7 12.110 12.s !$,47.2 11.5 11.407 s2:2 11,4W its U 213 5.2 as 71 a.i 108 a1 949 a8 1 1,4 n 0.1 734 as 2a 2 as as 71 as 24 as to CtA 4tA 5.a 8 0,5 as a& a5 = a2 71 ai as ca lG2"OK CA its a2 477!' as 214 12 20 a2 swomakaftol 18,28 2sa VA" I" 14,868 taT 98.901 I&i 16,9a9 i7;4I oomft u cyda&1B a.5 382; U 291 a4 255 4.9 a5 44&"C* t8t as as ma 0 as a9 Odwimbook4ts as 43L5 7 as 8 as a5 09W UNJAW"d aim" aA 30 G.5 167 a1 46 a3 a,9 T 22,77'4 3" 34,06 26.1 68.4'x2 1 3" SAW9a8' TOTAL.F09MIUM 61.2? "MA lr.1af '494.8 "An =A 60'.887 "Le MAN mm >p� 4,76a 4.7 4.730 4.s 4,004 4.4 UW 4.7 34W 4A ** 438 as 4866 44 2.4 781 u 4.9 Ovwwmpw4ckftdw 379 a4 211 5.2 641 aT 408 a4 a5 as = a5 as 48 a6 __ _ im 3,1 ! 98s 2.2 340 14 aAE 453 *A $.15$ 53 8,28a 9.a a8 4.47't t8 as M3 aA 0.187 aT X,= Z2 8,!ffi7 MA X �Biirogetc 4 as 381 a4 7 as ' i83 of 2a 3A857 ffi.9 2,4W 2.6 464 8A 2,109 22 u 7 aot 66adaa 67 as as as 28 OA ft70 at suft"tow Para"pvp*nw 14.FAi %A 16,TT1 its 1",US 12A 14.23! Isa UA oftawkw UML 2atm US am 57.7 AM 234 :4D.,9iX. 3La M20 28.7 umvt d 19x478 W-0 • 20W 1 214 li'm 21.5 18,1674 mi 5:1269 42 L"64"PA9W2r ISO= Ita 6,362 as i tvA Mm im 1.7133 IA umawwRegownica L1 !227 1.3 748 as 20 92 CAM 67 24e Lo as 8 as 21AW au 9 t0.vtie! t'*..'# +sem t.,A Kaama 40.+ 6 1&1 ttsm 11.4 • 4,452 3.7 T.m as ILM ai CA" 14 2.2 8 22 ' - 4,9078 s.4 xsu 2s 3,C ZA 3, 8A � spat iAtfiaee&viI(7T� as UA 707 as 228 a.8 i, L7 CAM ma 5„a as 9A a as 7.2143 7.4 skm 44.1+ A&ASS 441 4i#,a3Y 45.2 aAl? 4&1 4,1.746 Bi f Rvifldaro .SQA' 8,793 74 4,221 6.1•. 4.;72 4.A 8,375: X? ' 17"4 tas KIM 23,8 2r.1 35w4 2" 2L! Cob 10% a? 4,= 0.T 8,601 &A Wr W &Z to 144.194 A7 ",is6 2x.7 17.766 us26106 3E! 4 ' 17,IBE4 w 2,98" 2.6 33 as a" 7.2 a0 34A14 vn 29 faL 74',368 514 8r�el .` fa�ra €raa' 1,08! 801 1.1� 1.194 0 am 8iT3 T68 i.'Xffi 684 !.7873 S F"OR 6,684 &1 1.2ft us 2-M 31 Z&FA zR L so 14VAN9 ON anr18 518 ?21 3D0 .0 05 m 70 - 482 B wjW G76 4,24 i i.SBi f,32C 1.323 7 r 4 1961 7SS 4 x74 6704 - 7 d Sg 0 0 78 i 6 &A 3,E RGl 3.482 5.s Un L7 3,28 L6 811 603 $14 284 278 258 22 748 m 6 a8 7178 a8 77g 08 & ss Si6a. G k747 ai 9.773 Ls 4,734 as 6,4"8 a5 4,x33 6.3 6 LOG 102 a1 53 at 74 ai 73 of 0.1 28sm as m " 531 as 5S . PS�CM* 5.792 SY aa4 012 94 EA" #A 8.4 18 4 12„".t"i 18,'6 92 i3Ai 91, 8 12.1 "2.x21 181 1 - 'G$.1 TWAL 17= IW.1 183.7w ml fWA 184,+48 W.1 Ice,= 983T1 rAw*a%ad "r.1% 1063% lo?.3% Sa7.I% 487894 i4 r 68.896 82„9'% 96.x, 65.916 Notes to 1996 Appeals Board Fincfts 1 Based on testimony that refinery yield of 110% is too high, refinery yield of semi-refined distillate blendstocks was reduced. 2 Based on testimony that refinery yield of 110% is too high, refinery yield of semi-refined catalytic cracking stack was reduced. 3 Based on testimony that refinery yield of 110% is too high, refinery yield of aviation jet fuel was 4 Based on testimony that refinery yield of 110% is too high, refinery yield of CARR Diesel was 5 Based on testimony that refinery yield of 110% is too high, refinery yield of fuel sail was adjusted to . match 1995 production. 5 Based on testimony that lubes production was increasingly difficult after 1994, yield of 450 Neutral Oils was reduced. 7 Based on testimony that lubes production was increasingly difficult after 1994, yield of 199 Bright stock was reduced. 9 Based on testimony that lubes production was increasingly difficult after 1994, yield of tither lubes was reduced. 9 Based on testimony that refinery improvements did not significantly reduce produced feel rake, refinery yield of sour gas was increased. 10 Based on testimony that refinery yield of 110 is too high, refinery yield of pptrcleum coke was 11 Based on testimony that refinery yield of 110% is too high and that capital projects implemented in 1995 improved yields over previous yields, overall refinery yield of was reduced to 107.6%. 12 Variable operating costs changed to reflect the change in the amount of produced fuel yielded by the refinery (Table ld 13 Working capital requirement changed to reflect the change in the refinery yield ('able ill). TABLE VM COMM A COUNTY RODEOUNOCAL la9cMMW VALUATION t AFTER-TAXPIW FORMA Aw.1.ism- me 4817 � _ Im _ _ S minas cak9wiw 30 3w m 3w 30 30 m 3 64"47 6W217 $40,317 4,6A4 8lg4„944 7i1 6$6,711 MAN IM711 686,,711 am= oozms mks= oxom amm 6vl 24k796 Win ski= 2ml= MAN X122 2WI wykift _V bawd F 390,E D�OmB aff,tl�t 66,9G0 � 4� $�,t �. Ts4'� - '! 19tS,5M8 1S6,6t� 16„161 i$�3i95 t�r.ief 1atB,i 4�, 1 sta4y�1 IMM MM 12VU 12k= MAW 1A'1IMM MM 123k422 18$4 Sk= 64,104 78,40 62'M 1 40,4 36,6&61 XM lM.74s3'9 35, 3. 7,918 lk 14,= 17,=4 ASS19.s�9 21,496 22.3W M30 i 4 57371 18'16,7= 86,913 67775 SkW 64W 57,iS7 0,106 615 TOM 17.058 33$16 48X0 0,00 73,= 78,766 75,1441 73.315 71,tM If"Low Cur"Fbnwmd Twabw umm 65,in 17,0174E 36,946 0,94 73,;8 74?M 74 44 73,O4S r TSM 8,9E SAW Lm 3,%c 4X4 5.547 9,849 7,1 7,= k-M 6.1"1 T 35.€446 =04 k= IQ,766 44.7114 ittM ZL20 7x4.39; =M 23.179 VM Etta wAftr'i 41.0% 38,443 1 10" 27,414 410 4=1 49,287 83.041 41,997 Dap67,157i 101S.722 3&,843 79AW V.775 58,SV 36.Wr 6"7,167 dkIM 61,0 al ONO Cash F at+ SkS64 ii6,744 106,W 3114,334 IZZAC 1MGM 105,$14 101,722 1112,1= 10 =1% 3a,= 20.= 24,413 35,157 202 15;467 x,$14 26.414 27=1 21,6445 1n (66,416) mm CM*Fwm e 8 57,36 6k=b 79,761 74,= 76;,$11 Ml= IGAM +4 (4x=alt Roto a a d e 301204 _proomal i;a4t Fkw +,W-42% 7t 57,E 96,6411 16.781 f2.+ KM M31i '36aM 78.9111'1 aklu AAW-Tax Obwount Ruft &M Provo*vahwt,* Deducftrw kftnow-11 15,4l (1)7 baud an ave pear,Mmch 1sa1 1m spet maga pt" {2} rilla1s i5 a eaSaaa c#d4 28�I (4) otcmh 4th 4 6uat+ J*db=wmd Beat atart*mmyw. (63 Ix Tc-44IIt*b"( as .attd bwAftm Ndworkmoonm cwwwn.vaum( o4 a abs' � 4sr ,etarrea �1st. a"8 A4 Vis. r i �C ri r ca C4 4w W.z CA co C4 r P Xll r4 - � In No (a to 0s cm 40 LU vv M ca � s _ t Lu � �x r us tu rL ° a f.. w en CD CLas CD 0. uj V) Cm to Lisgo YACLC ta > U- k cis CD es e I to to 03 co 00 N3 vp co a to to cc a 0s w C00 V. le- 42 m V- tis to CD co 40 z 44 .� 0 It q see cis � era cis Ul ,€ w co cm at 0 > z Le { ci u aLo zq 9i atai go � � r LU LU 0 OD m cqa 0 to cm fa 9 UJ 93 2 CD to so 0 w th to cm cm M E3 a vic to cm to 94 to sic 0 M2w sv era to r CO co C go V to 0 � � 0 as � s .JOHN 0.CAHILL Foot, POLLOCK,PETTKER,GALBRAITH&CAHILL KARL B.Rost(1908.1982) .JOHN D. PETTK€�z A LAW CC1€2r`�C�$A"�1CN DAVM—C.BLOND(194.2.1977) WILUAM R.CHMSTIAN PAUL E.SCHWAS(1898-1973) HENRY P. PRAMOV,JR. ..'OHF! F.CE.RMAK,JR. 801 SOUTH GRAND AVENUE OF COUNSEL ALLAN E.C€RAN JOHN P.POLLOCK RoaERT A.YAI, 3.mo SUITE 400 JAMES M.GALBRAITH ELIZABETH S.BLAKELY LOS ANGELES,CALIFORNIA 90017-4.823 RossRT C. NORTON T€LECOMERS 'CWOTHY G.CEPERLEY `CEL.(213)895-4900 1 CORAuF-KuP=ER (2 3)895-4.921 (212)895-4922 CRFs K. O'NEALL SONJA A. 1NGL N (23 3)895-44750750 SCOTT E.ADAMSON ���� 9, 1999 .ENTHAL OUR SEL€NJ3.i8ECt MARGARET ROS MICHAEL A.ABRAHAM KENN€TH A. FRANKLIN i37$-i.Y4) RICHARD NESSARY D®NNA YAMIN? SHAN EL K.YANG WADE E. NORWOOD DEEPAK NANDA J. Daniel Dunlap, Chairman BY FACSIMILE AND- FEDERAL EXPRESS .Assessment Appeals Board CON RA COSTA COUN Y 651 Rine Street,Room 106 Martinez, California 94553 Rea Dear Chairman Dunlap: OCAL,'s continents can the proposed findings for the 1994-1996 assessment appeals on its Rodeo Refinery, submitted by Deputy County Counsel Dennis Graves can March 26, 1999 and as supplemented on March 30, 1999, are set forth herein and on the enclosed pages.' A. "e tra-1 Co-mme s o r-oposed IKindines 1. Tht PnPosed Fi dingg V`o Eight At the outset,UNOCAL objects to the entire premise upon which the proposed findings are based. As you know, the Board denied LNOCAI!s applications,thereby concluding that the roll values should remain unchanged. However, at the hearing the Assessor did not present any evidence from which the roll values could be determined. Furthermore, the.Assessor's witness, Rent Rose,testified that the roll valves had been determinedusing the cost approach to value. e written findings which the Board ultimately signs must: "fairly disclose the board's findings on all material pets raised in the application and at the hearing...[and]also include a statement of the method or methods used in determining the fall cash value of the property." � ev.&Tax.Code§ 1611.5,State Board of Equalization(SBE)Rules 308 and 324(e)) J, Daniel Dunlap, Chairman Assessment Appeals Board CONTRA COSTA COUNTY April 9, 1999 Page 2 The Assessor has now put forth in the proposed findings an discounted cash flow under the income approach based on wA facts and information in an effort to support the roll values. Neither the cash flow, nor many of the facts underlying that cash flow,were presented during the hearing before the Board. This is shown by footnote 2 on page 2 of the proposed findings,which references cash flows in Exhibits Al,A2 and A3. It is obvious that these cash flows have been engineered for the sale purpose of approximating the enrolled values for the subject refinery. The presentation of new evidence at this stage of the proceeding is a blatant violation of U 'OCAL's due process rights. The proposed findings,including Exhibits Al,A2 and A3, are replete with documents and information which U'Z IOCAL never saw until late march, over two months after the hearing before the Board had concluded. UNOCAL has had absolutely no opportunity to review, analyze or cross-examine the new documents and facts set forth in the proposed findings. Yet the Assessor urges the Board to sign the proposed Endings as if the new information set forth therein was introduced into evidence during the hearing. Based on the above, UNOCAL vehemently ajgEgs to all new evidentiary facts and information set forth in the proposed findings, including Findings 4a.1), 4a.3)through 4a.10) and Exhibits Al, A2 and.A3 attached to the proposed.findings. As the Board knows, and as we stated during the hearing,the Board can mly rely upon the evidence presented during the hearing. To do otherwise is a direct violation of State Board of Equalization(SBE) Rules 313(8)and 324(x), both of which state that the Board may only act upon evidence properly before it. These rules are binding upon the Board when equalizing assessments(SBE Rule 1). If the Board accepts the new evidence presented in the proposed findings,UNOCAL's due process right to a full and fair hearing(SBE Rule 313(8)), including cross-examination and rebuttal of all evidence relied upon by the Board,will have been denied in violation of the cited Rules as well as California Court of Appeal precedent (See Universal Q *i o id ted M Co fir..=(1944)25 Cal.2d 353 at 360-361 (taxpayer in equalization proceeding is entitled to substance as well as forma of hearing, including no taking of evidence outside presence of taxpayer,right to cross-examination, and no reliance by the board in the concluding steps upon the advice of the assessor or the assessors attorney)). 2. The Findings ShouhdNot Rgely-E2jelusiytly on he I co e Appm c The proposed findings are bottomed on discounted cash flows Cl~s)which the Assessor's Office did not present at the hearing. In fact,they are the third set ofDCps the Assessor has J. Daniel Dunlap, Chairman Assessment Appeals Board CONTRA COSTA COUNTY April 9, 1999 Page 3 proposed in this case, albeit not during the hearing. The values obtained by file assessor's using hese various DCFs have ranged from $438 million to $794 million. This alone demonstrates the volatility and unreliability of using an income approach in a vacuum without considering any other approaches to value. It also shows the ease with which input vas-fables can be manipulated to arrive at a desired result as well as the hundreds of assumptions which must be made in applying the income approach using a discounted cash flow analysis. UNTOCAL cautioned the Board about the clangers of relying solely upon:the inc,6m-.approach to value in its Pre-bearing Memorandum(bearing Exhibit a.). In footnote 2 of its Memorandum, UNOCAL recited this key language from page 94 the Mate Board of Equalization% rt g, d AH-50i (Sept 1997) entitled"Basic appraisal": f "The income approach requires careful application because small variations in its key variables(capitalization rate,duration of income stream, estimated income and expenses, etc.)will be mathematically leveraged into a wide range of estimated value." This is the reason why SIDE Rule 8,which controls the use of the income approach, states: "Tho in-come gppmach `s..to beusedin cogiunotioni a when the property under appraisal is typically purchased in anticipation of a money income and either has an established income stream or can be attributed a real or hypothetical income strew by comparison with other properties." As reflected in UNOCAL's Memorandum,the California Court of appeal has recognized the need to employ other approaches to value in assessing property. In Y dst to Theatre T=, v. !p=ofStanislaus (1976) 55 Cal.A.pp.3d 864 at 882,the Court found that it was appropriate to use the cost approach as a"check" on the value obtained using the income approach, even though the data supporting the cost approach was less than perfect. The Board must not bottom its findings solely on the income approach.. To do so would violate the precepts set forth above. It will also undermine the reliability of the Board's decision. J. Daniel Dunlap, Chairman Assessment appeals Board CONTRA COSTA COUNTY April 9, 1999 'age 4 3. Board's u t so and Cost Appmg&esto Valup. In light of the above,the Board roust avoid relying solely on the income approach. UNT®CAL,'s Pre-Hearing Mercoradurn cites authorities which support the Board's use of both the sales comparison and cost approaches to value in this case. The standard for applying the sales comparison approach was also stated in the Midstate hggtms case at page 880: "Where'true comparability'is difficult, a broader range in the use of sales as comparables should be alloyed.. Although dissimilarities between the sales considered ...may be noted as to time,place, size, etc., ... all of these sates shed light on the value of the subject property. ... Standards of comparability can never be treated in absolute teams. Even relatively poor€lata.can'fairly be considered as shedding light on the value of the property being valued'(rev. & Tax. Code, Sec. 402.5)if it is the best or drily available data." .this "sheds light" standard certainly applies in this case. Both parties presented a sign- ficant number of refinery sales for the Board's consideration. In addition,both parties graphed heir sales to show the trend in refinery sales. Moreover,U'INTOCPL's sales were adjusted for all categories of adjustment set forth in Revenue and Taxation.Code section.402.5 and SBE Rule 4. view of the extensive sales approach evidence presented, it would be error for the Board to simply ignore the sales comparison approach. Likewise,the cost approach should also be used by the Board in reaching its decision. UNOCAL's Memorandum pointed out that even significant amounts of obsolescence and depreciation do not prevent use of the cost approach, so long as adequate data is available. This was supported by the Court of Appeal in (at page$82) as well as byJhp Ang-raisaLd&al:stat,the highly-respected text of the Appraisal Institute. UNOCAL.'s appraiser had adequate information available to hire to perform and present to the Board a complete cost approach analysis,including a.full analysis of depreciation and obsolescence. The fact that the property had significant amounts of obsolescence and depreciation may have reduced the weight to be given to the cast approach value,but that does not prevent the Board from considering the cost approach, and the Board should do so in this case. J. Daniel Dunlap, Chairman Assessment Appeals Board CONTRA COSTA COUNTY April 9, 1999 Page 5 B. C€mmerats on SPecific LAI-1090 in the kroposed UIN'OCAL's specific comments are addressed in notations which have been superimposed directly on the proposed findings for ease of analysis by the Board. Those comments or concerns fall into several categories. Some of the comments have already been addressed above. The other categories of comments are discussed below. I. Mixing of c =Approach Qgnre th Qthgr Vaugim AD=o_=h_es- The proposed findings state repeatedly that the sales comparison approach and cost approach :oust take into consideration the income, operate costs and gross/net margins of the subject refinery and/or comparable sales. 