Legislature(2017 - 2018)ADAMS ROOM 519
04/23/2018 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| HB331 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 331 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE FINANCE COMMITTEE
April 23, 2018
1:35 p.m.
1:35:49 PM
CALL TO ORDER
Co-Chair Foster called the House Finance Committee meeting
to order at 1:35 p.m.
MEMBERS PRESENT
Representative Neal Foster, Co-Chair
Representative Paul Seaton, Co-Chair
Representative Les Gara, Vice-Chair
Representative Jason Grenn
Representative David Guttenberg
Representative Scott Kawasaki
Representative Dan Ortiz
Representative Lance Pruitt
Representative Steve Thompson
Representative Cathy Tilton
Representative Tammie Wilson
MEMBERS ABSENT
None
ALSO PRESENT
Sheldon Fisher, Commissioner, Department of Revenue; Ken
Alper, Director, Tax Division, Department of Revenue; Mike
Barnhill, Deputy Commissioner, Department of Revenue; Deven
Mitchell, Executive Director, Alaska Municipal Bond Bank
Authority, Department of Revenue; Representative Chris
Birch; Representative George Raucher.
PRESENT VIA TELECONFERENCE
Thomas Ryan, ING Group, New York City; Peter Clinton, ING
Group, New York City; Kara Moriarty, CEO, Alaska Oil and
Gas Association, Anchorage; Pat Foley, Caelus Alaska,
Anchorage; Jeff Hastings, CEO, SA Exploration, Anchorage;
SUMMARY
HB 331 TAX CREDIT CERT. BOND CORP; ROYALTIES
HOUSE BILL NO. 331
"An Act establishing the Alaska Tax Credit Certificate
Bond Corporation; relating to purchases of tax credit
certificates; relating to overriding royalty interest
agreements; and providing for an effective date."
1:36:29 PM
Co-Chair Foster invited Commissioner Fisher to come to the
table.
SHELDON FISHER, COMMISSIONER, DEPARTMENT OF REVENUE,
appreciated the focus and the attention to the bill. He
believed the bill was a good and prudent policy. He was
available to answer specific questions or concerns.
Representative Wilson mentioned a previous discussion about
evening something up. She asked if the legislature would
change something if a company decided to wait their turn.
She asked for more information.
Commissioner Fisher responded that the bill was structured
in a way that companies would be able to choose whether to
participate. The department had worked with companies to
convey the intent of the bill. He relayed that one of the
value blocks was the fact that the legislature did not have
to appropriate a full $184 million; it could appropriate a
lesser amount. He relayed that what the department
presented assumed that everyone participated. Under that
scenario, interest would need to be appropriated in the
amount of $27 million, based on participation from all
parties. If someone chose not to participate and would have
been entitled under the normal course to get a $5 million
payment during the year, the interest payment would decline
slightly because they would not be a part of the bonding.
Additional funding might be necessary to care for the
company's interest. The department's goal was to understand
and inform the legislature what it anticipated would happen
as it rolled out, should the bill be enacted. The
department had had multiple communications with the
companies over the last several months. So far, no one had
informed the department that they did not intend to
participate. They either informed the department that they
wanted to participate, or they were still thinking about it
and would get back to the department.
Representative Wilson was concerned that if a company chose
to wait to participate, they would be negatively penalized.
Commissioner Fisher indicated that the department's
intention was that companies would neither be advantaged or
penalized by choosing not to participate.
1:41:00 PM
Representative Ortiz asked if the bill could negatively
impact the ability of the state to bond for infrastructure
projects and deferred maintenance. Mr. Barnhill in the
prior meeting had indicated that the bill could have that
impact. He asked the commissioner to elaborate.
Commissioner Fisher responded that, as a general matter, it
was the department's view and understanding that the
legislation would not have a substantial impact on the
state's capacity to bond. There were a couple of reasons
for his answer. First, the debt was already on the state's
financial statement. It could be viewed as refinancing by
taking an existing obligation and financing it in a
different way. Second, there was a schedule presented in a
previous meeting that showed the cumulative amount of
general fund money used to finance other debt including the
pension obligation payments. It also showed the current
debt flattening out. The current plan would stabilize to 25
percent for a longer period rather than peaking over 30
percent of undesignated general funds (UGF). He thought it
would open up capacity because there would be more
available UGF. He remarked that the credit agencies viewed
it as an interesting and as a helpful tool to manage the
obligation. He thought the negative impact would be
minimal. He did not have a dollar figure but would see if
he could quantify it.
1:44:00 PM
Representative Guttenberg provided a hypothetical scenario
in which a company took money from the state at a
discounted rate to pay off loans and outstanding debt with
a plan in place for reinvestment. He wondered what would
happen if the company sold to another entity in terms of
the obligation to fulfill that plan by the new owner.
Commissioner Fisher heard 2 questions. The first had to do
with reinvestment and paying off current debt and the
source of capital a company would use to reinvest. He hoped
some banks would be testifying later in the meeting. One of
the things a number of people from financial institutions
and credit holders had articulated to the state was that
when they had a debt in default, it was very difficult and
expensive for them to attract additional capital. The
default had to be disclosed and their balance sheet, in
essence, had a cloud over it associated with the defaulted
instrument. By virtue of receiving the money, much of it
would go to paying off existing debt holders. If companies
were able to clean up their balance sheet resolving their
outstanding liability, they could attract capital from a
number of sources. He reported that a number of credit
holders had investors prepared to invest if their debt
could get resolved.
Commissioner Fisher addressed Representative Guttenberg's
second question about a company setting forth a plan. The
Department of Revenue (DOR) had the statutory direction to
review a company's plan. The department would look for a
schedule of investments, how a company would use the money,
and assurances of sources for capital to support a
company's plan. He reported that DOR was working with the
Department of Law to determine consequences for a company
that did not fulfill its obligations. Currently, the
departments were discussing the repayment of benefits
should a company defaulted on their commitment. He provided
an example. If the payment was 90 percent under the lower
discount rate ($90 million payment versus $85 million
payment resulting $5 million benefit), they would have to
repay the benefit plus some additional amount in the form
of a penalty that would induce a company to continue with
their commitment to reinvest. Generally, a company's
obligations would transfer with the sale of their business.
1:50:02 PM
Representative Guttenberg questioned the definition of a
qualified expenditure in the federal tax code as it related
to the state's purpose of reaching development and
production as quickly as possible. He asked for
clarification.
Commissioner Fisher would have to come back with a
response. As a general matter, he was assuming that the
companies had the same goal in mind as the state. He would
need time to think about how to respond.
Representative Kawasaki asked about the structure of the
bill. He asked how a bond corporation worked as an
instrumentality of government.
Commissioner Fisher thought the answer would be presented
as part of the sectional analysis later in the meeting. He
asked if he could defer the question until then.
Representative Kawasaki was okay with waiting for an
answer.
Representative Grenn asked the commissioner to talk about
how all of the different stake holders had come together on
the issue.
Commissioner Fisher explained that the department developed
the solution after the governor had requested a way of
dealing with the tax credits. The governor's concern was
putting Alaskans back to work. The department developed the
strategy outline and a structure by going through a few
different scenarios. The department also sat down with
different participants with different perspectives. The
department structured the bill as a balance, trying to
account for all of the different interests. Not many
changes were made in response to the meetings. Initially,
many of the credit holders were frustrated with the thought
of taking less for their money. He thought that over time
people started to see that the bill included a fair balance
of interest. It was not necessarily skewed one way or
another. People started gravitating to the legislation as a
potential solution.
1:55:52 PM
Co-Chair Seaton was concerned with 2 scenarios being
offered; 10 percent or 5.1 percent. He thought the lower
rates would be substantially different for each producer or
explorer. It was his first time hearing that DOR rather
than Department of Natural Resources (DNR) would be
handling the agreements to overriding royalty interests
(ORRI). The amount of value for an ORRI might be quite
different among projects and there might be time delays. He
reported hearing that as soon as the state reached 10
percent the royalty interest would go away. He was
uncertain how the ORRI was being written and whether it was
fair to the state to reduce the interest rate. He asked the
Commissioner to address both items.
Commissioner Fisher explained that when he stated a moment
prior that the state would be examining the plans for
reinvestment, he intended it to mean just the plans for
reinvestment. He clarified that the ORRI was something DNR
would be negotiating, not DOR. The plan for reinvestment
would be examined and approved by DOR. He noted that the
intent of the bill with respect to the ORRI was that the
credit holder would have the right to present a plan or
proposal. The Department of Natural Resources would examine
that proposal based on their view of the opportunity. The
intent was for the state to be taking some risk with the
field developer but also sharing in the upside. If he
implied that once the 10 percent was paid off, the royalty
would disappear, it was not the intent of the bill. In
other words, he imagined that a company could offer to give
the state a royalty interest that lasted 10 years, for
example. The Department of Natural Resources would evaluate
the proposal based on the time value of money, the risk,
and the return. There would be scenarios where the state
might not make as much as expected or make considerably
more. The department's expectation was that if someone gave
an ORRI, it would be for the life of the field. There would
be risk to the state as well as upside opportunity. It was
not the intent for the state to bare all the risk without
any upside associated with the ORRI.
