Legislature(2015 - 2016)BARNES 124
03/09/2016 01:00 PM House RESOURCES
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| Audio | Topic |
|---|---|
| Start | |
| HB247 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 247 | TELECONFERENCED | |
| + | TELECONFERENCED |
HB 247-TAX;CREDITS;INTEREST;REFUNDS;O & G
1:30:34 PM
CO-CHAIR NAGEAK announced that the only order of business is
HOUSE BILL NO. 247, "An Act relating to confidential information
status and public record status of information in the possession
of the Department of Revenue; relating to interest applicable to
delinquent tax; relating to disclosure of oil and gas production
tax credit information; relating to refunds for the gas storage
facility tax credit, the liquefied natural gas storage facility
tax credit, and the qualified in-state oil refinery
infrastructure expenditures tax credit; relating to the minimum
tax for certain oil and gas production; relating to the minimum
tax calculation for monthly installment payments of estimated
tax; relating to interest on monthly installment payments of
estimated tax; relating to limitations for the application of
tax credits; relating to oil and gas production tax credits for
certain losses and expenditures; relating to limitations for
nontransferable oil and gas production tax credits based on oil
production and the alternative tax credit for oil and gas
exploration; relating to purchase of tax credit certificates
from the oil and gas tax credit fund; relating to a minimum for
gross value at the point of production; relating to lease
expenditures and tax credits for municipal entities; adding a
definition for "qualified capital expenditure"; adding a
definition for "outstanding liability to the state"; repealing
oil and gas exploration incentive credits; repealing the
limitation on the application of credits against tax liability
for lease expenditures incurred before January 1, 2011;
repealing provisions related to the monthly installment payments
for estimated tax for oil and gas produced before January 1,
2014; repealing the oil and gas production tax credit for
qualified capital expenditures and certain well expenditures;
repealing the calculation for certain lease expenditures
applicable before January 1, 2011; making conforming amendments;
and providing for an effective date."
1:31:09 PM
THOMAS RYAN, Managing Director, Structured Solutions Group, ING
Bank, provided a PowerPoint presentation entitled, "Alaska State
Legislature: HB 247." He noted that ING is a Dutch domiciled
commercial bank and recounted that at a fall [2015] hearing he
discussed the tax credit financing done by ING and the tax
credit program in general. He explained that slides 3 and 4,
"Overview of Alaska State Tax Credit Program, and "Lender
Feedback on Tax Credit Program as Currently Structured,"
respectively reiterate some of that discussion. Rather than
revisiting those slides, he said he will address what could
change should HB 247 be passed as currently drafted.
REPRESENTATIVE SEATON requested that Mr. Ryan review ING's fall
[2015] testimony because not every committee member was present
for that hearing.
1:33:33 PM
MR. RYAN turned to slide 4, "Lender Feedback on Tax Credit
Program as Currently Structured," and addressed what ING likes
about the program. Key about the program, he said, is that the
tax credits are assignable. If ING lends to somebody on the
basis of tax credits earned, those credits are assignable to ING
and ING can take a security interest in them, which is extremely
positive. The ability to monetize the tax credits is extremely
helpful. He explained that when lending to an exploration or
development company that has earned tax credits, it is uncertain
that the company will ever actually be able to monetize those
credits and that uncertainty would make it pretty much
impossible to lend against them. However, the credits being
exchangeable for cash from the state makes them financeable,
which is a key positive of the program. Also very helpful is
that the Department of Revenue (DOR) will, once the credits are
assigned, pay the money to ING directly, which avoids the risk
of the money getting waylaid. Another positive is that
historically any changes to the program have been prospective,
not retroactive. It is very important to ING that the program
not change in the middle of transactions; that changes in the
law are not retroactive such that ING finds itself in a very
different position from when it entered into the transactions
from a legal perspective. Of comfort to ING is that the State
of Alaska's credit risk is extremely good, it is a very highly
rated state. Further, ING likes that the program supports all
developers equally so that some of the smaller developers are
significantly helped by the program. The actual qualification
of credits themselves, what expenses do and do not qualify, is
fairly well codified and there are clear milestones in terms of
what is to be delivered and what has to be done to actually
qualify for the credits. That is important to ING because when
lending against credits ING wants to make sure that nothing can
come up after the fact that could jeopardize the actual ability
for the exploration and development company to qualify for them.
1:36:31 PM
MR. RYAN, regarding the neutral elements of Alaska's credit
program, stated that a key piece of the program for ING is the
appropriations issue. Historically there was an open-ended
appropriation and the willingness of the state to fund the
program was always fairly clear. Last year, ING started to get
concerned about where the money will come from to actually fund
the program going forward. Another neutral element is that the
credits are tradeable. While cash refund is ideal, if that is
not available the credits are tradeable. Having to find
somebody to buy the credits is not something that ING would care
to do if it could not get a cash refund for them; however, if
that had to be done, it would be possible.
MR. RYAN addressed where the credit program could be improved.
Key for ING is the appropriation risk. Every year having to
wait to see whether there is an appropriation made to fund the
program the following year is something that can be very
worrisome. The governor's veto risk is also something that
causes a lot of concern. Another concern is a bankruptcy risk
issue in federal bankruptcy law, wherein if a borrower files for
bankruptcy before actually filing its tax returns, uncertainty
exists as to whether the assignment of those credits in the
previous year will be respected by the bankruptcy courts. A
hope of ING is that this point could be clarified so that the
risk is taken off the table. A related point is delay in the
lien perfection.
1:39:33 PM
REPRESENTATIVE SEATON recalled Mr. Ryan saying the certificates
are tradeable. He inquired whether Mr. Ryan meant they are
tradeable among financers instead of just among oil companies.
MR. RYAN replied he meant tradeable amongst taxpayers. If an
entity never actually has taxable income and [cannot] use the
credits itself and the credits are not exchangeable for cash,
there is the opportunity to trade those credits and sell them to
another taxpayer that could use them against its tax liability.
