ADOPTED RULES An agency may take final action on a section 30 days after a proposal has been published in the Texas Register. The section becomes effective 20 days after the agency files the correct document with the Texas Register, unless a later date is specified or unless a federal statute or regulation requires implementation of the action on shorter notice. If an agency adopts the section without any changes to the proposed text, only the preamble of the notice and statement of legal authority will be published. If an agency adopts the section with changes to the proposed text, the proposal will be republished with the changes. TITLE 1. ADMINISTRATION Part XII. Advisory Commission on State Emergency Communications Chapter 251. Regional Plans-Standards 1 TAC sec.251.3 The Advisory Commission on State Emergency Communications adopts an amendment to sec.251.3, without changes to the proposed text as published in the December 10, 1993, issue of the Texas Register (18 TexReg 9153). The section provides procedures for the utilization of funds toward addressing projects, which allow for the Automatic Location Identifier (ALI) feature on emergency communication systems. It enables improved effectiveness of 9-1-1 call delivery. The section serves as a guide for the distribution of addressing funds to local governments for the purpose of conducting addressing assignment projects. Of the 18 entities responding to proposed rule, the Coastal Bend Council of Governments and 14 member local governments in its region asked for extension of time to consider rules; North Central Texas Council of Governments expressed concern about requirements to accomplish 9-1-1 system upgrades; Deep East Texas Council of Governments comments that capping of addressing costs be permitted on a case-by-case consideration rather than retroactively to currently approved plans, and the Houston-Galveston Area Council recommends that each recipient county establish its own budget and implementation strategy based on its needs and resources and to avoid establishing line item maximum costs. The Deep East Texas Council of Governments commented in favor of adoption. The following commented against adoption: North Central Texas Council of Governments; Houston-Galveston Area Council; Coastal Bend Council of Governments; Corpus Christi Police Department; Beeville Police Department; Bishop Police Department; Mathis Police Department; Alice Police Department; Port Aransas Police Department; Nueces County Sheriff's Office; Jim Wells County Sheriff's Office; Bee County Sheriff's Office; San Patricio County Sheriff's Office; Live Oak County Sheriff's Office; Kleberg County Sheriff's Office; Refugio County Sheriff's Office; and Brooks County Sheriff's Office. The ACSEC disagrees with the Coastal Bend Council of Governments, Corpus Christi Police Department, Beeville Police Department, Bishop Police Department, Mathis Police Department, Alice Police Department, Port Aransas Police Department, Nueces County Sheriff's Office, Jim Wells County Sheriff's Office, Bee County Sheriff's Office, San Patricio County Sheriff's Office, Live Oak County Sheriff's Office, Kleberg County Sheriff's Office, Refugio County Sheriff's Office, and Brooks County Sheriff's Office in requesting additional review time since approximately five months had already been provided for initial review and comment by the public; and the ACSEC disagrees with the Houston-Galveston Area Council where it suggests allowing counties to figure out their own budgets with overall amounts; instead, the ACSEC chose to approve addressing plans by component costs. The amendment is adopted under Health and Safety Code, sec.sec.771.055- 771.057, 771.072, which provides the Advisory Commission on State Emergency Communications with the authority to develop and amend regional plans for the establishment and operation of efficient 9-1-1 emergency service that meet Commission standards and procedures. This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be within the agency's authority to adopt. Issued in Austin, Texas, on March 10, 1994. TRD-9437511 Mary A. Boyd Executive Director Advisory Commission on State Emergency Communications Earliest possible date of adoption: April 1, 1994 For further information, please call: (512) 327-1911 TITLE 4. AGRICULTURE Part I. Texas Department of Agriculture Chapter 19. Seed Division Texas Seed Law 4 TAC sec.19.8, sec.19.9 The Texas Department of Agriculture (the department) adopts amendments to sec.19.8 and sec.19.9, concerning administration of the Texas Seed Law, without changes to the proposed text as published in the November 26, 1993, issue of the Texas Register (18 TexReg 8738). The amendment to sec.19.8 clarifies language in the section in order to be consistent with language in sec.19.5 and sec.19.6 with respect to the use of an expiration date. The amendment to sec.19.9 provides for a penalty for late filing of a quarterly report of agricultural seed sales in Texas, in accordance with statutory changes made by the 73rd Legislature, 1993. The amendment will assist the department in recovering the cost of processing late filings. The amendment to sec.19.8 clarifies the fact that hermetically-sealed containers of agricultural and vegetable seed can be labeled with an expiration date statement in lieu of a "date of test" or "year packed for" statement. The amendment to sec.19.9 increases the existing penalty for late filing of a quarterly report of agricultural seed sales in Texas from $10 to $25. The Texas Seed Trade Association commented generally in favor of the amendments. The amendments are adopted under the Texas Agriculture Code, sec.61.002, which provides the Texas Department of Agriculture with the authority to adopt rules as necessary for the efficient enforcement of Chapter 61, and sec.61.011, which provides the department with the authority to assess a penalty for the late filing of certain quarterly reports. This agency hereby certifies that the rule as adopted has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on March 10, 1994. TRD-9437407 Dolores Alvarado Hibbs Chief Administrative Law Judge Texas Department of Agriculture Effective date: March 31, 1994 Proposal publication date: November 26, 1993 For further