'There is no basis for these statements other than the Assessor's insistence that the income approach is the only method to be used in valuing the subject refinery (which seems to almost carry over into a request that an income approach be performed on each of the comparable sales). The recitation of the methods to determine margins in an income approach analysis should be stricken from those portions of the proposed findings which deal with.the sales comp&rison and cast approaches to value. 2. t n alp r The proposed findings demonstrate considerable confusion as to the meaning and effect of the various adjustments which 1 �OCAL's appraiser used in his sales comparison approach. This confusion indicates an incomplete understanding of the sales comparison approach on the pari of the party who prepared the proposed findings. First, the proposed findings fail to understand the nature of the size and complexity adjustments and the differences between the two. The size adjustment uses a scale factor based on capacity and cast relationships that are widely discussed in engineering tuts. The relationship is a non- linear one, that is, as capacity increases, so does cost, and in turn processing capability and value. The complexity adjustment takes into consideration the magnitude of all processing capabilities of a refinery(including the off-sites needed to support that processing capability), and provides inflation beyond that shown by capacity alone. This is also a positive relationship in which increases in processing capabilities increases cost and value. When taken together,these two adjustments can.tell an appraiser a great deal about a refinery's capacity and refining capabilities, 1. Dardel Dunlap, Chairman Assessment Appeals Board CONTRA COSTA COUNTY April 9, 1999 Page 6 and can account for differences in charges and.yields between refineries,particularly refineries that fall into the same class, like;the"fuels refineries" considered by UINTCCAL's appraiser. Second,the proposed findings dos not comprehend the time adjustment employed by UNTOCAL's appraiser. The adjustment.for time was made through a comparison of economic conditions at different points in time through an econoin c obsolescence analysis. Time adjustments for valuation purposes are not based on inflation,but rather on market conditions. Consequently, there was no adjustment called a"time" adjustment in I IOCAL's analysis. This adjustment is supported by generally accepted appraisal theory and practice. The third adjustment is for age. This adjustment is based on effective age,which takes into consideration maintenance and condition, and not calendar age or'lifetirne. Differences in effective age, depreciation and obsolescence between various refineries are accounted for through this adjustment, and not through the complexity adjustment as the proposed findings state. A fourth adjustment for location was based on a paired-sales analysis of a California refinery and a Gulf Coast refinery. In making that analysis,LNTOCAL assumed that all California,refineries race similar cost and market constraints and opporiities. The purpose of the paired sales analysis, and what that analysis shows,is the difference between refineries located in California and those located outside California.. 3. Theoretical Basis for the Cost An rsrooach. The proposed findings assert that the oast approach should not be considered because a new refinery would never be built in the Bay Area. Unless there is evidence of actual government regulations or laves which prohibit the construction of refineries in the Bay Area, this argument has no validity. The appraiser's task is to detennine the value of the property using all approaches to value, including the cost approach. Although building a new refinery aright be unpopular, there are refineries in the Bay Area,and public opinion or political considerations do not prevent an appraiser ftom calculating a current asst of construction and developing a dist approach to evaluate the property. There is one other point to be made on the cost approach. While it is difficult to determine the &-mounts for physical depreciation, functional obsolescence and economic obsolescence, that does not excuse the failure to analyze those items. SBE Rule 6 requires it, and T�,L OCCAL's ,a. Daniel Dunlap, Chairman Assessment Appeals Board CONTRIA COSTA COUNTY April 9, 1999 Page 7 appraiser did analyze those items. The proposed findings failure to address these elements of the cost approach ignores the legal requirements as well as the evidence presented. Furthermore, it gives the impression that depreciation and obsolescence were not analyzed simply because it would take toga much time and effort(which is the position the Assessor's witness took during the hearing). 4. Nature and Meaning ofLNTI O .AL' aonoiriig Q ote encr,Amalysis. In a nutshell, UNOCAL's economic obsolescence analysis relied upon two comparisons. The first was a comparison between the financial returns at different points in time of L .S.refining companies which focus primarily on refining and marketing. The second was a comparison of the coil industry to all U.S. industies at different points in time. In both cases, the purpose was to determine how the refiring industry was faring based on its prior performance or based on its performance when compared to ether industries. Because the analysis included companies which have operations in California(anal even the Bay.Area),the econornic obsolescence conclusions reached by I TOCAI,'s appraiser are applicable to the subject refinery. 5. UNOCAL's Charae_and YjOd Analysis. UNOCAL's appraiser analyzed the historical charge and Meld for the refinery(see Dearing Exhibit in projecting what the future charge and yield would.be. He reviewed a detailed historical charge and;Meld(not a summary one as the proposed findings suggest)which is the best method for determining fature charge and yield. The proposed findings, like the Assessor, assume a charge and yield which often differs from the actual prier experience of the subject refinery and, as a result, the projected charge and yield is hypothetical and subject to question. in addition, NOCAlr,witnesses Swenson and Vautrain validated the charge and yield projection used by UNOCAL's appraiser through their testi riony. Finally, the Assessor never demonstrated that a detailed charge and yield analysis was absolutely essential to determine the proper value of the subject refinery. 6. Handling oflntaogib a Asseta. The proposed findings assert that"start-up" intangible assets can and should be taxed.. The example; cited are permits and assembled workforce. These assertions are contrary to California J. Daniel Dunlap, Chairman Assessment Appeals Board CON'TR.A COSTA COUNTY April 9, 1999 .page 8 statutory law and case precedents. Revenue and Taxation Code sections 110 and 212 only permit partial taxations of intangible assets that relate directly to the real property involved. Thus, assets such as permits and assembled workforce, as well as going concern or business value, are not subject to property taxation. Furthermore, Court of Appeal cases cited in LWOCAL's specific comments specifically state that permits and assembled workforce are not taxable. 7. Discount Rate. A number of disputed or incorrect items regarding the discount rate are set forth in the proposed findings. For example,the findings state that"off-balance sheet financing" should be included in debt and that preferred stock belongs in equity. Both these contentions were criticized at the hearing as unconventional and incorrect. The capital structure adopted in the proposed Endings (which are the Assessor's numbers)was shown by UINTCBCAL's discount rate expert witness,Dr. Udinsky, to be erroneous due to miscalculation by the Assessor's discount rate witness (see Hearing Exhibit FF). In contrast,UNII OCAL's debt(long-term debt) and equity rates were based on appropriate market values or book values which approximated market(the Assessor's equity rate was not a market equity rate). The proposed findings discuss the concept of duration at some length. The -5 year refinery investment horizon followed in the findings was contrary to the evidence and testimony showing refinery investments of at least ten years, as well as the ten year cash flows in Exhibits Al, A2 and A3. In contrast,LINIOCAL's appraiser relied on the ten-plus year period for his analysis, as shown by his twelve year discounted cash flow and his selection of debt instruments for risk-free and risk premium rates of ter.or more years. Finally,the use of the build-up method to develop a discount rate(in addition to the CAPM method)was supported by the testimony of UNOCAL witness Udinsky as well as a published appraisal authority. Dr. Udinsky stated that the discount rates found by the Assessor(anal presented in the proposed findings)were equivalent to rates.for commercial real estate, and well below the rates which apply to refineries,much less a single, stand-alon refinery, such as the subject property. , I Daniel Dunlap, Chairman Assessment Appeals Board April 9, 1999 Page 9 Ce c9ndwin The proposed Endings are severely flawed. They are grounded on evidence which is outside the hearing record. Moreover,the findings`reliance solely upon the income approach, a method which is easily manipulated,without consideration of any other valuation method whatsoever, drastically undermines the credibility of the findings'value conclusions. On top of these gave errors, the proposed findings fail to comprehend and incorporate the abundant evidence presented by UNOCAL using both the sales comparison and cost approaches to value. LTNIOCAL strongly urges the Board not to sign the proposed findings and to prepare its own findinis in accordance with the evidence presented during the hearing before the Board. Respectfully submitted, John D. Cahill Enclosure cc: Dennis C. Graves (w/enclosure) Deputy County Counsel Contra Costa County 651 Pine Street, 91 Floor Martinez, CA 94553 UNOCAL'S SPECIFIC COMMENTS ON PROPOSED FINDINGS April 9. 1999 A.-m-Messment,Appeals Board Contra Costa County fr. the ratter of Appeals Dose: 96-9480 95-3539 96-4259 96-.9455 95-3539 96-4260 96-9467 95- 3540 96-4261 96-9469 95-3541 96-4243 96- 9468 95-3543 96-4244 96-9471 95-3542 96-4246 96- 9470 96- 3545 96-4245 96-9473 95- 3544 96-4248 96-9474, 95-3547 96°4247 96-9478 95-350 96-4250 96- 9475 95- 3555 96-4251 96-9479 95-3549 96-4258 96- 9476 95- 3556 96-4252 98- 9481 95- 3550 96-4253 FINAL DECISION AND FINDINGS of Unocal Corporation on the Valuation Of the Unocal Rodeo Refinery for 1994, 1995, 1996 for Apps: 358-020-004 132310-0051 707562-0000 000 357-010-001 357-300-005 357-310-001 357-300-006 357-010-002 357-300-t Ji 357-310-002 357-310-003 .356-010-008 357-319-005 357-310-006 a This statement is incorrect. SBE Rule 3 sags that all approaches which.are"appropriate for the p p a'shall be considered. Rule 4 says that the comparative sales approach is the preferred method of valuation. Rule 6(a)flays that the cost approach"is used in conjunction with other value approaches." And Rule 8(a)states that the income approach "is used in conjimotion with other approaches:" a UNOCAL presented a number of comparable refinery sates which it considered reliable. Likewise,the assessor's appraiser used the sales comparison app�aach and presented a number of refinery sales. ` he Assessor's value by the approach did not differ greatly from LINOCA .