Co-Chair Seaton noted that, generally, plans of development
got delayed rather than accelerated. He was concerned about
the time commitment.
2:00:53 PM
Vice-Chair Gara thought the bill had both pros and cons. He
understood the policy. It would be easier for him to
support the bill if the legislature had raised some oil
money. However, it seemed like money only flowed one way.
He relayed that the $600 million that the oil tax bill
passed by the House, would have easily paid for this. One
of the pros was that if the state did not take action, a
provision was included in the law that would let the oil
industry buy the credits for a fraction of $1 but deduct a
full $1 from their taxes. He was concerned about a massive
liability with huge deductions if BP, Conoco, or Exxon
started buying up the credits for $.60 on the dollar. He
asked if the commissioner considered allowing the state to
purchase the credits for less than what they were worth,
like the major oil companies were allowed.
Commissioner Fisher had been asked the question before.
There were two things the department was trying to balance.
There was no question that there were certain companies
that would sell their credits for a deep discount. However,
he did not believe it extended to all of the companies. One
of the department's goals was to finally address the issue
for the state and the industry. Another objective of the
department was to provide a balanced solution. He was not
suggesting that the bill reflected the best financial
decision for the state. He thought it was neutral to
modestly positive for the state. It required the credit
holders to bare the cost of the interest. The solution was
thoughtful and respected by the oil industry and the
financial industry. He thought it served the state well in
the long term. He felt that balancing the various interests
in the way the bill did was appropriate and better for the
state in the long run.
Vice-Chair Gara asked if the department had considered
giving the state the same right as the major oil companies
to buy the credits at less than face value.
Commissioner Fisher responded that the state was buying
them at less than face value. The state had never
considered a deep discount when the department did its
modeling. The proposal brought forward in the bill tried to
balance some of the other factors he had mentioned.
2:05:09 PM
Representative Pruitt was uncertain whether the legislature
had expressed the importance of where the money would go.
He mentioned concerns that had been expressed about the
money potentially being used to pay off banks. He asked how
important it was for the money to open up opportunity for
further investment.
Commissioner Fisher responded that, at a high level, it was
difficult for a company in default on a credit to attract
additional debt or equity investment. Representations and
warrantees would be required. The existence of debt gave
the debt holder the ability to put the company into
bankruptcy. The threat of bankruptcy, even if the bank was
in forbearance, made future investors uncomfortable with a
credit. Cleaning up a company's balance sheet offered
tremendous benefit. Companies would structure their debt
based on the cash flow they expected. They would be able to
create a capital structure more sustainable in the
long-term.
Commissioner Fisher continued that one of the things the
legislature would hear from ING was that they were over-
collateralized. They might have, for example, $100 million
of debts and $140 million of credits. In other words, when
they got paid there would be some money that would be
returned to the companies. There would be money going back
to the companies and would be available to the companies
for their operations.
Co-Chair Foster acknowledged Representative Chris Birch and
Representative George Raucher in the audience.
2:09:05 PM
THOMAS RYAN, ING GROUP, NEW YORK CITY (via teleconference),
had a couple of points he wanted to make. He had made
similar points in the resource committee hearings two weeks
prior. The company had been working with two specific
borrowers in Alaska, both of whom were nearing full
production. ING financed the tax credits beginning in 2015.
Those loans were still outstanding, past due, and in
default. ING had been working with the companies to
restructure their loans for the past couple of years. He
thought one of the key hallmarks of the transactions was
that ING provided short-term liquidity to companies at very
inexpensive rates against their tax credits with the
expectation that they would be repaid and cashed out
quickly. Obviously, that did not happen, and the terms of
the loans were extended even though they were in default.
The money was already spent by the companies in Alaska.
Significant amounts of money including debt that the
companies raised and equity that they raised were spent.
The equity of the credit money was taxed and was expected
to come back from the state: The equity was used as
collateral for ING's lending purposes.
Mr. Ryan continued that clearly circumstances had changed
over the last number of years. ING had been patient and had
worked as diligently as possible with the state and with
the companies to keep them liquid and in operation. Both of
the companies had significant capital investment plans
going forward. They also had further capital to finance
those plans. The fact that they had defaulted balance
sheets prevented them from moving forward with their plans.
The companies had been trying stay afloat over the past few
years.
Mr. Ryan reported that ING was over-collateralized. There
was a concern that somehow the companies would take the
money and run. ING was a committed lender to the State of
Alaska and lent to several different industries in Alaska.
He noted that much of the money that the credits were
coming back against had already been spent. There would be
excess that would go back to the projects to spend further
as well as raising new capital. From the very beginning,
ING had been asking for a restructuring of debt on the
balance sheet, which meant that everyone would have to
experience a bit of pain in the restructuring. The credits
were being refinanced at a discount. ING was realistic
about things. He suggested that once the balance sheets
were cleaned up, it might be possible for the projects to
be refinanced and operations furthered.
2:12:45 PM
PETER CLINTON, ING GROUP, NEW YORK CITY (via
teleconference), commented on the bill. He reported that
things had not worked out as intended for anyone. The
situation was similar to a private credit restructuring
when a company had to restructure because of an unforeseen
event impacting its revenues or earnings to the point of
not being able to pay its original debts. The difference
had to do with the length of time that it took for the
state to address its problems. It had to address them
through the annual legislative process. Typically, the
first thing private companies did when restructuring was to
stop making their payments. Next, they had to decide which
payments were a priority. In the state's case, it had some
tough decisions to make because of having several other
priorities.
Mr. Clinton reported that the size of the problem needed to
be determined. The state did so when it stopped issuing the
tax credits and ended up where it was today - needing to
solve the problem of how to pay the credits. He thought the
proposal was balanced and fair. The proposal was also
consistent with the packet of proposals that would be seen
in private industry when a company took an obligation and
tried to identify a solution in which everyone
participated. He thought the bill asked everyone involved
to participate. The bill asked the parties that were owed
money to accept a discount. The bill also asked those
participants who benefited from the program to commit to
reinvesting in the state. The bill would take near-term
appropriations and spread them out over a longer period.
While he appreciated there was some concern about not
having great visibility over a 10-year period regarding
repayment capacity, it was not dissimilar to other types of
organizations. Collectively, the proposal on the table made
good sense. It was true to a formula that was used in the
private sector.
2:16:53 PM
Representative Wilson asked who made the final decision on
the discount. She asked who owned the credits presently.
Mr. Ryan responded that one of the positive features of the
program was that when ING financed the credits they
essentially purchased them from the companies. The tax
credits were issued in ING's name as the recipient. He
reiterated that ING was overcollateralized and had an
obligation to give back to the companies anything in excess
of what ING was owed. It would be a joint decision. He
furthered that ING would look at the final capital
investment plans of the company going forward and the right
discount. ING and each company would decide collectively
what the right strategy was for both parties. Much of the
decision would come down to the final details of a
company's plan. For example, it might be possible to split
the credits into multiple buckets with different rates. ING
was still working on the details.
Representative Wilson used a hypothetical scenario in which
a credit was worth $100 million, and ING was given $90
million. She asked if the company would have to make up the
difference of $10 million.
Mr. Ryan responded, "If we're overcollateralized, yes." He
explained the bank had two different deals. The first deal
was overcollateralized to a large extent and the other was
not. Depending on the exact final details of the plan and
the plans of the company, ING might take a loss on one deal
and the other deal might have some excess that would be
returned to the company. He furthered that depending on the
size of the discount, some of it would be borne by ING in
one case and all of it would be borne by the company in the
other. Until the final details were available it would be
difficult to make a prediction.
Representative Wilson was trying to get something on
record. She suggested that if the company owned the note
they could guarantee that they would do a certain amount of
work in the following couple of years. She was not sure the
bank could make the same obligation. She wanted to make
sure the legislature was not putting the banks at a
disadvantage. The banks could only do a 10 percent discount
rather than a 5 percent discount. She was trying to figure
out the difference between the bank owning the note versus
the company owning the note.
2:20:23 PM
Representative Grenn noted that the testifiers used the
term "fair and balanced." He wanted to use the term as a
way of framing a conversation he had regarding the state's
reputation the last few years and instilling or hurting a
confidence in the state's oil and gas tax policy. He asked
how the proposal would impact the state's reputation
regarding investment in the state's oil and gas tax policy
compared to the status quo of the past few years.
Mr. Clinton offered his perspective. He thought it would
greatly enhance the state's reputation. He suggested
rephrasing the question to reflect how much the state's
reputation would hurt by not doing something like what was
being proposed. He thought the state's reputation had
already been damaged significantly. He indicated that
private lenders were not put off by similar situations
where something unexpected happened that had to be
addressed. Ultimately, lenders looked for the ability of a
predictable payout. His job was to manage the expectations
of senior management regarding a payout timeline. He
relayed that if he had a report each year that a payout was
subject to appropriation and that the amount was in
dispute, it would not be predictable. However, if the state
were to adopt a program, such as the bond, where it paid
something off at a discount over a longer term,
institutions would be more than happy to accept the
tradeoff - the tradeoff of predictability. He relayed that
one of ING's loans would not likely lead to a loss because
it had overcollateralization. Another loan might lead to a
small loss. In cases that lead to a loss, for ING, it led
to a more desirable outcome than the uncertainty that would
continue to exist without a solution.