information, please call: (512) 463-7583 Chapter 29. Texas Agricultural Diversification Program: Matching Grants 4 TAC sec.29.3 The Texas Department of Agriculture (the department) adopts the repeal of sec.29.3, concerning the board of directors of the Agricultural Diversification Program, without changes to the proposed text as published in the January 25, 1994, issue of the Texas Register (19 TexReg 389). The repeal is adopted to ensure consistency with recent statutory changes. The repeal deletes references to the board of directors, which was abolished by the Legislature in the last legislative session. No comments were received regarding adoption of the repeal. The repeal is adopted under the Texas Agriculture Code, sec.12.016, which provides the department with general rule-making authority, and sec.44.002 of the Code, which provides that the commissioner shall create an agricultural diversification program. This agency hereby certifies that the rule as adopted has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on March 11, 1994. TRD-9437479 Dolores Alvarado Hibbs Chief Administrative Law Judge Texas Department of Agriculture Effective date: April 1, 1994 Proposal publication date: January 25, 1994 For further information, please call: (512) 463-7583 TITLE 10. COMMUNITY DEVELOPMENT Part I. Texas Department of Housing and Community Affairs Chapter 1. Administration Subchapter A. General Policies and Procedures 10 TAC sec.1.2 The Texas Department of Housing and Community Affairs (TDHCA) adopts an amendment to sec.1.2, without changes to the proposed text as published in the February 11, 1994, issue of the Texas Register (19 TexReg 1003). The amendments change the person by whom complains concerning TDHCA are received. Complaints concerning the Texas Community Development Program and the TDHCA's administration of the Community services Block Grant are governed by TDHCA's Block Grant Complaint System at sec.1.11 and sec.1.13. No comments were received concerning adoption of the rule. The amendment is adopted under Texas Government Code sec.2306.066, which provides the Texas Department of Housing and Community Affairs with the authority to develop procedures by which complaints are filed with the department. This agency hereby certifies that the rule as adopted has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on March 14, 1994. TRD-9437540 Henry Flores Executive Director Texas Department of Housing and Community Affairs Effective date: April 4, 1994 Proposal publication date: February 11, 1994 For further information, please call: (512) 475-3902 Subchapter B. Block Grants 10 TAC sec.1.13 The Texas Department of Housing and Community Affairs (TDHCA) adopts an amendment to sec.1.13, without changes to the proposed text as published in the February 11, 1994, issue of the Texas Register (19 TexReg 1003). The amendments change the person by whom complaints received about the Texas Community Development Program and TDHCA's administration of the Community Services Block Grant are received. Complaints concerning other matters that TDHCA has the authority to resolve are governed by the complaint system at 10 TAC sec.1.2. No comments were received concerning adoption of the rule. The amendment is adopted under Texas Government Code sec.2306.066 which provides the Texas Department of Housing and Community Affairs with the authority to develop procedures by which complaints are filed with the department. This agency hereby certifies that the rule as adopted has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on March 14, 1994. TRD-9437539 Henry Flores Executive Director Texas Department of Housing and Community Affairs Effective date: April 4, 1994 Proposal publication date: February 11, 1994 For further information, please call: (512) 475-3902 TITLE 22. EXAMINING BOARDS Part X. Texas Funeral Service Commission Chapter 203. Licensing and Enforcement-Specific Substantive Rules 22 TAC sec.203.13 The Texas Funeral Service Commission adopts an amendment to sec.203.13, without changes to the proposed text as published in the January 18, 1994, issue of the Texas Register (18 TexReg 337). The amendment ensures the proper training of mortuary students and that the public is protected during a disaster of major proportions. The section will function by allowing students who are currently enrolled in an accredited college of mortuary science to obtain further experience by working in a licensed establishment under the direct supervision of a licensee. In the event of a major disaster, the Executive Director can authorize embalmers licensed in another state to temporarily assist in this state so long as they work under the general supervision of a Texas licensee. No comments were received regarding adoption of the rule. The amendment is adopted under Texas Civil Statutes, Article 4582b, sec.5 which provide the Texas Funeral Service Commission with the authority to adopt rules and prescribe forms necessary to administer the act. This agency hereby certifies that the rule as adopted has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on March 11, 1994. TRD-9437527 Larry A. Farrow Executive Director Texas Funeral Service Commission Effective date: April 4, 1994 Proposal publication date: January 18, 1994 For further information, please call: (512) 834-9992 TITLE 34. PUBLIC FINANCE Part I. Comptroller of Public Accounts Chapter 9. Property Tax Administration Subchapter I. Validation Procedures 34 TAC sec.9.4031 The Comptroller of Public Accounts adopts new sec.9.4031, concerning the methods and procedures necessary to discount future income from the sale of oil or gas to present value, with changes to the proposed text as published in the January 11, 1994, issue of the Texas Register (18 TexReg 199). Section 9.4031 adopts these methods and procedures in the form of a manual entitled Manual for Discounting Oil and Gas Income. The new section is necessary because House Bill 925, 73rd Legislature, 1993, requires the comptroller to develop and distribute a manual for discounting oil and gas income to appraisal districts. The manual provides appraisal districts methods and procedures for discounting future income from the sale of oil and gas to present value. The manual explains the concept of