°s. 6 It is incorrect to state that the cost approach is"inconsequential"because a refinery could not be built in the 13ay Area. The Board must bear in mind that an appraisal of the subject property's fair market value assumes a transfer between a willing buyer and a willing seller. This valuation is a theoretical construct which allows the appraiser to use the cost approach regardless of whether or not a nese revery would actually be built. Evidence of'obsolescence and depreciation was available and was presented by LINOCA .'s appraiser(see Hearing Exhibits Y.,L,x19 R.and'). `fixe fact that the Assessor's witness did not perform a study to quantify obsolescence and physical depreciation sloes not mean that it could taut be done. It only means that he fdlsd to complete his cost each analysis. There was no evidence presented at the hearing that offers to purchase refineries are always based can the income a refinery is expected to generate. Moreover,Rale 8(a)does not support this statement. °That Rule states that the income approach has to be"used.' conjunction with other approaches." Finding I: The Board has considered extensively the evidence resented by both parties as to all gree approaches to valve. comparabl ales approach, cost approach and income approach. While appraisers fer to have multiple approaches as indicators of value, they properly can . e weight only to such approaches as are valid for the valuation in gL€esti . In the present case, th income approach is the only approach having s - stantial validity because V) e comparable sales are not available, 2) the cost approach is of very little conseq;ue that (inter alia) a replacement refinery could not be built in this Area and reliable es 4 of obsolescence and physical depreciation for the subject refinery are lacking, ars 3) offers to purchase operating refineries are virtually always based upon the income the refineries car.. be expected to generate. (See Rule 8(a).) The excess land is not a part of the income producing wait in issue herein and has not been, in dispute in the appeals. ``The actual final values Indicated by this Board's adopted income approach are $544,139,000 for 1996, $438,713,000 for 1995, and $443,390,000 for 1994. (See page 8 of Exhibits All, R2 and A3 hereto.) While these values.are slightly higher than the Decision Value which sustains the enrolled values, the differences are so slight haat the Board adopts the enrolled values less excess land as its final Decision Values herein, 2 2. Findings regarding the Comparable Sales Approach: Finding 2 a: The Board agrees with the Assessor and finds that the comparable sales approach should be given no eight because there is a lack of reliable comparables to make the approach meaningful in this case. Although Unocal submitted a number of purported comparables, this Board finds that Unocal's purported comps lack meaningful comparability. Explanation and further findings; Uno l's purportedly comparable refinery sales are too different from the subject refinery, in teras of(inter alia) capacity, complexity, age, location and time of sale to provide a reliable indication of the value of the subject propert tithout valid adjustments, and the adjustments that Unocal rade W reit adequate to establish comparability. (See Unocal Ex F.)` Further, orae must know the charge (mix and volumes of rave materials) and yield (mix and volumes of products produced) of a refinery in order to establish real comparability. Not only did Unocal fail to present a meaningful charge and yield for the subject refinery, but also failed to present any such information .about its purported comparable sales. Comments on proggl�d ELnding 2g Wage 3a top): The testimony was that the comparables used by UNOCAI2s appraiser, like the subject, were all faels refineries and Haat all of the comparable refineries produced marketable petroleum products,primarily gasoline and diesel fuels, from crude sail and other inputs. "Standards of comparability can never be treated in absolute terms. Even relatively payor data.can Tairly be considered as shedding light on the value of the property being valued' (Rev. &Tax, Code, Sec.402.5) if it is the best or only available data." Q& st to tr hw. v. Cowly of Star3l5laus (1976) 55 Cal.A.pp.d 864 at 880.) The statement that the comparable refineries are not comparable without adjustments is irrelevant because appropriate adjustments were.made by UNOCAL as required by SBE Rule 4 and Rev. &Tax. Code section 442.5. It should be noted Haat the Assessor's appraiser looked at comparables sales,but failed to make any adjustments to diose sales. UNOCAL dial present and rely upon a charge and yield history for the subject refinery (see Hearing Exhibit W . INI OC ,'s appraiser testified that differences in charge and yield were handled through his adjustments for different capacities and complexities. Cmmm-eAk An nr-opoaf.-d Elpfin.2a Mau Qom: LTNOCA .`s appraiser made time adjustments based on economic conditions(see Hong Exhibits F and L). L OCAI2s appraiser presented 8-years of data to show the lenge-tom trend in refinery sate prices (vee Hearing Exhibit G). Even IF Unocal had demonstrated sufficient comparability of charge and yield, each of the adjustments Unocal made would have to be meaningful in order for Unoc l's purported comps to have significant reliability as indicators of the value of the subject refinery. As next explained, this Board finds that neither Unocal$s size, complexity, market conditions, age or location adjustments, when applied to sales of other refineries, result in an adjusted sales price that is a reliable indicator of the fair market value of the subject refinery. Further, Unocal has failed to make a proper adjustment for the time of the purportedly comparable sales, some of which occurred as much as eight years before valuation date. Subfinding 2 a.1): The mathematical methodology of Unocal's adjustment factors fails to meaningfully adjust the sales prices of ether refineries to reliable indicators of value of the subject refinery. Explanation and further findings: Unocal determined a numerical factor for each adjustment and then multiplied all factors together (factor I X factor 2 X factor 3 etc. ) to get an overall adjustment factor, which was then applied to (multiplied by) the sales price of the comparable to purportedly make the comparable indicative of the 3 fair market value of the subject property. (The wine result could have been obtained by multiplying the sales price of the comparable by the first adjustment, multiplying the result by the seed adjustment, multiplying that result by the third adjustment, etc.) For such a method validly to adjust a comparable sale price to a reliable indicator of the value of the subject ,property, the tactor for the adjustment (ie, location factor, size factor, complexity factor, market conditions factor, age factosr) must reflect a mathematical relationship (eg, ratio of the comp and subject property) that, when applied to the comp, meaningfully adjusts the cramp sale price to be a reliable indicator of the fair market value of the subject property. Unless such a meaningful mathematical relationship is shown to exist, such adjustment facttors are simply mathematical manipulations that do not provide a reliable indication of the faire market value of the subject property. As eaopfained more particularly below as to each purported adjustrhert, Unocal has failed to demonstrate that any of its adjustments meet this threshold criteria, Moreover, Unocal has failed to demonstrate that its adjustment factors should be compounded (multiplied together) to apply the adjustments. It may be that ars additive or other mathematical application would better reflect an adjustment that otherwise is shove to be validly determined. o outs o n pmP El 1 e 4 o . The discussion Isere does not state why the method of multiplying adjustment factors together,as was done byOCA12s appraiser, fails to establish a meaningful mathematical relationship between the subject and the comparables. TJNOCAL°s appraiser did arrive at an overall adjustment factor for each comparable sale based on consideration of individual adjustments. There was no evidence introduced by to Assessor to establish that this method of deterznining the size adjustment was invalid and,thus, the statement that"this adjustment lacks validity" has no basis or support in the hearing record. To use this approach in the sales comparison analysis would require an appraisal(at least an income approach valuation)of each of the comparable sales. Items such as future, capital expenditures and levels of operating details for each comparable refinery would have to be addressed. This level of detail is generally not available. The analysis which is descfibed here is part of an income approach,not a sales comparison approach. ubfinding a.2): Unocal*s Size Adjustment Factor fails to meaningfully adjust the sales prices of other refineries to reliable indicators of value of the subject refinery. Explanation and further findings: To get its size adjustment*actor, Unocal established a rano of the crude capacities of she subject and damp by dividing the capacity (expressed in total barrels of crude oil processed per day by the crude unit) of the subject refinery by the capacity (expressed in total barrels of crude oil processed per day by the crude unit) of the comp, and thea raised that ratio to the .7 power. The .7 poorer was called a "scale factor". The Board finds that this adjustment lacks validity. Refinery values are determined primarily by the net margins refineries can generate. To determine a refinery net margin, the..steps are: ¢) determine the dross margin, which depends upon the charge (mix and volumes of raw materials and semi-'refined products input to the refining process) and yield (mix and volumes of semi-refined and finished products output from the rM-dig-UU Wt 11-48 COMITY I-OW, NSEL FAX NO, P r� 8461078 - P. 03 refining process) and the prices for the elements of charge and yield and 2} deduct operational costs from grass margin. The margins and value for e refinery can only be properly determined if one knows the mix and volumes of the raw meterlals and semi-refined products that go Into the refining process (charge) and the tribe and volumes of semi- refined and finished products that come out of the refining pros (yield) and the prices of each iters of charge and yield. The crude oil processed by a refinery is only one component of 6harge, and the charge and yield and pricing for the iters of charge and yield can vary greatly among re nerles of similar crude capacity.3 Because of this, there is no mathematically determinable relationship between crude capeckty and the value of a refinery that would allow the retic of the crude capacities of two refineries to be the basis of a formula that legitimately adjusts the sate prfde clone one(the camp) to indicate the fair market value of the other(the subject).� In many refineries,such as the subled,the charge input to the refinery and the yield output from the refinery are increased significantly by semi-refined or blending feedstocks. Unocal's use of barmis per stream day could not reflect Income producing potential because barrels per stream day is only a measurement of crude processed and thus does not account for the additional semi-refired or blending feedstocks. Indeed,the total charge for the subject refinery is 13o% of ode input, and much of its income potential derives from that extra 30% of Sam!- refined or blending feedstocks. Given that the purpose of the size adjustment is to snake the comp sale a valid Indicator of the valve of the subject properly, and given that value relates to net margins, operating costs also mould have to be taker into account,every IF all elements of charge were accounted for. Unocal's purported size adjustment aiso fails to do this. CQmmauts on jaranosed Fan"m .2a.2) lXUe to): ® This is an incorrect statement—there is a relationship between the size of re eries and the price paid for them. Larger refineries have bigger crude units and,hence, more processing capabilities. Consequently, larger refineries sell for hider prices and have higher values. Once age, this comment assumes that an income approach is being used,not a saes comparison approach.. X--Ju-813 TUT 11:46 l C011 T CCUtIS"EL FAX O. >� 4 aC�� P. C c Co eats on roI Isecl -in—d 2 j) e 5 bottom): The example set forth here demonstrates the validity of the method used by INOCA ,'s appraiser. The example is mistaken in stating that the asswnptions are unrealistic. in fact,it cues not utter what the underlying assumptions are. The point is that a refinery twice the size of another should sell for approximately twice the sales price, eve hia"se e (or assuming that all ether variables remain the same). A simplified exam pie will help lilustrate this point. fume arguendo that all refineries use the same rasp materials, have the same operating costs per unit(costs per barrel of finished product),and produce a single Identical product: one barrel of octane 90 unleaded gasoline per barrel of crude oil input. Asstime further that the costs of the raw materials and finished gasoline are the same everYwhe lmith mase unrearistdc assumpffans,the value of a refinery would be directly prnpartionalte1hroughpult and one could develop an adjustment factor that could be applied to pro indicate the fair market value of a subject prope ` rapacity of refinery comp one: 50,000 barrels per day Value of refinery comp one: $100,000,000. Adjustment Factor: 10,3,000,000 f 50,000 barrels per stay i $2000 per barrel per day size of subject refin": 100,000 barrels per day Adjustment of cornp one to Indicate fair market value of subject reflnm: 100,000 barrels per day X$2000 per barrel per day=$200,000,000 value Unfortunately, the assumptions required to make such adjustments valid are not true In real life and the type of adjustment that Unocal has made lacks vaildily, In addition, Unocal failed to show that its "scale factor' adjustment (the power ` ) validly relates to gross margins, operational costs, or value, all of which may vary significantly from refinery to refinery. The scale factor adjustment appears to be ars attempt to apply the concept that refineq capacity and cost do not have a linear relationships Even assuming, arguendo, that cost and value are meaningfully related for refineries, the use of a single power is not sufficient to apply this concept to make a size adjustment. The power reflecting the logarithmic character of the curve could vary substantially:for refineries with different processing capabilities (eg, different charge and yield). Thus, the shape of the curve, which the power reflects, would be different for different refineries with different processing capabilities. Since Unocal°s purportedly comparable refineries have not been shown to have similar processing capabilities, tlnocai should not have used a common power of .7 for all. In sumr,,ary, the purported Unocal size adjustment-laclts validity because Unocal failed to demonstrate that the ratio of barrels per day for the subject and comp, raised to the power .7, would result in a meaningful indication of the market value of the subject property when applied to the sale price of another refinery. CO eats O prom ed Fin-di:n 6 r): T"ne 0.7 scale factor's relationship to gross margins, operational costs and value is irrelevant. The scale factor is part of the adjustment process, and is used because there is a non-linear relationship between refinery capacity and cost. This statement is misdirected. The differences in processing capabilities were addressed by i OCAL's appraiser in his adjustments,=in the 9M adjustment,which is being discussed here. Sipe only reflects potential crude processing capacity. Complexity adjusts for differences in the magnitude of all processing capabilities. � � 6 C maicats on p-ased Din Za (Page 6, bay j; The Assessor presented no evidence during the hearing to establish that this method of adjusting for compleidty was invalid, This is a correct statement and confirms that the relationship betvreen:refinery capacity and cost is non-linear. "Processing capabilities" do not Crary as widely as the this sentence implies. Ail"fuels re veries" (the only refineries considered by L'NOCA 's appraiser)process crude, oftentimes crude like that used at the Rodeo Refinery, into Bels such as gasolines, diesels and jet fuels. LNIT OCA 's appraiser did not use any asphalt refineries or topping refineries in his analysis,and he distinguished these types of refineries f omn the subject refinery and his comparables. Subfinding 2a.3): Unocal's Complexity Adjustment fails to Meaningfully adjust the sales prices of other refineries to reliable indicators of value of the subject refinery. Explanation and further findings; The Nelson Complexity Factor for a refinery reflects the cost, new and undepreciated, of the processing components of a re.