1:40:14 PM
MR. RYAN [addressed slide 6, "Tax Credit Amendment."] He noted
that at the fall [2015] presentation ING acknowledged the world
has changed significantly given what has happened with commodity
prices and given the size of Alaska's program as it has evolved.
Therefore, ING recognizes the program is unsustainable in its
current form and welcomes modifications to it. As a lender ING
is reasonably agnostic as to the size of credits and only asks
that the payouts on those credits be predictable and that any
changes be prospective. From ING's perspective, an improvement
would be solving the appropriations issue and that any changes
be prospective and add some clarity to the program. Reiterating
that ING is agnostic as to the actual size of the credits, he
qualified that it would be bad for ING if the credits were so
small that its borrowers went out of business or could not
complete their projects. But, he added, for operation of the
program itself, ING is looking for more predictability in
appropriations and functioning of the program.
MR. RYAN explained slide 7, "Key Risk Factors and Considerations
- Lender Perspective," is a list of risk issues that a bank like
ING worries about, what the lender considerations are, and what
HB 247 actually does to make that risk worse or better. If the
bill makes a risk worse or neutral, the slide offers potential
solutions for how it could be changed to make it function better
for ING. Regarding the risk issue of borrower liquidity, he
said a lender's consideration is that a borrower requires
sufficient liquidity to continue to finance exploration and
extraction activities over the medium term. The tax credits are
a significant source of liquidity for a lot of these borrowers.
The proposal in HB 247 would cap tax credit refunds at $25
million per year. This is problematic to ING from a liquidity
perspective. Because drilling in Alaska is incredibly expensive
and unpredictable, a cap of $25 million per year would put these
borrowers under extreme liquidity pressure. A fix to that would
be that if there is a bankruptcy event, or these entities go out
of business or are acquired, the lender be able to continue to
earn/receive the $25 million going forward. This comes down to
the functioning of the program so that it would be assignable to
the lender, would give the lender senior claim, and if there is
a bankruptcy then that claim would be respected and the lender
would continue to earn the credits as they are paid over time;
the credit payment does not stop if the borrower goes bankrupt.
1:44:25 PM
MR. RYAN, continuing on slide 7, pointed out that the tax credit
qualification risk is a key issue for ING. He said ING needs to
be able to rely on the fact that once the credit is earned it
will become the property of the borrower and in turn can be
assigned to ING. If a performance component happens after the
fact, it is obviously a concern for ING because if the company
does not comply or ING cannot comply on the borrower's behalf,
then there is a danger that the company's credits are no longer
available. The addition of the employment requirement in HB 247
concerns ING because what if the borrower does not comply with
that? Would the credits then go away, would they cease to be
refundable, and then how would that affect ING? It would be
helpful to ING, and the easiest, to not have that requirement.
But, if it is important that this stays in, then ING would look
for a way that it could satisfy it somehow on behalf of the
borrower or that ING can satisfy it in a quantifiable way such
that ING is able to continue to claim the credit refund.
MR. RYAN, continuing on slide 7, said the lien perfection risk
is where the lender worries about the bankruptcy of a borrower
before the lender actually has a perfected claim. Last fall,
ING requested that if there is legislation that it somehow
strengthen that analysis and reduce that risk for the lender.
However, ING does not see anything in HB 247 that would change
that position. Therefore, ING would ask that a change be made
that would somehow improve the legal position or at least
strengthen the security interest in the case of a bankruptcy.
1:46:50 PM
REPRESENTATIVE SEATON understood Mr. Ryan to not be opposing the
cap, but that ING would like to be able to own the credit
certificate and then get it reimbursed at that cap amount in
future years. He further understood that Mr. Ryan is wanting
the state to protect ING from federal bankruptcy law by saying
something like the state's general fund will be liable even if
the federal bankruptcy takes some of the credit obligation and
absorbs it to other creditors.
MR. RYAN confirmed this is what he is asking. Bankruptcy risk
happens in one of two ways, he said. One is that there is a
bankruptcy before the tax returns are filed and therefore there
is actually an assignable tax credit. The second is what
happens during the earn-out period because the cap on the refund
would make the term longer over which the payout occurs; ING
would ask for some clarity as to what would happen in that
instance. So, if there was a bankruptcy, then what would happen
to those unclaimed or unrefunded credits? Would they continue
to become the property of the assignee and would the refunds
continue to be paid long after the company is gone?
REPRESENTATIVE SEATON asked whether that would be like a double
payment. For example, if the bankruptcy court assigned that to
another creditor, the state is supposed to then obligate further
money from the general fund to pay the tax credits.
MR. RYAN replied he does not know that he is being that specific
as to how it would be solved and he is not sure that he has a
specific solution in mind. But that would be one solution - if
credits that the state had already agreed to and assigned to ING
were reassigned to somebody in a bankruptcy, the state would pay
twice. However, he added, he has not spent a lot of time with
bankruptcy attorneys and legislators and does not know if there
is another way to fix it legally such that that situation could
not arise, so he is not saying that that is the only answer.
1:50:01 PM
REPRESENTATIVE JOSEPHSON posed a scenario of a vendor of a
product in the Cook Inlet who uses secured transactions under
the Uniform Commercial Code (UCC) to get a security risk and a
lien of some sort. He asked whether Mr. Ryan is saying that ING
should always get in the queue before that creditor.
MR. RYAN qualified he isn't sure he understands the question,
but thinks he is saying yes. If ING is lending against these
tax credits and they are assigned to ING, and ING has a UCC
filing/claim on those credits, then that seniority should be
respected in the case of the unsecured creditors. He asked if
that is Representative Josephson's question.
REPRESENTATIVE JOSEPHSON replied yes, and then inquired whether
Mr. Ryan is asking for some statutory presumption of seniority,
of which the state may not be able to afford to ING anyway under
federal law. He said he is unsure what Mr. Ryan is asking for
that the state could guarantee.
