Luminant Generation Company, LLC v. Somervell County Appraisal District: Day one

Travis M. Smith Managing Editor | @travis5mith
The opening day of Luminant Generation Company, LLC v. Somervell County Appraisal District was dominated by testimony made by Todd Filsinger, the appraiser hired by Luminant and EFH during its bankruptcy case.

GLEN ROSE – Opening statements and day one of testimony for Luminant Generation Company, LLC v. Somervell County Appraisal District took place on Monday, Feb. 15 inside the Somervell County Courthouse Annex with 18th District Court Judge John Neill presiding.

Opening statements began with Andrew J. Mytelka, on behalf of the SCAD, outlining the three appraised valuations of Comanche Peak Nuclear Power Plant located in Somervell County.

The Somervell County Appraisal District set the first valuation of $2,361,721,055 on Jan. 1, 2015 and is the original figure Luminant is disputing. The second – a total of $2,947,330,000 – was found to be the value of the property by an appraiser hired by SCAD, Michael Lane. The third totaled $949,121,000 and was produced by Luminant’s expert appraiser, Todd Filsinger.

The approximate $2.361 billion valuation is the only remaining issue left undisputed after both parties agreed to the $149 million valuation for fuel costs.

“The facts do not support their valuation and certainly not to cut it in half,” said Mytelka of Luminant’s figure that sits approximately $1.4 billion lower than the originally taxed value.

Exhibit 21, an internal Luminant document, could potentially determine the entire case on its own, Mytelka told the court during his opening statement.

The document shows that average price of energy has increased since 2011 and, according to Mytelka, that there is no reason or correlation for the property tax decrease.

Mytelka also said, that the document showed that “in 2014 [Luminant] claimed they were going to pay $30 million in property taxes and in 2015 they thought they were going to pay $31 million. They thought the property tax was going to increase from the $1.9 billion in 2014.”

Luminant’s lead attorney, Andrew Russell was brief and direct during his opportunity to openly address the court.

“I think once the court hears the testimony in this case that the court will find Mr. Filsinger’s valuation credible and, in turn, will find Mr. Lane’s valuation grossly inflated,” Russell said.

Three witnesses were called to the stand by Luminant’s legal team during Monday’s proceedings, but the plaintiff’s star witness was its appraiser, Todd Filsinger.

Todd Filsinger, appraiser

Filsinger is a registered professional engineer in the state of Colorado, a member of the American Society of Professional Appraisers, and began in the field of valuation in 1986.

According to Filsinger, he has completed “somewhere north of 150” property valuations of power plant units and “over 30” of those were nuclear plants.

To appraise a unit, Filsinger said he uses a hypothetical third party buyer to look at the market for electricity, the operating costs, the history of the market place and several other factors to determine how the third-party buyer would value the property if it were on the market.

“What you are trying to do is come up with a net cash flow,” Filsinger said. “You want to [determine] present value.”

In order to obtain the present value, appraisers use discounted cash flow analysis, a roughly seven-step formula that includes revenue, discounted rate, expenses, forecasted numbers and historical free cash flow.

The revenue is critical and the discounted rate is equally important to make certain the numbers being calculated are consistent, explained Filsinger in much greater detail.

“This is common practice and is well understood,” said Filsinger of the formula’s use in the industry.

However, when asked if appraisers are allowed to differ in their choice of formulas or forecasted numbers during Mytelka’s cross-examination, Filsinger agreed that he doesn’t “think that it is an exact science.”

One of the entities that provide these forecasted numbers is Ventyx.

Ventyx’s validity and Lane’s use of its numbers were the central issue for the majority of the afternoon session.

Twice a year, Ventyx, an ABB company, publishes a forecast of numbers related to the power market in Texas and around the globe – once in the spring and once in the fall. These forecasted numbers help determine the trend and projection of natural gas prices.

One of the largest issues Filsinger has with the Lane valuation, is the latter’s use of the Spring 2015 projections, which vary greatly from Ventyx’s fall projections a few short months later.

According to Filsinger, if Lane were to plug the Fall 2015 forecast into his formula the difference would result in approximately $1.8 billion delta.

Or in general terms, based on newer projections of natural gas prices, Filsinger said Lane’s approximate $2.9 billion valuation of Comanche Peak is, at a minimum, $1.8 billion too high.

Filsinger also stated that Lane’s report does not include an abundance of other factors that apply to the energy market place, especially those related to hydraulic fracturing. Because of this, the report utilizes a forecast of numbers that show a sharp uptick in the coming years.

“I believe that just taking a report and pulling a forecast out of it [is not proper],” Filsinger said, “you have to do your diligence before using the numbers in a report to forecast.”