2:23:29 PM
Representative Grenn thanked the testifiers for their
comments.
Vice-Chair Gara expressed confusion about the issue about
the state's reputation. He mentioned that for many years
the state paid credits as they came in. Circumstances
changed with the oil price crash in 2015, which hurt
everyone including the state. Since that time when the
state stopped paying every single dollar, the state shifted
to what the statute stated. The statute defined that the
state paid 10 percent of the production tax revenue if oil
was over $60 per barrel and 15 percent if oil was less than
$60 per barrel. He reported that the legislature had
followed the statute. He was confused as to why the state's
reputation would be hurt. He assumed that ING read the
statute before lending money. He was bothered by the idea
of the state's reputation being damaged because the state
had been following the law. He asked if ING had read the
law.
Mr. Ryan indicated that the bank had been aware of the
terms and the state's historical performance. ING was
mindful that future legislative budgets could not be bound.
ING based its lending decisions on speaking with several
entities including DOR, DNR, and the governor's office. ING
was aware of what happened and that a future event could
potentially slow down payments to the formula. The bank
stress-tested the payments and scenarios. Based on the
representations it had from stakeholders and ING's
modeling, the lender felt comfortable with event risk.
There was no question that the event happened taking
everyone by surprise. He did not think anyone was saying
that the state was not honoring the letter of the law.
However, there were some reasonable expectations made and
discussions had amongst serious stakeholders in Alaska
prior to ING making its decision. He indicated that based
on a willingness to pay and the state's ability to pay, the
bank was asking for some predictability. As a bank, ING
would like to lend more and with its projects it would like
some certainty. He furthered that when the projects and the
equity was put into the projects in Alaska there were
promises made of prompt payment of credits in exchange for
cash. He agreed that the relationship of the state was a
good one. However, they thought the bill, by adding clarity
and certainty at a discount, would help show the state's
goodwill and compliance with the legislation. ING had
experienced positive dealings with the state in the past
and he hoped, with the passage of the bill, it would
continue to do business in Alaska.
2:28:00 PM
Representative Pruitt noted that earlier in ING's testimony
Mr. Ryan had referenced the genesis of working with some of
the oil companies and offering liquidity at cheap rates
because of the state's precedent of paying the companies
off over a short term. He assumed there were terms that
would allow for lower interest rates or certain payment
schedules that took into account the state would pay the
credits within a reasonable amount of time. Mr. Ryan had
also expressed that ING had been working with the companies
in renegotiating the terms. He wondered how the bank was
adjusting and reorganizing the debt. He asked if a higher
interest rate would be imposed.
Mr. Clinton replied that the imposition of a higher
interest rate would be typical in any credit restructuring.
A general loan agreement would include a default rate,
which was generally 2 percent above the contracted rate.
ING's default rate kicked in when a loan was not repaid.
There were other rights and remedies available to ING,
which it did not exercise in these cases. For instance, ING
could have foreclosed on the company or caused the company
to file for bankruptcy by taking certain actions. However,
forcing the company into bankruptcy would not result in ING
getting paid any sooner or solve the company's problems.
There were other creditors involved with the companies who
were standing aside waiting for certain developments to
happen to lead companies back to financial health. Since
ING's only source of payment was through the tax credits,
it stood by and let the other creditors control the
outcome. He reported ING staying in close contact with the
other creditors.
Representative Pruitt asked if interest could be used
against a tax liability - therefore, less tax available to
the federal government or the state entity. He wondered if
interest was the cost of doing business.
Mr. Clinton answered there was a cost of doing business.
ING had implied costs that were not balance sheet costs.
They were calculated the way ING thought it did business,
with a cost of capital. ING had things called risk weighted
assets - capital the bank set aside based on the quality of
assets it had. He conveyed that when a bank had a loan of
$100 million that was past due without any immediate
repayment in sight, then the bank had a significant amount
of capital set aside against that loan which could not be
used for new loans.
Mr. Ryan asked if Representative Pruitt was speaking about
the interest expense for the bank's customers. If so, their
interest was typically deductible against their tax
liability.
2:33:18 PM
Representative Pruitt was asking about the interest expense
of the customer. He noted that it effected the state's
ability to get additional tax for Alaska. He asked if ING
had been unable to extend capital to the Alaska oil and gas
sector because of the current circumstance.
Mr. Clinton responded in the affirmative. He elaborated
that ING ran a significant oil and gas business out of one
of its Houston offices. The company had a portfolio equal
to $2.5 billion with 40 to 50 different followers. Since
the beginning of the energy crisis, about 10 of those
borrowers filed for bankruptcy. ING was fortunate in most
of those instances that the level it lent at was not
empiric. However, there were significant loses to other
investors. ING continued to lend to those companies after
they came out of bankruptcy. ING continued to make new
loans in the production industry in Houston as well. ING
looked and the process and the predictability of outcomes
before conducting the financial analysis to assess whether
the next opportunity to lend to a company made sense. The
fact that a company had incurred some problems previously
did not exclude ING lending to them again.
Vice-Chair Gara thanked Mr. Clinton and Mr. Ryan for the
tone of their testimony.
2:37:08 PM
AT EASE
2:37:48 PM
RECONVENED
Co-Chair Foster commented that it was good for members to
thank testifiers but cautioned members to be mindful of
what others might infer from legislators' statements.
KARA MORIARTY, CEO, ALASKA OIL AND GAS ASSOCIATION,
ANCHORAGE (via teleconference), introduced herself and read
from a prepared statement:
For the record, my name is Kara Moriarty and I am the
President/CEO of the Alaska Oil & Gas Association,
commonly referred to as "AOGA." AOGA is a private
trade association that represents the majority of oil
and gas producers, explorers, refiners, and
transporters of Alaska's oil and gas. The following
testimony reflects the opinion of our membership.
AOGA supports an expedited resolution this year to
refund the earned credits. Companies earned these
credits by investing hundreds of millions of dollars
to hire Alaskans for the exploration and production of
oil. The delay in the rebates has damaged the state's
reputation and chilled future investment; caused
projects to be shelved, resulting in negative economic
impacts to the state and local communities; and many
Alaskans are now out of work, especially within the
oil and gas industry.
AOGA believes the state should honor all outstanding
earned tax credits in full, and in as expedited
process as possible. The Governor's bill is an
innovative approach that seeks to refund a portion of
the earned credits via bonding to raise the money,
then refunding the credits at a reduced rate. The
Governor proposes to lower the refunding rate to cover
the state's bond finance costs. AOGA has concerns
about the steep discount rates and other provisions of
the bill. But AOGA is committed to working with the
administration and legislature to finding an equitable
solution it's simply too important. AOGA does
applaud the administration for acknowledging that
refunding these payments is a critical step this year.
AOGA supports an equitable plan that will refund the
entirety of the earned credits this year: Let's send a
strong signal to investors that Alaska is open for
business and attract much needed new investment to
employ Alaskans, produce more oil, and drive Alaska's
economy forward. Thank you.
Ms. Moriarty made herself available for questions.
2:42:50 PM
Representative Grenn asked if she had unanimous consent to
testify.
Ms. Moriarty confirmed that she had to have unanimous
consent on matters of tax, which tax credits were a part of
tax policy.
Representative Grenn asked if some of the members were not
owed tax credits.
Ms. Moriarty responded that Representative Grenn was
correct. However, the companies that did not have earned
tax credit certificates were supportive of getting the
credits paid sooner rather than later because having a
healthy oil business, large or small, was important to the
entire industry. It was important to have strong companies
across the board. She represented companies like Caelus and
Petro Star that were holding tax credit certificates that
had not received their payments in full. The lack of
payments hampered these companies in their ability to
continue to do business and attract investment in Alaska.
She also represented companies that were never eligible for
cash payments such as BP, Exxon, and Hilcorp. The
organization looked at the issue holistically and, having a
healthy business climate for all companies was very
important to all of her membership.
Representative Wilson asked if AOGGA's members were
concerned about the additional requirement of investing in
Alaska within the following 2 years.
Ms. Moriarty responded that AOGA member companies were very
committed to the State of Alaska. Alaska Oil and Gas
Association would prefer that the credits were paid in full
because the companies spent the money and believed the
credits were owed. Her members also recognized the position
the state was in and were trying to find an innovative
approach when prices were in a lower-for-longer range. She
thought all of the companies she represented planned to be
in Alaska. She had not heard any objections from her
membership about putting together future development plans
to make the discount contingent on future spending. She
reiterated that, in a perfect world, members would like to
be paid in full without any type of discount. The companies
that she represented were very committed to investing in
Alaska.
Representative Wilson asked if the intent of DOR was to
utilize a development plan as an indicator of reinvestment
for a company that already had a development plan in place
- with or without the credits.
