By COLLIN GALLANT on April 18, 2020.
City officials will recommend financing the debt to pay for the abandonment of most of the city’s low-production gas wells in the next three years, News reported.
Last fall, the 110-year-old oil producer announced that it could no longer sustain deeply depressed prices for natural gas and would close and recover about 2,000 wells that are losing money in its 2,500 well portfolio.
At that time, the cost of the three-year program to complete the work was estimated at $ 90 million – apparently to be paid out of $ 150 million in reserve funds for that purpose that the city set aside with AIMCo several years ago.
However, with money blocked in long-term investments, but necessary before expected, managers recommend accessing favorable credit markets and underwriting debts with cash.
“We are going to draw up the full 10-year plan and we expect at least one installment – the first (abandonment) installment will be financed by loans,” said energy and utility commissioner Brad Maynes.
“Our cost of capital is very low, and arbitration (of debt management with investment income) can be very advantageous.”
The full details will be described in a presentation at Monday’s city council meeting. This meeting is physically closed to the public and the media, although the proceedings are broadcast on the city’s website and at the local Shaw-TV cable station (cable 10).
Speaking on a separate topic this week, Mayor Ted Clugston said that while many cities are cutting spending, Medicine Hat would continue with its municipal capital program and “absolutely” the abandonment program, as wells are operating at a loss. .
“It’s like pulling out an abscessed tooth,” said Clugston. “The sooner the better.”
According to the city’s financial report for 2019, also due to be presented on Monday, the gas production business lost $ 31 million last year and needed money from the city’s gas depletion reserve fund to continue operating.
This took the balance – once close to $ 200 million – to zero after years of using the money originally intended to buy new gas fields to offset tax increases, as budgeters work to close a deficit.
But operating costs in the production business have also been reduced by $ 1 million, thanks to the early stages of the abandonment program, which will also require substantial budget changes that could be introduced on Monday.
There may also be some policy change in relation to the city’s internal rules on debt burden targets. With about $ 400 million in debt today, the city is about half its established limit, which is set by the province.
In addition, a special provincial order may be required to make new loans. Cities are limited to lending only for construction that results in a physical asset, while closing wells is the opposite, even if it reduces liability.
Medicine Hat is currently concentrated in major cities in terms of loan and investment regulation, due to its relatively large properties and utility operations.
Debt management in relation to the cost of borrowing can provide a benefit, as interest rates that are already close or historic decrease with the potential to fall further, as central banks seek to stimulate a post-COVID economic recovery.
The local process can also be similar to a traditional “amortization fund”, in which the city holds cash assets and receives a rate of return, while borrowing and then paying off the debt.
By managing money from the long-term fund, the city would maintain the difference between the rate of return and interest expense, which is normally blocked for municipal loans.
Depending on annual returns, the gain can be substantial, but it can also end up in negative territory in the event of a major market reversal.
AIMCo’s investments, including a portion of the city’s Heritage Savings Fund, grew 14.5% in 2019, according to the annual report released recently by the city. But it lost 2.3% in 2018, after a 7% return the previous year. Analysis of the most recent major market correction this spring is not available.
The annualized rate over three years is about 6%, close to the city’s declared inflation target, plus 4%.
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