Session V: J. Mousseau

Energy and the Municipal Bond Market Global Interdependence Center November 2015

John Mousseau, CFA Executive VP & Director of Fixed Income john.mousseau@cumber.com

ŠCopyright 2015 Cumberland AdvisorsŽ. Further distribution prohibited without prior permission.

Direct Impacts: Energy Sector • Impacts state and local government fiscal balances through three transmission mechanisms 1.

Sales taxes 

Affects personal income, jobs, increased tax receipts from retail, hotel and motel occupancy, and local permits and fees

2. Income taxes   

3.

Personal income Employment Wealth demographics

Property Taxes 

Ad valorem property revenues increase with mineral rights valuation, an inmigration to oil-rich regions

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Case Studies  Sales taxes  Arkansas  5% natural gas severance tax  Oil excise tax with tax rate of 5% of oil and gas production market value

 Income taxes  Barnett Shale  Generated $730.6 million in fiscal revenues (2011) to counties, cities, and school districts  $911.8 million to the State of Texas

 Property taxes  Krum Independent School District (Texas)  Property values increase $182 million to $723 million over last several years  Mineral valuations account for nearly half of the district’s tax base ©Copyright 2015 Cumberland Advisors®. Further distribution prohibited without prior permission.

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Oil Prices De-Linked Oil Prices have de-linked from Sales Tax Receipts in Recent Years

Source: Bloomberg and Cumberland Advisors ŠCopyright 2015 Cumberland AdvisorsŽ. Further distribution prohibited without prior permission.

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Bond Trading Levels 5

4.5

4

3.5

3

2.5

MMA AAA

30-yr. TX GO

30-yr. OH GO

30-yr. PA GO

Source: Bloomberg ©Copyright 2015 Cumberland Advisors®. Further distribution prohibited without prior permission.

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Texas Standard & Poor’s “The energy sector…the state’s predominant industry…insulated Texas from the effects of the national economic downturn. We have seen recent growth and diversification in other sectors…Houston’s medical industry and Austin’s technology sector.”

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Property Values in Texas 550

190

Dallas-Froth Worth-Arlington 180

Houston-The Woodlands-Sugar Land 500

170 160

450

150 140

400

130 120

350

Austin-Round Rock

110

San-Antonio-New Braunfels

100

300

90 2007

2008

2009

2010

2011

2012

2013

2014

Houston-The Woodlands-Sugar Land

Dallas-Fort Worth-Arlington

San Antonio-New Braunfels

Austin-Round Rock

2015

Source: Standard and Poor’s ©Copyright 2015 Cumberland Advisors®. Further distribution prohibited without prior permission.

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Alaska • Rated AAA by S&P – August 25, 2015: Outlook changed to negative from stable

• 74% of revenues petroleum-related – From state’s fiscal 2016 budget of $2.2 billion

• FY2016: $3.6 billion deficit • Rainy Day Fund: $45.6 billion • S&P – “Outsized reserves have thus far shielded the state’s credit quality from degradation that the large deficits would inflict on most states’ credit quality.” ©Copyright 2015 Cumberland Advisors®. Further distribution prohibited without prior permission.

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Global Oil Landscape

Source: Energy Policy and the Environment, Mark P. Mills, Senior Fellow Manhattan Institute ŠCopyright 2015 Cumberland AdvisorsŽ. Further distribution prohibited without prior permission.

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Shale Boom Boosts Finances  Shale break-evens approaching single digits in recent years  Barnett Shale projected to bring $10 billion in revenues to Texas over next decade

 Four top-producing counties in North Dakota produced roughly 200 million barrels of oil in 2012 • More than Ecuador (in OPEC)

 Unknown-unknown benefits of shale • DFW signed lease with Chesapeake Energy o $186 million cash payment o 25% on gas product royalty  From portion of Barnett Shale that lies beneath airport-owned land ©Copyright 2015 Cumberland Advisors®. Further distribution prohibited without prior permission.

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Texas 10-year CDS

Source: Bloomberg and Cumberland Advisors ŠCopyright 2015 Cumberland AdvisorsŽ. Further distribution prohibited without prior permission.

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Pennsylvania 10-year CDS

Source: Bloomberg and Cumberland Advisors ŠCopyright 2015 Cumberland AdvisorsŽ. Further distribution prohibited without prior permission.

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Ohio 10-year CDS

Source: Bloomberg and Cumberland Advisors ŠCopyright 2015 Cumberland AdvisorsŽ. Further distribution prohibited without prior permission.

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Disclosure All material presented is compiled from sources believed to be reliable. However, accuracy cannot be guaranteed. Past performance is no guarantee of future results. All investments involve risk including loss of principal. Fixed income investments are subject to interest rate and credit risk.

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