Ms. Moriarty thought the issue was something that members
had to work through with the state. She needed further
clarification whether the state was expecting a brand new
development plan or something already in place. She thought
the companies that would take advantage of the program
would work closely with the state. If they had to provide
something additional, hopefully it would not be any more
onerous than what they have had to provide for their lease
in the first place.
Representative Wilson asked if in-state refineries were
under the same obligation for 2 years as the other oil
companies with tax credits. The tax credits were not
written exactly the same. She asked about the 2-year
stipulation.
Co-Chair Foster mentioned that there were folks calling in,
but the committee was only hearing invited testimony.
However, public testimony would be heard the following day
at 1:30 P.M.
2:47:57 PM
Representative Thompson noted that in Ms. Moriarty's
testimony she reported that hundreds of millions of dollars
had been invested by the oil companies. In actuality, he
thought the total investment dollars were well over
billions. He wanted to clarify that companies had invested
billions of dollars in Alaska because of the tax incentives
and only received a percentage back in the form of tax
credits.
Ms. Moriarty agreed with Representative Thompson that that
companies had invested billions. They did not get all of
their money back except the portion that was part of the
credit as stated in law.
2:49:27 PM
PAT FOLEY, CAELUS ALASKA, ANCHORAGE (via teleconference),
suggested the bill represented the end of an era. He noted
that Pioneer started its business in Alaska in 2002 under
profit-based production tax (PPT). Between Pioneer and
Caelus, they had invested over $2 billion in the state.
They participated in about a dozen exploration wells,
developed Oooguruk, commenced operations on its Nuna
development, and made a substantial discovery in Smith Bay.
All of the work he mentioned had been done under various
tax credit programs that helped assist the company's
financing. All of the credits had ended with the passage of
HB 111 [Legislation passed in 2017 - Short Title: Oil and
Gas Production Tax; Payments: Credits].
Mr. Foley thought HB 331 would bring an end to the state's
obligation to repay the tax credits. He articulated that
the state had been the beneficiary of a number of items as
a result of the investments made by the oil companies. He
also asserted that the large number of investments in the
state was beneficial as was a diverse population of
explores and developers. He asserted that Alaska was a
high-cost environment with substantial barriers to entry.
The tax credit program that began more than a decade ago
helped to level the playing field between the large
existing legacy producers and the new companies trying to
grow and incubate their businesses in Alaska. The state had
seen benefits from all of the tax credit programs through
jobs, production down tax taps, and increased royalty
payments. He indicated that it was not the big legacy
producers that had been the beneficiaries of the recent tax
credit programs. It was companies like Caelus, Repsol,
Brooks Range, Great Bear, Doyon, CIRI, Arctic Slope
Regional Corporation (ASRC), Blue Crest, Fury, and SAE that
have made the investments and were entitled to the payments
that would hopefully result under the bonding program.
Mr. Foley asserted that if the bill was able to become law
and the credits were paid to the bonding program, it would
demonstrate the state taking great steps to help its
reputation and making good on its obligations. It would
also help to put money back into the hand of developers
allowing new investments to be made in Alaska.
Mr. Foley believed that HB 331 represented good policy - a
win for the state, and a win for investors. The credit
holders would be paid out earlier than what the statutory
minimum formula provided. Companies would take a small
haircut, a discount they were willing to accept. The amount
of the discount (the interest cost of the repayment) was
similar to the company's cost to capital at 10 percent. If
his company was able to enjoy the lower discount rate it
would be economical money and a fair deal for the state and
the investor. The state helped clear all of its obligations
to repay the taxes and, from a cash flow standpoint, the
state minimized its 2018 cash obligations. Absent the
program, he believed the statutory minimum obligated a
payment of about $184 million. He thought Commissioner
Fischer had testified that the interest payment the state
would incur in 2018 was about $27 million.
Mr. Foley offered that he thought it was good policy that
the bill provided two different discount rates. It created
an incentive for more activities in the state. It
encouraged investors to put money back into the state. He
thanked Representative Wilson who reminded the committee
that the tax credit holders had made literally billions of
dollars in investments in the state. Those investments had
resulted in jobs, production, royalties, and other tangible
benefits to the state. The investments had earned the tax
credit certificates. The bonding program would resolve the
repayment of those tax credit certificates. He thanked the
administration for making it a priority to repay the tax
credit obligation that existed. He asked the committee to
pass HB 331 and for the legislature to write the bill into
law. He thanked the committee and offered to answer any
questions.
2:55:05 PM
Representative Grenn asked Mr. Foley if he could share the
amount Caelus was owed in tax credits.
Mr. Foley responded that the amount was close to $190
million in tax credit certificates.
Representative Grenn asked what would be happening at
Caelus the day after the passage of the bill.
Mr. Foley responded that the company would be happy. The
company had loans against the $190 million in tax credit
certificates. The company would be poised to pay off the
loans and to attract additional investment through equity
or debt or a combination to allow Caelus to move forward
with the Nuna project and to drill an additional appraisal
well in Smith Bay. It should set the environment to
facilitate other investment in the state.
Representative Wilson thanked Caelus for its investment.
She asked him if he was comfortable with the added
requirements to receive the higher discount.
Mr. Foley responded in the affirmative. He believed Caelus
would be in a position to make investments in the state
that exceeded the $190 million tax credit certificates. He
was confident his company would be entitled to the lower
discount rate. Having said that, even if his company was
discounted at 10 percent, he would have to go into the
market to borrow more money. He thought the cost to borrow
that money would be in the neighborhood of 10 percent.
Representative Wilson asked if Caelus had put any projects
on hold as a result of the credits not being paid.
Mr. Foley responded, "Yes and no." Although it was not a
direct connection, the fact that credits were not being
paid and discussions continued at the legislature about
reshuffling production taxes made it difficult for Caelus
to attract investment dollars. He elaborated that Caelus
had been out in the market place for more than a year
trying to obtain financing for the Nuna development and
additional work at Smith Bay. It had been difficult for
Caelus to obtain financing. The company had yet to be
successful. He hoped the legislation would be a first step
in facilitating the company's ability to attract capital.
Representative Wilson thanked Mr. Foley again for his
investment.
Representative Pruitt asked Mr. Foley what the value of
$190 million would translate to in future Alaskan jobs and
potential production.
Mr. Foley responded that Pioneer and Caelus have had as
many as 900 employees and contractors working for them
simultaneously on the slope. Today they had less than 50
working on the North Slope and about 50 employees in
Anchorage. He indicated that Oooguruk had totally been
developed within some kind of a tax credit program. The
company had made about $30 million barrels of production
thus far. The company's daily production was a little more
than 13,000 barrels per day. He relayed that the company's
Nuna development project was the next development project
it hoped to begin work on soon. He claimed that the Nuna
project would be about 15 million barrels plus, peak
production was about 25,000 per day. Peak jobs would be
over 200 or 300 during the construction phase. The total
investment for Nuna would be more than $1 billion.
3:01:01 PM
JEFF HASTINGS, CEO, SAEXPLORATION, ANCHORAGE (via
teleconference), read a prepared statement:
Good Afternoon;
I would like to start by extending my appreciation to
Chairman Foster and Chairman Seaton and members of the
House Finance committee for allowing us to participate
in today's testimony.
For the record my name is Jeff Hastings. I am the
Chairman and Chief Executive Officer for
SAExploration, and the managing member of Kuukpik/SAE,
our Joint Venture with the north slope, native village
of Nuiqsut. My family has lived in Alaska since 1987.
Our core business is offering seismic data acquisition
services to the oil and gas industry. We are not an
oil company we simply provide the seismic data to
help the State and companies know where to look in
order to find oil more effectively and efficiently.
Our company has employed an average of 400 Alaskans
annually. We are the holders of approximately
$50,000,000.00 of assigned tax credits and continue to
wait for an additional $21,000,000.00 in assigned
credits, which are still in the process of being
verified and audited for more than two years. Since we
are not an oil company, we do not have any long- term
production prospects for making up the money that is
owed our company for all the work we performed.
Instead, we have been forced to restructure and
downsize our company as we await payments from the
State of Alaska.
Today I would like talk in support of HB331, which if
passed would provide a mechanism to pay off the
existing oil and gas tax credits owed by the State
through the issuance of bonds.
Over the past couple years, we have felt adverse
effects as a result of prolonging the period in which
the oil and gas tax credits are verified, issued, and
ultimately paid. As an Alaskan company and as
Alaskans, we understand the state's fiscal dilemma and
appreciate the Legislature's efforts to find long term
fiscal solutions. But circumstances are such that we
need to work together today to find a solution, and
HB331 offers a pathway.
In our sector of the industry, seismic data
collection, we have experienced a continuing downward
trend in activity since the governor's first
appropriation veto in Q2 of 2015. Year over year, a
50% decrease in the dollars being spent on new data,
data needed to identify new reserves that the state
needs for its economic well-being. In 2015,
$200,000,000.00 was spent on new high-resolution data.
