Legislature(1993 - 1994)
04/05/1993 08:10 AM Senate FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SENATE BILL NO. 171
An Act relating to the contracting and financing
authority of the Alaska Industrial Development and
Export Authority, giving approval of the issuance of
the authority's revenue bonds, and delaying the
termination date of the authority's business assistance
program; and providing for an effective date.
Co-chair Pearce directed attention to SB 171 which she
explained contains AIDEA authorization for an Anchorage
International Airport fueling facility and reauthorization
and delay of sunset for the business assistance program.
She then directed attention to revised amendment no. 1,
advising that it would add the Mat-Su, Port MacKenzie,
Midrex project. The Co-chair further referenced amendment
no. 2 to delete the word "revenue" from authorization for
the fueling facility.
Senator Kerttula requested a brief recess.
RECESS - 9:50 a.m.
RECONVENE - 10:05 a.m.
RILEY SNELL, Executive Director, AIDEA, Dept. of Commerce
and Economic Development, came before committee. Co-chair
Pearce observed that she had spoken to both amendments 1 and
2 while the bill was in Senate Labor and Commerce, but no
changes were made in the legislation at that time.
Mr. Snell explained that the first provision of the bill
relates to the Anchorage Fueling and Service Company--a
consortium of airlines operating the fueling system at the
Anchorage Airport. He noted that a large contingent of
airline officials and a representative of MAPCO were present
to speak to the project.
He then introduced members of that contingent.
JOHN OLSON, Deputy Director, Development, AIDEA, Dept. of
Commerce and Economic Development, came before committee.
He explained that the consortium contains a "wide cross-
section of principal users of Anchorage International
Airport, including foreign flag carriers, domestic and . . .
even some air taxi operators . . . ."
In response to a question from Co-chair Pearce regarding
international carriers that have pulled out of Anchorage,
Mr. Snell explained that "they are still obligated
financially to meet some of the debt of the company." The
existing agreement also contains a step-up requirement.
Should a carrier fail or cease to operate in Anchorage, the
carrier would be obligated by two or three times its
commitment to satisfy financial requirements. AIDEA would
negotiate that type of arrangement in the new financing as
well.
Mr. Olson directed attention to charts and packets
containing background information and letters of support.
He then asked that TOM MUSHOVIC, Partner, Signature Flight
Support, explain the various components. Mr. Mushovic
pointed out that fuel presently flows to Anchorage via one
of three methods:
1. Rail car from North Pole--MAPCO
fuel coming to the Anchorage area.
2. The Nikiski pipeline containing Chevron and
TESORO products.
3. Marine shipment via barge or tanker from
anywhere in the world.
All commercial jet aviation fuel reaching Anchorage comes
via one of the above means. Within the city, fuel flow to
the airport is by one of two methods:
1. The Alaska Railroad from the downtown core.
2. The AFSC cross-town pipeline from the Port of
Anchorage.
One of the benefits of the proposed project is that, once
constructed, the new terminal will allow interception of
product from the Nikiski line. That will free up capacity
on the cross-town line and allow for a more equitable supply
of fuel to the airport. There are times when rail car and
cross-town delivery barely meets needs. The new terminal
and interception from the Nikiski pipeline will allow the
cross-town pipeline to satisfy demand. Need for rail cars
from the Port of Anchorage to the airport will be
diminished.
The present airport facility is a combination of three old
tank farms. The site now occupied by AFSC will be
demobilized and a new operation and maintenance station
located thereon. That is the second phase of the proposed
project. The primary phase consists of construction of a
new tank farm, consisting of three, 100,000 barrel tanks.
That effectively increases supply from two to twelve days of
fuel. Other components (control building, pump house,
filter building etc.) would also be part of the project.
Co-chair Pearce asked if the project includes reconstruction
of the existing cross-town pipeline. Mr. Mushovic answered
that the only pipeline cost included in the request is
extension of the six-inch line to the new facility. The
cost of the tie in from the Nikiski line will be borne by
TESORO.
Senator Sharp commented that while the cost to be borne by
TESORO might be a minor part of the project, it could give a
competitive advantage to one refiner over another. Mr.