discounting; the discounted cash flow equation; discounted cash flow appraisal; discount rate components; and three acceptable techniques for estimating a "discount rate" in the discounted cash flow method: market surveys, sales, and weighted average cost of capital. Several comments were received regarding adoption of the new section. One comment concerned the formula for converting an after-tax cost of equity to a pre-tax cost of equity, urging the comptroller to substitute the effective federal income tax rate for the statutory federal income tax rate in the formula. In response, the comptroller added language to subsection (j)(5)(E) on cost of equity, allowing substitution of the typical effective income tax rate for the statutory rate in certain situations. A second comment suggested that the comptroller change the discounted cash flow example in Appendix 1 because deducting property taxes from gross income produces a more accurate appraised value than increasing the discount rate by the total tax rate. In response, the comptroller added language in Appendix 1 stating that some appraisers treat property taxes as a deduction from gross income. A third comment stated that data sources used in the manual were too limited. The comptroller disagreed, and made no changes because the manual does not limit the appraiser to a particular source. The comptroller also made some minor, nonsubstantive changes to the text of the new section. The new section is adopted under the Tax Code, sec.23.175, which requires the comptroller to develop and distribute to each appraisal office appraisal manuals that specify methods and procedures to discount future income from the sale of oil and gas from the interest to present value. sec.9.4031. Manual for Discounting Oil and Gas Income. (a) The Comptroller of Public Accounts adopts a Manual for Discounting Oil and Gas Income, with text as follows. (b) Basis of the Manual for Discounting Oil and Gas Income. (1) Property Tax Code, sec.23.175, enacted by the 73rd Legislature, 1993, requires the comptroller's office to develop and distribute to each appraisal district an appraisal manual that specifies the methods and procedures to calculate the present value of oil and gas properties using discounted future income. (2) Section 23.175 also directs each appraisal district to use the specified methods and procedures. (c) Introduction. (1) This manual explains the concept of discounting, the discounted cash flow (DCF) equation, DCF appraisal and three acceptable techniques for estimating a "discount rate" in the DCF method. The numbers used in the calculations are for illustrative purposes only. (2) The three acceptable techniques for estimating discount rates are: (A) market surveys; (B) oil and gas sales analysis; and (C) weighted average cost of capital (WACC), also called "band of investment." (3) Together, these techniques provide a range of discount rates. The appraiser must estimate the risk for each oil or gas property to assign a discount rate from the discount rate range. (4) The appendices provide examples to illustrate DCF appraisal, the WACC estimating technique, a standard deviation analysis and a description of property specific risk factors. (d) Discounting. (1) Because investors prefer immediate cash returns over future cash returns, investors pay less for future cash flows -they "discount" them. The amount investors discount the future cash flows depends on the length of time until the cash is due, the amount of risk that the cash will not be tendered when due and the rate of return available from other comparably risky investments. This discounting procedure converts future income to present value usually using annual discount factors. The discount factor for each successive year declines to reflect the reduced value of revenue received in the future. The appraiser calculates the present worth of the forecast revenue stream by multiplying the projected net income (cash flow) for each year by the calculated discount factor for that year. These discount factors are derived from the discount rate (also known as the yield rate), and the process is known as discounted cash flow (DCF) analysis. (2) The International Association of Assessing Officers in Property Appraisal and Assessment Administration (1990) defines "discount rate" as: "The rate of return on investment; the rate an investor requires to discount future income to its present worth. It is made up of an interest rate and an equity yield rate. Theoretical factors considered in setting a discount rate are the safe rate earned from a completely riskless investment (this rate may reflect anticipated loss of purchasing power due to inflation) and compensation for risk, lack of liquidity, and investment management expenses. The discount rate is most often estimated by band-of-investment analysis or a sales comparison analysis that estimates typical internal rates of return." (3) The discount rate is a key variable in discounted cash flow analysis, making correct rate selection crucial. The market's expectations are critical when choosing a discount rate. According to the Appraisal of Real Estate by the Appraisal Institute (1992): "The selection of the yield discount rate is critical to DCF analysis. To select an appropriate rate an appraiser must verify and interpret the attitudes and expectations of market participants, including buyers, sellers, advisers, and brokers. Although the actual yield on an investment cannot be calculated until the investment is sold, an investor may set a target yield for the investment before or during ownership. Historical yield rates derived from comparable sales may be relevant, but they reflect past, not future, benefits in the mind of the investor and may not be reliable indicators of current yield. Therefore, the selection of yield rates for discounting cash flows should focus on the prospective or forecast yield rates anticipated by typical buyers and sellers of comparable investments. An appraiser can verify investor assumptions directly by interviewing the parties to comparable sales transactions or indirectly by estimating the income expectancy and likely reversion for a comparable property and deriving a prospective yield rate." (e) Discounted cash flow