MR. RYAN responded that as he understands it, and as ING's
experience has been, most times the bankruptcy court is very
fact circumstance specific. He allowed he does not believe
there is an easy state legislated fix for this. Last fall, ING
requested that any legislation proposing to change the credit
program make it clear that the state's intention is that the
assignee of tax credits should rank senior to all those
creditors in the case of a bankruptcy that occurs prior to the
actual filing of the tax return. This would improve ING's
position in the bankruptcy and that would be helpful.
1:53:18 PM
REPRESENTATIVE JOSEPHSON, in regard to borrower liquidity on
slide 7, recalled Mr. Ryan's statement that ING is agnostic on
the tax credit refund cap of $25 million, although Mr. Ryan said
it increases the risk of bankruptcy before all credits are paid
out. Representative Josephson posited that a conservative-paced
exploration and development project that wasn't absorbing lots
of credits suddenly would be a sign of more predictability and
stability. As an example he posed a scenario in which the tax
credit system is uncapped like it is today and someone qualifies
for $100 million all of a sudden. He inquired whether there is
some risk associated with that approach, because he would
surmise there is less risk with someone who has a more
conservative approach to exploration and development by having a
more cautious practice of borrowing since the company must match
35 or 45 cents with what the state is paying.
MR. RYAN posed an example of a project that qualifies for $100
million in credits in the first two years. Under the existing
system of no cap, the company would get the $100 million in,
say, 9-12 months after the date of filing its tax return. He
explained that when ING finances a company it is a short-term
transaction, so the interest rates are very, very low because
ING expects to get the money back fairly quickly. As a result,
the advance rates are higher. The borrower therefore pays less
interest and gets more of that money quicker to pay its bills,
stay liquid, and stay in business. If the borrower was capped
to $25 million [a year] in the amount of credit refunds and
received that amount over a period of four to five years, it
would then be a longer term loan for ING and so the interest
rates would be higher and the advance rates would be lower
against the same amount of credits, meaning the company would
get less cash. There is also the risk of what will happen to
those credits if the company gets into trouble in the short
term. If there is uncertainty around that, then ING may not be
willing to lend against the full amount, maybe ING would only
lend against the first two years of the credits.
REPRESENTATIVE JOSEPHSON thanked Mr. Ryan and said the
aforementioned helps to explain the context.
1:56:42 PM
REPRESENTATIVE HERRON brought attention to the tax credit
qualification risk on slide 7. He said Alaska hire is near and
dear to legislators for many reasons and inquired why ING is
asking for a solution when the lay of the land is known.
MR. RYAN replied he is absolutely sympathetic to the situation;
from his perspective, hiring in Alaska should not really matter
as far as ING's willingness to lend against the credits.
However, if it is a future obligation to hire Alaskans, then
what happens if the company doesn't comply and no longer
qualifies for the right to get a refund of the credits? In that
case ING will have loaned money against the refund of a credit
that then does not materialize and ING would make a significant
loss on that loan simply because the company didn't comply with
its requirements to hire a certain number of Alaskans in a given
period. Ideally, what he is asking for, is whether there is a
way that if that should happen that he can actually perform that
responsibility on the company's behalf in order for the company
to continue to qualify for the refund of the credits.
REPRESENTATIVE HERRON said he believes it is ING's best interest
that a company maintains Alaska hire. Therefore it would seem
somewhat odd for a policymaker to say the state is going to
protect ING when actually the company should be protecting ING.
MR. RYAN noted there are different kinds of financing that these
companies can get. He explained that if he took an "operation
project success risk" on a company, then he would not be a
secured bank lender charging 5-7 percent interest on his loan.
Rather, he would be an equity investor or some kind of mezzanine
investor earning 17-18 percent return on his money. This is
purely about trying to keep the cost of funding for these
companies as low as possible. He is the cheap funding here, the
guy who comes in on a secured basis and doesn't take a lot of
project risk. If he were to take a lot of project risk, which
would mean that if the company isn't successful and doesn't hire
the people and he is going to lose his money, then he would
expect a much higher return on his investment. So, while what
Representative Herron is saying is perfectly valid for somebody
who is taking equity risk on a project, that would not be the
case for him because his is a different type of credit.
2:00:49 PM
MR. RYAN resumed his discussion of slide 7, turning to the key
risk factor of intercreditor risk. Reiterating that there are
different sources of capital for these projects, he noted that
with the credits at today's levels and the refund program in
place now, the tax credit component and therefore the cheap bank
financing component of the capital structure of these borrowers
is a lot larger. This means the borrower needs less of the
really expensive money and less of the equity investors in a
project. If the mix is switched so that it is more risky
capital, and less credits and bank financing that monetizes
those credits, then the bargaining power of the banks would be
reduced significantly. This would mean that banks have much
less control over how the loans are structured and the terms and
operations of the borrower. That would increase ING's funding
costs and make ING's funding more expensive for the borrower.
MR. RYAN moved to slide 8, "How has 247 effected risks - Lender
Perspective," and discussed appropriation risk. He pointed out
that the annual appropriation process has become a little more
unpredictable and is causing ING some concern. A solution to
the short-term appropriation issue is proposed in HB 247 in that
it would contain a large appropriation to cover all credits that
had been earned up to the point of the change of law. However,
while that is helpful because it would cover credits up to July
1, it would increase the appropriation risk on the backend
because there would now be longer term earn-outs and there would
be no certainty that the appropriation and the funds would be
there to pay those credits over a longer period of time into the
future. Therefore, ING would suggest either a legislative or
permanent funding fix such that if there was a cap for the
credits of $25 million a year over several years that something
be put in place that would essentially remove that annual
appropriation risk.
MR. RYAN, regarding the construction/project operating risk,
explained that the [current] credit program creates certainty
for the lender that there will be cash to pay back the loan it
has made, that ING does not necessarily take success risk on the
project. The proposed annual cap on the credit refund would
push that repayment much further into the future, so it would
increase the risk that if there is a significant event in the
future or the project does not get completed, ING would be faced
with the issue of getting its money back in the future.
