Enbridge Energy, Limited Partnership v. Commissioner of Revenue

• Decision Date: 09 March 2021
• Docket Number: 8771-R,8579-R,8631-R
• Parties: Enbridge Energy, Limited Partnership, Appellant-Petitioner, v. Commissioner of Revenue, Appellee-Respondent.
• Court: Tax Court of Minnesota

Enbridge Energy, Limited Partnership, Appellant-Petitioner,
v.
Commissioner of Revenue, Appellee-Respondent.

Nos. 8579-R, 8631-R, 8771-R

Tax Court of Minnesota, Regular Division, Ramsey County

March 9, 2021

AMENDED FINDINGS OF FACT, CONCLUSIONS OF LAW, AND ORDER

These consolidated matters came before The Honorable Jane N. Bowman, Judge of the Minnesota Tax Court, on Enbridge Energy, Limited Partnership's motion for amended findings of fact, conclusions of law, and order for judgment.

Paul B. Kilgore, Fryberger, Buchanan, Smith & Frederick, P.A., represents appellant-petitioner Enbridge Energy, Limited Partnership.

Jennifer A. Kitchak, Assistant Minnesota Attorney General, represents appellee-respondent Commissioner of Revenue.

At issue is the value as of January 2, 2012, January 2, 2013, and January 2, 2014, of the Minnesota portion of Enbridge Energy, Limited Partnership's (EELP) crude oil pipeline system. The court, having reviewed and considered the evidence adduced at trial^[1] and the arguments of counsel, and upon all of the files, records, and proceedings herein, amends and supersedes its previous findings of fact, conclusions of law, and order for judgment as follows:

FINDINGS OF FACT

1. Appellant-petitioner Enbridge Energy, Limited Partnership, a Delaware limited partnership, has sufficient interest in the subject property to maintain this petition; all statutory and jurisdictional requirements have been fulfilled; and the court has jurisdiction over the subject matter of the action and the parties thereto.

2. The subject property is the Minnesota portion of the Lakehead system, an interstate petroleum pipeline that spans approximately 1, 900 miles across the United States and Canada. In Minnesota, portions of the Lakehead system are located in Aitkin, Beltrami, Carlton, Cass, Clearwater, Hubbard, Itasca, Kittson, Marshall, Pennington, Polk, Red Lake, and St. Louis Counties.

3. EELP is controlled by Enbridge Energy Partners, L.P., a master limited partnership whose partnership units are traded on the New York Stock Exchange. In addition to EELP, Enbridge Energy Partners controls entities that own pipelines and related facilities in other parts of the country, including Enbridge Pipelines (North Dakota), LLC; Enbridge Pipelines (Bakken), LLC; and Enbridge Pipelines (Ozark), LLC. The ultimate parent of both EELP and Enbridge Energy Partners is Enbridge, Inc., which is also publicly traded on the New York Stock Exchange.

4. The Commissioner determined the market value of EELP's entire pipeline operating system to be $3, 751, 118, 693 as of January 2, 2012.

5. The market value of EELP's entire pipeline operating system as of January 2, 2012, was $3, 199, 718, 866, of which $985, 743, 790 is attributable to Minnesota.

6. The Commissioner determined the market value of EELP's entire pipeline operating system to be $4, 180, 770, 714 as of January 2, 2013.

7. The market value of EELP's entire pipeline operating system as of January 2, 2013, was $3, 216, 940, 619, of which $915, 949, 852 attributable to Minnesota.

8. The Commissioner determined the market value of EELP's entire pipeline operating system to be $5, 605, 458, 900 as of January 2, 2014.

9. The market value of EELP's entire pipeline operating system as of January 2, 2014, was $3, 501, 716, 925, of which $892, 587, 644 attributable to Minnesota.

CONCLUSIONS OF LAW

1. The highest and best use of the subject property as of January 2, 2012; January 2, 2013; and January 2, 2014, was as a portion of an interstate petroleum pipeline.

2. The Commissioner waived the prima facie validity of her January 2, 2012; January 2, 2013; and January 2, 2014 assessments before trial.

3. The Commissioner overstated the system unit-value of EELP's pipeline operating system as of January 2, 2012.

4. The Commissioner overstated the system unit-value of EELP's pipeline operating system as of January 2, 2013.

5. The Commissioner overstated the system unit-value of EELP's pipeline operating system as of January 2, 2014.

ORDER

1. The Commissioner shall reduce the system unit-value of EELP's pipeline operating system as of January 2, 2012, to $3, 199, 718, 866, and shall adjust the value attributable to Minnesota to $985, 743, 790.

2. The Commissioner shall reduce the system unit-value of EELP's pipeline operating system as of January 2, 2013, to $3, 216, 940, 619, and shall adjust the value attributable to Minnesota to $915, 949, 852.