appraisal. (1) The DCF method is versatile and widely used to appraise income producing property. An appraiser using DCF first projects an anticipated net income for each year of the property's remaining economic life. Each annual cash flow is discounted to present value, and then all the present values are added to obtain the total market value of the real property interest being appraised. (2) The DCF equation is expressed as follows: [graphic] (3) To estimate the present value (PV), an estimate of the income (cash flow) to be received in each period is necessary. The number of periods, n, (usually years) used in the analysis is determined by the number of years that the mineral property is expected to produce a positive net income. (4) There are many variations on the DCF formula. The formulas vary based on the time the money is received, i.e., continuously, beginning of period, middle of period or end of period. The period may be continuous, daily, monthly, quarterly, biannual or annual. Many oil properties are evaluated using an annual mid-period discounting variation of the DCF formula. The appropriate present- worth factor for mid-year DCF analysis is: [graphic] (5) Appendix 1 illustrates how a discounted cash flow is calculated, using a mid-year factor, for a mineral property. (f) Discount rate components. (1) Components. The discount rate used in discounted cash flow analysis has several components. These include: (A) inflation rate; (B) risk-free component; (C) general risk premium; and (D) property-specific risk premium. (2) The inflation rate. The annual rate of price change for a basket of consumer goods. Inflation is normally measured by the Consumer Price Index for All Urban Consumers (CPI-U), calculated by the United States Bureau of Labor Statistics. The inflation rate is the most basic component of a discount rate. An investor's rate of return must equal the rate of inflation just to break even in real dollar terms. (3) The risk-free component. A return to compensate the investor for a loss of liquidity. This component can also be defined as the risk-free rate minus the inflation rate. The risk-free rate is made up of the inflation rate plus a return to reimburse the investor for a loss of liquidity and is measured by the yield to maturity on Federal government securities with a maturity period comparable to the investment under consideration (oil or gas reserves in this case). The market perceives these securities as risk-free for all practical purposes since they are issued by the United States government. (4) General risk premium. (A) A return to compensate the investor for assuming diversified company-wide risk. The weighted average cost of capital (WACC) minus the risk-free rate is the general risk premium. The WACC is measured by weighting the typical oil company debt and equity costs by the typical oil company debt and equity capital structure percentages, and then adding the weighted costs. If one were appraising companies, the WACC would be the discount rate, since it reflects the market's expected yields from the stock and debt of a company. Calculation of a WACC will be explained in more detail later in this manual. (B) For property tax purposes, appraisers estimate the value of individual mineral reserves, not the value of oil companies. Buyers of mineral reserves usually perceive these individual reserves as riskier than the stock and debt of an entire company. Companies can spread their risk over many individual mineral reserves and often over several kinds of assets (some of which are unrelated to the oil or gas business). This asset diversification reduces the company's risk and, as a result, the WACC derived from company financial data is usually lower than an individual producing property's discount rate. However, the WACC is always higher than the risk-free rate. This increase in the rate is a general risk premium to reward investors for assuming the diversified company-wide risk. (5) Property-specific risk premium. A return that compensates the investor for assuming the unique risks associated with a particular mineral producing property. The discount rate minus the WACC is the property-specific risk premium. Investors demand a premium above the WACC to compensate them for this individual property risk. For certain high-risk properties, this premium can be quite high. See subsection (k)(3) of this section (Appendix 4) for a list of property-specific risk factors. (6) Component summary. These discount rate components can be summarized: [graphic] (A) There are other ways to "build up" a discount rate. This method's advantage is that the first three components are quantifiable from public data. The property-specific risk premium may be derived from available data in some cases, but in general, the appraiser must estimate it. (B) Refer to subsection (k)(3) of this section (Appendix 4) for mineral- property conditions that should be considered when estimating the property- specific risk premium. (g) Using the three techniques. (1) Components contained in the three techniques. (A) Market surveys and sales analysis result in rates that include all of the discount rate components. However, in these two techniques, the rate included for the property-specific risk premium is the typical rate for the properties included in the survey or sales analysis. The appraiser must estimate the property-specific risk premium (unless the sales sample is directly comparable to the property being appraised) and adjust for atypically high or low risk. This means that the appraiser must reduce the risk premium for properties with less than the typical risk and increase the risk premium for properties with more than the typical risk. (B) The third technique (WACC) produces a rate that does not contain a component for property-specific risk. Because it lacks this component, the typical WACC of potential purchasers sets a minimum value for a discount rate and the appraiser must calculate the typical WACC of potential purchasers to know this lower limit. On a case-by-case basis, the appraiser should exclude oil companies from the WACC calculation if they cannot participate in the market for the property he or she is currently appraising. For instance, small companies may