2:05:14 PM
REPRESENTATIVE SEATON interpreted Mr. Ryan to be saying that the
credits give the opportunity for someone to get a lot more
reasonably priced capital without bringing in partners.
However, he posited, it would seem that bringing in partners
with good balance sheets would create less risk for ING because
there are more parties that have stronger balance sheets than if
it is just a single small company relying on financing by the
credits. Therefore, he continued, he is trying to figure out
the balance between risk, the level of credits, and the amount
that is needed. He recalled Mr. Ryan saying that ING does not
mind the cap because that is not ING's portion of the problem;
rather, it is the payout later. He postulated that the more the
credits, the greater the risk to ING, because it would be
smaller companies just working off this loan capital instead of
having a balance sheet that supports the project risk.
MR. RYAN agreed, but pointed out that what ING likes about
Alaska's program is that it allows ING to bank some of these
smaller companies. He understood that one of the objectives of
the credit program in general is to encourage these smaller
exploration companies. The larger oil and gas exploration and
development companies have significant balance sheets of their
own and so do not particularly need ING's funding. Many of them
have tax liabilities for which they can actually use the tax
credits and therefore do not need to finance them. One of the
impacts of the proposed changes, he predicted, will be to put
some of these smaller companies out of business, they will not
be doing the projects that they currently plan to do, which, he
allowed, means less business for ING, too.
REPRESENTATIVE SEATON remarked that he is trying to balance the
risk situation, the amount of return here, and also the creation
of bigger risk by having smaller companies not taking on other
partners to have a stronger balance sheet to undergo these
projects, and then asking for bankruptcy protection.
MR. RYAN concurred that reducing the credits would force the
smaller exploration companies to partner with companies with
larger balance sheets, or, if they could, to find larger sources
of equity funding, as opposed to being able to finance
themselves on a stand-alone basis by monetizing credits.
2:08:56 PM
MR. RYAN continued his review of slide 8, stating that the
interest rate risk is a fairly neutral risk. He explained that
it is a purely operational issue with the loans in that draws
happen periodically and the draws are at the interest rate
prevailing at the time. The interest rates are set for the
period of loan, which is the period from the date of the draw to
the date that the credit refunds are paid out. To the extent
the terms would be stretched out by the proposed cap, the
interest rate exposure would be increased because the borrower
would be dealing with interest rates over a longer period of
time. This is not particularly a material issue in HB 247, he
allowed, as it is easy to hedge that risk, but there is a slight
cost associated with it.
MR. RYAN addressed the change in law risk, noting that it is
particularly important to ING that any laws be prospective
rather than retroactive. He offered his appreciation to the
governor and the legislature for being careful to make sure any
changes to the program are prospective. Regarding potential
fixes, he said he does not think anything needs to be done
there, but it would be nice if the effective date was pushed
back a bit farther in 2016 to provide more time from when the
legislation is finalized so that ING's deals can be restructured
if necessary.
MR. RYAN stated that the rest of the slides in his presentation
cover ING's background, the companies, what ING is active in,
and ING's position in the oil and gas exploration field. He
added that because of the uncertainty around the changes in the
program, ING has not closed any new deals since fourth quarter
2015 and currently ING's advances against 2016 are on hold
pending some clarity as to what the changes to the program are.
The sooner these proposed changes can be clarified, he said, the
better for everybody. In response to Representative Tarr, he
confirmed that in regard to ING's advances for 2016 he means
calendar year 2016.
2:11:58 PM
REPRESENTATIVE SEATON understood Mr. Ryan to have said that the
size of the loans or credits is not the issue as much as is the
predictability of the repayments.
MR. RYAN responded yes and no. He said yes, ING is agnostic,
predictability is key, but stretching the credits over too long
of a period, or making them too small, increases other risks.
The other risks include the success of the project, the
viability of the borrower, and potential bankruptcy issues
should the borrower file for bankruptcy before ING gets all its
money back. In an ideal world banks like their money to come
back quickly and predictably; therefore anything that stretches
out the repayment period is an issue for ING.
REPRESENTATIVE SEATON surmised ING would probably be happier if
the credit percentage was smaller because that would represent
less portion of the project itself, but that ING wants very
predictable repayment terms.
MR. RYAN answered that smaller does not mean it is less risky.
He said ING generally looks to the importability of its claim to
get the refunds and looks to the creditworthiness of the State
of Alaska. The larger the credits the more that ING can advance
and that is better for ING because for the same amount of effort
it can do larger deals. Smaller credits mean ING would be doing
smaller deals and earning less. The creditworthiness of the
State of Alaska would not have changed, but ING would now be
doing a smaller deal. Also, the viability of ING's borrowers
and the bargaining would now be diminished because they would
have less credits, and the bargaining power of the equity
investors would go way up because they would be putting in much
more of the money. So, while ING is kind of agnostic in regard
to the size of the credits, at a certain point in time the
credits become too small, which would jeopardize both ING's
business and the viability of its borrowers, and then for ING it
would become detrimental to the program.
2:15:13 PM
REPRESENTATIVE SEATON understood Mr. Ryan to be saying that ING
is not having to do much due diligence on the project because
ING is relying on the enforceability of the claim and the
balance sheet of the State of Alaska, not that of the project
sponsor, as to whether ING is going to make the loan. Whether
the project has problems, other than somebody going bankrupt
before the credits are issued, would not be ING's worry.
MR. RYAN replied he is saying the opposite. If he is worried
about getting his money back, it would be for one of two
reasons: the State of Alaska does not pay out or defaults, or
appropriations. Given the state's creditworthiness, not paying
out or defaulting is less of a concern than is appropriations.
He stressed that he cares very much about his underlying
companies. Bankruptcy is one thing, but he likes his borrowers
to stay in business, to be viable, to be liquid, and to be
successful. If everything goes to plan - the company doesn't
file for bankruptcy and stays in business and ING's security
interest is perfected - then what ING really has at the end of
the day is State of Alaska risk. He said he does not think he
ever said that he does not look at the viability or care about
the viability of the project; it is the opposite.