Mushovic assured that the project does not provide a
competitive advantage to anyone. It "opens up the supply of
fuel to the airport." At the present time, all fuel is
passed through the Port of Anchorage and subsequently turned
around and brought out to the airport. Interception of
product from the Nikiski line will not give a competitive
advantage to either TESORO or Chevron. That interception
merely opens up the cross-town pipeline, allowing MAPCO to
more freely increase delivery.
Co-chair Pearce asked if TESORO provided a letter of support
for the project. Mr. Snell explained that he had talked
with TESORO representatives who indicated support. A letter
will be forthcoming.
Senator Sharp recalled testimony in previous years
indicating that the cross-town pipeline is in disrepair. He
then inquired concerning the remaining life of the line.
Mr. Mushovic said that the line from the Port of Anchorage
to the airport is in excellent condition and is expected to
last 25 to 30 years. It was constructed in the early 1960s.
Co-chair Pearce echoed statements by Senator Sharp, advising
that current testimony on the pipeline is a departure from
that of the past. Prior testimony from the municipality
indicated that the pipeline had environmental problems. Mr.
Mushovic acknowledged a situation in 1988-89 when the line
developed a leak near Chester Creek. The leak was caused
when construction on C Street relocated the line and damaged
it with construction equipment. That is the only situation
that has caused concern.
In response to a question from Senator Rieger asking who
would manage the tank farm, Mr. Mushovic said that if AFSC
remains the operator, it would also manage the facility.
Senator Rieger next asked what arrangements would be made to
protect the state investment. Mr. Snell explained that
while design and construction oversight, operation,
maintenance, and liability are vested in AFSC, AIDEA will
conduct annual maintenance and operating budget review.
AIDEA also reserves the right to conduct periodic
inspections to ensure that the facility is kept up to
standard.
Senator Rieger asked if all partners in the consortium would
jointly and severally guarantee the debt. Mr. Snell
responded negatively. He then reiterated earlier comments
regarding step-up provisions, requiring that a member of the
consortium assume two or three times the ratio of the
member's investment should the member airline fail or leave
the area.
In response to an additional question from Senator Rieger,
Mr. Snell indicated that AIDEA's operating budget would
cover the cost of staff assigned to oversee the project.
Any third-party costs for independent analysis would be
borne by the developer.
Co-chairman Frank asked why AIDEA would be the owner on the
proposed projects rather than merely the financier. Mr.
Snell explained that the principal reason is to take
advantage of IRS tax-exempt bond issues for governmental
entities that provide infrastructure development for ports,
harbors, or airports. In order to obtain that benefit,
ownership must be vested in the governmental entity.
Senator Sharp asked who would be responsible for clean up of
the old tank farm. Mr. Snell said that AIDEA would not be
responsible. AIDEA will seek indemnification from prior
existing conditions. Senator Rieger then asked who would be
responsible for environmental issues relating to the three
new tanks. Mr. Snell said that responsibility would inure
to the fueling consortium through contract provisions.
Senator Rieger suggested that strict liability law may
prohibit that. Mr. Snell acknowledged the concern. He
explained that for that reason the consortium is responsible
for design, construction, maintenance, and operation. There
will thus be only one party liable over the course of the
project. Contract provisions will fix responsibility for
spills, cleanup, etc. with the consortium. The airport, as
the land owner, would also come into play should the
consortium have difficulty in meeting its obligation.
Senator Rieger asked if harm would be done to the
legislation if indemnification from environmental issues was
added. Mr. Snell reiterated that responsibility would be
fixed in contract. If AIDEA does not receive that
assurance, it will not proceed with the project.
Discussion followed between Co-chair Pearce and Mr. Snell
regarding possible environmental problems at the existing
facility. Mr. Snell stressed that the proposed project
would be located on new land which would be base-line
studied to determine that there is no existing
contamination. Ongoing monitoring programs would ensure
that no contamination occurs. Further discussion followed
regarding demobilization efforts at the existing facility.
Senator Kerttula commented on past efforts relating to the
right-of-way leasing act. Experts testified that well-
written contracts are more powerful instruments in terms of
giving direction than are state statutes.