not be able to bid on certain very valuable oil and gas properties because of insufficient capital. A typical WACC for larger oil companies would establish an appropriate minimum discount rate for appraising these properties. (C) An investor should not buy a property at a lower discount rate than his or her WACC, otherwise the investor's net worth will decrease. The appraiser must add the property-specific risk premium to the typical WACC of potential purchasers to develop a discount rate. See subsection (k)(3) of this section (Appendix 4) for a list of property-specific risk factors. (2) Developing a range. (A) Ideally, the appraiser should use these three techniques simultaneously to develop a range of discount rates. The typical WACC sets the lower limit, while surveys and direct sales analysis provide a set of discount rates that the appraiser can use as a database that will help to estimate a midrange discount rate and an upper limit to the discount rate. Examples of these techniques can be found in subsection (k)(3) of this section (the appendices). (B) Some mineral properties may appear to sell at or below the purchaser's WACC. There are several reasons that a mineral property may appear to change hands at a discount rate equal to or less than the WACC. When a buyer (or appraiser) reduces the cash flows to account for reserve recovery risk the discount rate will not reflect the risk, but the purchase price will. To calculate a discount rate that is comparable to discount rates from other sales, the appraiser must quantify the risk adjustment and add it back to the cash flows. This discount rate will be higher than the non-risk-inclusive rate. (C) Atypical income tax deductions, or abnormally high or low overhead can also create an artificially high or low discount rate. When faced with market evidence that would indicate a discount rate at less than a company's cost of capital, the appraiser should review all other appraisal parameters to determine why an abnormally low discount rate is indicated. An understated income stream is the most obvious reason. The appraiser may be able to adjust the cash flows and derive a market discount rate or may delete the sale from consideration. (h) Market surveys. (1) An appraiser may use market surveys as an indicator of the discount rate. Many studies and surveys are published to help the appraiser estimate an appropriate discount rate or range of rates for appraising oil and gas properties. The Society of Petroleum Evaluation Engineers' (SPEE) Annual Survey and the Western States Petroleum Association's (WSPA) Analysis of Oil and Gas Property Transfers and Sales and Derivation of a Band of Investment are good examples. (2) The SPEE survey asks producers', consultants', and bankers' opinions on future prices, cost escalation and economic indices (including the discount rate) used in petroleum property evaluation. (3) The WSPA study, conducted by Richard J. Miller and Associates, consists of two parts: an analysis of oil and gas property transactions and sales occurring in California from 1984 through the current year and an analysis of the weighted average cost of capital (WACC) or "Band of Investment" of a representative group of companies for the same years. The WACC analysis is based on public data. (i) Developing a discount rate from sales. (1) Basic steps. To develop a discount rate from sales requires three basic steps: (A) obtain recent sales prices from a variety of oil and gas producing properties; (B) develop cash flow projections for each property; and (C) calculate the internal rate of return (IRR) for each sale. This is also known as the discounted cash flow return on investment (DCFROI). (2) Sales sources. Information about sales can be obtained from a variety of sources, but the best source is the buyer or seller. Other sources that list sales of oil and gas property include the Texas Railroad Commission, Oil and Gas Journal 300, Strevig and Associates, private firms and oil and gas companies. It is important to remember that the sale of an oil or gas property must be a market transaction when developing a discount rate from sales. (3) Cash flow projections. After obtaining verified sales prices, the appraiser develops cash flow projections for each property. To the extent possible, the appraiser must talk with the parties to each sale to determine their expectations of the property and take those into account when making projections. The validity of the derived discount rate is a direct function of the amount of information obtained from the buyer and seller about their cash flow projections. The appraiser must incorporate this information into his or her projections. If the appraiser's projections differ from the buyer's and seller's expectations, the discount rate derived from the sale will be invalid. (4) Calculating the IRR. (A) The third step in developing a discount rate from sales is to calculate the internal rate of return (IRR) for each sale. The IRR is the yield (discount) rate at which the present value of a cash income stream equals the present value of the cash expenditures (the sales price in our analysis) necessary to produce that income stream. This discount rate is prospective; it does not depend on the historical performance of the property, but on the market participants' expectations of future performance. The discount rate at which the present value of the cash flows equals the sales price can be determined by trial and error. However, there are several calculators and personal computer software packages that can solve for the discount rate (IRR). (B) Although computational procedures may vary slightly, this measure is also referred to as the profitability-index and investor's method. The IRR recognizes that funds received now are more valuable than those received at some future time. The investment outlay can be regarded as borrowed funds and the pre-tax cash flow as the payment of principle plus compound interest on the investment. (j) Weighted average cost of capital. (1) Definition. A widely used method for deriving a pre-tax base discount rate for valuation purposes is the band of investment, or WACC technique. The basis for this analysis is the financial data from a broad sample of oil companies