In 2018 there will be less than $20,000,000.00 spent
on new seismic data collection. Perhaps more
importantly are the jobs that have been lost and
continue to be reduced year after year. As a company
we have gone from employing 400 Alaskans and
multitudes of Alaskan subcontractors for 8 to 9 months
a year, to a company that employees 150 Alaskans and a
few select Alaskan contractors for 45 days in 2018.
This is not a result of a loss in our market share to
competition or a continued downturn in the commodity
price. It is simply due to a lack of capital spending,
be it our clientele waiting on tax credits owed to
them individually or a lack of confidence in the
State's oil and gas tax policy. Their capital budgets
are being directed to other basins and opportunities
where there is a higher level of confidence.
The governor's tax credit appropriation vetoes, the
debate about annual minimum appropriations, and the
two DOR advisory bulletins 2016-01 and 2017-01, which
effectively shut down the secondary market, have all
combined to create a business environment without
meaningful consistency. Please know that this isn't
trying to cast blame or fault anyone all of us are
doing our best to cope with the State's fiscal
situation. But I point these things out to you with
the hope that we can move forward with HB331 as a
solution.
Working together and passing this bill will create
opportunities to bring online the reserves that the
state desperately needs to solve our fiscal gap,
opportunities which are now effectively sidelined due
to the current situation. Except for one exploration
effort in 2018, the capital needed to get us back to
work is not being allocated. Project after project
suspended because of a lack visibility, resulting in a
lack of capital available, both the institutional
capital and the private capital needed to move
projects forward because of the continued erosion of
confidence in the consistency of our oil and gas tax
policy and plan to pay the outstanding credit
liability.
Recent data from DOR would indicate that the 2016 and
2017 credits, depending on the annual allocation will
not see payments begin until fiscal 2021 and may not
see the full amounts paid until sometime beyond fiscal
2024 or 2025. This data would indicate an even more
protracted period of low activity.
The DOR projections for commodity pricing over the
near-term show that we cannot depend on an increase in
price of oil to solve this issue. And yet as a state
we need more production and more revenue generated by
that production to bridge our fiscal gap and the
future needs as a State. To do that we need the
industry off the sidelines and working to increase our
throughput.
We believe HB331 provides a path to restarting the
industries engine. Is it ideal - - no. On one side of
the equation no one wants to have to take a haircut on
monies owed. On the other you can argue why, should
the State take on the debt and service of the debt
even if the, discount provides for an offset.
The level of the discount will be a company by company
choice. Dependent on the current projected payment by
DOR, their cost of capital and their need for new
project capital.
What HB331 does do is create confidence in when
companies will be paid, how much they will be paid and
normalizes the amount that the state will need to
appropriate each year against the tax credit liability
More importantly it gives us the ability and
confidence as an industry to find the capital we need
for new or suspended projects. And it puts our Alaskan
families back to work.
Thank you for your time today and the opportunity to
share our view point.
3:08:26 PM
Representative Thompson asked for a copy of Mr. Hastings'
prepared statement.
Mr. Hastings confirmed that he had submitted it.
Co-Chair Foster indicated that Mr. Alper would be providing
the sectional analysis.
3:09:15 PM
KEN ALPER, DIRECTOR, TAX DIVISION, DEPARTMENT OF REVENUE,
offered to review the bill in as much detail as the
committee required. He also conveyed that he could
potentially answer some of the questions that came up
during testimony earlier in the meeting.
Mr. Alper specified that there had been a question on the
prior Saturday posed by Representative Kawasaki. He had
given a preview to the section and indicated that the bill
did 4 things. He would keep the structure of the 4
subtopics as he reviewed the bill in greater detail. He
reviewed the sectional analysis.
Section 1:
Exempts the bond corporation created in Sec. 2, and
any overriding royalty interests negotiated under Sec.
11, from the procurement code.
Section 2:
Establishes the Alaska Tax Credit Certificate Bond
Corporation within DOR. [Largely patterned after
Alaska Pension Obligation Bond Corporation, AS 37.16]
37.18.010 Creates the corporation.
37.18.020 Establishes the board of directors, all of
whom are state department commissioners.
37.18.030 Authorizes the corporation to issue bonds up
to $1 billion and contract for associated services.
37.18.040 Authorizes the corporation to have a reserve
fund which will hold funds to be used for repurchase,
as well as funds appropriated for the purpose of
interest and principal payments to bond holders.
37.18.050 Authorizes the corporation to set the terms
of bonds to be issued.
37.18.060 Corporation must adopt a resolution to
approve the issuance of bonds.
37.18.070 Gives certain enforcement rights to certain
bond holders.
37.18.080 Bonds may not be issued unless the discount
rate by which tax credits are purchased is at least
1.5 percent greater than the total interest cost of
the bonds.
37.18.090 Corporation may refund bonds prior to the
maturity date.
37.18.100 Bonds are legal instruments.
37.18.800 This chapter shall be liberally construed to
carry out its purposes.
37.18.810 Corporation may adopt regulations necessary
to implement this chapter.
37.18.900 Definitions.
Section 3:
Amends the Gas Storage Credit to enable repurchase of
any credits via the bond program.
Section 4:
Amends the LNG Storage Credit to enable repurchase of
any credits via the bond program.
Section 5:
Amends the Refinery Infrastructure Credit to enable
repurchase of any credits via the bond program.
Section 6:
Amends various provisions of AS 43.55.028, the tax
credit repurchase fund.
.028(e) The department may either use the tax credit
fund money, or money disbursed from the bond program,
to purchase tax credits. Written to maximize
flexibility and retain the existing program and
procedures.
Section 7:
.028(g) Clarifies that the current $70 million per
company per year cap, with the associated "haircut",
does not apply to repurchases via the bond program.
Section 8:
.028(i) Adds definitions for "money disbursed to the
commissioner," and "total interest cost."
Section 9:
.028(j) Clarifies that if a company has an outstanding
liability to the state, this can be offset against a
payment via the bond program as well as via
traditional repurchase.
Section 10:
.028(k) New section authorizing the department to
negotiate a repurchase of all credits held by a
company and describing how the holder of credits
indicates their desire to participate in the program.
This section contemplates that if a holder of credits
existing at the time of a bond issuance declines to
participate in the program, such holder is precluded
from submitting such existing credits for purchase in
connection with future bond issuances. This provision
does not preclude such holder from submitting credits
claimed after a bond issuance for purchase in
connection with a future bond issuance.
.028(l) New section describes the mechanism by which
the department estimates the expected cash flow to a
company via the current repurchase process and
expected schedule. From this estimate, a purchase
offer can be calculated based on the discount rate
determined in (m).
.028(m) New section establishing a base discount rate
of 10 percent, with four methods to reduce this to a
number equal to total interest cost + 1.5 percent.
1. For a seismic credit, the company has waived
the 10-year confidentiality period for the data
and allowed it to become public;
2. The company has agreed to an overriding
royalty interest (ORRI) accepted by the
Department of Natural Resources;
3. The company has committed reinvest the entire
amount received within an Alaska oil and gas
project within 24 months; or
4. The credit is against the corporate income
tax, primarily impacting refinery infrastructure
credits.
.028(n) New section clarifying that the amount of a
credit in excess of the discounted amount purchased
retains no value and cannot be used against taxes or
sold.
Section 11:
Authorizes the Department of Natural Resources to
negotiate Overriding Royalty Interests (ORRI). These
are then valued, and a determination is made whether
the incremental value received by the state warrants
the approval of the lower discount rate for purposes
of credit repurchase.
Section 12:
Authorizes DNR and DOR to adopt regulations to
implement this act
Section 13:
Authorizes retroactive application of regulations.
Section 14:
Immediate effective date.
Mr. Alper summarized Section 1 having to do with the
procurement code. There were two new pieces of the bill in
which certain new state activity would not explicitly
require going through the details of the state procurement
process. First was the bond corporation and the second was
the acquisition of those overriding royalty interests
through DNR in Section 11.
Mr. Alper reported that Section 2 wrote a new chapter into
statute, AS 37.18, which creating a new state bond
corporation for the purpose of the Alaska tax credit
certificate bond corporation within DOR. The section was
modeled after very similar language specific to the pension
obligation bond corporation law that passed through the
body about 10 years prior. There were many subsections
within Section 2 and took up about half the length of the
bill.
Mr. Alper referenced AS 37.18.010 which created the
corporation. He conveyed that AS 37.18.020 established a
board of directors which included three commissioners: one
from DOR, one from the Department of Commerce, Community
and Economic Development (DCCED), and one from the
Department of Administration (DOA). He reported that AS
37.18.030 authorized the board could sell up to $1 billion
in bonds. He was expecting multiple bond issuances,
although, the first one would be the "big" one - roughly
$700 million presuming most companies participated in the
program.
Mr. Alper indicated that AS 37.18.040 was the reserve fund.
It provided much of the meat of how the legislature would
appropriate money to pay the principle and interest of the
bonds. The language was spelled out in AS 37.18.040 and had
a number of subsections. He moved to AS 37.18.050 which
authorized the corporation to set the terms of the bond.
The last bonds would be issued by the end of 2021. It fit
in with the state's expectation that the last cashable tax
credits, the last refinery credits, and potentially the
credit the interior gas utility would request, would come
into the state sometime in 2020.