Discussion followed regarding planned demolition of existing
facilities and use of the land thereafter.
Co-chair Pearce next directed attention to amendment no. 2
which she explained was requested by AIDEA. The amendment
would delete the word "revenue" on page 1, line 12. Mr.
Snell explained that use of the word "revenue" limits the
ability of the authority to use its general obligation
powers to finance projects. Revenue financing is based
strictly upon the credit of the participants in the project.
AIDEA seeks the flexibility to deliver "the cheapest capital
cost to the project." Providing that AIDEA gets the type of
security it seeks from developers, the authority wants the
ability to use its general obligation powers. Under that
arrangement, the faith and credit of the authority is
obligated by issuance of the bonds. Senator Kelly expressed
a preference for issuance of revenue bonds over general
obligation bonds. Senator Rieger voiced his discomfort as
well, advising that a $40 million obligation represents a
substantial portion of AIDEA's net worth.
Senator Kelly asked if AFSC could finance a $40 million
project without AIDEA backing.
End, SFC-93, #49, Side 1
Begin, SFC-93, #49, Side 2
Mr. Snell advised that while it could be done, it would
require a joint and severable relationship with the airlines
to obtain financing. FRED KETZEBACK, Director, Fuel
Administration, Alaska Airlines, and Chairman, AFSC, came
before committee. He explained that the consortium could
obtain financing but it would not be as favorable as the
tax-exempt arrangement through AIDEA. Increased financing
charges would be passed along to the airlines in fuel costs,
etc. Mr. Snell observed that since revenue bonds are based
on the credit of the developer, they entail greater
financing costs than do general obligation bonds. The
difference between the two depends upon weekly market
conditions, but it could range 25 to 50 basis points in
interest rates (a quarter to one-half percent). Senator
Frank voiced his understanding that in issuing general
obligation bonds, AIDEA was, in effect, taking a greater
risk and passing the benefit on to the borrower. Mr. Snell
observed that AIDEA would charge the developer a higher rate
for use of general obligation bond authority. While a
higher fee would be paid, the developer would get the
overall benefit of cheaper money. Senator Frank voiced
concern regarding the additional risk. He then asked if the
authority had proceeded in this manner on other projects.
Mr. Snell told members that general obligation powers were
used at Unalaska and the Skagway Ore Terminal. The Red Dog
Mine at Kotzebue was a revenue bond issue. Senator Frank
questioned whether such use of general obligation bond
authority was good policy.
Co-chair Pearce asked why the international airport system
did not seek to utilize federal funds for the project,
retaining ownership within the airport while allowing the
consortium to operate it. Mr. Snell said that he was not
aware that the project would be eligible for such funding.
Discussion followed between Senator Rieger and Mr. Snell
concerning AIDEA charges on general obligation versus
revenue bonds. Mr. Snell said that costs are usually
negotiated. For issuance of general obligation bonds for
Federal Express, AIDEA charged 85 basis points beyond the
cost of money. Ownership was also retained by the
authority. Senator Kelly asked if the original
recommendation from AIDEA was for issuance of general
obligation bonds. Mr. Snell concurred. He suggested that
use of the word "revenue" was most likely a drafting error.
In response to a question from Senator Rieger, Mr. Snell
explained that under a revenue bond issue AIDEA would have
to retain ownership to keep tax-exempt financing in place.
Senator Frank voiced his understanding that regardless of
whether the project proceeds as a revenue or general
obligation bond issue, should default occur, AIDEA would
assume financial responsibility. Mr. Snell concurred,
advising that if the authority did not do so its reputation
in the marketplace would be severely damaged. He added that
because the proposed project involves both foreign and
domestic carriers as well as Federal Express and UPS, it
collectively has good credit.
Co-chair Pearce next directed attention to bill provisions
relating to extension of the business assistance program.
Mr. Snell explained that the provision extends the sunset
date to 1996. Material changes in the program were made
last session at the request of banking institutions and the
authority to make the program more usable and to fulfill a
need for small loans in rural Alaska. Mr. Snell urged that
the sunset extension be approved.
Co-chair Pearce directed attention to revised amendment no.
