DKRW turns to the state to finance Medicine Bow plant

Feb 10, 2012

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DKRW’s proposal to build a coal to liquids plant in Medicine Bow is a big deal for many reasons. It’s a major facility, the first of its kind in the United States, it promises to provide jobs and tax revenue to the state, and its completion could be a major boost to the energy industry. But before any of that happens, it’s a big deal in Wyoming because DKRW is asking for help to finance the project.

IRINA ZHOROV: The plant in Medicine Bow is estimated to cost about two billion dollars to start up. Right now, that price tag is causing delays in its construction. After the economic crisis and sharp drop in oil prices in 2008, investors pulled out and left DKRW scrambling for new funds. And though DKRW has insisted over the years that the project can make it without government assistance, they’ve asked for it nonetheless.

While they will be using up to 1.1 billion dollars ofprivate bank debt, they want a substantial amount through bonding.

Carbon County’s Commissioners have approved 245 million dollars in tax exempt bond allocations.

MIKE MARTIN: The state would not be purchasing those bonds, only giving authority to allow those to be issued free of taxes on the income earned from the bonds.

ZHOROV: That’s Mike Martin, from the Wyoming Business Council.

The IRS permits each state to issue a certain amount of these tax exempt bonds every year, mostly for development activities. For 2012, Wyoming’s cap is about 284 million dollars. DKRW is asking for 245 million of that for their bank, Citibank, to sell to private investors. Investors are usually eager for tax exempt bonds because they don’t have to pay taxes on the revenue they make from interest while DKRW wants them because they’re easier to sell off and the tax free status often means the interest rates are lower.     

The second bond DKRW has in mind is an industrial development bond for up to 300 million dollars. If that bond gets approved by lawmakers, the state would be the investor. There’s a statute that governs how this is done…

MARTIN: It allows the treasurer to make purchases which are called legislatively designated investments, or LDIs, and it allows the treasurer to purchase bonds to try to promote economic development around the state.

ZHOROV: However, the treasurer is obliged under his fiduciary obligations to make sure that he is making a prudent investment. According to Senator Phil Nicholas, Co-Chairman of the Appropriations Committee, a prudent investment generally puts money in investment grade securities.

PHIL NICHOLAS: If the company can’t sell it on the private market that may in itself suggest they’re not investment grade. So then if the company is saying, ‘State of Wyoming, would you buy them?’ the first question is ‘why didn’t you sell them on the private market?’ If you can’t do that then we have to ask the question, ‘are they investment grade?’

ZHOROV: The legislature, on the other hand, could decide to throw caution to the wind.

NICHOLAS: The legislature could if it wanted say ‘we’re going to put this investment in a riskier fund for other reasons, for economic development reasons, for job development reasons,’ and if the return isn’t there I guess then the people can vote us out of office.

ZHOROV: In other words, the treasurer has to be careful but the legislature can vote to take more risks if they think it will lead to development in the state. 

So is DKRW’s proposition a risky one?

NICHOLAS: Oh yeah, absolutely.

ZHOROV: Currently, the Business Council is reviewing the project and waiting for technical review from the Idaho national Laboratory.

There are also precautions being required by the lending banks, like production guarantees. A production guarantee is basically an assurance by a company – a construction company that DKRW hires, for example - that it will provide the product it promises – like a plant of certain capacity. This makes an investment safer and DKRW says costs for these production guarantees are built into their budget. 

If the state gets involved, the governor and legislators in both houses will have to approve it. But since lawmakers are considering cutting budgets this year, Nicholas says that could be a challenge.

NICHOLAS: Right now I don’t think that there is an appetite from most legislators to become an investor at 300 million dollars but on the other hand I don’t want to tell DKRW that we’re not interested in their project.  

ZHOROV: After all, many believe there’s a lot to gain if the project is successful.

And though there’s a chance the state could lose its 300 million if it chose to invest, there’s this:

NICHOLAS: If the worst case scenario is that the company who put it together files bankruptcy and another company comes in and operates it after the bankruptcy with lower debt, but they actually operate the plant, there’s still a benefit to the state of WY for that plant operating…

ZHOROV: There’s no guarantee that would happen.

Nicholas says at this point it’s very important that the state review the project carefully and apply the same due diligence that the loaning banks are. But he believes the state should keep an open mind…

NICHOLAS: We should aid them but how we do it is what's up for debate. We should give as much help as we can at an appropriate risk threshold that we need to determine.

ZHOROV: While Wyoming thinks this all through, the Department of Energy is pondering another DKRW request – this one for 1.7 billion dollars in loan guarantees. That application is still open.

For Wyoming Public Radio, I’m Irina Zhorov.