This rule was filed as SIC Rule 89-3.

TITLE 2 PUBLIC FINANCE

CHAPTER 60 INVESTMENT AND DEPOSIT OF PUBLIC FUNDS

PART 22 REGULATIONS GOVERNING THE INVESTMENT OF THE SEVERANCE TAX

PERMANENT FUND IN OIL AND GAS LOAN PARTICIPATIONS

2.60.22.1 ISSUING AGENCY: State Investment Council.

[Recompiled 10/1/01]

2.60.22.2 SCOPE: [RESERVED]

[Recompiled 10/1/01]

2.60.22.3 STATUTORY AUTHORITY:

A. Pursuant to Section 7-27-5.7 NMSA 1978 the severance tax permanent fund may be invested in notes, obligations and mortgages held by banks and savings and loan associations which represent loans by such financial institutions upon the production potential of new oil and gas wells that have been drilled in New Mexico when such investments are recommended by the oil and gas production assistance council. The principal amount of such notes, obligations or mortgages purchased in any twelve month period may not exceed fifty million dollars and the total aggregate amount of purchases outstanding at any one time shall not exceed three hundred million dollars or ten percent of the book value of the fund, which ever is less.

B. The state investment council is required under Section 7-27-5.7 NMSA 1978 Subsection B,C,E to adopt regulations to provide for the terms and conditions for participation in the investment, to set limits on fees to be charged by the state and lending institutions and to determine the effective yield on investments at or not more than one percent below market rate but in no case less than seven percent. The purpose of these regulations is to implement the legislation.

[Recompiled 10/1/01]

2.60.22.4 DURATION: [RESERVED]

[Recompiled 10/1/01]

2.60.22.5 EFFECTIVE DATE: [Filed July 12, 1989.]

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2.60.22.6 OBJECTIVE: The purpose of this investment program is to provide a mechanism to encourage private New Mexico financial lending agencies to make loans to qualified oil and gas producers to initiate the drilling of and enhance the production from new oil and gas wells in the state and thereby promote the economic welfare of New Mexico.

[Recompiled 10/1/01]

2.60.22.7 DEFINITIONS:

A. "Lender" shall mean a New Mexico bank or savings and loan which has made loans based upon the production potential of new oil and gas wells drilled in New Mexico and desires to sell a participation in the notes, obligation of mortgages to the severance tax permanent fund.

B. "OGPAC" shall mean the oil and gas production assistance council as created in Section 7-27-5.12 NMSA 1978.

C. "Production potential" of new oil and gas well(s) means the calculated fair market value of potential production of oil and gas reserves in New Mexico as determined by a qualified professional engineer based on evaluation of proven reserves.

D. "SIC" shall mean the state investment council.

[Recompiled 10/1/01]

2.60.22.8 INVESTMENT MANAGEMENT POLICY: The state investment officer may invest the severance tax permanent fund in participations up to but not to exceed 80 percent of the outstanding funded principal balance at the time of purchase, of loans made on the production potential of new oil and gas wells drilled in New Mexico when the proceeds of such loans are used solely to drill and complete new oil and gas wells in New Mexico. Such investments must be made in accordance with applicable statutes and the requirements outlined below.

A. All investments must be recommended by the OGPAC before the purchase of the participation can be made.

B. The term of the investment may not exceed five years and the maximum individual loan participation purchased shall not exceed five million dollars nor shall more than five million dollars be loaned to one individual except with the approval of the state investment officer and the SIC after considering the diversification of funds among borrowers.

C. The effective yield on the investment to the state excluding servicing fees shall not be more than one percent below market rate. The market rate shall be determined by taking the chase prime rate plus one percent or the lender's rate for the loan whichever is greater. Any service fees would then be added.

D. The servicing fee to the lender for servicing the loan shall not exceed one half of one percent per year of the unpaid principal balance of the loan. This does not include origination fees, legal fees or documentation costs which shall be passed on to the bank or borrower at cost.

E. The lender must complete and sign a participation agreement in the form approved by the state's attorney general and submit all information required in the application.

F. The SIC or the OGPAC may hire a consulting professional engineer and/ or oil and gas attorney to do reasonable work reviewing the loan, the cost of which will be paid for by the borrower.