Mr. Alper returned to Representative Wilson's question
about refinery credits. The refinery automatically came
into the system at the lower discount rate. It was a
specific care-out in a later section of the bill. In terms
of talking about getting the lower discount rate through a
reinvestment commitment, it was external to the refinery
credits. It applied to companies holding the more
traditional operating loss or exploration spending type of
credits. He would talk about it in greater detail when he
reached the applicable section.
Mr. Alper continued to AS 37.18.060 which required the
corporation to issue a resolution to authorize the selling
of the bonds. Alaska Statute 37.18.070 housed enforcement
rights. Alaska Statute 37.18.080 inserted a restriction
which only allowed the state to issue bonds if the state
received a discount the equivalent of at least 1.5 percent
above the total interest cost. The total interest cost was
a standard financial term which referred to the interest
and associated fees.
Mr. Alper explained that 37.18.090 was a repurchase ability
that allowed a corporation to buy them back prior to the
maturity dates. Alaska Statute 37.18.100 indicated they
were an official legal instrument of the state. He reviewed
AS 37.18.800, AS 37.18.810, and AS 37.18.900.
Representative Wilson asked why a corporation was being
created.
Mr. Alper was aware that the method had been used
previously. He cited the pension obligation bonds as a
comparable example. As far as any legal reason or
requirement, he deferred to Mr. Barnhill.
3:16:03 PM
MIKE BARNHILL, DEPUTY COMMISSIONER, DEPARTMENT OF REVENUE,
reported that at the outside of the design and envisioning
how to construct the bill, the department had considered
having the state bond committee issue the debt. It was on
the advice of tax council that, specifically because the
use of a corporation was approved by the Alaska Supreme
Court in the Carr-Gottstein case, they thought it was a
useful thing to include. The department had recently used
the same structure 10 years prior for the pension
obligation bond. The department thought it was a familiar
structure for the legislature and did not anticipate any
controversy.
Representative Wilson asked if the corporation would be
dissolved once the final payment was made.
Mr. Barnhill replied there was no sunset clause in the bill
and would remain on the books until the legislature decided
to repeal it.
Co-Chair Seaton asked if there was any reason why the
legislature would not want to include a sunset date after
the fees were paid off.
Mr. Barnhill commented that there was no reason not to
include a sunset. He was hesitant about defining a sunset
date in the event there was some sort of refunding that
extended the term. They would want to make sure the
corporation existed all the way through the term. He
thought the better practice might be to wait until the
program was complete, at which time the department could
come back to the legislature to repeal it.
Mr. Alper mentioned that the ability to issue the bonds was
fixed in the bill and expired at the end of 2021. If a
delayed repeal was going to be inserted it would need to be
about 10 years after that time. There was a precedent in HB
111 that had a delayed repeal for the tax credit sections
themselves in AS 37.18.028 1 year after the last credit was
paid off. It was not a fixed date. Rather, it was when a
condition was met. It was in a transitional section - a
noncodified section at the end of the bill.
3:19:09 PM
DEVEN MITCHELL, EXECUTIVE DIRECTOR, ALASKA MUNICIPAL BOND
BANK AUTHORITY, DEPARTMENT OF REVENUE, thought Mr. Alper
provided great answers. If there was language that was
conditional upon the maturity of all outstanding
obligations, the entity would cease to exist, which would
have to be after 2021.
Co-Chair Seaton commented that it would be nice not to have
to come back with another bill to repeal the corporation.
Representative Pruitt asked if the corporation would have
to remain in existence as long as the bonds were
outstanding. The current model had the state paying out
until 2031. He thought there was interest in inserting a
sunset date for the corporation.
Mr. Mitchell clarified that it would be after the final
payments were made rather than a specific date. He was
unclear what the future held and did not think the
legislature would want to limit flexibility into the
future. He suggested that a hard sunset date of 2035 would
be sufficient. He did not believe it would impair the
state's ability to market and issue the bonds.
Representative Pruitt clarified. Mr. Mitchell responded in
the affirmative.
Mr. Alper continued to review the sectional analysis. He
indicated the next sections addressed Title 43, tax laws.
Sections 3, 4, and 5 were connected. They were in AS 43.20,
the corporate income tax statute. They reflected the three
credits outside the traditional system that were also
eligible for cash repurchase. Alaska Statute 43.20.046 was
the gas storage credit used for the Kenai facility a few
years prior. Alaska Statue 43.20.047 reflected the
liquified natural gas (LNG) storage credit that would be
used for the interior gas utility. AS 43.20.053 was the
refinery credit. All of these sections had a subsection
that specified the credits were eligible for repurchase
through the state's tax credit repurchase program. Sections
3, 4, and 5 were being amended to create an alternative
repayment so that they would also be eligible to purchase
through the new mechanism of the bonding fund. The term in
the bill was "funds dispersed to the commissioner from the
tax credit bond corporation" which meant the bond sales
proceeds could be used to repurchase the credits. It
created a parallel, alternative payment.
3:23:15 PM
Mr. Alper spoke to Sections 6-9 amending existing sections
of AS 43.55.028, the tax credit fund and the rules around
which the state used that fund to repurchase state tax
credits. Alaska Statute 44.55.028(e) in Section 6 created
the same alternative flexibility. It allowed the state to
purchase credits with money in the fund or the fund could
be used as a conduit to do the bond repurchase through the
bond sales and the money dispersed to the commissioner from
the bond corporation.
Mr. Alper continued to Section 7, a newer section that
amended AS 43.55.028(g). The amendment was done 2 years
previously through HB 247 [Legislation passed in 2016 -
Short Title: Tax; Credits; Refunds; O and G]. House Bill
247 eliminated the Cook Inlet credits and inserted a cap
that prevented a company from getting more than $70 million
per year in cash repurchases. The department needed to
create a statutory waiver, which was in Section 7 of the
bill.
Mr. Alper reported that Section 8 contained definitions.
One of the definitions was "money dispersed through the
commissioner" which included the bond proceeds and total
interest costs.
Mr. Alper relayed that Section 9, another new section,
amended AS 43.55.028(j) which was added by HB 247. It
ensured that if a company owed money to the state through
another tax, royalty, fine, or a fee related to the oil and
gas business, the state could offset them with the tax
credit payments. The department could back out the
obligations without a company's permission paying the
company the net amount. Section 9 was amended to also
include the measure within the tax credit bonding program.
In the case of a company that might stand to receive $90
million, if they owed $5 million to the state through
something they were delinquent on, the state would pay its
own liability and give the company the remaining $85.
3:26:04 PM
Mr. Alper continued to the bulk of the changes which were
in Section 10. Section 10 added four new subsections to
AS 43.55.028 that talked about how a company would
participate in the program. The first subsection,
AS 43.55.028(k) was the mechanism by which a company
offered its tax credits to the program. The companies were
solicited and indicated whether they wanted to sell. If
they wanted to sell, companies could not pick and choose
their credits because all the old credits would get bumped
up to be first in line to get better access to the
remaining cash. Alternatively, companies would be able to
participate in a better rate in a second round. The statute
clarified that a company had to commit all of its credits.
If a company did not participate with the credits it had,
those credits would not be available for purchase through
the bonding program in subsequent years. If a company
earned new credits between now and the second round, the
new credits would be eligible in the second round of
financing.
Mr. Alper continued to explain AS 43.55.028(k), which
included the idea of timing. Companies had to make an
irrevocable commitment by time certain, the commissioner
came up with amount the state would give the company, and
the company would either accept or reject the state's offer
in writing. If a company rejected the states' offer, they
waived their right to participate in future rounds through
the program.
Mr. Alper explained AS 43.55.028(l) was the mechanism to
calculate how much the state was going to pay a company
based on the idea of an anticipated prorated amount. There
were three new definitions embedded in subsection l;
assumed payment amount, assumed appropriation, and assumed
proration methodology. It clarified that the state would
first pay all of the 2016 credits pro rata among all of the
companies that held them, then the state would pay the 2017
credits. He suggested that assuming the state would make
annual calculations based on the statutory formula, the
statutory formula was reference in subsection l in a way
that clarified any ambiguity. It stated taxes levied by
O-11 before the application of any tax credits. For the
purpose of this calculation only the state was locking in
184 in 2019 and 168 in 2020 and beyond. Presuming the
stream of appropriations appended, it defined any given
company's share.
Mr. Alper continued that AS 43.55.028(m) defined the
discount rate was 10 percent per year, unless a company met
one of the four criteria (see above). He elaborated that in
subsection (3) the reinvestment requirement was deliberated
extensively and the 24 month commitment for reinvestment
was decided on. He mentioned potential amendments to
strengthen authority.
Mr. Alper discussed AS 43.55.028(n) noting that he did not
expect to see it in the bill. He admitted not understanding
it to start. It indicated that if a company was to sell
something at less than face value, they could not turn
around and keep the amount that was discounted to collect
on later. By selling something at a discounted rate, it
overtly retired the discounted amount.