REPRESENTATIVE SEATON clarified he didn't mean that Mr. Ryan did
not care at all, but that ING's issues and ING's security were
really with the State of Alaska.
2:17:32 PM
REPRESENTATIVE TARR noted that the issue of the annual refund
cap has come up in other conversations. She said it sounds like
Mr. Ryan is saying he does not have a specific number. However,
she continued, [a number] might be interesting from a lending
perspective because the state's division of taxation provided a
graph showing that without the cap the state could be getting
into hundreds of millions of dollars per year in the early years
of development versus having a cap of $25 million. From a
lender's perspective it seems that Mr. Ryan might have some
insight into the area in between those numbers if he is saying
that increasing the annual cap might be a possible solution.
Regarding the statement on slide 7, "for smaller explorers and
developers," she noted that the committee talks about explorers,
development, and then operators. She asked whether Mr. Ryan is
saying that the developers are also the operators or is talking
about the stage of development for projects prior to them being
in operations.
2:18:48 PM
MR. RYAN opined that Representative Tarr was asking two
questions, and he thought the first question was whether he had
a number in mind between the $25 million and the 100 percent
refund. He asked whether she was asking him to suggest a
number, or just a general question of how he feels about
something in between the two.
REPRESENTATIVE TARR clarified that HB 247 proposes a cap of $25
million and that the committee saw graphs depicting the state's
spending in the range of $300-$700 million. She inquired
whether Mr. Ryan has anything to offer from a lender's
perspective as far as a number in between.
MR. RYAN responded that it is a balancing act. First, ING would
like to see the program be sustainable and be a program that
everybody is supportive of in the current oil and gas price
environment. Second, ING recognizes that the program has gotten
very, very big and the annual payouts are extremely large;
therefore ING would be happy to see a reduction in the amount of
payouts. Also, in some ways the caps would be good for ING
because it would mean the money is outstanding longer and ING
would be earning more interest. But reducing and extending
would not be good for ING if it is so much that it actually
jeopardizes the project. Where is the right number? That is a
very difficult question to answer and he does not have an
answer, but certainly somewhere in between is the ideal answer
but he cannot say whether it is halfway in between the two.
Additionally, it may be different depending upon the project.
2:21:13 PM
REPRESENTATIVE TARR reiterated her second question regarding
"smaller explorers and developers."
MR. RYAN answered that ING's interest is in companies before
they are actually paying tax. The exploration and development
phase are when a company is spending the money and not earning
any revenue. Once in production a company is actually earning
revenue, in theory is paying taxes, and can use the tax credits
themselves. It is at that point that these facilities are no
longer of interest; it is the two phases prior to actually
generating revenue.
REPRESENTATIVE TARR, in regard to suggesting a different amount
for a tax cap, asked whether Mr. Ryan could see using a
percentage of overall project cost.
MR. RYAN replied that that would be a good solution because that
would allow it to be tailored to the actual size of the spend
that the companies are making and therefore their need for
liquidity. So, a percentage of the actual credits would be a
better solution than a dollar number.
2:22:56 PM
REPRESENTATIVE SEATON observed slide 10, "A Leader in Alaska
State Tax Credit Financings," states that ING has financed
Caracol Petroleum, LLC, a North Slope exploration project, at
$30 million, and Cornucopia Oil and Gas Company, LLC, a Cook
Inlet exploration project, at $150 million. He asked whether
ING has financed any other companies.
MR. RYAN responded that ING has only closed those two. Three
other deals were in the pipeline that are now on hold pending
some clarity on the changes to the program. Similarly, the
borrowers themselves are a bit concerned because their capital
spend and planning for the future are also on hold pending the
proposed changes to the program.
2:24:05 PM
REPRESENTATIVE SEATON noted that Alaska's statutes provide for
an amount that is appropriated for paying credits, dependent on
the price of oil, at either 10 percent of the production tax
paid or 15 percent of the production tax paid in Alaska. He
inquired whether that statutory limit is something that ING
recognizes or is something ING has ignored because all the
credits submitted a few years ago were paid.
MR. RYAN replied that if he understands the question, the issue
has not been material for ING because all credits that were
issued were paid out and there was a sort of open-ended
appropriation historically. The statutory limit has not been in
effect historically.
2:25:16 PM
REPRESENTATIVE SEATON concurred that it has not been utilized,
but said high production tax values were coming to the state so
it was not much of an issue. Under the tax credit program, he
explained, there is some assurance that there will be some
because it is in statute that that amount will be appropriated.
He asked whether that seems to Mr. Ryan to be an appropriate
mechanism to ensure that there will be money for paying those.
MR. RYAN replied that as a mechanism to solve the appropriations
risk issue, it would seem to him to be a way to fix it if it was
set at the right level commensurate with the expected payout.
2:26:59 PM
The committee took a brief at-ease.
2:27:47 PM
LARRY PERSILY, Oil and Gas Assistant to Mayor Mike Navarre,
Kenai Peninsula Borough, provided a PowerPoint presentation
entitled, "DIFFERENT WAYS TO LOOK AT TAX CREDITS." He said he
will mostly talk about Cook Inlet and Kenai Peninsula oil and
gas exploration development tax credits. Responding to
Representative Josephson, he said he is speaking for the mayor
and the Kenai Peninsula Borough. He added that he is a former
deputy commissioner at the Department of Revenue and a former
federal official on the Alaska gasline, but his testimony today
is on behalf of the Kenai Peninsula Borough.
MR. PERSILY brought attention to slide 2, "Return on state
investment," and pointed out that when looking at what to do
with tax credits there is no production tax on oil in Cook
Inlet, and there has not been since the 1980s. For natural gas
the production tax is hardwired at the minimal rate of about 2.5
percent of today's gas prices to the utilities. There is
royalty, property tax, and corporate income tax on C
corporations as opposed to other business entities. However,
when looking at the payback to the state over the years, with
discount inflation and opportunity cost of what could have been
done with the money elsewhere, there realistically is not a
positive return on the investment to the state general fund.