that derive a majority of their operating revenues from oil and gas production. Since petroleum property valuation typically involves discounting cash flows over a long period of time, a long-term cost of capital is most appropriate for developing an oil or gas property discount rate. Thus, the appraiser should incorporate a broad time series of data to approximate a long-term cost of capital. (2) Required calculations. Four sets of calculations are required to determine the WACC. (A) The typical capital structure is derived and expressed as a proportion of debt and equity. (B) The typical cost of outstanding debt is calculated based on bond yields. (C) The typical cost of equity is computed using the Capital Asset Pricing Model (CAPM) or another method such as the DCF Model. (D) Debt and equity costs are weighted according to the typical capital structure percentages and added to derive a typical cost of capital. (3) Capital structure. (A) "Capital structure" describes in percentage terms the sources of funds (capital) used to purchase the assets necessary to operate a company. The capital structure of any company consists of debt and equity. The debt portion consists of long-term debt (represented by outstanding bonds) and preferred stock, while the equity portion consists of outstanding common stock. If the company is funded by debt and equity of equal value, the capital structure is 50% debt and 50% equity. (B) To estimate a discount rate for mass-appraisal purposes, the appraiser should use the typical market capital structure for a representative group of major and independent oil companies that derive a majority of their operating revenues from oil and gas production. (4) Cost of debt. The yield-to-maturity is the best approximation of the cost of debt capital. This yield is observable in the marketplace and can be found by referring to Standard and Poor's Corporation Bond Guide, Moody's Bond Report or a comparable publication. (5) Cost of equity. (A) The Capital Asset Pricing Model (CAPM) is the preferred approximation of equity cost since it considers both historical market yields and current expectations, plus a market-derived equity risk factor. The CAPM method measures the cost of equity by considering that an investor's required rate of return on common stock is comprised of a risk-free return plus a risk- adjustment factor related to the specific stock. This is represented by the following equation: [graphic] (B) The current risk-free rate (Rfc) is typically based on current long-term government securities, i.e., the yield-to-maturity observed on an annual basis on a default-free treasury bond, note or bill of the relevant time period. For oil and gas property appraisal, the yield on a long-term bond is an appropriate measure of the risk-free rate. (C) The historical market return on equities (Rm) on common stocks and the historical arithmetic mean on long-term government bond income returns (Rfh) can be obtained from Ibbotson Associates' Stock, Bonds, Bills and Inflation. The beta coefficient (B) measures market risk by regressing the stock's total return against the market's total return. A more detailed description of the beta calculation can be found in the Ibbotson Associates report. The beta coefficient value can be obtained from Value Line Publishing, Incorporated's The Value Line Investment Survey, Standard and Poor's Corporation's S&P Stock Reports and similar investment services. (D) The difference between the historical risk-free (Rfh) and market (Rm) rates of return is a measure of the non-systematic or non-market related risk caused by changes specific to the companies comprising the stock rate of return sample and is, in effect, an equity risk premium. Note that two different risk- free rates of return are used in the CAPM. The current risk-free rate (Rfc) is used to acknowledge the expectational function of the model. The historical risk-free rate (Rfh) is used in conjunction with the historical market return for the same time period when calculating the equity risk premium. (E) The cost of equity resulting from this model is a nominal (current dollar) after tax rate. Conversion to a nominal, pre-tax rate requires dividing the equity cost (K) by 1 minus the federal statutory income tax rate for petroleum companies. The income tax rate is presently 35%. This is represented by the following equation: [graphic] If the appraiser calculates a typical effective income tax rate from a representative sample of petroleum companies that could participate in the market for the property that he or she is appraising, the appraiser may substitute that typical effective income tax rate for the statutory rate. (6) Weighting debt and equity costs. (A) Once capital structure, debt and equity costs are determined, the final step in deriving the WACC is to weight the cost of debt and equity by the proportional share each has in the overall capital structure. This is represented by the following equations: [graphic] (B) The WACC estimating technique is illustrated in subsection (k)(3) of this section (Appendix 2). (7) Final discount rate selection. (A) As discussed earlier, the typical WACC of potential purchasers sets the lower end of the discount rate range. To help establish the upper end of the discount rate range, the appraiser can calculate a standard deviation of all the discount rates indicated by the sales in the sales sample and the survey. One standard deviation above and below the mean contains 68% of all the observations in a normally distributed set of data. Two standard deviations above and below the mean contains over 99% of all the observations in a normally distributed set of data. The data may not be normally distributed. Even so, this kind of analysis may help the appraiser to establish the upper end of the discount rate range. (B) Very high-risk properties (for example, a one-well lease with high water production near the end of its economic life) may be discounted by the market at two standard deviations above the mean. Properties with lesser risk will have correspondingly lower discount rates. One standard deviation above the mean may establish an upper limit for properties in a typical risk-range. The mean or median of the discount rates from the sales