€very in relation to the cost of a crude distillation unit. Unocal's complexity adjustment factor was determined as the ratio of the complexity of the subject refinery to the complexity of the comp. The Board finds that such ars adjustment lacks validity. if capacity were one axis and cost were another on a graph,the plotted points representing the capacity and cost for a number of refineries would not form a straight line. Even assuming similar processing capabilities, Refinery A with a capacity of 200,000 barrels per day would not be worth twice Refinery B with a capacity of 100,000 barrels per day. Given similar rrrocessing capabilities, the pointy for refi;ienes of different sizes would tend to form a logarithmic curve. a Given (inter glia)the different crudes processed, the different complexity factors,the different capacities and the different ages, it is virtually certain that the processing capabilities of the purported comps would vary widely. (See Ex. E and Unocal Appraisai, page 48.) , I I _� 6 r,AR-30-99 TUE 11:46 AM COUNTY COWNSEL FAX .N0. SP 94610 IUs7 8 P> 04 Unocal's complexity factor adjustment necessarily assumes that there is a meaningful mathematical relationship be*, een complexity and value. The value of a refinery depends upon the income it can generate. More precisely, the value depends upon 1) the gross margin, which is determined by the charge (volumes and mix of raw materials and semi-refined products) and yield (volumes and mix of semi-refined and finished pro'ducts) and price's for the elements of charge and yield and 2)the net margin, which is determined by dedtipting operational costs from gross margins, Refineries with similar compleAty factors may use substantially different raw materials and serni-refined products (ie, have substantially different charges) and may produce substantially different slates of finished products and semi-refined products (ie, have substantially different yields). Further, refineries with s1milar complexity faPtors may have substantially different operating Thus, there is no datehninable mathematical relad6nshlp between complexiy factors and refinery net margins and value; refineries with sfmflar complexity factors may produce very different slates of products and have substantially different net margins and values. Accoengly, the ratio of the complexities of two refineries cannot be the basis'of a formula that legitimately adjusts the $,ils 'price of one (the comp) to Indicate the fair market value of the other (the subjct). Cgimments on proposedFinding-2ajj&age 73 top): There is a mathematical relationship between complexity and value. A higher complexity means there are more process its at a refinery,which means that it would cost more to build the refinery(increases value) and which means there is more processing capability at the refinery(also increases value). These statements do not apply to a sales comparison approach. They are only appropriate for an income approach. The sales comparison approach must be performed separately and independently from the income approach. This statement assumes that the complexity adjustment will adjust Iffir all of the differences between refineries. But the complexity adjustment is only one of several adjustments. When all adjustments are taken together,they_do adjust flor all of the factors stated here. 7 TUE 11$46 AM COUNT OOZE'. FAX O. ��� ���1�7� qg�g� P, 04 M on need indin2a 31 ne bQft a Differing ages, depreciation and obsolescence are accounted for in the age adjustment calcula ion, not the complexity adjustment. This statement is wrong. Nelson complexity factors are based on the processing capabilities of individual wits, and a refinery's complexity factor,is an amalgamation of complexity factors for individual processing units at a refinery, including custom units if they are sizeable. Moreover,the complexity factors assume allowances for the land, tankage,wharfs and other supporting assets(off-sites).needed for the operation of each processing unit at a refinery. The complexity factors used by UTNO 's appraiser were updated.Nelson complexity factors published by Solomon Associates, a refining industry consulting fes. 7 In addition, Nelson complexity Factors fall to reflect the differing ages,depredation and obsolescence of the various components of a refinery. Further,the Factors are out of date, having been established many years ago and not updated to the present. Moreover,Nelson complexity Factors for a refinery fain to take into account all the components that contribute to the income produdng potential of a refinery, including land, off site improvements(eg,tankage and wharfs) and even some processing Suits(eg, custom units). (deletedl 7 Accordingly, Unocal's Nelson complexity factor adjustment lacks validity for adjusting a comp sale prig to become a reliable indicator of the value of the subject property. Subfinding 2a.4)o Unocal's Effective Age Adjustment fails to meaningfully adjust the sales prices of other refineries to reliable indicators of value of the subject refinery. Explanation and further findings: Unocal subtracted the effective age of the comp from that of the subject, refinery and divided that number by 35, which Unocal asserts is the average physical life of a refinery. That amount was then subtracted from I to get the effective age adjustment factor. (See Ex. F.) The Board finds that this adjustment lacks validity. Preliminarily, there was not an adequate showing that the 35 year component of the factor was accurate. Further, Unocal failed to show important detail as to determination of the effective ages of its ceps, including whether there was any adjustment for the effect of maintenance practices and the actual condition resulting therefrom. Without at least that adjustment, effective age determinations would lack validity. Comments tin prgposed Findin2 2a84)(Page-B Capco No evidence was introduced by the Assessor during the hearing to support this statement that the complexity factor adjustment lacks validity. Effective age is not the same as calendar age. Effective age is based on the level o capitall investments made since the original construction. It takes into account maintenance practices. Consequently,no adjustment for maintenance practices or actual condition(as called for here by the Assessor)is needed.. '� 8 MMOR srn�Md MdIng a.4) (Page&JI9t:toM): This language is only appropriate for an income approach and has no place in a sales comparison approach. This paragraph is incorrect. An old, obsolete refinery will have equipment that uses more energy,have a larger workforce, and generally have higher operating costs. Such a refinery will also have a.less valuable product slate or yield because it employs old, obsolete process T,ni.ts that have not been:updated to the level of current technology. That is why UNOCAL's appraiser used a e: `v . . It reflects all the capital investments made in both the subject refinery and the comparable sales. Unocal used the example (Ex. F) of a refinery having an effective age of 9 years compared to the effective age of 24 years for the subject refinery. These ages yielded an age adjustment factor of .571. But Unocal failed to show that such an adjustment has a meaningful relationship to the income producing potential of the two refineries. The value of a refinery depends primarily upon 1) the grass margin, which is determined by the charge (volumes and mix of raw materials and semi-refined products) and yield (volumes and mix of sem-refined and finished products) and prices for the elements of charge and yield and 2) the net margin, which is determined by deducting operational costs from gross margins. The gross margin, which depends upon charge and yield, is the more significant determinant of value. The Board recognizes that older refineries may need more maintenance and thus operational costs may be somewhat higher and net margins somewhat lower as a refinery ages. However, with proper maintenance a refinery can have virtually the same processing capability regardless of age, ie, can have much the same urge and yield regardless of age; since charge and yield are the primary determinants of margins and value, a well-maintained refinery can have largely the same value regardless of age. Unocal has failed to demonstrate a determinable mathematical relationship between a refinery's age and its charge and yield, margins or value and, accordingly, Unocal's age adjustment factor lacks validity as a means of adjusting a comp sale price to a reliable indicator of the value of the subject property. Subfinding 2a.5): Unocal's Market Conditions Adjustment fails to meaningfully adjust the sales prices of other refineries to reliable indicators of value of the subject.refinery. Explanation and further findings: Unocal's market conditions adjustment reflected Unocal's estimates of the economic obsolescence of the subject and comparable refineries. -it was determined as the ratio of the quantity 1 minus the percent estimated economic obsolescence of the subject property to the quantity I minus the percent estimated economic obsolescence of the comp property. (See Ex. Economic obsolescence is applied in the cost approach. (See Rule 6(e).) Thus, the adjustment is the ratio of the cost approach percent good after deduction of obsolescence for the subject property to the cost approach percent good after deduction of obsolescence for the comp property. The Board finds this adjustment lacks validity. Comments on proposed Md s 2&4) and Z-a.S).(PzIIg 2.ton): This sentence again mixes elements of the sales and income approaches. Economic obsolescence is based on refining industry economics. It is used in the cost approach to represent a loss of value due to reduced returns or earnings. Economic obsolescence is also used in the sales comparison approach to compare the "market conditions" at one point in time(when a sale occurred)to the appraisal date for the subject property. LNOCAL's appraiser=mu testified to the information in this sentence. Moreover,the statement is incorrect—the adjustment is not a ratio of percent good figures. 9 n Pravosed-Finadbag age 9 btsttts t The economic conditions adjustment is independent of the cost approack and is a valid adjustment in the sales comparison approach regardless of whether the cost approach is appropriate in this case. 19 There are several gays of determining economic obsolescence other than,that referred to here. LNOCAL,'s appraiser used two separate methods to determine economic obsolescence. (See Hearing Exhibit L.) Once agate,this statement is describing the income approach to value and is misplaced in a discussion of the sales comparisons approach.. There is no reasons for FOCAL to make a comparison between are adjustment factor for market conditions in the sales approach and net margins, a concept which only applies to the income approach. Nor did LNOCAL's appraiser ever testify that there was such a relationship. Y The use of this adjustment necessarily presumes that the cost approach, upon which it is based, is a good indicator of value in this case. That is not correct. Only the income approach is a good indicator of value in this case. Further, the use of this adjustment presumes that economic obsolescence, a key component of a sound cost approach value, can be determined in a meaningful Manner in this case. As demonstrated below in the findings on the cost approach, Unocal's economic obsolescence adjustment lacks validity and, indeed, the way to determine economic obsolescence herein is by reference to the value determined under the income approach. The value of a refinery depends primarily upon 1) the gross margin, which is determined by the charge (volumes and mix of rave materials and semi- refined products) and yield (volumes and mix of sai mi-refined and finished products) and prices for the elements of urge and yield and ) the net margin, which is determined by deducting operational costs from gross margins. Unocal failed to demonstrate that there was a mathematically determinable relationship between the cost approach percent good after economic obsolescence and the net margin or income producing potential of the refinery. Accordingly, Unocal's market conditions adjustment, based upon economic obsolescence applicable to the cost approach, fails to meaningfully adjust the sales prices of other refineries to reliable indicators of value of the subject refinery. Subfinding 2x.61: Unocal's Location Adjustment fails to meaningfully adjust the sales prices of other refineries to reliable indicators of value of the subject refinery. Explanation: and further findings: Unocal's location adjustment was done by establishing a 'paired-sales' ratio of two values by comparing a single 1966 Southern California sale with a single 1968 Gulf Coast sale, and applying that ratio to adjust sales throughout the US. The Board finds that this adjustment lacks merit. In addition to the sales being 6 to 6 years before the valuation dates in question, the ratio of a single Southern California sale and a single Gulf Coast sale has little statistical validity as an adjustment to determine comparability of other sale A statistically adequate number of comparable sale comparison ratio ould have to be done and a sufficient number of those ratios wool ave to group meaningfully when plotted on a graph before one d even reasonably argue that a proper ratio for the grouping (eg, th edian ratio of the grouping) could be used as a location a ' ment. Comments on nroposed WMdig 2-g-0 Mage 19,tQ12): 'the term"statistically adequate" should be placed into the context of the subject property. There are 12 to 15 refineries in California which are comparable to the subject reffinery. One sale from those 12-15 refineries is certainly "significant." In addition, here are perhaps 1513 refineries nationwide which are comparable to the subject revery. given the Rmited number of those 15€1 refineries that have sold over the past ten years, the sales of the California and Gulf Coast reveries would appear to be adequate and quite "significant" in maldng a location adjustment. 