G. The loan must be secured by a first mortgage and/or a first lien against the new oil and gas wells and the potential production of the wells, assignment or control of purchaser payments for production from the new wells and any other source to the borrower sufficient to repay the loan and assignment and control of any other collateral required by the OGPAC or SIC. Evidence of title to collateral must include a title binder or attorney's title opinion. The original loan may not exceed fifty percent of the appraised or fair market value of the pledged collateral or ninety percent of the present value of the discounted cashflow of the borrowers production interest in the new and other wells securing the loan over a five year period. The cashflow shall be discounted using the discount rate required by the securities and exchange commission for similar transactions. At the lender's recommendation, if the loan is to a partnership or single individual, life insurance may be required for the value of the loan as well as personal guarantees where appropriate. The participation agreement with the lender must include a due on sale clause.

H. The purchasers of production from the well(s) will specify on their division order, or other internal payment control document, that the borrowers percentage of production from the well (identified as net recoverable income (NRI) from the well payable to the borrower, after deduction of royalties or overriding royalties, severance taxes and operators payments) be paid directly to the lender. Upon receipt of such payment, the lender will retain the amount currently due, or overdue, in monthly payments on the loan and will forward the state's participation payment as required in the servicing agreement between the lender and the SIC and the balance of the payments will be immediately forwarded to the borrower or distributed as otherwise directed by the borrower.

I. The lender and the borrower shall provide a statement of the purpose of the loan and prior to release of any funds by the state investment office provide copies of the approved application for permit to drill (APD) and the authority for expenditure (AFE).

J. The borrower must agree to provide at least annually to the SIC, a current certified financial statement and, if requested, to submit new engineering reports throughout the life of the loan.

[Recompiled 10/1/01]

2.60.22.9 APPLICATION PROCESS: New Mexico banks and savings and loan associations desiring to sell a participation interest in a loan based an the production potential of new oil and gas wells to the severance tax permanent fund may do so by submitting a request in writing to the state investment officer providing the following:

A. a description of the loan and the purpose of the loan made by the financial institution which has been reviewed and approved in accordance with the financial institutions loan review procedures;

B. a signed loan participation agreement on a form approved by the attorney general;

C. the borrower's loan application and all loan documentation;

D. the borrower's business experience with respect to the production of oil and gas, including a resume of the experience and qualifications of the applicant in regard to oil and gas exploration, field development and production;

E. the borrower's financial condition including a certified income statement and balance sheet, a description of all current debts, liens, encumbrances or other financial obligations and other relevant financial information;

F. an engineering report prepared by a licensed professional petroleum engineer detailing cashflows and evidence including geological tests of the production potential of the new well(s);

G. a copy of the loan agreement, the original note and the mortgage securing the loan, documents evidencing all overriding royalties, percentage working interests, and net recoverable income to be utilized to make monthly payments, a legal description of any additional collateral to be provided, and a copy of the title binder or attorney's title opinion;

H. all necessary draft documents evidencing the assignment by the borrower of all payments and collateral to the SIC and agreements subordinating any lienholders interest to the SIC; fully executed and recorded originals of these documents will be provided to the SIC prior to completing the investment.

I. copies of the approved APD and AFE; Both must be received before funds are dispersed.

J. a statement of the estimated economic impact upon the New Mexico economy as a result of the proposed drilling and production activity including estimates of jobs to be created, effect on service industries, and the market demand for crude oil, oil products and for natural gas;

K. The request and the documentation as well as any additional supplementary information will be submitted to the OGPAC. The OGPAC shall review each request for the investment of the severance tax permanent fund in the loan participation within thirty days of receipt of all completed documentation and shall recommend to the state invesment officer whether the participation should be purchased. After a favorable recommendation by the OGPAC the proposal and all documents will be subject to approval as to legal form and sufficiency by the New Mexico attorney general and approval of the state investment officer before the investment will be made.

[Recompiled 10/1/01]

HISTORY OF 2.60.22 NMAC:

Pre-NMAC History: The material in this part was derived from that previously filed with the State Records Center and Archives:

SIC Rule 89-3, Regulations Governing the Investment of the Severance Tax Permanent Fund in Oil and Gas Loan Participations, 7/12/89.

History of Repealed Material: [RESERVED]