analysis and the survey indicates the mid-range discount rate. (C) For a standard deviation analysis to have meaning in selecting an upper limit to the discount rate range, the survey or sales data set must contain properties with broadly varying risk . A high-end discount rate selected by this method will not apply to very risky properties (it will be too low) unless these risky properties are represented in the sales data set used in the analysis. (D) To select a discount rate for an individual property, the appraiser must assess the property-specific risk inherent in the property. Subsection (k)(3) of this section (Appendix 4) lists risk factors that should be taken into account. (k) Summary. (1) This manual describes methods and procedures used to calculate the present value of oil and gas properties using discounted future income. The discounted cash flow method, DCF, is the most widely used method to appraise mineral properties. (2) Within the DCF equation, there are three generally accepted techniques for estimating a discount rate: market surveys, oil and gas sales analysis and the weighted average cost of capital. Ideally, the appraiser should use these three techniques simultaneously to develop a range of discount rates. (3) The evaluation of oil and gas properties demonstrates the importance of viewing a discount rate in the context of the entire appraisal, including the production decline rate, price and cost parameters. The discount rate should not be considered an isolated variable, for it is only one component of a complex interaction of variables that collectively determine an estimate of value. [graphic] (7) Discounted Cash Flow equals Net Income multiplied by the Discount Factor Other factors that should be considered in the DCF method include capital expenditures, environmental remediation costs, and the present worth of the salvage value of equipment less well plugging costs. [graphic] (6) months production history H. Secondary Recovery Project in early stages before fill-up I. Offshore oil or gas lease J. Unusually high operating expenses (ex: paraffin problems, sour gas, etc.) K. The appraiser should add to the base discount rate (WACC) for any other property specific factors that increase the operator's risk This agency hereby certifies that the rule as adopted has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on March 10, 1994. TRD-9437373 Martin E. Cherry Chief, General Law Section Comptroller of Public Accounts Effective date: March 31, 1994 Proposal publication date: January 11, 1994 For further information, please call: (512) 463-4028 TITLE 37. PUBLIC SAFETY AND CORRECTIONS Part I. Texas Department of Public Safety Chapter 15. Drivers License Rules Examination Requirements 37 TAC sec.15.55 The Texas Department of Public Safety adopts an amendment to sec.15.55, concerning waiver of knowledge and skills tests, without changes to the proposed text as published in the February 4, 1994, issue of the Texas Register (19 TexReg 777). The adoption of the amendment will simplify the process for obtaining a Texas Driver's License by not requiring a knowledge test when the applicant has been licensed in another jurisdiction. The title of the section is changed for uniformity with text. Paragraph (3) is added to clarify language relating to examination requirements for advance in trade. Paragraph (4) is added for clarifying a knowledge test and a skills test. No comments were received regarding adoption of the amendment. The amendment is adopted under Texas Civil Statutes, Article 6687b, sec.1A, which provide the Texas Department of Public Safety with the authority to adopt rules that is determines are necessary to effectively administer this Act. This agency hereby certifies that the rule as adopted has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on March 8, 1994. TRD-9437433 James R. Wilson Director Texas Department of Public Safety Effective date: April 1, 1994 Proposal publication date: February 4, 1994 For further information, please call: (512) 465-2000 Reciprocity in Driver Licensing 37 TAC sec.15.92 The Texas Department of Public Safety adopts an amendment to sec.15.92, concerning interstate and armed forces reciprocity, without changes to the proposed text as published in the February 4, 1994, issue of the Texas Register (19 TexReg 778). The adopts of this amendment will simplify the process for obtaining a Texas Driver's License by not requiring a knowledge test when the applicant has been licensed in another jurisdiction. Amendment to subparagraph (6)(C) proposes changes that provides members of the military or its civilian components of a NATO country may drive in Texas on their country's license or be issued a Texas license after they have met all of the license requirements except for the knowledge and skills tests which will be waived. No comments were received regarding adoption of this amendment. The amendment is adopted under Texas Civil Statutes, Article 6687b, sec.1A, which provide the Texas Department of Public Safety with the authority to adopt rules that is determines are necessary to effectively administer this Act. This agency hereby certifies that the rule as adopted has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on March 8, 1994. TRD-9437432 James R. Wilson Director Texas Department of Public Safety Effective date: April 1, 1994 Proposal publication date: February 4, 1994 For further information, please call: (512) 465-2000 TITLE 40. SOCIAL SERVICES AND ASSISTANCE Part I. Texas Department of Human Services Chapter 10. Family Self-support Services Employment Services 40 TAC sec.10.2303 The Texas Department of Human Services (DHS) adopts an amendment to sec.10. 