That does not make it wrong, he said, it is just something that
people should be aware of as the legislature wrestles with tough
decisions. Certainly, return to the general fund is not the
only way to look at what the state gets for those tax credits.
2:30:32 PM
MR. PERSILY turned to slide 3, "Local benefits count," and said
the local benefits are substantial. Over the last 10 years the
assessed value of oil and gas property in the Kenai Peninsula
Borough has more than doubled, reaching more than $1.4 billion
in 2016. Much of the past year's increase comes from Furie
Operating Alaska, LLC, ("Furie") developing the Kitchen Lights
Unit offshore, and BlueCrest Energy, Inc., ("BlueCrest")
developing the Cosmopolitan Unit on a pad onshore. The assessed
value of those two entities in 2016 approaches $300 million.
These two companies are the borough's top property taxpayers.
Of the top 20 taxpayers in the borough a few years ago, 17 were
oil and gas related. The three non-oil and gas taxpayers were
Fred Meyer, WalMart, and NACS. Income is up, the unemployment
rate is down, and sales tax is back to where it was before
taking a dive a few years ago. The borough and the communities
are capturing economic benefits from that activity through sales
tax, property tax, and new homes. However, the state, without a
state sales tax or state income tax, has no way to capture any
benefit from the economic activity that is spurred by new oil
and gas development. The state is relegated to production tax
royalty, corporate income tax, and such. The borough knows that
an upward trajectory is not going to continue; for example,
Apache Corporation left the Cook Inlet despite knowing there was
oil and having its federal permit.
MR. PERSILY addressed slide 4, "More oil, more gas," noting that
[oil production in Cook Inlet has doubled since 2010]. Average
oil production in 2015 was 18,000 barrels a day, the best in a
decade, with nearly 20,000 barrels a day in April 2015. Natural
gas production is ahead [of 2013 numbers]. ENSTAR Natural Gas
Company ("ENSTAR") has signed a contract with Hilcorp Energy
Company ("Hilcorp") to meet most of ENSTAR's gas needs through
2023. Furie signed a contract with Homer Electric Association,
Inc., that starts in April. There is potential for more gas in
Cook Inlet, but the problem is that no one is going to look for
gas unless there is a market for it, regardless of tax credits.
2:33:37 PM
MR. PERSILY drew attention to slide 5, "It's been more than just
credits," and looked at what has created, added to, and
incentivized the resurrection of Cook Inlet oil and gas. First,
he said, was that with higher oil prices it paid to explore
because good money could be made selling the oil. Second, state
tax credits helped because credits reduced the capital risk to
the explorers and provided financing. Third, several years ago
the Regulatory Commission of Alaska (RCA) changed how it looked
at gas supply contracts for Southcentral Alaska utilities and
that reassured producers they could get a fair return on their
investment. Fourth, the Cook Inlet Natural Gas Storage Alaska
(CINGSA) facility created a year-round market for the gas for
the first time. Fifth, there is a market for the gas as long as
ConocoPhillips Alaska, Inc. ("ConocoPhillips") can continue to
export liquefied natural gas (LNG) during the summer when gas is
surplus to local needs. The U.S. Department of Energy has
granted ConocoPhillips export authority, but whether
ConocoPhillips or any other producer in Southcentral Alaska
liquefies and sends gas overseas is going to depend on the
market. Currently the spot market prices in Asia for LNG are
under $5 per thousand cubic feet (Mcf) of gas. In its filings
with federal regulators, ConocoPhillips shows it was receiving
$7-$8 in 2015 and $15-$16 in 2014. He advised that low prices
in Asia are going to make it harder to export LNG from
Southcentral Alaska, and those exports have been important in
creating and enabling that year-round market.
2:35:46 PM
MR. PERSILY presented slide 6, "Why credits worked," and said
credits worked for a lot of reasons. For example, there were
explorers that did not have deep pockets and did not have easy
access to investment capital. Oil prices were high, investors
were looking to earn an interest rate higher than 1-3 percent,
and opportunities were good in Southcentral Alaska. There was
someone who needed money and someone who was looking to lend
money to get a higher rate of return, so it was a marriage made
in Wall Street and it worked for everyone. Because the State of
Alaska was rich with high oil prices it could afford to take
that risk, shoulder some of the burden, to hopefully lead to
more oil and gas production, gas in particular for the local
market. It was an era of relatively risk-free payback on the
part of the state. It was not like the state said it was only
going to loan to prospects that it judged to be in the state's
best interest or see a company's reservoir data to decide if it
was worth putting money into. It was a "check the box" - the
company spends the money, turns in the application, and if all
goes well the investor gets the check. That reduced the risk to
the investor, worked out well, and there was public support in
recent years for tax credits to bring new entrants into Alaska
because as a maturing oil and gas province Alaska needed more
money and new players.
2:37:46 PM
MR. PERSILY showed slide 7, "Looking ahead," and pointed out
that regardless of credits, producers must have a market. Even
if the exploration is funded, if the producer has no place to
sell that gas the producer is not going to look for gas. Oil is
a little different because a producer can send as much oil as it
has to [Tesoro's Kenai Refinery]. BlueCrest's plan for the
Cosmopolitan Unit is to start producing oil this year, get it to
the Tesoro refinery, and hold off on gas production until it has
contracts and a market for the gas. Cook Inlet's history shows
that large customers are needed - the fertilizer plant and the
liquefaction and export terminal in the 1960s and 1970s
justified the investment. Looking ahead, the issue for Cook
Inlet is finding that demand growth to justify large-scale
production. For example, the state has now selected its
preferred participant in the LNG trucking project from Cook
Inlet to Fairbanks. About 8 million cubic feet a day is being
looked at, which is about 4 percent of Cook Inlet production.
This is great for Fairbanks if it works, and certainly it could
work for the producer's contractor, but that volume is not
enough to justify someone going out and spending a lot of money
to develop a huge resource, or even a large resource.
