Committee Substitute for HB0874BIS

HOUSE BUSINESS AND INDUSTRY COMMITTEE SUBSTITUTE FOR

HOUSE BILL 874

47th legislature - STATE OF NEW MEXICO - second session, 2006

AN ACT

RELATING TO THE PUBLIC PEACE, HEALTH, SAFETY AND WELFARE; AUTHORIZING CERTAIN HEDGING CONTRACTS FOR THE PURPOSE OF PROVIDING A LEVEL OF PREDICTABILITY OF OIL AND GAS REVENUES; MAKING APPROPRIATIONS; DECLARING AN EMERGENCY.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF NEW MEXICO:

Section 1. CONTRACTS FOR THE HEDGING OF SEVERANCE TAX BONDING FUND AND GENERAL FUND REVENUES.--

A. As used in this section:

(1) "hedging contract" means a written agreement with a counterparty relating to a commodity price for crude oil and natural gas, including contracts commonly known as swap agreements, futures or options providing for payments to or from the counterparty based on levels of or changes in commodity prices, options, puts or calls to hedge price or similar exposure;

(2) "qualified counterparty" means a person whose long-term obligations are rated, at the time the hedging contract is executed, in one of the three top rating categories of a nationally recognized rating agency, without regard to any modification of the rating; and

(3) "state severance taxes" means the taxes levied on the severance of oil or natural gas under the Oil and Gas Severance Tax Act, the Oil and Gas Conservation Tax Act, the Oil and Gas Emergency School Tax Act and the Natural Gas Processors Tax Act.

B. The state board of finance, on behalf of the state, may enter into hedging contracts authorized in this section if the board finds that such a contract would be in the best interests of the state and determines that the contract results in a financial benefit to the state. The primary purpose of hedging contracts shall be to establish a desired level of predictability in tax receipts derived from part of the anticipated crude oil and natural gas production subject to state severance taxes, in accordance with the terms and conditions established by the state board of finance, and subject to the provisions of this section.

C. Hedging contracts shall be entered into only pursuant to the following criteria:

(1) the state board of finance may enter into a hedging contract only with a qualified counterparty selected by the board through negotiation or by competitive bid, provided that the board may require more stringent rating levels and may require collateralization of the qualified counterparty's obligations at the time of execution of the hedging contract or thereafter;

(2) no hedging contract shall have a duration of more than ten years; and

(3) the proposed contract shall be prepared with the review and assistance of a financial advisor to the state board of finance and legal counsel to the state board of finance. The financial advisor and legal counsel may be the financial advisor and the bond counsel under general contract to the state board of finance, or such other financial advisor or legal counsel, selected pursuant to the provisions of the Procurement Code, as the board deems appropriate.

D. The state board of finance may determine and designate the amount of severance tax bonding fund and general fund revenues derived from state severance taxes that shall be covered by hedging transactions; provided, however, that:

(1) the aggregate amount of severance tax bonding fund revenues for any fiscal year covered by hedging contracts at any one time may not exceed fifty percent of the total revenues derived from state severance taxes imposed on the production of oil and natural gas to be deposited in the severance tax bonding fund for that fiscal year, before giving effect to any hedging contract, as estimated by the state board of finance; and

(2) the aggregate amount of general fund revenues derived from state severance taxes and covered by hedging contracts at any one time may not exceed fifty percent of the total revenues derived from state severance taxes to be deposited in the general fund for that fiscal year, before giving effect to any hedging contract, as estimated by the state board of finance.

E. Any payments, net of payments received from and costs paid by the qualified counterparty, including any premiums, periodic payments, termination payments and costs associated with entering into and performing the contract, required to be made by the state under or in connection with a hedging contract may be made from money in the applicable fund with respect to which the contract was made, except that any net payments required to be made by the state pursuant to a hedging contract relating to the state severance taxes to be deposited in the general fund shall be payable only from the state severance taxes.

F. A contract entered into by the state board of finance pursuant to this section shall not impair the contract of the state with, or impair adversely, the owners of bonds issued by the state.

G. The hedging contracts allowed by this section may only be made for the purpose of providing a level of predictability concerning anticipated revenues from state severance taxes, and not for speculation.

H. The net revenues derived by the state from hedging contracts shall be paid into the severance tax bonding fund or the general fund as applicable, as though they were the revenues actually derived from those severance taxes. The state board of finance shall treat the net revenue derived and to be derived from hedging contracts entered into under this section as the revenue actually derived from state severance taxes on the severance of oil and natural gas, as applicable, for purposes of:

(1) complying with any statutory and constitutional requirements concerning deposits of state severance taxes in the applicable fund;

(2) complying with any statutory and contractual requirements concerning tests applicable to the issuance of severance tax bonds and supplemental severance tax bonds; and

(3) making determinations of projected revenues for purposes of bonding capacity and budgetary matters.

I. Any contractual obligation made by the state board of finance shall be valid and binding from the time when the contractual obligation is made; the revenues, money or property so obligated and thereafter received by the state shall immediately be subject to such hedging contract obligation without any physical delivery thereof or further act, and shall be valid and binding as against all parties having claims of any kind in tort, contract or otherwise against the state, irrespective of whether such parties have notice thereof. Neither the resolution nor any other instrument by which a hedging contract obligation is created need be recorded.

Section 2. APPROPRIATIONS.--

A. To the extent that any net payments required under Subsection E of Section 1 of this act are to be derived from state severance taxes to be deposited in the general fund, there is hereby appropriated to the state board of finance from state severance taxes revenues to be deposited in the general fund amounts necessary to make such net payments.

B. To the extent that any net payments required under Subsection E of Section 1 of this act are to be derived from state severance taxes to be deposited in the severance tax bonding fund, there is hereby appropriated to the state board of finance from state severance taxes revenues to be deposited in the severance tax bonding fund amounts necessary to make such net payments.

Section 3. EMERGENCY.--It is necessary for the public peace, health and safety that this act take effect immediately.

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