Lane used a 73-percent debt and 27-percent revenue in his valuation, which Filsinger said is inappropriate. He then explained that a valuation using a 40-to-50 percent debt is more appropriate when determining the valuation of a nuclear plant in a market-driven economy, such as Texas.

Filsinger continued by explaining if 50-percent debt is used in place of Lane’s original 73 percent, the latter’s valuation drops to roughly $2.011 billion. That number drops even further – approximately $300 million – if 46-percent debt is used, according to Filsinger.

Economic risks that could potentially determine the longevity of a plant greatly factor into an appraisal, according to Filsinger. For example, wind energy, especially in the quantity Texas is able to produce, puts a “great deal of pressure on other energy producers,” Filsinger explained.

“When you look at power plants, the income approach, generally, is the driving factor,” said Filsinger.

During Mytelka’s cross-examination, it was brought to the court that neither Luminant nor Energy Financial Holdings hired Filsinger for the sole purpose of serving as an appraiser of Comanche Peak for current litigation.

Filsinger Energy Partners (FEP), which is Filsinger’s consulting firm that advises entities in the energy space and is currently working on six nuclear power valuations, was originally contracted during the company’s bankruptcy case.

According to Mytelka and confirmed by Filsinger, FEP submitted bills totaling over $19 million dollars and another $1 million in expenses to EFH and Luminant while working on its bankruptcy case. The total was over 90 percent of Filsinger’s reported income for the 2015 fiscal year, according to Mytelka.

FEP also advised Luminant on its metrics for a bonus program for its executives, but Filsinger claimed that his company “did not advocate anything. We are advisors, not advocates.”

When asked by Mytelka if it was true that he had “been hired by other companies to give low numbers in a tax case,” Filsinger relied with an emphatic, “No.”

“I believe the value is as it is stated in my report,” Filsinger affirmed.

Filsinger will return to the stand to begin day two of proceedings on Tuesday morning at 9 a.m.

Shannon Carter, EFH

Luminant’s first witness was Shannon Carter, a non-income tax manager for EFH. Carter confirmed that three Luminant Generation Company accounts being disputed in the case have identification numbers of T11918, T17325 and T17326.

Carter also confirmed that the account with ID No. T49817 – valued at $140 million – is the fuel account that is no longer in dispute.

“We believe the values were too high,” said Carter on why Luminant chose to contest the property tax value and file the lawsuit on Aug. 24, 2015.

According to Carter, Luminant “paid on the undisputed value of this property using Mr. Filsinger’s report” a few days prior to the Jan. 31 due date.

She also noted that pollution control equipment can be exempt from property taxes if the Texas Committee on Environmental Quality (TCEQ) deems the equipment to fit pollution control standards. These exemptions are not something that Luminant would have to re-file for and are already on file with SCAD.

Robert Baker, Jr., Luminant

Robert Baker, Jr., senior director of planning and analysis for Luminant, was the plaintiff’s second witness and has been with the energy company for seven years. He previously served for four years as the finance director at Comanche Peak.

Baker’s testimony was centered around confirming facts and figures pertaining to Comanche Peak, such as construction beginning in the 1970’s, first unit going online in 1990, the energy capacity for the two plants and numbers related to the energy market.

“In a regulated market, the rates are generally agreed upon by the state,” Baker said. “As Texas has entered into a merchant or market design, we have been able to charge less for our energy as prices have gone down.”

Baker also noted the growth of solar and wind energy for the drop in nuclear energy value.

According to Baker, Comanche Peak’s licenses with the NRC are set to expire in 2030 & 2033, respectively, and, as of right now, there is no forecast that would “make it worth while” for the plant to renew those licenses. Despite original documentation that states the decommissioning to begin in 2050 and 2053, Baker stated that Luminant still has the option to nonrenewal at the end of the current licenses.

Luminant officials released a response to the Comanche Peak property tax litigation prior to Monday’s afternoon session.

“For this trial, Luminant’s goal remains consistent with when the valuation process began in early 2015 fro Comanche Peak Nuclear Power Plant: We want to pay our fair share,” the statement reads. “We believe the plant’s taxable value has been driven down by market factors, including sharply wholesale power prices. Turning to the courts to resolve the valuation issue, a process prescribed in state law and available to any taxpayer, will ultimately determine the proper value of CPNPP.”

The bench trial, which calls for Neill to serve as judge and jury, is expected to last into midweek and does not require an immediate decision. According to several legal databases, the average length for a judge’s decision in a bench trial varies from 10 to 30 days.

*A correction was made on Tuesday, Feb. 16 at 6:39 p.m. to Shannon Carter's testimony in regards to when Luminant paid Somervell County on the undisputed amount. Court records shows that Carter said the payment was made "a few days" prior, not 50 days as previously reported.