1. She explained that the amendment would place both the
amount of aircraft fueling facility bonds and the proposed
Midrex bonds in the title. It would further authorize a
facility for use by Midrex Corporation.
DON MOORE, Borough Manager, Matanuska-Susitna Borough, came
before committee. He explained that the Midrex project
would be located in upper Cook Inlet at Point MacKenzie.
Midrex Corporation is an American corporation and a wholly
owned subsidiary of Japan's Kobe Steel. Midrex utilizes a
process by which iron ore is directly reduced into a
metallized product for steel making and foundry
applications. The process uses large amounts of natural
gas. Approximately 92% of the natural gas is used for
chemical feedstock. Only 8% is used as combustible fuel.
That is important in light of the pending federal BTU tax.
Senator Kelly asked if the plant could be operated by
another energy source. Mr. Moore said that while another
energy source could be used to operate the system, the
process requires the carbon and hydrogen in natural gas as
the chemical reductant. The resulting product is marketed
in the Pacific Rim. Although there are 42 similar plants
throughout the world, there are none "on the west coast of
either of the Americas." As the third world electrifies,
the Pacific Rim market will grow larger. The Midrex process
creates feed stock for electric arc furnaces and will be
shipped to other parts of the world. The product does not
compete with scrap metal. It assists the scrap industry.
With increasing metal standards for steel, reprocessed scrap
metal is not of sufficient quality for modern construction.
Feed stock is thus added to the scrap to bring it to
standard.
The capital investment for the proposed plant is
approximately $200 million. The facility would employ 120
full-time employees. During construction, employment would
be considerably higher than that. The stability of the
United States and the Alaskan labor market are attractive
features for investment. There are currently only three
such plants located in North America.
The borough has 5,000 acres of land at the site and has made
a commitment of that land. The product is compatible with
coal. Coal from the Wish Bone Hill project, should it
commence operation, could be loaded and transported from the
same site.
Mr. Moore described the effort as "authentically a free-
trade-zone project." Iron ore from outside the state (the
West Coast and South America) would be processed for
shipment to Japan. Co-chair Pearce voiced her understanding
that the Municipality of Anchorage refused the Mat-Su
Borough request to be part of the proposed Anchorage free-
trade zone. She then asked if Mat-Su had submitted a
federal application for a separate zone. Mr. Moore said
that Mat-Su has not yet applied for free-trade-zone status.
In response to comments by the Co-chair indicating that
establishment of such zones takes considerable time, Mr.
Moore said that the zone was not "absolutely necessary" to
the project. Mr. Snell added that time needed to bring the
proposed plant into service would be sufficient for
processing a free-trade-zone application.
Mr. Moore stressed the advantage of locating at Point
MacKenzie:
1. A close supply of natural gas.
2. Available low-cost industrial land.
3. Deep-water port site with a Corps of Engineers
404 permit.
4. Strategically positioned for emerging Pacific Rim
markets.
5. Stable politics and labor force.
He next directed attention to the proposed budget for the
$50 million project. In response to a question from Co-
chair Pearce, Mr. Moore explained that the $50 million
represents only the "public loan portion of the
infrastructure." The Midrex plant would involve private
enterprise investment. AIDEA backed bonds would provide for
the dock and conveying system. Senator Kelly asked if the
bonds would cover a boat loading facility or a dock that
could be expanded for other uses such as the Alaska State
Ferry, passenger ships, etc. Mr. Snell explained that the
concept at this time is to design something for the client.
Funding above and beyond Midrex debt service would require a
clear demonstration that there were other sources of funds
to cover that portion.
Responding to an additional question from Senator Kelly
regarding land arrangements, Mr. Moore explained that the
arrangement would not be entirely cost free. A lease, which
is yet to be negotiated, would be involved. Senator Kelly
voiced reluctance to approve financing for the project
without a firm lease in place. Mr. Snell observed, "This is
a positioning effort . . . to demonstrate to private sector
participants that we are prepared to participate in
infrastructure development." The authority would only
commit funds after review of a financing plan that
identifies all costs and all sources of funds. That would
include land use and the lease with the borough.
