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Walker proposes state bonds to pay outstanding O&G exploration credits
Kristen Nelson Petroleum News
Alaska Gov. Bill Walker’s budget, introduced Dec. 15, includes a three-year temporary payroll tax targeted to deferred maintenance, a slight overall decrease in spending and a proposal to move to a two-year budget cycle with penalties for legislators if it takes more than 90 days to produce a budget.
There are also two significant resource-related items, which would also require legislative approval: a proposal to pay off outstanding oil and gas exploration credits in fiscal year 2019 using bonds and a proposal to grant the Alaska Gasline Development Corp., currently state funded, the ability to accept non-state money.
In its packet of information on the proposed budget the administration said that after House Bill 111 ended the cash credit program, the governor asked the Department of Revenue to explore further options for expediting payments of outstanding oil and gas exploration tax credits.
“As part of the Alaska Economic Recovery Plan, we propose to pay off the remainder of our outstanding future obligations to independent oil and gas exploration companies at a modest discount rate in fiscal year 2019,” the administration said. It proposes to issue bonds to pay off the credits, and said credit holders would be paid “at a discount that covers the cost of borrowing.”
About a billion dollars Revenue Commissioner Sheldon Fisher, speaking at a Dec. 15 press conference on the budget release, said there is a formula in statute for the amount of credits the state must pay each year, and the administration estimates that by the time all the credit programs expire there will be about a billion dollars in credits. It is estimated that some $100 million of those credits will be sold to other oil companies to offset taxes, leaving just under $900 million. Based on current revenue, Fisher said, those credits would be paid off over the next six to seven years.
The administration is proposing to pay off the credits immediately, which would require legislation, he said. The proposal is to offer the holders of credits a discount to the face amount, depending on where the credits fall in the queue and how quickly they would be paid off.
Fisher said the proposal recognizes the time value of money, with the notion that the state will discount the amount to the credit holders to cover the state’s cost of issuing debt or bonds to pay them off and said the state believes the discount would be substantially below what the companies’ cost of capital would be and would allow them to receive money to use in operations.
Payment details Details from the Office of Management and Budget show the estimated required payments under statute as $206 million in FY2019, $167 million in FY2020, $119 million in FY 2021, $132 million in FY 2022, $135 million in FY2023, $139 million in FY2024 and $1 million in FY2025.
OMB said the Fall 2017 Revenue Forecast estimates that $711 million in tax credit certificates will be available for purchase by early in FY2019, with an estimated $188 million additional over the next three years.
The proposed legislation for bond financing would include authority for Revenue to “negotiate discounted tax credit certificate purchases”; authority to issue bonds to finance the cost of the purchase; and appropriation for debt service for the FY2019 operating budget, with $27 million in the budget for the estimated bond payment.
OMB said that under the proposal bonds would be issued beginning in FY2019 to pay off the discounted present value of the $711 million in existing tax credit certificates, with bonds issued later to cover the remaining certificates.
The proposed base discount rate is 10 percent, which OMB said is believed to be less than the weighted average cost of capital for the credit holders. There would be an option for credit holders to receive a reduced discount rate equal to the state’s breakeven cost in exchange for an overriding royalty interest to be defined by the Department of Natural Resources.
- KRISTEN NELSON
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