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State tax credits important in financing Working group told credits used as collateral provide liquidity; Norway has tax credit program with some similarities to Alaska’s KRISTEN NELSON Petroleum News
State tax credits can be important in financing exploration projects, the Senate Oil and Gas Tax Credit Working Group heard Oct. 6, in presentations by Jon Iversen of Stoel Rives and Thomas Ryan and Richard Innis of ING.
Iversen, a former director of the Department of Revenue’s Tax Division, as well as a former assistant Attorney General, said tax credits, because they are transferable and refundable, are important for use as collateral in financing.
Credits can be used in financing to obtain liquidity for a project, he said, allowing companies financing to move a project forward.
The process of using tax credits in financings has become fairly standardized over time, Iversen said, and it is not uncommon to see financing deals come together in a couple of months. The program was much narrower in 2007, he said, with cash purchase rules pretty narrow and requirements for reinvestment.
Uptick following 2010 changes But following the 2010 changes, and as programs stabilized over time, there has been a noticeable uptick in activity. The tax credits proved themselves to industry and additional mechanisms in 2010 created an increase in investment.
There is now a tremendous amount of investment and projects on the cusp of going into production, he said.
Iversen said Stoel Rives represents all sorts of different players, both on the borrower and lender side and said there was uniformly tremendous anxiety after the governor limited credit payment available in the last budget. He said the action really caused a lot of uncertainty that was not highlighted before in terms of political risk.
Iversen said his firm had several financing transactions ongoing at that time. They stopped, he said. Some never started again; some started with changes to account for the risk.
He said he was caught by surprise by how much of a ripple effect the action had.
Damage control? Asked about damage control, Iversen said that anything that could be done to support the program would be meaningful - anything to provide comfort that the program will be kept significantly structurally in place.
Any suggestions of changes that would structurally harm the program are very worrisome as the tax credit program is vital to so many exploration-development programs in the state, he said.
Alaska is well positioned to be an importer of capital because of the tax credit program, Iversen said.
Iversen said he was not representing any particular client, but the delay in payments raised great concerns about not just the when but the if of payment. He noted that the administration has said they view tax credits as obligations, but from both the borrowers and lenders side, return of capital in a timely manner and as expected is very important.
And in terms of project economics, Iversen said, it’s very important to have cash back early on because in terms of the project that is when cash is needed.
Alaska v. Norway John Innis and Thomas Ryan, bankers with ING, said tax credits being assignable was a game changer for them, because they can be monetized as cash.
The goal here is to attract smaller players and with the financing option provided by credits, lending can be turned around very quickly.
Asked how the state benefits, Ryan said the state is attracting parties to come in and invest in oil and gas, and since the state is the principal owner and royalty and tax collector, it benefits as companies successfully drill for oil and gas.
Comparing Alaska’s program to Norway’s, ING’s presentation materials said while Alaska has a cap on tax credits equal to appropriations, there is no statutory cap on tax credits paid in a given year in Norway, and unlike Alaska, in Norway funds for the program are not subject to appropriation, but are a statutory obligation.
In Alaska, tax credits are generally available on up to 30-40 percent of exploration costs and 25-45 percent on net operating losses; in Norway tax credits can be up to 78 percent of exploration costs. In Norway lender security interest is perfected immediately while in Alaska there is a delay in perfecting borrower security interest until the end of the year.
Similarities between Alaska and Norway include: payment of tax refunds annually; eligible capital expenditures subject to review and certification by a state-appointed auditor; the state provides reasonable clarity regarding qualified expenditures; state is highly creditworthy; and tax credits assignable by borrower to a third party.
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