3:31:21 PM
Mr. Alper moved to Section 11, which had to do with DNR. It
addressed the process by which overriding royalty interests
were negotiated and accepted. There had to be an offer that
had to be valued, risked, discounted, and turned into cash
flow. The offer had to be valued at a minimum of the
difference between the higher discount rate and the lower
discount rate. For example, a company would receive about
$85 million at the 10 percent rate and about $92 million at
the 5.1 percent discount rate - a $7 million difference.
The overriding royalty interest had to be worth at least $7
million to the state for the Commissioner of DNR to be able
to sign off on the transaction.
Mr. Alper reported that the remainder of the bill contained
housekeeping sections that always appeared at the end of a
complex bill. Section 12 authorized regulations. Section 13
authorized retroactivity of regulations. Section 14
outlined the bill would have an immediate effective date.
If the bill passed without an effective date, it would go
into effect 90 days after the governor signed the bill into
law.
Co-Chair Seaton referred to Section 6 on page 2 of the
sectional. He asked for more information regarding 028 for
the payment or disbursement of bonds. He asked if the
section would impact constitutional or state debt.
Mr. Alper explained that the 028 fund was a fund in which
the traditional appropriation passed through the fund.
Without further appropriation, the DNR staff had been
making the purchases of tax credits for the prior 10 years.
The language in Section 6 stated that the money that came
through the bonds could also be used to purchase the tax
credits. It did not actually pass through the 028 fund. In
fact, the conforming language on page 9 of the bill stated,
"The Department may not purchase with money from the oil
and gas tax credit fund more than $70 million in tax credit
certificates." The real purpose of Section 6 was to
establish that the old system still existed but that there
were certain rules to the old system that did not apply to
the bond system. In terms of debt capacity, he deferred to
Mr. Mitchell.
3:35:37 PM
Co-Chair Seaton asked specifically about the department
because the department spent from the 028 funds. He was
concerned with state debt and the department doing the
purchasing.
Mr. Barnhill responded that in DOR's and the Department of
Law's view, debt as it was used in the Alaska Constitution
(Article 9, Section 8) had a very specific meaning of "Term
of Art." It meant that it was the kind of debt in which the
state had pledged its full faith and credit of the state.
If debt was issued that did not do that, then it was not
debt governed by the Alaska Constitution. There was nothing
in the bill that pledged the full faith and credit of the
State of Alaska, therefore, it was not debt governed by the
Alaska Constitution. The issue of revenue or other items in
the bill that triggered the Alaska Constitution's
definition of debt was not part of the bill. He reiterated
that the bill did not pledge the full faith in credit of
the State of Alaska. Instead, it disclaimed that the full
faith in credit as not pledged and therefore, not state
constitutional debt. The perspective was held strongly by
the Department of Law and the bond council. Many issuances
using a variety of structures relied on that
interpretation. He indicated that the anxiety discussed on
the previous Saturday had never been contemplated but, the
department remained comfortable that the constitutional
issues were not triggered by the bill.
Mr. Mitchell mentioned that the statutes were modeled off
the Pension Obligation Bond Corporation. The department had
gone a significant way down the path of issuing those
obligations and contemplating how that commitment to pay
would be created. It was determined that there would be a
funding agreement in place. The Department of
Administration would enter into a funding agreement with
the corporation. There would be a one-time deposit into the
pension trust from the corporation's sale of bonds. In
exchange for that there would be a commitment to pay from
the state through DOA for purposes of satisfying the annual
debt service of the corporation. The appropriation would be
subject to the appropriation of the legislature every year.
It was the model that the department anticipated using for
the corporation, if the legislation was approved. There
would be a funding agreement that the corporation would
enter into with DOR. Having a public corporation at an
arms-length legal existence from DOR helped in the effort.
The Department of Revenue would enter into a contractual
commitment with the corporation which would provide a one-
time funding each time there was a transaction. In
exchange, it would receive a commitment from the department
to seek an annual appropriation for the funding agreement
payment amounts. They would consist of the annual debt
service related to the bond issuance and perhaps the annual
$2,500 for paying agent services, an ongoing contractual
fee with every bond issuance.
3:40:54 PM
Co-Chair Seaton wanted to make sure there were no
complications when transferring the funds into the existing
028 fund. He asked if there was an amount that would
provide a better rate. He asked Mr. Mitchell to comment.
Mr. Mitchell thought his question was interesting because
there were different buyers that participated in different
size transactions. Specific to taxable transactions, bigger
was definitely better. There were investors that looked for
a $50 million block size. In other words, it meant that
they wanted $50 million for themselves and wanted other
people to have $50 million blocks so that there was a high
probability for secondary market liquidity. It meant that
they would be able to trade the paper later on in the event
of their needing to get out of their position. The
municipal market was a little different. It did not have
some of the same thresholds that the taxable market had. In
order to get the market's attention, it helped to have
size. He suggested that a transaction of $100 million would
attract the market's attention. A transaction of $5 million
would attract a different class of buyers. Institutional
investors would look at the larger transactions. The
department did not know what it would be selling on a
taxable tax exempt basis because it required additional tax
work. If the department had an $800 million transaction
that went 50/50 or 60/40 it would be a highlighted
municipal market issuance. Due to tax law changes people
could not do "advance for funds" anymore in the municipal
market, and the ability to refinance bonds had diminished
supply. Therefore, a $400 million or $500 million issuance
coming out of an issuer would glean a significant amount of
attention currently. On the taxable side, while it might
not be billions, he thought it was a sufficient size to get
good market interest in the transaction.
Co-Chair Seaton wanted DOR to look at Section 7 where the
bill removed the $70 million cap. He suggested that if DOR
anticipated it would be able to sell all of the bonds
without any interest difference he was okay with it.
Otherwise, he thought the legislature should consider some
pro-rata amounts if the bond issuance was lower than what
people were willing to pay. He wanted to be asking the
appropriate questions on the sections in the bill.
Mr. Barnhill added that in terms of how it would work with
deposits into the fund, with many transactions the
department often funded money in an escrow account. There
would be a requisition process for obtaining money out of
the fund for qualified expenditures. He used the structure
used at Goose Creek for an example. As the project was
conducted and built by the Matanuska-Susitna Borough, there
would be a requisition from the borough to the construction
fund with sign-off from the state bond committee for the
purpose of paying contractors. If there was going to be an
issue with money being deposited directly into the fund,
the structure could be considered as well.
3:45:38 PM
Representative Wilson asked if a specific plan was in the
bill.
Mr. Alper responded that the concept of 2 years of interest
only and the rising principle was not defined in the bill.
However, the notion that the corporation had the authority
to establish the terms was included in the bill. The market
would help to establish the terms, as the people buying the
bonds might have certain preferences. It was the intent of
the administration to move forward with the way it modeled
and presented it the prior Saturday.
Representative Wilson asked about the effects of it being
higher.
Mr. Alper replied that if the interest rate was higher than
the administration was showing, then the discount rate at
which the state would be buying the credits would also be
higher. In other words, the state would be buying them for
a little less money to cover the fact that the interest was
larger. The lower discount rate for the companies
participating would not be set until the last minute at
which time the state would likely know the interest rate.
If Representative Wilson's question was about restructuring
the timing of the payment, it would change the timing of
the payments and increase the amount the state would have
to pay in the first couple of years. The net effect was
still advantageous to the state - the numbers were slightly
different. Currently there was a $27 million fiscal note
attached to the bill with the assumption of the state's
interest obligation for 2019. He suggested that if the
bonds were sold under different terms, the state would have
to come back to the legislature with a supplemental
request.
Representative Wilson was concerned about different terms
for different companies. She was also concerned with adding
another bonding obligation to the Public Employees'
Retirement System (PERS) and Teacher's Retirement System
(TRS) bonding obligation. She had a question for the
commissioner. She referred to a company that had
development plans currently. She wondered if they would be
required to make new development plans to meet their
obligation for 2 years of showing their intent to invest in
Alaska, or whether they could use what they had in place
with DNR.
Commissioner Fisher commented that Representative Wilson
had a great question. He would return with an answer at the
next hearing.
3:49:40 PM
Representative Wilson did not want to make things more
difficult for the companies, as it was a stipulation being
added.
Commissioner Fisher responded to Representative Wilson's
question about PERS and TRS. He explained that when PERS
and TRS was added to the new schedule the state was
flattening out the total amount of the payment as a
percentage of state UGF. He thought there was a benefit. He
remarked that PERS and TRS were rising and the tax credit
bonds would be rising in the outyears. However, it would
not peak at the same high level it would if the state did
not do the proposed program.
Representative Wilson remembered that it also depended upon
oil going up more than what it was presently. She recalled
contemplating the price of oil going up. However, she did
not want to bet the state's budget on the price of oil.
Commissioner Fisher conveyed that the administration
believed that pushing the payments out was an appropriate
strategy because of anticipating an improvement in the
state budget. Under the status quo, if the state did not
enact the legislation, the combination of debt, PERS and
the TRS, and the credits would cap out at about 31 percent.
He continued that with the program it capped out about 24
percent. His point was that the program would supply a
smoother and flatter overall expense to the state,
regardless of what happened with oil.
