Bankrupt methane farming company Luca Technologies Inc. owes $738,594.45 in underpaid taxes to the state and Campbell County, public records show. But an attorney for the Golden, Colo.-based company is disputing the tax bill.
Luca acquired previously drilled coal-bed methane wells in the Powder River Basin and developed a process of feeding water, chemicals and microbes in coal seams to continuously create methane by stimulating microbes to eat coal and produce the gas. But in July, the company filed for Chapter 11 bankruptcy protection in federal court in Denver and laid off all but three employees, saying that low natural gas prices and delays in getting the federal government permits to regulate the new industry left it no option but to sell all assets.
The Wyoming Department of Revenue seeks $309,720.60 in unpaid severance taxes and interest for production dating back to 2007, according to documents that were submitted to the Wyoming Board of Equalization, a board to which Luca executives has appealed the tax bill.
Severance tax is imposed on companies that extract or sever minerals from the earth, said Wyoming Department of Revenue Director Dan Noble. State budget documents show that the state distributes revenues from severance taxes to cities, towns, counties, highways and county roads, water projects and the state’s General Fund.
At the county level, Luca owes ad valorem taxes, which Noble said are a tax on the value of minerals produced. Ad valorem taxes fund Campbell County offices such as the treasurer, clerk, commissioner, county roads and bridges and courts, Campbell County Treasurer Shirley Study said.
Luca owes the county $8,377.42 for 2013 personal property and ad valorem taxes, which were due Sept. 1 but would become delinquent Nov. 10. They can be paid without interest until Dec. 31, she said.
Luca subsidiary Patriot Energy Resources owes the county $420,496.43 for 2009 and 2010 ad valorem taxes, Study said.
The Wyoming Department of Audit sent a letter to the company in January 2012 saying it audited the company’s tax returns for the production years of 2007 through 2009 and found a difference in what was paid and what it thought Luca owed,
according to documents.
Craig Grenvik, the Department of Revenue’s Mineral Tax Division administrator, said severance tax is calculated through the mineral’s sale price, minus transportation and processing. He said Luca calculated the severance tax by only considering the spot price of natural gas at the time but that the Department of Audit found there was a long-term contract price that should have been calculated. The contract price was higher than the spot price, which would have made the severance tax higher, he said.
Noble, the Revenue Department director, said the audit didn’t consider ad valorem taxes, but “if you underpaid the tax on the severance side, you also underpaid on the local level.”
Luca attorney Matt Micheli, among the three employees still with the company, disputes the allegation that the long-term contract price should be considered. He said the long-term contract is actually a hedge, a corporate contract that should be treated more like an insurance policy on the wells in Campbell County.
“Patriot is absolutely convinced that it is not required to pay severance and ad valorem taxes on a financial hedge,” he said in an email. “The State of Wyoming has never required producers to pay taxes on a hedged value. Patriot believes it will prevail on the appeal to the Board of Equalization and if not, Patriot would ultimately prevail before the Wyoming Supreme Court.”
Luca presented its case before the Board of Equalization in the spring and is awaiting a decision, Micheli and the Department of Revenue officials said.
The company is in the process of selling all its assets to pay off its creditors — from office furniture and pickup trucks to patents.
“We’ve worked on that and sold everything, bit-by-bit as we’ve gone through,” Micheli said. “Of course all those sales are in the bankruptcy process. You put them up and the get them sold under that umbrella.”
On Sept. 26, Luca filed court documents seeking permission to sell intellectual property, such as patents and specialized equipment, to Transworld Oil USA Inc. of Houston for
“Their offer does not include any of the wells in Wyoming,” Micheli said.
Court records state the company owns 1,350 wells in Wyoming.
Technically, Luca, which owns the patents, is going through the bankruptcy. Patriot Resources owns the wells, he said.
“Patriot Resources owns the wells, and we are still working as hard as we can to try to put together a path that allows those wells to be fully plugged and reclaimed and have that taken care of,” he said.