10 !QoMmots on p-oposed FindWg,2g,6J This is the fourth time these sentences have appeared in the discussion.of the sales comparison approach. These sentences only pertain to the income approach and should not be included in this portion of the findings at all.. There is no reason forUNTOCAL to demonstrate any relationship between an adjustment factor for location in the sales comparison approach and refinery margins,a concept which only applies to the income approach. Nor did.UNOCA1 es appraiser ever testify that there was such a relationship. These statements fail to comprehend the purpose of the paired sales analysis,namely,to determine how Hauch of an adjustment for location should be made. FOCAL contends that the Southern California refinery it used in the location adjustment analysis is sufficiently similar to the Rodeo Refinery for a location adjustment analysis to be made and for such analysis to be applicable to the Rodeo Refinery. This statement begs the questiom The p9.arpose of the location adjustment is to account for differences "across the country." In this case the only question is whether the subject refinery and the Southern California refinery used in the location adjustment are similar (not whether the subject refinery and the Gulf Coast refinery used in the pairedmsalc analysis are similar), Because those refineries process similar slates of crudes and nye similar products for the California market,the location adjustment used by UN C3CAL is quite valid. The value of a refinery depends primarily upon 1) the gross ;margin, which is determined by the charge (volumes and mix of rave materials and semi- refined products) and yield (volumes and € ix of semi-refined and finished products) and prices for the elements of charge and yield and 2) the net margin, which is determined by deducting operational costs from gross margins. In addition to the statistical deficiencies noted above, Unocal has not demonstrated that its paired sales ratio retates in any mathematically determinable gray to the margins or value of the refineries that are represented by the ratio. Even IF Unocal were able to demonstrate a statistically meaningful ratio of values between Southern California and Gulf Coast refineries, such a ratio could not reasonably be expected to apply to other areas of the Country-- including the Bay area — because refinery economics (differences in costs of raw materials and prices of misled products, differences in operating costs, etc.) that affect margins are substantially different across the Country. Uno l's Location Adjustment fails to account for such differences across the Country. Thus, even IF such an adustrnent were meaningful when applied between the areas in which the paired sales exist (Southern CaH.1110 ria. and the Gulf Coast), it would have ,no gelidity when applied to other areas unless Unocal first demonstrated a determinable mathematical relationship for the costs of raw materials and prices of finished products, operating costs, etc. between the Bay Area (the area of the subject property) and the areas of the paired sales (Southern California and the Gulf Coast), and than demonstrated such a relationship between those areas and the area of the comp in question. Unocal has made no such shoving and, because such factor as operating costs, raw materials and prices of finished products vary significantly between northern and Southern California, the Gulf Coast and the areas in which the purported comps exist, Unocal could not demonstrate that its location adjustments are valid. 011 UNLOCAL's paired sales analysis assumes that operating costs,prices and other factors would be quite similar in Northers and Southern California. There was no evidence introduced at the hearing to contradict this. CoMm at&o Lpi-vsed lEidi Za aye ® Size and complexity do have a relationship to both cost of constructing and to the operating capabilities of a refinery. As size and complexity increase, so do cast and operating capabilities. Because increased cast and increased operating capabilities generally increase the value of a refinery,there is a relationship between size and complexity and value. SuBfinding 2a.71e The dollars per barrel per complexity Unocal caiculated are not valid indicators of value. Unocal did a dollars per barrel per complexity computation for each purported comparable: the sales prig of the comp was divided by the barrels per stream day of crude processed by the comp and that figure was divided by the Nelson complexity factor for the camp. (See Ex. E .) A similar computation was done to purportedly reflect, after the aforenoted adjustments, dollars per barrel per complexity, using the adjusted sale price of the comp, and the barrels per stream day and complexity of the subject. (See page 48 of Unocal appraisal.) As noted in the foregoing findings and explanations, Unocal's size adjustment (based on Barrels per stream day of crude processed) and Unocal's complexity adjustment (based on the Nelson complexity factors for the camps) lack validity as meaningful indicators of the value of the subject refinery. (See Findings 2a2) and 2a3), above.) Further, size and complexity alone (ie., without the ratio computations of the aforenoted adjustment factors) are not meaningful indicators of tete value of a refinery, for the reasons explained above it t the discussions on the size and complexity adjustment factors. Unocal's dollars per barrel per complexity computation uses size (crude capacity) and complexity as demonstrated above (sales price divided by crude capacity divided by complexity). Since size (crude capacity) and complexity lack validity as meaningful indicators of value, this Shard finds that Unocal's dollars per barrel per complexity computations, which are based upon size (Qude capacity) and complexity, also lack validity as meaningful indicators of the value of the subject refinery- 9 Subfinding 2a.8): Unocal's comp sales are not reliable indicators of value of the subject refinery because Unocal failed to adjust the sales prices of other refineries for differences in the time of the sales from the valuation dates of, the subject refinery. Explanation and further findings: Some adjustment must be made when potentially comparable refinery sales are not close in time to the valuation date for the subject property. (See , Rule 4(c ),(d).) At some point, the differences resulting from time alone may be-so great that the property cannot be considered comparable; this is particularly an issue for properties like refineries which are subject to the vagaries of world oil economics. Unocal used comp sales that were as much as much eight years before the valuation date, but made no adjustment for time. At a minimum, inflation over the time in question must be accounted for, and Unocal's comp sales approach lacks validity because it failed to make even this basic adjustment. Commeub on.VrQpQsed Eluding 2a.8).(rW 12 tap andAf _qtn_ote 9): OC 's appraiser adjusted the comparable sales prices for time using the market conditions adiustment. To reiterate,that adjustment is based on a comparison of economic obsolescence as of the comparable sale date(a point in time)to economic obsolescence as of the appraisal date(a second point in time). It is improper to make adjustments for inflation in the sales comparison approach. All adjustments in the sales comparison approach must be based on the market,and may have little or nothing to do with inflation. Furthermore,a time adjustment was made in the market conditions adjustment. The Assessor has mixed things up here. The sales grid on page 48 ofL N- OCAL.'s appraisal report adjusts the sales to the subject. After the adjustments are made, the adjusted sales prices reflect the value of the subject based on each sale. When you divide the size and complexity of the adjusted sale price by the size and complexity of the subject,the result reflects the dollars per barrel of complexity of the subject based on each sale. In addition, Unocal's second dollars per barrel per complexity adjustment inappropriately mixes the adjusted sales price of the comp with the barrels per day and complexity of the subjectl (See bottom of p. 48 of Unocal appraisal.) 12 Comments on Prawns €ndin3 e 1.2 12ok m The Assessor failed to independently determine the amount of economic or functional obsolescence,in violation of SBE Rule 6(e). Therefore, it is inappropriate to assert that the Assessor made a complete and full analysis using the cost approach. It is also unproper to assert that the "cost approach" figures in the Assessor's appraisal reports represent anything more than reproduction cost less physical depreciation. 'hose figures have= .,�a °� because they do not include any deductions for obsolescence, a fact whish the Assessor's appraiser readily admitted during the hearing. This paragraph does not make sense. If replacement is impossible or too costly,how sloes it follow that the cost of replacement will have little influence on the property's market value? The sentence should be deleted. 3. Findings re Cost Approach Finding : The Board considered the cost approach. Although generally accepting the validity of, the Assessor's cost approach (also called physical asset value) methodology, the Board finds that the cost approach should be given very little eight in the.present valuation. Recognizing that the Assessor did not attempt to quantify economic obsolescence in its cost approach, except indirectly by reference to the value obtained under the income approach, the Board has used the Assessor's cost approach value herein merely as a gross upper limit value check. Explanation and further findings. The cost approach is based on the economic principal of substitution, which assumes no costly delay in creating a satisfactory substitute property. If a delay exists and is too costly, or if replacement is impassible, the cost of replacing the subject property with an alternative plant will have little influence on the property's market value. The Board finds that environmental and political restraints would not only delay, but very likely prevent the construction of a satisfactory substitute refinery plant in this area. The Board therefore concludes that a prudent investor would not rely..on the cost approach to determine value for the subject refinery. Accordingly, the cost approach should have very little bearing on value in the present case. The cost approach is.appropriate when property has experienced relatively little physical depreciation and is not unduly affected by other forms of depreciation or obsolescence, and the approach is preferred only when neither reliable sales data nor reliable income data are available. In the present case, reliable sales data is not available but reliable income data is. In fact., this Board finds that the income approach is highly reliable in the present case because such properties are invariably purchased on the bads of the income they are expected to generate. Property costs tend to equal value only when the improvements are new, and adjustments roust be made for depreciation and obsolescence if the property is not new, as is the case herein. Depreciation and obsolescence (the difference between replacement cost and market value) are typically difficult to accurately measure, and the reliability of the cost approach decreases as the lass in value from such causes increases. Commenu ony�°a� rs�,�c��ee Finding 3 Cbzc 3.toy): Just because building a new refinery would be politically unpopular or upset environmental interests does not mean that an appraiser should not do a cost approach. Furthermore,there gust be actual evidence o governmental restraints(land use restrictions)that would prevent building a replacement facility(see Rev. &Tax,Code section 402.a), There was no evidence presented at the hearing of any governmental restrictions against building a replacement facility for the subject refinery. This lege,which is takes from SBE Rule 6(a),only leads one to the conclusion that the cost approach is not to be preferred over the other approaches to value. It does not require that the cost approach be mored, UNOCAL also disagrees with the unsubstantiated assertion that reliable sales data is not available, It is incorrect to says that cost always equals value when property is neer. Economic obsolescence,which must be considered in any east approach,can keep eves:new propel from being valued at its cost. Although measuring depreciation and obsolescence may be difficult,appraisers detmmine those items regularly,often with the help of well-known cost reference manuals such as Marshall&Swift. In addition,UNOCAL introduced evidence showing hoar physical depreciation(,fearing Exhibits K,R, ,economic obsolescence(Hearing Exhibit L)and functional/operating obsolescence(Hearing Exhibits M and CC)should be deterred, 13 mm-ents an Prey used Muding 3 Rau 1 ., e- ): These statements ignore the substantial amount of evidence on fictional and economic, obsolescence which.LINOC ,'s appraiser presented at the Board beteg, There is no explanation for this wholesale dismissal of that evidence. The analysis by T. 00AUs appraiser compared returns in 1975-79 and also 1988 to the present. None of the companies used by UNOCAL's appraiser were"fly integrated" companies. They were all primarily"rebfin g and marketing" companies with little or no upstream assets (oil and gas production). This statement fails to comprehend the purpose of the economic obsolescence analysis, which is to show the condition of the refining and marketing industry at two different points in time. It also mores the fact that two of the companies used by UNOCAL's appraiser,Tosco and Ultra-nar,have significant refining assets in California(even Northern California). The Board finds that obsolescence, and particularly economic obsolescence, is very difficult to meaningfully quantify in the present case. In addition to an adjustment for physical depreciation (actual wean and tear due to the elements and operation over time) of about 45%, Unocal made an obsolescence adjustment of about 40%, but failed to demonstrate an adequate basis for its obsolescence adjustment. The Unocal obsolescence adjustment includes both economic and functional/operating obsolescenc , with over half of the total obsolescence adjustment bong for economic obsolescence. Unocal's economic obsolescence adjustment is based upon the return n capital for several similar companies for a 5 year period from 1975-79. Exhibit L.) This adjustment reflects nation-wide performance of refiningfretailing -companies and fully integrated companies , ving both crude oil production and refining/retailing operations. The Board finds that returns on capital for integrated companies 15 to 20 years prier to the valuation dates in question and largely attributable to other geographic areas are not meaningful indicators of economic obsolescence and market values for the subject Bay Area refining property for the valuation dates in issue. 