Representative Ortiz asked why the state might or might not
want to pass HB 331. He recalled asking Mr. Mitchell if,
with the passage of HB 331, there might be a potential
impact on the state's ability to bond to protect the
state's infrastructure. He asked Mr. Mitchell to further
comment on what the state's ability to engage in a bond
program for infrastructure might be if the bill were to
pass.
Mr. Mitchell noted that, from a management perspective,
there were pros and cons to the state having a liability
that was being refinanced. It was not as impactful as a new
obligation but would take a soft liability and make it a
hard liability. There would be no optionality in payment
and would have an impact on rating agencies. Also, it would
be included in net tax supported debt when considering the
state's debt capacity. He thought it would have not quite a
full $800 million worth of impact on the state's capacity
but an impact of about $200 million. In the debt
affordability analysis release earlier in the year, the
state opined that the current debt capacity of the state,
given the metrics that the state followed and the current
unrestricted general fund revenue forecast from the fall,
was in the range of about $300 million to $400 million.
There were several other variables in play. Without
considering the other matters, it had an impact on the
state's current ability to borrow.
3:55:08 PM
Representative Ortiz asked if it was safe to say that 10
years prior the state was more apt to be all things to all
people. He asked if, by going down this road, the state was
limiting its options for future legislatures and their
ability to address certain issues.
Mr. Mitchell replied that there was a budgetary smoothing
as a result of the proposal in the bill which allowed some
flexibility. In an ideal world, the state would have a
capital project plan that was embedded with a debt
management component. There were highly essential projects
funded on a routine and regular basis using a policy that
flowed from one group of elected officials to the next.
However, circumstances had been much more ad hoc.
Representative Guttenberg mentioned the legal opinion
letter provided by Legislative Legal Services on the
constitutionality of the bill. The legislature had also
received a press release from the attorney general on the
issue. He mentioned a document from the commissioner as
well. He was looking for a broader basis to have a
conversation.
3:58:07 PM
Vice-Chair Gara asked about the impact of the bill on the
state's bonding capacity. He wondered about an amount or
specific numbers.
Commissioner Fisher asked if the assumption would be that
the Percent of Market Value (POMV) legislation passed.
Vice-Chair Gara responded both ways.
Commissioner Fisher replied that it might be fair. However,
his assumption was that the notion of the capital budget
was premised on the assumption there would be a POMV that
would fund it. He could talk about it both ways. Obviously,
if the POMV bill passed, the answer to Vice-Chair Gara's
question would be much easier to answer.
Co-Chair Seaton explained that if a POMV passed there would
be an expectation that the earnings reserve would be
available for state spending and supporting state services.
The difference was whether an asset was counted or not
counted regarding a bondable amount.
Commissioner Fisher answered that with a POMV in place the
state would experience a much larger bonding capacity
amount.
Mr. Mitchell answered that the debt affordability analysis
that the division released in January used the fall
forecast. The state's historical metrics for purposes of
determining capacity was to have general obligation debt
and state supported debt be no more than 5 percent of UGF
revenue. The division did not want the debt to be more than
8 percent if the school reimbursement debt was added. The
division had not been incorporating the obligations that
the state had placed upon itself through the payment on
behalf of the employer situation with PERS and TRS.
Employees were held harmless at percentage of payroll
levels - not making them pay the actuarially determined
payroll levels. He continued that with the analysis the
department's projected UGF revenue was about $2.3 billion.
The state's existing debt was declining because the program
was mature and had step-down obligations. The state had
some new obligations that had to be issued but were already
authorized. He commented that a 10-year look-forward
resulted in a debt capacity of between $300 million to $400
million. In other words, over the following 10 years the
state could be highly confident in maintaining a credit
rating with a debt issuance program of that amount. The
bill would have a significant impact on a percentage basis.
He suggested that a guesstimate of $200 million impact was
accurate, about half of the limited capacity.
Mr. Mitchell indicated that if a POMV passed, $1.7 billion
would be available for UGF spending on an annualized basis
and growing with inflation at 2.25 percent. The ratios
looked much better. He did not believe it could be the same
analysis that had been used in the past. The department
needed to have a holistic review of the debt affordability
analysis. He had been hesitant to go the high end of the
historical analysis. It would increase the state's debt
capacity by about $1.7 billion.
4:04:42 PM
Vice-Chair Gara asked if it would be $1.7 billion with the
passage of the bill.
Mr. Mitchell replied that if the bill had a $200 million
theoretical impact, the state would have a remaining
capacity of $1.5 billion. He was projecting on the low end.
He was reluctant to use the historical metrics without
considering some of the shifts that had occurred since the
department started conducting the debt affordability
analysis with the payments on behalf of the employers. It
would result in a harder liability from a credit rating
perspective and would be included in the state's
Comprehensive Annual Financial Report (CAFR) with the
potential to have impacts.
Co-Chair Seaton had a question regarding Section 10 on page
3 of the bill. He referenced AS 43.55.028(m) and pointed to
the first item regarding seismic credits. He used a
scenario with two companies that were willing to release
their seismic data immediately. One of the companies was in
the early stage of development and the other conducted
seismic testing several years prior. He wondered how the
department would value the release of their seismic data.
Mr. Alper replied it was an important question which might
help clarify the issue the department was discussing about
seismic credits and what data would be provided. There were
certain credits that were earned for seismic work that were
still outstanding and unpaid. Those credits were for work
done in the past couple of years. If there was seismic
shooting done 5 or 6 years prior and there were credits
associated with them, they were long paid and not the
seismic data being considered for early release. The
department was looking for the seismic data that were
specific to the credit shoots that had the open tax credits
against them - a more recent vintage of tax credits. If the
state had a case where a company had some seismic credits
as well as other credits, it was only the seismic credit
that would be bought down to the better discount rate. They
would not be able to get all of their non-seismic credits
at the better discount rates simply to give the data for
their seismic credits. Mr. Alper asked if his explanation
helped.
4:08:20 PM
Co-Chair Seaton responded in the affirmative. He opined
that he had not been given a good explanation about how to
get two rates. He provided a hypothetical scenario. He
asked if it was an on-off lever of 10 percent or 5.1
percent.
Mr. Alper answered that the seismic credits were discrete.
There was a finite amount of them within a set. He
suggested that 10 percent to 15 percent of the total
outstanding credits were seismic related. He imagined a
split application where a company might have some
outstanding seismic credits and not be able to obtain a
better discount rate on a non-seismic credit. As far as the
reinvestment requirement, the way the division interpreted
it, the credit would not be able to be split. A company
would need to make a commitment in the full amount of their
cash out, whether $10 million or $200 million. The company
would need to commit the full amount of their payment
within the 24 month period. It did not anticipate someone
splitting the particular provision.
Co-Chair Seaton asked about the overriding royalty. If a
company had credits on several different operations, he
wondered if the overriding royalty was on each part of the
company's production. He provided another hypothetical
scenario. He asked if the overriding royalty was based on
the company's entire production or on the credits
generated. He asked if it was proportional or company-wide.
Mr. Alper answered that the overriding royalty section was
not explicit to the leases where there might have been
credits earned. The only requirement was that the company
had tax credits eligible for repurchase and then
negotiating an overriding royalty. They would be
negotiating with DNR for royalty on an associated lease or
on another lease under production. If they had a lease
under current production, it might be perceived as more
valuable to DNR because there might be much less risk
associated with it. There was not a requirement that all of
a company's leases be included. They needed to be offering
something of value to the state. The commissioner of DNR
would have to value the offering in such a way that it
would be worth the incremental money.
4:12:06 PM
Co-Chair Seaton asked if Mr. Alper was referring to the net
present value of the incremental amount based on the plan
of development.
Mr. Alper answered there would be the expectation of the
plan of development (when the company indicated they would
come online). There would be a certain risking that would
occur which was not unlike what DOR and DNR do in
generating the production forecast. There was a level of
uncertainty baked into the calculation, more or less
reducing the value of what the company's projected cash
flow would be. A present value would be assigned. The
result of the calculation, the discounted risk present
value, would have to be greater than the increment between
the higher and lower discount rates. He referenced the $7
million difference - the difference between $85 million and
$92 million. The calculation would result in something
perceived to be at least $7 million to the state.
Co-Chair Seaton thought it was good to get out more
explanation on developing the cost benefit to the state. He
thanked the presenters.
Mr. Alper took some notes and offered to speak now or write
a letter to the committee.
Co-Chair Seaton asked the department to submit the
information in writing. He reviewed the schedule for the
following day.
Representative Wilson asked if an amendment deadline for
the bill had been set.
Co-Chair Seaton answered that amendments were due on
Wednesday at 5:00 p.m. He recessed the meeting [note: the
meeting did not reconvene].
ADJOURNMENT
4:15:27 PM
The meeting was adjourned at 4:15 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB 331 - Support from ASRC.pdf |
HFIN 4/23/2018 1:30:00 PM |
HB 331 |
| HB 331 SAExploration House Finance Testimony 4-23-2018.pdf |
HFIN 4/23/2018 1:30:00 PM |
HB 331 |