3. The Commissioner shall reduce the system unit-value of EELP's pipeline operating system as of January 2, 2014, to $3, 501, 716, 925, and shall adjust the value attributable to Minnesota to $892, 587, 644.

4. The Commissioner shall calculate the value of EELP's property "which is non-formula-assessed or which is exempt from ad valorem tax [and] is deducted from the Minnesota portion of the unit value" under Minn. R. 8100.0500 to arrive at EELP's taxable value, and shall file and serve that calculation no later than April 9, 2021.

5. No later than 15 days after service of the Commissioner's calculation, EELP may file and serve objections.

6. No later than 15 days after service of EELP's objections, the Commissioner may file and serve a response, if any.

7. If EELP files no objection to the Commissioner's calculation, the court will promptly file a final order for judgment. If EELP does file objections, the court will determine the appropriate deduction amount and EELP's taxable value, and then file a final order for judgment.

IT IS SO ORDERED.

MEMORANDUM

Jane N. Bowman, Judge

Appellant-petitioner Enbridge Energy, Limited Partnership owns and operates an interstate petroleum pipeline system in Minnesota and throughout the upper Midwest and elsewhere. This court previously concluded the Commissioner of Revenue overvalued the EELP pipeline system as of all assessment dates. Enbridge Energy, Ltd. P'ship v. Comm'r of Revenue, No. 8579-R et al., 2019 WL 5995766, at *2 (Minn. T.C. Nov. 5, 2019). Upon EELP's motion for amended findings-and considering the supreme court's ruling in Enbridge Energy, Limited Partnership v. Comm'r of Revenue (Enbridge II), 945 N.W.2d 859 (Minn. 2020)-this court now considers the limited question of what weighting to assign the income and cost approaches to valuation.^[2]

I. Procedural History

At issue in these consolidated matters is the market value, as of January 2, 2012, January 2, 2013, and January 2, 2014, of the Minnesota portion of a common-carrier pipeline system (known as the Lakehead system) that transports mainly crude oil from Western Canada to refineries in the United States and eastern Canada. Enbridge Energy, 2019 WL 5995766, at *3. The Lakehead system spans approximately 1, 900 miles across the United States and Canada.^[3] Id. In Minnesota, portions of the Lakehead system are located in several northern counties. Id. at *1.

Trial occurred from October 3, 2017, through October 10, 2017. Id. at *8. The court was asked to consider the three main approaches to value-market, cost, and income. See id. at *13-48. The market indicator, or sales comparison approach, assumes, among other things, "that the value of property tends to be set by the cost of acquiring a substitute or alternative property of similar utility and desirability within a reasonable amount of time." Appraisal Institute, The Appraisal of Real Estate 352 (15th ed. 2020). "The cost factor to be considered in the utility valuation formula is the original cost less depreciation of the system plan, plus" other enumerated items. Minn. R. 8100.0300, subp. 3. Generally, the income approach "is a method used … to convert a single year's income expectancy into a value indication." Id. at 459.

A. The Tax Court's May 15, 2018 Decision

On May 15, 2018, this court issued its first Findings of Fact and Conclusions of Law in these matters, concluding the Commissioner overstated the market value of the Lakehead system as of each assessment date. Enbridge Energy, Ltd. P'ship v. Comm'r of Revenue, No. 8579-R et al., 2018 WL 2325404, at *2 (Minn. T.C. May 15, 2018). Relevant here, EELP's appraisal, authored by Tegarden & Associates, considered but did not use or give any weight to a sales comparison approach (based upon the stock-and-debt method), doubting this approach had "any validity at all in the appraisal process." ^[4] EELP's rebuttal expert, Dr. Hal Heaton, Professor of finance at Brigham Young University, ^[5] defended Tegarden's rejection of the sales comparison approach. Id. at *13. Although the Commissioner chose not to introduce evidence through an expert appraiser, id. at *7, the Commissioner likewise asked this court not to consider the sales comparison approach.^[6] Relying on EELP's experts' conclusion that the sales comparison approach was not reliable, along with the Commissioner's request not to consider the sales comparison approach, this court did "not determine the market value of EELP's operating property under the sales comparison approach." Id. at *13-14.

Although both parties encouraged the court to consider the cost approach to valuation, id. at *15, the court "decline[d] to reach a determination of value under the cost approach," id. at *23. In rejecting the cost approach, the court reasoned that: (1) EELP was not rate-regulated during the years at issue; and (2) the tax court was not bound by the cost approach as prescribed in Minnesota Rule 8100. Id. at *15-*23.

Having previously rejected the sales comparison and cost approaches, the court was thus left with the income approach. Id. at *42. This court concluded, under the facts in these matters, "that the revenues generated and expenses incurred by EELP amount to rental income" and found "the income approach to valuation appropriate." Id. at *23. This court concluded to a total unit value of the Lakehead system of $3, 595, 398, 000, $3, 292, 362, 000, and $3,...