13 Unocal also attempted to support its economic obsolescence with a comparison over more than 10 years of the ratios of stock price to book value for integrated domestic oil companies d for the Standard and boors industrial .stacks generally. This compa n fails to meaningfully quantify economic obsolescence in the present cas ecause (inter alfa) such a comparison is not specific to refineries, but ra ' er is based upon the earnings and value attributable to all integrated oil comp assets and lines of business. Further, it is inappropriate to measure t performance of one industry against the performance of other very differ t industries, including fast grooving high-tech industries, when attempting to ningfully quantify the economic obsolescence of a single asset (refinery) in a industry (oil refining). Unocal bases its operating/functional obsolescence adjustments "In.dicated Solomon Equivalents". However, Unocal did not provide e Solomon reports, even though requested to do so. Thus, neither the Ass6s or or this Beard could validate the data upon which Unocal base is adjustments. Further, for its operating obsolescence adjustment, Unocal relies or, comparisons to equivalent distillation capacitiesof ether properties, but did not adequately demonstrate the validity of those , s. This Beard is not inclined to consider such adjustments without an adequa demonstration of the accuracy and validity of the data upon which y are based. Ca mgnts gn,proposed VWdia13(I!a c 14, on): .s is inaccurate. LNI OC. 's appraiser dict not use 14 years of data but to most current year prior to the appraisal date. UNOCAL disagrees. The comparison here was between the S&P 500, a benchmark of industrial performance, and the oil industry sector of the economy. This provides a meaningful look.at how the ail industry is doing in comparison to industries generally. `here is no request for Solomon reports in any of the requests for information roadie by the Assessor's Office(.gee Dearing Exhibits 18, 39 and Supplement Fable I in Exhibits 40, 41 and 42). Furthermore,because the inforrration relied upon.by`tNOCA.I_,'s appraiser related to information taper: from the Solomon reports for refineries other than the Rodeo Refinery,there would have been no need for UNOCAL to provide the Solomon reports on those refineries to the Assessor's O ce. This paragraph is unsupported and should.be deleted from the proposed findings. If the Assessor wanted more information on equivalent distillation capacity,it could have cross-examined LTNOC .'s appraiser on that subject. There is no basis for ignoring evidence presented by LITNIOCAL simply because the Assessor failed to adequately cross- examine that evidence. � . 14 Comments QILXmpmd Fftn-dineI, "age 14.bottogmj: Where is absolutely no basis in the record,particularly the evidence presented by the Assessor, for this statement. The Assessor dad UgI perform a pg=Jgk cost approach analysis, so he would have no basis for asserting how the income produced by the property relates to its replacement ent value. This statement places too much reliance on an valuation approach which is highly volatile and easily manipulated. The Board should rely on as many approaches to value as possible, reliance upon one particular approach can easily lead to an over-or understatement of the true market value of the subject property. Unocal's cost value approach results in a value about 12% of replacement cost of improvements (14% of total replacement cost value, including land), due largely to very extreme reductions for physical depreciation and obsolescence. This is highly inconsistent with the Assessor's demonstration that the subject property is -capable of producing more than 90% of the income of a new replacement property. The difference between replacement cost, adjusted for physical depreciation and functional obsolescence, and market value is economic obsolescence. When reliable comps do not exist, when the income approach is the best determinant of market value, and when economic obsolescence is significant but very difficult to measure, all of which are true in the present case, the income approach becomes the default ,means of measuring economic obsolescence for the cost approach. Effectively, then, virtually total reliance is placed upon the income approach. Given the deficiencies of the Unocal cost approach noted above, given the income the refinery can generate, and given the high validity of the assessor's incorne'approach herein, this Board concludes that Unocal's cost approach adjustments (particularly obsolescence) are far too high and its cost approach valve far too low. 14 _CDmm§ntun Dronosed Finding 4ad)(kae 15. o m it should be noted that the.assessor's appraisal witnesses were not certified appraisers, This is in contrast toUNOCAL's appraiser,who was a Certified Ca.ffornia Real Estate Appraiser, an Accredited Senior Appraiser of the American Society of Appraisers (ASS.), and a Registered Professional Engineer. ® UNOCAL witnesses Rand Swenson and john Vautrain both demonstrated significant expertise in dealing with charge and yield. In fact,Mr. Swenson,who had worked at the Rodeo Refinery for many years,was intimately familiar with the charges and yields for the subject refinery. a. Findings re Income Stream Finding 4 a.1). Charge and Yield This'Board finds that the first critical element in projecting a meaningful income stream for a refinery is the charge (mix and volumes of raw iaaterials, blendstocks and semi-refined products that are inputs to the refining process) and yield (mix and volumes of blendstocks, refined and sem{-refined products that are produced). This Board finds that the Assessor's charge and yield methodology, with the modifications explained below, is the first step in projecting a proper income stream to be discounted to reach the fair market value of the subject property. Explanation and further findings: The assessor presented a detailed line item by lire item charge and yield in Table Ill of its Original appraisal Deport (Ex. 9) , based upon the information that Unocal had provided in response to the assessor's demands for information. The assessor's appraisal experts were refinery ngineers who were able to review (inter alia) data about the processing units of the Refinery; about the raw materials, blendstocks and semi® refined products historically used by the Refinery, and about the blendstocks, refined and sem-refined products produced by the Refinery and, based upon their demonstrated knowledge of refinery processing and economics, determine a meaningful charge and yield that a prospective purchaser could be expected to project. Unocal presented no such experts or charge and yield. Unocal's approach was deficient (inter alfa) because it failed to present an adequate charge and yield. In its ,appraisal (Ex C, p, 56 for the 1996 Among cher things, a proper income approach inherently accounts for any obsolescence of a refinery. � � 15 year) the applicant merely presented a summary line for revenues and a summary line for raw materials costs, supported only by a superficial "Product and Raw Material Balance History' (Ex. ) and "Revenue Projection" (Ex. l). Unocal's data was nowhere neer as detailed and meaningful as the charge and yield and pricing (discussed bele) presented by the ,Assessor. Unocal failed to divulge full information in response to the assessor's demands. Further information was elicited at the hearing and, during the several week break before the continued hearing, Unocal provided additional information in response to this Board's order to provide such information. The Assessor rust its charge and yield in response to the additional information and the new charge and yield was shown in Fable li of the Assessor's Supplemental Reports (Ex. 41 ,41,42). Based upon evidence (inter glia) presented by the Applicant and ,assessor at the continued hearing, this Board has rade adjustments to the,Assessor's Supplemental Reports charge and yield as shown on page 2 of Exhibits Al, A2 and A3 to these Findings. `C'tnese adjustments also result in an adjustment to the bottom line volumes, shown as Refinery`Meld as % of Feedstocks at the bottom of page 2 of Exhibits Al, A2 and A3 hereto. ormtnts on proposed FLndi= Jage 16 to�1< The Assessor never demonstrated that a charge and yield projection,such as that employed by the assessor,was a prerequisite to valuing the refinery. This language is prejudicial and untrue. UNOCAL,made its best efforts to provide information to the Assessor prior to the hearing. When the assessor Office realized that it needed more information than it had previously received,it asserted that UNOCAL.had not been cooperative,which was false. In fast, as the Board will recall,testimony by Mr. Gray from the assessor's Oce indicated that the.assessor actually received information which it contended during the hearing it had not received. Moreover,the follow-up request for information issued by the Assessor's Office on November 10, 1998 was an expanded version of the original request issued on April 10, 1997(see Hearing Exhibit X, pages 5-8 and Hearing Exhibit 39,pages 2-3). This indicates that the Board is going to make adjustments to the evidence now in the record(i.e.,Table 11 of Hearing Exhibits 40, 41 and 42) "based upon evidence (inter alfa) presented by the applicant and assessor at the continued hearing." '1`l�e e,js= indication what g3dde-ce is being referred to hereorder to; et ad`us a is t :e ' ce, and reliance by the Beard upon such evidence would constitute the use of evidence outside the hearing record and beyond the evidence presented at the hearing. For that reason.,`�`I OCAL<vehemently objects to this language. If the Board does what is stag here, it will violate UNOCAL's due process hearing rights.,as more fully explained.in. LTLN-OCAI:s general comments on the proposed.fundings. 16 !QpMM=15 ren proposed dig 4-&2 e 16,hoitQ la UNOCAL's appraiser relied upon market information to determine gross margins. He used published market prices from Platt's and historical charge and yield relationships, along with published price projections from the Coil &Gas Journal and Energy Information Administration, to project future gross margins. Finding 4a.2): pricing and Grass Margins This Board finds that the second critical element in projecting a refinery income stream is the pricing that is applied to the items of charge and yield to determine the refinery product revenues and feedstock costs that result in the gross margin. (See Assessor's Supplemental Reports Table fit (pricing) and Table IV (margins),) This Board finds that the Assessor's pricing of Assessor's Supplemental Reports Table [if and page 3 of Exs. Ali A2 and A3 hereto is the pricing that is proper for the subject refinery valuation. Explanation acrd further findings: Both the charge and yield and the pricing must be done properly to produce meaningful margins because each item of charge and yield is multiplied by the price for the item to get the feedstock costs and product revenues that result in grass margin. As already demonstrated, the Applicant failed to present an adequate charge and yield and thus failed to adequately support its gross margin projections, regardless of the validity of its pricing. The Assessor did detailed pricing estimates for each iter: of charge and yield in its Original Appraisal Report, reflecting the prices that a prospective buyer would have anticipated at the time in question.The estimates started Wth the historical spot pricing for the Refinery(Table and thea rade estimates for each item for 10 years from the lien date (Table VI). Appropriate adjustments (eg, for transportation costs)were thea applied to reach the final projected `netback� pricing (Table IV)for the iterms of charge wid yield. The netback pricing then was applied to the volumes projected for charge and yield (Table Ill) to get the feedstock costs and product revenues that result in grass margin. The Assessor's original estimates were based in part on the information provided by Unocal In response to the assessor's demand for information. However, Unocal failed to provide complete Information. at the hearing, questions were raised about some of the items In the Assessor's pricing estimates..Based can information elicited at the hearing and on further information provided by Unocal pursuant to direction of this Board during the break before the continued hearing, the assessor recast-his pricing projections in his Supplemental Reports Table III . (See also , 35- 8.) This Board accepts those projections as valid and supported by the evidence, and has used those projections for page 3 (projected refinery gate values) and the resulting gross margins of page 4 of Exhibits Al, and A3 attached hereto. `c eats can taroposed ndigg 4a 1 6 ® This statement is prejudicial and may be false because there is no indication ghat information is being referred to. The sentence should be deleted.. Much of the information on page 4 of Exhibits.Al,A2 and A3 was never introduced into the record. The information on those pages,with the exception of fixed operating costs, differs Born the evidence presented at the hearing. There is no gndicat;onw81erV the nm informadon—s=orting a e 4 ofEyl ibits Al.A2 gid A LGame from,and therefore reliance by the Board capon such evidence would constitute the use of evidence outside the hearing record and beyond the evidence presented at the hearing. For that reason, LINOCf L vehemently objects to this language. If the Board accepts the information on page 4 of Exhibits Al,A2 and A3, it will violate L7NOCAL!s due process hearing rights, as more fully explained in UNOCAL's general comments on the proposed.findings. 