2:39:58 PM
MR. PERSILY displayed slide 8, "What industry/investors need,"
and noted that certainty [of payback] is what an investor needs.
As was discussed by ING, right now the refundable tax credits
are essentially short-term, one-year loans. There certainly are
investors that would be interested in longer-term paybacks. For
example, a pension fund may take a 10-year payback because that
fits into its investment portfolio and earns more interest.
Going in, the pension fund just needs to know the certainty of
whether this will be a 1-year, 10-year, or 5-year payback. Even
with a longer payback, he advised, investors will still be found
to buy those refundable credits. Those investors want to see
that Alaska is tax stable, which gets to the point of the
state's budget deficit and fiscal crisis or non-crisis.
Investors are looking at Alaska and starting to get nervous as
to whether the state will fund this. So, in addition to dealing
with tax credits and finding some solutions that the state can
afford going ahead, the fiscal problems must also be dealt with
so that investors, be they oil and gas companies or the people
who loan them money, feel confident that they are not going to
go through this every year.
MR. PERSILY turned to slide 9, "The elusive best answer," and
said he does not have proposed amendments for the perfect
answer. But, he continued, he thinks the elusive best answer is
the same that all committee members are looking for - to not
hurt a development investment that is underway. Reducing
credits, changing credits, and amending credits may mean that
someone who might have come here before might not come
otherwise, so members don't want to discourage future investment
any more than they have to by the fact that the State of Alaska
is not as rich as it used to be and is cutting services and
reducing funding. But, as members try to make those decisions,
clearly it pays to look at the benefits to the state economy and
local benefits, not just the gain to the general fund, and then
balance the benefits against all the other public needs that
members are having to make tough choices on every day on the
fiscal year 2017 budget and those budgets further ahead.
2:43:07 PM
REPRESENTATIVE HERRON requested Mr. Persily to provide examples
regarding the statement on slide 8: "Phase-in of any changes
should reflect lead time for multiyear investment spending
before production."
MR. PERSILY replied that BlueCrest, for example, plans to start
oil production this year, but is going to keep drilling wells,
adding storage tanks, expanding to get up to full production,
and looking at gas. While he is not speaking for BlueCrest or
proposing specific changes, he said he thinks the legislature
would want to be careful that any changes made do not jeopardize
a development that is midway through construction, because that
is more painful than for a project not yet off the ground. If
someone has not spent any money yet and changes are made, there
is no harm done other than the time that was spent on it. But
when someone has sunk a lot of money, has a business plan that
is based on getting to X barrels a day, and is at a percentage
of that because more needs to be spent to finish the buildout,
the state must consider that out of fairness and because
production will actually be seen from them.
2:44:47 PM
REPRESENTATIVE SEATON noted that the legislature's consultant,
enalytica, provided information showing that $5-$7 per Mcf has
been an adequate price to develop even the most expensive gas
projects around the world. Given the new contracts extending to
2023 and ending at $8.19, he requested Mr. Persily's opinion as
to whether price support of those contracts basically should
take care of making those economical and profitable for gas for
the Cook Inlet, Southcentral, and the Fairbanks region.
MR. PERSILY responded he is not privy to the capital costs and
operations expenses of the companies. However, Hilcorp has
signed a multi-year contract with ENSTAR without any assurances
that in years 2017-2020 it is going to be getting back any tax
credits, so Hilcorp must feel comfortable enough in the
economics to sign a deal through 2023 based on what it knows
today. If credits were eliminated, the question is whether that
would show up in a lower return to the producer or higher gas
prices to customers. His guess is that it might be a little bit
of both, but is probably company specific. As required by RCA
regulation, the 2010 gas storage legislation mandated that any
tax credit benefit to the gas storage [facility] must flow
through to the customers and RCA must watch over that. It is a
little different here because there is no guarantee that the
credits flow through to the customers. The initial concern with
Cook Inlet was to just get gas and worry about the price later.
It may be very difficult to put in statute that every dollar of
credit show up at a dollar reduction in the bill. Any change in
the credits would change the economics for sponsors, but he does
not know how much of it, if any, would flow through to customers
in future contracts.
2:48:20 PM
REPRESENTATIVE OLSON asked whether Mr. Persily knows of any
other jurisdictions that have changed their tax regime six times
in ten or eleven years.
MR. PERSILY answered he is unaware of any that have changed it
as much, however he is also unaware of any that have had as
robust of a tax credit program as Alaska. British Columbia
gives some credits for road building if a company is developing
oil and gas fields and Alberta had some royalty relief for cost
recovery. But he is unaware of any other jurisdiction in the
free world that changes as much. On the other hand, he said, he
is unaware of another that has as varied and multi-layered a
system of tax credits as Alaska. So, Alaska has sort of dug its
own hole on this one, although a well-meaning hole.
2:49:51 PM
REPRESENTATIVE TARR observed the bullet on slide 8 that states,
"Investor needs to know the 1-year loan will not be stretched
into a 10-year payback." She recalled Mr. Persily stating an
investor would not mind that as long as the investor knew that
was going to happen. She requested Mr. Persily to comment on
the idea that $25 million is too small of a cap. She posed a
scenario in which the cap is amended to be larger and is paid
over a certain number of years, and asked whether something like
that is what Mr. Persily is suggesting.
MR. PERSILY replied he is talking about what the investor wants
to know going in. Pension funds are different than day traders.
A pension fund might look for longer-term investments.
Investors just want to know when it pays off. As long as it is
stated upfront, there will still be investors, as opposed to
saying payoff will be in one year and then changing it to five
years.
2:51:47 PM
REPRESENTATIVE JOSEPHSON, regarding slide 9, recalled Mr.
Persily saying that one of the benefits is that the state will
get production. He offered his understanding that the state has
spent over $7 billion on credits. He said if a citizen were to
ask him what the state has gotten from that, he would be able to
answer that. Relative to the Cook Inlet renaissance, there is
absolute provable correlation and causation that the first made
the second. However, as to the North Slope, he does not know
what he would say. Noting he has data saying that everyone
agrees [the pipeline] is going to be down to 350,000 barrels in
about 6-7 years, he requested Mr. Persily to comment on the
merits of what the state is doing on the North Slope.