2303, with changes to the proposed text as published in the February 8, 1994, issue of the Texas Register (19 TexReg 893). The justification for the amendment is to include the extension of case management beyond 90 days post-employment for some recipients in San Antonio as provided for under a Department of Health and Human Services Discretionary Grant. The amendment will function by helping Aid to Families with Dependent Children recipients in San Antonio, who participate in the Job Opportunities and Basic Skills Training Program and who obtain employment, to maintain employment and long-term self-sufficiency by providing long-term transitional post-employment case management. No comments were received regarding adoption of the amendment; however, DHS is adopting the amendment with a minor editorial change. The word "grant" is changed to "project" to clarify that the Department of Health and Human Service Discretionary Grant is now an implemented demonstration project. The amendment is adopted under the Human Resources Code, Title 2, Chapters 22, which provides the department with the authority to administer public assistance programs. sec.10.2303. Participant Extended Eligibility for Case Management Services. (a)-(b) (No change.) (c) Job Opportunities and Basic Skills Training Program participants in an approved Administration for Children and Families demonstration project being conducted in San Antonio receive intensive follow-up case management services for up to 24 months following employment entry. This agency hereby certifies that the rule as adopted has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on March 14, 1994. TRD-9437535 Nancy Murphy Section Manager, Policy and Document Support Texas Department of Human Services Effective date: April 15, 1994 Proposal publication date: February 8, 1994 For further information, please call: (512) 450-3765 Chapter 52. Emergency Response Services Definitions 40 TAC sec.52.101 The Texas Department of Human Services (DHS) adopts amendments to sec.sec.52.101, 52.501, and 52.502, without changes to the proposed text as published in the February 4, 1994, issue of the Texas Register (19 TexReg 778). The justification for the amendments is to streamline the Emergency Response Services reimbursement methodology by combining units of service, decreasing the number of cost areas, deleting sections regarding DHS ownership of home unit equipment to reflect current practices, and revising the language for clarification. The amendments will function by providing a better understanding of the reimbursement methodology. No comments were received regarding adoption of the amendments. The amendment is adopted under the Human Resources Code, Title 2, Chapter 22, which provides the department with the authority to administer public assistance programs. This agency hereby certifies that the rule as adopted has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on March 14, 1994. TRD-9437536 Nancy Murphy Section Manager, Policy and Document Support Texas Department of Human Services Effective date: May 1, 1994 Proposal publication date: February 4, 1994 For further information, please call: (512) 450-3765 Claims 40 TAC sec.52.501, sec.52.502 The amendments are adopted under the Human Resources Code, Title 2, Chapter 22, which provides the department with the authority to administer public assistance programs. This agency hereby certifies that the rule as adopted has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on March 14, 1994. TRD-9437537 Nancy Murphy Section Manager, Policy and Document Support Texas Department of Human Serivces Effective date: May 1, 1994 Proposal publication date: February 4, 1994 For further information, please call: (512) 450-3765 Texas Department of Insurance Exempt Filing Notification Pursuant to the Insurance Code, Chapter 5, Subchapter L (Editor's Note: As required by the Insurance Code, Article 5.96 and 5. 97, the Texas Register publishes notices of actions taken by the Department of Insurance pursuant to Chapter 5, Subchapter L, of the Code. Board action taken under these articles is not subject to the Administrative Procedure Act. These actions become effective 15 days after the date of publication or on a later specified date. The text of the material being adopted will not be published, but may be examined in the offices of the Department of Insurance, 333 Guadalupe, Austin.) The Commissioner of Insurance at a public hearing under Docket Number 2085 on March 7, 1994, at 8:30 a.m., in Room 100 of the Texas Department of Insurance Building, 333 Guadalupe Street in Austin, Texas adopted the amendment proposed by the staff of the Workers' Compensation Division to the Procedures Section of the Texas Basic Manual of Rules, Classifications and Experience Rating Plan for Workers' Compensation and Employers' Liability Insurance (Manual) to eliminate the filing of specimen policies, information pages, endorsements and cancellations with the Texas Department of Insurance. The adopted amendments to the Procedures Section of the Manual eliminates the filing requirements for specimen policies, information pages, endorsements and cancellations with the Texas Department of Insurance. Since the Workers' Compensation Division will no longer be reviewing these documents, it will not be necessary for the documents to be filed. In addition, the data to be included on the Information Page is being proposed to be updated to include such items, if applicable, the premium for increased limits for employers' liability, the experience modifier, the negotiated experience modifier, the deductible credit, premium discount, the maintenance tax surcharge recoupment and the schedule rating factor. The Commissioner of Insurance adopted this matter pursuant to the Insurance Code, Articles 5.96 and 5.60. The Commissioner of Insurance adopted the amendments to the Procedures Section of the (Manual) as outlined above and attached hereto and incorporated by reference, by Board Order Number 94-0239. A copy of the amendments containing the full text of the adopted amendments is available for review in the office of the Chief Clerk of the Texas Department of Insurance, 333 Guadalupe Street, Austin, Texas 78714-9104. For further information or to request copies of the amendments, please contact Angie Arizpe (512) 322-4147, (refer to Reference Number W-0194-01). This notification is made pursuant to the Insurance Code, Article 5.96, which exempts it from the requirements of the Administrative Procedure Act. This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be within the agency's authority to adopt. Issued in Austin, Texas, on March 11, 1994. TRD-9437508 Linda K. von Quintus-Dorn Chief Clerk Texas Department of Insurance Effective date: April 2, 1994 For further information, please call: (512) 463-6328