1 — 17 CMMMOUS on 12 4aQLe_t__.Jn_dhum 4o-31 and 4& X&Le 17 baa t��r Tlu language indicates that the Board will ado- pt friable operating cost flguresora page 4 of Ddiibits Al,A2 and A3 which were not presented at the hearing before the Board> �e�ss�o irEd?c 'cs�a ate ear a�c� rar {� � �,to `ust mea 41 md-41 and reliance by the Board upon such evidence would constitute the use of evidence outside the hearmg record and beyond the evidence presented at the hearing. For that reason,UNOCAL,vehemently objects to this language. If the Board accepts the variable operating cost information on page 4 of Exhibits Al,A2 and A3,it will violate UNOCAL's dace process hearing ruts,as more fully explained in UNOCAL's general comments on the proposed findings. This states that the Board will adopt new amounts for initial capital investment and depreciation thereon on page 6 of Exhibits Al,A2 and A3 Bch differs from that presented at the Beard hearing. iso iconh ? videne Hca or l trs ad'ust the v e cs ���t rosl�rn ,t ble ear' hfb4 4t?,4t and reliance by the Board upon such evidence would constitute the use of evidence outside the hearing mord and beyond the evidence presented at the hearing. For that reason,UNOCAL vehemently objets to this language. If the Board accepts the variable operating cost infdrmatioti on Page 6 of Exhibits Al,A2 and A?,it will violate I�OCA.L,'s due process hearing ruts,as more fuller explained in IJNOCAI2s general comments on the proposed findings. ne deduction for depreciation here is inappropriate mer SBE Rule 8 Finding 4a_3): Operating Costs and Net Margins The Board finds that the variable operating costs will change from those stated in the Assessor's Supplemental Reports, Table IV, to the figures shown or page 4 of Exhibits A!, A2 and A3 hereto, because of changes in ref eery yield from the Assessor's Supplemental Reports (Table Il) he page 2 of Exhibits Al, A2 and A3. The fixed costs of page 4 of Exhibits Al, A,2 and A3 are not changed from the Assessor's Supplemental Reports Table IV. The Board determines the not margins to be as shown on page 4 of Exhibits Al, A2 and A3 hereto. Finding 4e.4)o Capital Investment and Depreciation This Beard finds that the sustaining capital investment and depreciation thereon does not change from that specified in the Assessors Supple ental Reports, Table VI. (See p.6 of Exs. A1, A2 and A3 hereto.) This Board finds that the initial capital investment and depreciation hereon change from that specified in the Assessor's Supplemental Reports, Table VI, to that shown on page 6 of Exhibits Al, A2 and A3 hereto, in order to reflect 17 the new after tax present values, resulting from the changes to gross and net margins as explained above. (See page 5 of Exs. Al, A2, and A3 hereto for after tax present values.) Finding 4a.5): Working Capital This Board finds that the Working Capital shown in the Assessor's Supplemental Reports, Table VII, changes to that shown on page 7 of Exhibits Al, A2 and A3 hereto to reflect the changes made in refinery yield as noted above. Finding 4a.6): Residual value This Board finds that the residual values ho Irl Assessor's Supplemental Reports Table V, change' to those shown on page 5 of Exhibits Al, A2, and A� hereto because of the above noted changes which are reflected in the ret _ cash flows of page 5 of Exhibits Al, A2, and A3 hereto. Commezift-on prop Findings 4a.4) 4a.M and 4&.6)(tare L8.1gM: The new cash flows(including gross and net margins)on page 'bits M,A2 and 5 of Exb A3 am completely different from those presented at the hearing(Table V in Exhibits 40, 41 and 42). Reliance by the Board upon such evidence would constitute the use of evidence outside the hewing record and beyond the evidence presented at the hearing. For that reason,UNOCAL vehemently objects to this language. If the Board accepts the cash flows page 5 of Exhibits Al,A2 and A3,it will violate UNOCAL's due process hearing rights,as more fully explained in UNOCAL's general comments on the proposed findings. This indicates that the Board will adopt new amounts for working capital on page 7 of Exhibits Al,A2 and A3 which diff as from that presented at the Board hearing. IbcM ja no indicati 4 the Board has or ndll rely=Qn IQ 4=t=-yAdabla WMIding- cost Am=fry throe shomm in - lo-VILin Hratin&ExhibilA 4DL 41 Md and reliance by the Board upon such evidence would constitute the use of evidence outside the hewing record and beyond the evidence presented at the hearing. For that reason,UNOCAL vehemently objects to this language. If the Board accepts the worldng capital amounts on page 7 of Exhibits Al,A2 and A3,it will violate UNOCAVs due process hearing rights,as more filly explained inL JNOCAVs general comments on the proposed finding& The now residual values on page 5 of Exhibits Al,A2 and A3 are completely different from those presented at the hearing(fable V in Exhibits 40,41 and 42). Reliance by tho Board upon such evidence would constitute theuse of evidence outside the hearing record and beyond the evidence presented at the hearing. For that reason,UNOCAL vehemently objects to this language. If the Board accepts the residual values on page 5 of Exhibits Al,A2 and A3,it will violate UNOCAL's due process hearing rights,as more fally explained in UNOCAI:s general comments on the proposed findings. e anents ore prrepose d l d 4&J) d 4&M(Ease 18,be9ttf M °Ihe:new amounts for taxes on page 5 of Exhibits Al,.A2 and A3 am completely different from those presented at the h (Table V in Fixhibits 40,41 and 42). Reliance by the Board upon such evidence would constitute the use of evidence outside the hearing record and beyond the evidence presented at the hearing. For that recon,UNOCAL vehemently objects to this language. If the Board scuts the tax amounts on page 5 of Exhibits.Ail,A2 and A3,it will violate UNOCAL's due process hearingrights, as more fully explained in UN0CAI;s gen comments on the proposed findings. The handling of taxes on page 5 of Exhibits Al,A2 and A3 is co to the requirements ofSBE Rule 8. The new amounts for elements of cash flour,after tax present values and adjusteed present values page 5 of Exhibits Al,X42 and.A3 are completely different from those presented at the h (Table V in Exhibits 40,41 and 42). Reliance by the Board upon such evidence would constitute the use of evidence outside the he a-ring record and beyond the evidence presented at the hearing. For that reason,UNOCAL vehemently objects to this language. If the Board accepts the elements of cash flow, after tax present values and adjusted present values on page 5 of Exhibits Al,A2 and A3,it will violate UNOCAIA due process hearing rights, as more fully explained in UNOCAL's gen et comments on the proposed findings. Finding 4a.7): Taxes As a result of the foregoing changes, which flow through to the After Tax Cash Float spreadsheets (Assessor's Supplemental Reports, Table V, and page 5 of Exhibits Al, A2, and A3 hereto), the spreadsheet line items relating to taxes shown on the Assessor's Supplemental Reports, `fable V, change to those shown on page 5 of Exhibits Al, A2, and A3 hereto. Finding 4a.8): After Tax Values As a result of the foregoing changes, which flow through to the after Tax Cash Flow spreadsheets (Assessor's Supplemental Reports, Table V, and page 55 of Exhibits A i, A.2, and A3 hereto), the elements of cash flow and the resulting after tax present values and adjusted present values change from those sheen on the Assessor's Supplemental Reports, Table V, to these shown on page 5 of Exhibits Al, A2, and A3 hereto. Finding 4a.9): Fre Tac Values The standard in the industry is for prospective purchasers of refineries to do their income approach discounted cash lova analyses on ars after tax basis. However, for California property tax valuation purposes, Rule 8(c ) ,d — 18 -rM:-jU- * l Uh 11 :41 COUNTY COUNSEL MA WJ, b b rl 84610'18 P, contemplates pre-tax income approach values. The income stream rust therefore be converted to pre tat by removing the impact of all taxes. As a result of the foregoing changes, which flow through to the Pre Tax Cash Flow spreadsheets (A,ssessoes Supplemental Deports, Table Vill, and page a of Exhibits Al, A2, and A3 hereto), the elerrrents of cash flow and the resulting pre tax present values and adjusted present values change from those shown on the Assessor's Supplemental Reports, Table Vill, to those shown on page 3 of Exhibits Al, A2, and A3 hereto, It is the Pre Tax Cash Flow Adjusted present Values of page 3 of Exhibits Al, A2, and AS hereto that support the Decision Values shown at the beginning of these findings. (See Footnote 2, above.) Finding 4a.10). Calculations of new gross refining margins n Page g of E ibits Al, A2, and AS hereto show the calculation of gross margins (in dollars per year) by extending the barrels per day of each item of charge and yield times 355 days per year tunes the price (iris dollars per barrel)for the item. The page g calculations reflect the changes noted in the prdvious findings. Cgm ut on proposedin an . g The new elements of cash flow,pre tax present values and adjusted present values page b of Exhibits Al,A.2 and A3 are completely different fim these presented at the hearing ('able VM in Exhibits 40,41 and 42). Reliance by the Bayard upon such evidence would constitute the use of evidence outside the hearing record and beyond the evidence presented at the hearmg. For that reason,UNOCAL vehemently objects to this language. If the Board accepts the inforrnaation on page 8 of Exhibits Al,A.2 and A3, it will violate UNOCAL's due process hearing rights, as more fully explained inOCAL's general comments on the proposed findings. The new gross refining margin calculations on page 9 of Exhibits Al, A2 and.A3 present entirely neer information which was not presented at the Beard hearing. Reliance by the Board upon such evidence would constitute the use of evidence outside the hearing record and beyond the evidence presented at the hearing. For that reason,I✓ OCAL vehemently objects to this information. If the Board accepts the information on page 9 of Exhibits Al, A.2 and A.3, it will violate UNOCAL's due process hearing ruts,as more fully explained in I.1'IOCAL's general comments on the proposed findings, 19 Comments on Wi sed finding 4a.1 1) ( ge 19 hotto J> Permits or.franchises and assembled workforce are intangible assets which is not subject to property taxation under California law. (,deeo o tv oy. Orange yQmugqjaqUUty Assessment A egg1s Board(1993) 13.Cal.App.4th 5224 at 533 Qor unications Corp. vunty of Alarraeda (1994) 26 Cal.App.4th 992 at 1007). These items must not be included in the taxable value of the subject refinery. Rev. &Tax. Code section 110(e) and Roel riz y. Q=e `o do not support the assertion that the value of"start up" intangibles is subject to property taxation. The cited authorities only state that the value of intangibles can be"reflected" in the taxable value of the property. No definitive meaning for the tea "reflected" as used this context has ever beep.provided by the Legislature or the courts. However, Section*110 does indicate that intangibles related directly to real property, such as zoning,are taxable. Finding 4a.1,1): The Assessor's adjustment for intangibles is accepted by this Board. A necessary assumption underlying the income approach is that the property is valued in its; income producing state. (See Rule 8.)To the extent that intangibles ,such as operating permits and labor are necessary for a property to be pied into income producing operation, the value of such "start-ups intangibles (eg, the costs of obtaining permits and assembling a workforce) thus should be included as ars inseparable pert of the taxable income approach value. In addition to Mart yap intangible value, there are additional elements of intangible value, such as trademarks, logos/names, good4 1, and marketing, which are a part of the overall value of the income producing business enterprise or going concern. (see The Appraisal of Real Estate, [The Appraisal Institute, `l t�' fid. 19961, pp. 6" 53., Although intangibles are generally not taxable in California, the value of start up intangibles is'taxable as it Is necessarily including or reflected in the value of taxable tangible property that is in operation produclin ncome. (see R+TC sec. i 10(a), Rhoerrt v Orange County[1948] 32 C2d 280, 285.) However, while start up intangible value shouid be included in a California -k-3U-UB- 'l'l�E -'47 COUNTY :'gJNSET r FAX Ob 61" '346 r 076 8 07 property tax valuation, any increment of going concern or business value beyond the value attributable to start up intangibles should not be included. (R+TC Sec. II0(d),(1).) The pricing of the Assessor's income approach valuation was based on spot prier which .rnaricet pries available to anyone and thus inherently avoid including any amount for the intangibles of logos, name recognition, goodwill, superior management, etc. speciflc.to € vocal. Further, the Assessor's• income approach was based throughout on the concept of projecting income and expenses that any reasonable potential purchaser would expect when operating the property. Thus, the income streams projected by the Assessor do not depend upon superior management, logos, name recognition, goodwill, etc. but rather are the income streams which any prospective purchaser could expect to obtain. Accordingly, the non-taxable elements of going concern or business enterprise vara are excluded from the Assessor's income approach. Notwithstanding the forgoing, some argue that the value of an assembled workforce is a part of the going concern value which should not tea taxable in California. Because of this argument, the Assessor has rade an ad;ustment for intangibles which reduces the discounted cash*low value: by "15,100..000. (See page 8 of Exs. Al, A2 and A3 hereto.) This adjustment is larger than Unocal's intangibles adjustment, and reflects largely the intangible value contr`abuled by the world'orce (labor and management) for the refinery. Thus, in order to eliminate the argument that some element of intangible value has been Included contrary to California law, a $15,000,000 deduction is made for the intangible costs of labor (operating�workforce and management), operating permits, and a,-,y elements of business enterp6sefgcing concern valve that may arguably remain in the income .ream. ,Comm-en,Comm-enti can Proayosed Eind 4a.1 1 -e a Going concern or business value are not the only intangible assets which may not be included in the value of taxable property. All intangible assets of real property not directly related to real property are nontaxable. (rev. and Tax. Code §§ 110(d)(3),( � 2L2(c).) The Assessor's income approach methodology results in a value for the entire business enterprise,which necessarily includes intangible assets. Consequently, some deduction must be taken for intangible assets. 