MR. PERSILY concurred it is easier to look at the Cook Inlet and
say credits have been a significant part of the growth in oil
production, and also gas production. Certainly in the North
Slope there is not gas production in the sense of going to
homeowners. The difference is that most of the refundable tax
credits, cash out of the treasury, have gone to Cook Inlet;
whereas the North Slope has received a much smaller portion of
refundable tax credits, given its structure of three major
producers. Much of the tax credits in the North Slope have gone
against tax liability. If the question is how much more oil is
in the pipe today that might not have been there had there not
been credits, he said he thinks maybe some but he couldn't point
out which barrels. That is the dilemma in Cook Inlet and the
North Slope, he continued. Yes, there has been increased oil
and gas investment and spending in Alaska and that is good for
local property taxes, for those Alaskans who have a sales tax,
and for businesses. It is tough to argue that long-term net
present value adjusted for inflation is a profit to the general
fund, but it is good for the state economy. That is the
conundrum because a lot of constituents want to know it is a
profit to the general fund.
2:55:06 PM
REPRESENTATIVE JOSEPHSON referred to the last words on slide 9,
"Alaska is oil and gas dependent." He said his view on this is
that that dependency has paid huge dividends for decades and now
it does not. He recalled Mr. Armstrong [of Armstrong Oil & Gas
Inc.] who testified that [legislators] need to concede that
Alaska is a petro state. He surmised this dependency is
something Alaska needs to shake loose from and that a means
needs to be found to break away from that.
MR. PERSILY responded, "No doubt." Even with an income tax and
use of permanent fund earnings, he said, Alaska will still be an
oil and gas state. What is being learned is that Alaska cannot
be as dependent on oil and gas as it has in the past, there just
is not enough money there. He related that Norway's sovereign
wealth fund is $800 billion, which is much bigger than Alaska's
permanent fund. If Alaska had not paid dividends and had just
built up its savings account like Norway did, Alaska's permanent
fund on a per capita basis would be about equal to Norway, which
has about 5 million residents. That is not to attack the
dividends, it is that Alaska can no longer live off of [oil] and
is going to have to make some tough choices while acknowledging
that oil and gas will always be the number one industry, but the
revenue stream needs to be diversified because [oil] cannot
carry the state, and throwing tax credits into it is not going
to change that.
2:57:35 PM
REPRESENTATIVE SEATON recounted that one of the presentations to
the committee about tax credits looked at a hypothetical big
field of about 120,000 barrels a day, which there may be on the
North Slope. The problem [with such a field] is that over the
next six years the state would have to put in $3 billion as tax
credits under the current bill, and over time maybe make some of
that back. Plus, there would be other projects in addition to
this hypothetical field requiring $3 billion. He asked whether
Mr. Persily thinks such draws on the state budget would be
sustainable or would force Alaska to go through another oil and
gas tax rewrite.
MR. PERSILY quipped that he is turning 65 this year and the last
thing he wants to live through is another oil and gas tax
rewrite. But, he said, it raises a good point as legislators
look at what to do with oil and gas tax credits, the floor with
the minimum, and the other issues in HB 247. As pointed out by
Representative Olson, Alaska's tax provisions have been changed
frequently. Legislators want to come up with the right answer
given he does not think members want to do something that means
in two years there will be special sessions on oil and gas taxes
all over again. Just like with the fiscal plan, legislators
need to come up with a plan that sets up future earnings and
reasonable spending so there is not a budget crisis every year.
There needs to be that perfect answer on oil and gas taxes that
is stable for at least a decade, given nothing lasts forever.
Even though it may be wanted and needed to bring more oil and
gas investment into Alaska, the state is not in great shape to
write those checks. So, maybe spreading refundable credits out
over time cushions it because not all of them would be written
at $35 oil, and maybe there are other things.
3:00:55 PM
REPRESENTATIVE TARR recounted industry stating something that is
transitional over the next year or two and then something that
could be stable for eight to ten years after that. She inquired
whether Mr. Persily thinks something like that would put Alaska
more in line with other jurisdictions.
MR. PERSILY replied that it would be cause for celebration if
industry and policymakers could come up with something that
everyone grumbled about but could live with for 8-10 years. It
would be impossible to come up with something that would last
for 50 years. For example, Alberta just went through a royalty
review and does that on a fairly regular basis.
REPRESENTATIVE TARR, in looking at what other jurisdictions do,
such as British Columbia helping with road building and
infrastructure, asked whether Mr. Persily sees any of those
opportunities as being advantageous for Alaska. It is
frequently heard that it is much more expensive to do business
in Alaska, so she is trying to think if there are things outside
of just refundable tax credits that could be of interest.
MR. PERSILY answered that the state has talked about helping to
build roads, "roads to resources" being an example, but that has
its own problems. Since dollars are so precious right now, it
needs to be ensured that something will be gotten back from it.
He pointed out that British Columbia has some road building
credits but it is different there because roads can actually be
built to the fields, whereas in Alaska that cannot be done. He
related that British Columbia recently held a monthly oil and
gas land lease sale and for the first time in years there were
absolutely no bids. The market is just that bad and sometimes
trying with credits, incentives, or attractive acreage just does
not work.
[HB 247 was held over.]
| Document Name | Date/Time | Subjects |
|---|---|---|
| HSE RES 3.9.16 HB 247 - Kenai Peninsula Borough.pdf |
HRES 3/9/2016 1:00:00 PM |
HB 247 |
| HSE RES 3.9.16 - ING Alaska Tax Credit Bill 247 presentation.pdf |
HRES 3/9/2016 1:00:00 PM |
HB 247 |
| HSE RES 3.9.16 Inside Energy Report 4.30.15.pdf |
HRES 3/9/2016 1:00:00 PM |
HB 247 |