When questioned further by Senator Kelly, asking if the
proposed legislation represents a commitment, Mr. Snell
answered:
I look at it, Senator, certainly, as legislative
authorization to proceed with the project. But,
certainly, it's not an indication that there's a
done deal.
AIDEA will examine the financial feasibility of the project,
the economics, the risk, etc., and assure that Midrex has
the ability to repay the debt prior to commitment.
Senator Rieger asked if the remaining $150 million
investment would be made before or after dock construction.
Mr. Snell said that there would probably be parallel
construction efforts. Site development is likely to be
ongoing as port development commences.
Senator Rieger next inquired concerning the extent of the
guarantee from Kobe Steel. Mr. Snell acknowledged that that
had not yet been negotiated.
Discussion followed concerning the triangular shipping route
for raw and processed materials.
Co-chair Pearce inquired regarding a resolution from Midrex
Corporation. Mr. Snell advised of a board of directors'
resolution authorizing development of the project with the
Mat-Su Borough and Midrex.
In response to a question from Senator Rieger concerning
ownership of the dock and loading facility, Mr. Snell noted
IRS code advantages for tax-exempt financing under public
ownership. Public ownership also makes sense in terms of
possible multiple users.
Further discussion followed regarding 1986 changes in the
Internal Revenue Service Code. Mr. Snell observed, "About
the only thing that remains for tax-exempt financing anymore
are ports and harbors and airports."
Additional comments followed by Mr. Snell concerning
possible share costs under a multiple use arrangement.
Co-chair Pearce voiced her intention to move both SB 16 and
SB 171 from committee at the same time. She then directed
attention to SB 171 and inquired regarding disposition of
revised amendment no. 1, relating to Midrex.
Senator Kelly inquired concerning the tax status of the
proposed airport fueling facility. Mr. Snell explained that
if the project is owned by AIDEA, it would be exempt from
municipal taxation. If owned by Anchorage Fueling and
Service Company, it would be subject to taxation. Senator
Kelly expressed a preference for adoption of revised
amendment no. 1 but not amendment no. 2--pertaining to
deletion of language concerning "revenue bonds." He then
formally MOVED for adoption of revised amendment no. 1
relating to Midrex. Senator Rieger OBJECTED. He voiced
support for the concept of the project, but noted lack of
supporting information, questioning whether it was ready to
proceed. Senator Kerttula said that if the project does not
meet all criteria, it will not proceed under AIDEA. He
expressed concern that delay of authority might mean loss of
"this year" in terms of timing as well as ultimate loss of
the opportunity. Mr. Snell concurred in comments by Senator
Kerttula. The legislation represents a positioning effort
whereby Alaska may compete for the project and demonstrate
AIDEA's willingness to participate in infrastructure
development. That development poses a major cost component
to the developer.
Senator Rieger reiterated support for the project, but again
suggested that authorization appears to be premature. He
voiced reluctance to vote on a $50 million issue based on
little information. Co-chair Frank indicated need to review
terms and conditions that would have to be met before AIDEA
would proceed. Co-chair Pearce pointed to the fact sheet
from AIDEA and limitations built into AIDEA statutes.
Senator Kelly raised concern regarding lack of information
on Mat-Su Borough involvement. He asked what the borough
would be devoting to the project. Mr. Moore explained that
borough ordinances establish set rates and maximums for
lease of borough land. The borough could both forgive lease
payments and levy a property tax on the development. It
seeks the development on behalf of the state and the jobs
for the local economy.
Co-chair Pearce requested that Senator Kelly withdraw his
motion for adoption of revised amendment no. 1 and asked
that Mr. Snell obtain a copy of the resolution passed by
AIDEA as well as additional information concerning action
intended to be taken by the board once authorization is
provided.
Co-chair Frank voiced his understanding that bonds issued by
AIDEA would be repaid by revenue from the Midrex operation.
Aside from the tax-exempt benefit of the bonds for port
construction, no subsidy would be involved. He then
registered his support for the project, saying that such
capital development should be encouraged.
Senator Kelly WITHDREW his motion for adoption of revised
amendment no. 1 and reiterated need for further information
on Mat-Su Borough involvement.
ADJOURNMENT
The meeting was adjourned at approximately 11:25 a.m.
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