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Calculation of Royalties Based on Netback Method - Calculation of Royalty Waiver Based on Expanded Netback Waiver

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Title: Calculation of Royalties Based on Netback Method - Calculation of Royalty Waiver Based on Expanded Netback Waiver
Authors: Morris, Steven E.
Keywords: policy
leasing
Hawaii
Issue Date: Apr 1991
Publisher: Steven E. Morris, Financial Consulting Services
Citation: Steven E. Morris, Financial Consulting Services. April 1990. Calculation of Royalties Based on Netback Method - Calculation of Royalty Waiver Based on Expanded Netback Waiver. Foster City, California: Steven E. Morris, Financial Consulting Services.
Abstract: Report created for the State of Hawaii, Department of Land and Natural Resources, Division of Water Resource Management. To encourage the development of geothermal energy in Hawaii, the Board of Land and Natural Resources (the "Board") has the authority to waive royalty payments that would otherwise be due to the State of Hawaii (the "State") from the production of geothermal resources from State leases. The Board's assessment of each application for royalty waiver is required by statute to include the examination of such factors as the need for providing financial incentives in order for the applicant to proceed with development. The Board can waive royalties for a maximum period of eight years. The decision on whether or not to grant royalty waivers to a project is a difficult process that involves many considerations.
I believe it would be useful for the Board to separate its decision on whether or not to grant royalties waivers to a project from its decision as to how much and when the royalties should be waived. Further, I believe that the timing and amount of royalties to be waived should be determined on the basis of the actual results of operations and not based on projections. Determining the timing and amount of royalties to be waived based on the actual results of operations gives the Board the opportunity to provide support to projects based on actual need, not projected need. If a project operates better than expected, the Board won't be in the position of being committed to waive a fixed amount or fixed percentage of royalties when financial support to the project is not needed. Uncertainty as to the specific amount of royalties to be
waived should not cause any major concern to the developer or its financial backers in that the amounts to be~waived will vary only if the resul ts of operations vary from the projections. If the results are better than projected, the developer should not mind receiving a lower subsidy from the State.The Puna Geothermal Venture ("PGV")- has requested that the Board agree to waive 60% of the royalties that would otherwise be due to the State during the first eight years of operations of-its Puna geothermal project (the "PGV Project"). In connection with PGV's request, I have reviewed the projected operating cashflows of the PGV Project submitted in support of the waiver request. My review was performed in the context of 1) using the assumptions in the projected cashflows to calculate the amount of royalties that would be due the State based on the geothermal netback method of valuing geothermal resources and 2) recommending to the State, a methodology to be used in evaluating requests for royalty waivers. A copy of my comment letter regarding the projected cashflows of the PGV Project, which was sent under a separate cover, is Exhibit 1 to this report.
Pages/Duration: 38 pages
URI/DOI: http://hdl.handle.net/10524/33643
Appears in Collections:Department of Land and Natural Resources
The Geothermal Collection



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