2 Explanation and additional findings: As demonstrated in Findings I and 2, reliable comparable sales do not exist for the subject refinery. Because of this, one cannot develop a rate from the market by use of the following formula: Market derived rate=net income steam f adjusted sales price of comparable property Further, even IF there were one or even two arguably comparable sales, a reliable rate likely could not be developed. To be reliable, such a rate should reflect a more meaningful number of comparable sales transactions and such does not even arguably exist in the present case. In.addition, to properly determine the adjusted sales prices of comparable properties one would need, at a minimum, sufficient information to-allow a propef allocation of the amount paid for a refinery out of the total bmount paid for all assets included in the transaction. Such information usually is very difficult to obtain a and, even if available, often is not validbecause the accounting is dame for income tax or other purposes and does not truly reflect the value of the refinery. Even IF such information were available, to properly determine a market derived rate one would have to know the net income that the purchaser projected in order to solve for the rate, as shown by the above noted equation. Such information is often considered very sensitive and not available to those who would like to use it to derive a rate. The alternative recognized by Rule 8(g) is the weighted average cost of capital ( ACC) or"band of investment" rate. This Board finds such a rate methodology to be the proper way to determine the rate in the present case. There is no reason for this discussion because neither party derived its discount rate from actual saes—both parties used the"band of investment"method. 21 .o on or'f ped Finding h.9 a The reference to"off-balance sheet king"is inappropriate because there was no data or evidence presented on this issue,and this is not normally adjusted for in financial analyses. The reference to preferred stock is inappropriate because it is a form of debt,not equity. Dr.LF " s testimony showed that theAssessor's vital structure was incorrectly determined and that rhe rates for at least two of the companies relied upon by the Assessor were close to the debtlequity ratio employed by UNOCAL. (See Hewing Exhibit .) OCA12s debt rate was purposely based on"book"debt,but because companies tend to keep their debt coasts at market,there was littla difference between this book debt and market debt. It is inappropriate to include short-term debt;only lost;-terra debt should be included. ® This is a-russtatement. Equity must be at market value. no Assessor did not use a market value equity rate, Capital Structure The debt used is the book value of long terra debt and short term debt (curre t'maturities of long term debt and short term notes) for the ye ded the December 31 prior to lien date. Off balance sheet financing, I ch as long term non-cancellable operating leases are also to be recognized.. v equity used is the book value of equity, including preferred stock, r the year ended the December 31 prior to lien date. The percentage debt and equity used represents the structure of the financing that the market companies would have anticipated for the purchase of the refinery on the lien (valuation) dates in question (3/1194, 3/1195, and 3/1196). That is 46.957% debt and 53.943 % equity for 1996. (See Ex. 33.) Determined in the same manner, the capital structure for 1995 was 48.785% debt and 51.215% equity. Determined in the same manner, the capital stnicture for 1994 was 52.235% debt and 47.7605% equity. he foregoing reflects the Assessor's debt structure calculations, which were m eliable than Unocal's (inter glia) because 1) Unocal used market value equity bu failed to adjust debt to market value, 2) Unocal failed to include short-term debt, 3) Unocal failed to properly adjust for preferred suck, and 4) Unocal failed to appropriately adjust to include off balance sheet financing, such as long-term noon-cancellable operating leases. Unocal's failures resulted in its percentage of equity being too high. The Assessor made a comparison of Unocal's capita! strucl ,e to the Assessoes capital structure by correcting Unocal's near value debt/equity ratios to account for items 1) though 4) above. i h' ornparison indicates that the Assessors book value debt/equity ratio very fair, and indeed may somewhat overstate the proportion of equity financing (which would favor Unocal). This Board accepts the Assessor's book value debt./equity ratio. �1) CQ eats an Pro dingy W)ftec 23S boff9m); The 5-year potential financial investment duration is unrealistic. Lnvestors have a longer terms horizon for refiery investments. Consequently,the assessor's use of a risk free rate and risk premiums based on a 4 to 4 lz year investment duration was inappropriate. Duration Duration is the weighted average of the present values of a series of cash flows received over time. Duration thus is a measurement that accounts both for timing and amount of projected cash flows. For purposes of developing a CAPM cost of equity, the financial durations should roughly match for 1) the instruments upon which the risk free rate is based (eg, the Assessors use of 5 year treasuries (see belovrjl, 2) the instruments upon which the risk premium is based (e , the Assessors use of the lbottsen risk premium for 5 year treasuries, rather than 20 year treasuries rsee below]), and 3} the investment in the Unocal refinery. The Assessor employed this concept, basing his risk free and risk premium rates on instruments that approximate the duration of the refinery investment. The Assessor determined the financial duration.of the potential.purchasers` investment in the Unocal Rodeo refinery to be roughly five years, ie., about half the 10 year projected holding period upon which'the income stream and valuation is based. The durations for investments in,the instruments upon which the Assessor's risk free rate and risk premiums are based were between four and four and a half years. Thus, there is an adequate match of durations to support the Assessor's CAPM cost of equity. o — 23 Unocal did not employ this analysis, and its durations were significantly mismatched, with its risk free rate being based on mid term instriments and the risk premium being based on long term, (20 year) instruments. This methodological problem raises significant doubt about Unocal's CAPM cost of equity. Risk Free Rate The risk free rates of the,assessor were based on the yields for five year (short terra) US treasury notes, which resulted in rates of 5.20%, 7.81% and 5.38% for 1994, 1995 and 1996, respectively. (See Ex. 33.) The risk free rates for five year notes are used because 1) the durations for the investment in question, the risk free rate and the risk premium all should approximately match, 2) lbbotsen risk premiums are used, 3) lbbotsen provides risk premiums only for one month, five year and twenty year debt instruments, and 4) the term for which Ibbotsen, provides risk premiums that approximate the duration of the refinery investment is 5 years. Unocal failed to use risk free rates that matched the duration of the refinery investment. For instance, Unocal used a rate close to a IQ year treasury instrument rate as its risk free rate for 1996. Risk Premium The Assessor used lbbotsen risk premiums based on five year treasury instruments: the difference between 1) the average return on large company stocks over the period 1926 to current and 2) the return on intermediate treasuries (5 year instruments). The duration was adequately matched for the investment in the refinery, for the risk free .A rate and for the risk premium. The resulting risk premiums are 6.995%, 6.904%, and 7.1% for 1994, 1995, and 1996 respectively. (See Ex. 33.) Q=imt or€=Rig d Eindt 4b. )132),..( )a This is a misstatement. UNOCA-L s appraiser used a 10 year terra which approximates the term ofL`NOCA .,'s discounted cash f?ow. Also, U-NOCAL used a ten-year note for its risk free rate(,gee Hearing Exhibit J,page 2). Incorrect. UNOCAL's 10 year risk flee rate approximates the term of its discounted cash flaw. TJNOC ,'s risk prerrr tits for all three years was 7.0%,virtually the same as the Assessor's risk premium rates. �. 24 greater percentage than the market as a whole In the CAPM formula, a beta is applied to (multiplied by) the risk premium to reflect the nor:- diversif€able risk for the investment in question. The Assessor calculated betas for the four companies that were the prospective purchasers of the refinery, using 60 months (five years) of data on returns for the overall stock market and on the four companies. The betas used by the Assessor for 1994, 1995 and 1996 were .943, .951, and 1.029'respectively. (See Ex. 33.) The assessor's betas are more favorable to Unocal than Unocal's betas. The Board finds the assessor's betas sound and uses those rather than Unocal's. Unocal- 'Build Up Method" In addition to the CaPM methodology discussed above, Unocal used a "build up" methodology to get an alternative cost of equity. The Board finds this method lacks validity because (inter alfa) 1) it mismatches BBB bond yields for the risk free rate while using AAA yields for the risk premium, 2) it inappropriately includes yields associated with callable bonds, 3) it uses yield to Maturity instead of expected return, 4) it adds an unsupportable I% "non-diversification" premium to an asset likely to be purchased by a company owned by large institutions and 5) it fails to make appropriate adjustments for risk (other than beginning with a corporate bond yield). Each of these errors is biased towards a higher cost of equity. Comments on imposed Eindig- 4b.&M) (Rage ,te There was never any evidence supplied by the Assessor as to the source of its betas. The Assessor's witness simply testified that the beta information had been supplied by another party who was not made available at the hearing. The validity of the buildup methal was confu ed by Dr.Udinssky,who said that he regularly used the method in his work. The method was supported by the appraisal text ost o it 1 authored by Dr. Shannon Pratt,a recognized authority in the appraisal eld. (See Hearing Exhibit GG.) q- 2 26 ® The use of these companies assumes that a buyer of the refinery would have multiple asset& This assumption is unrealistic because the refinery must be valued as a single stand-alone asset,without any other ref-ineries or market°ina assets. Under these circumstances, and as.I OCAI, s appraiser testified, the appropriate debt cast would be that of a BBB industrial baud because of the additional risk which a single stand-alone refinery would face. UNOCAL's use of 15 year bonds was appropriate because the anticipated holding period was at least 12 years, and the debt cast roust be for a long term instn=ent. 3)) Cost of Debt The Assessor used a cost of debt that was based upon weighted average band yields and maturities for intermediate maturity bonds, determined at the end of the calendar year prig to the valuation date, for the four companies that were potential purchasers of the refinery. For the 1994, 1995, and 1996 valuations, this resulted in costs of debt of 6.46%, 8.49% and 6.79% respectively. (See Ex.'33.) Unocal used an average yield for 15 year maturity bonds, but this can be expected to give results that are too high due to the call option features of many longer maturity bonds. The Board finds that Unocal's cost of debt is high. The Board finds that the Assessor's cosi of debt is sound and uses the Assessor's figures. �� ,� 25 4)) Computation of after tax WACC (Secs Ex. 33); As noted above, the Board has found several problems with Unocal's rate development; the Board finds the components of Uno l`s rate, and its final rate, too high. The Board accepts the Assessor's rate methodology, including all components thereof. Using the Assessor's rate data as explained above, the Board computes the after tax WACC rate as follows: WACC Rete = after tax cost of debt X % debt PLUS cost of equity X % equina ACC fete = ((1-.4105.) x .0679)x .46957 + (.1266566 x .53043) m (.049027 X .46957) + ( .1268568 X .53043) Final 1996 after tax WACC rete (without property tax component) 6.609% Determined in the same mangier, the final rate for 1995 = 9.6957% Determined in the same manner, the final rate for 1994 = 7.6237% Cammentignar-aumd Finding 4b Z )4) (Page Win): Dr.Udinsky testified that the discount rates for commercial real estate in Berkeley were in this age and that rates for refineries good have to be significantly higher beew se of the additional risk refineries face. +1-03% 15.63% final 1996 pre tax discount rata (Sea Ex. 33.) This is the rate used in the pre tae DCF of page 3 of Exhibit A3 (1996) hereto. Determined in the same manner, the final rate for 1995 00 This is the rate used in the pre tax DCF of page 3 of Exhibit A2 (1995) . hereto. Determined in the same manner, the final'rate for 1994 This is the rate used in the pre,tax DCF of page 3hfra Exhibit Al (1994) hereto. Bated: April s 1999 Assessment Appeals Board By: J. Daniel Dunlap, Chair C: unocalftndsngs.doc-3f26199 Lrl 27