Legislature(2013 - 2014)BELTZ 105 (TSBldg)

02/05/2013 01:30 PM Senate LABOR & COMMERCE


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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
*+ SB 37 EXTEND SUICIDE PREVENTION COUNCIL TELECONFERENCED
Moved SB 37 Out of Committee
+= SB 23 AIDEA: LNG PROJECT; DIVIDENDS; FINANCING TELECONFERENCED
Heard & Held
        SB  23-AIDEA: LNG PROJECT; DIVIDENDS; FINANCING                                                                     
                                                                                                                                
1:41:12 PM                                                                                                                    
CHAIR DUNLEAVY announced the consideration of SB 23.                                                                            
                                                                                                                                
1:41:28 PM                                                                                                                    
TED  LEONARD, Executive  Director, Alaska  Industrial Development                                                               
and Export  Authority (AIDEA), Department of  Commerce, Community                                                               
and  Economic Development  (DCCED),  explained that  SB 23  would                                                               
allow AIDEA  to provide development  project financing to  all or                                                               
portion of  a project that it  does not intend to  own. This will                                                               
allow AIDEA  to serve as a  catalyst to leverage more  funds from                                                               
the private  sector. The bill  also amends the statute  to expand                                                               
the definitions  of "net income" [and  "unrestricted net income"]                                                               
to  accommodate changes  required  by  the Government  Accounting                                                               
Standards  Board  (GASB).  AIDEA  also requests  the  ability  to                                                               
calculate dividends  on each of  its two funds separately  to try                                                               
to maximize the dividend to  the state. Finally, SB 23 authorizes                                                               
AIDEA  to participate  in  the financing  and  developing of  the                                                               
liquefaction  plant  and distribution  system  with  the goal  of                                                               
reducing energy costs in Interior Alaska.                                                                                       
                                                                                                                                
MR. LEONARD  said Mr. Davis  would explain the  technical aspects                                                               
of the bill.                                                                                                                    
                                                                                                                                
1:44:50 PM                                                                                                                    
SENATOR OLSON asked  what AIDEA would use as  collateral on large                                                               
projects it doesn't own.                                                                                                        
                                                                                                                                
MR. LEONARD explained the three  components in project financing:                                                               
the term  loan or first tier,  the second or mezzanine  tier, and                                                               
equity. In these  projects, he said, AIDEA's best  position is in                                                               
the mezzanine tier, where it  can promote a bank's involvement in                                                               
a project.  The asset  and cash flows  are the  collateral, which                                                               
would  be calculated  by going  through the  deal structure.  The                                                               
collateral is the  same under a lending structure as  it would be                                                               
if AIDEA owned the project.                                                                                                     
                                                                                                                                
For example, on the jack-up rig  there is a $55 million term loan                                                               
through  an  overseas  Chinese  bank,  a  $23  million  preferred                                                               
ownership  loan   with  AIDEA,  and  about   $30  million  equity                                                               
investment by  Buccaneer and Ezion Holdings,  Ltd. The collateral                                                               
is the rig itself, valued at  about $127 million. In a worst-case                                                               
scenario the overseas Chinese bank  would have the first lien and                                                               
take $66  million, AIDEA  would take $23  million, and  Ezion and                                                               
Buccaneer would get what was left.                                                                                              
                                                                                                                                
He noted  that AIDEA was  able to  move forward with  the jack-up                                                               
rig project due  to Senate Bill 300, which allowed  AIDEA to be a                                                               
limited  liability  corporation (LLC)  in  order  to protect  its                                                               
assets. The $23.6  million is second to the term  loan and before                                                               
the equity and  has none of the risks because  AIDEA was just the                                                               
banker.                                                                                                                         
                                                                                                                                
Sometimes,  he said,  it is  advantageous to  be in  an ownership                                                               
position. The road  to the Red Dog Mine is  an example. More than                                                               
one owner  is using that road  and it's good that  AIDEA [through                                                               
DeLong Mountain  Transportation System] is there  to control fair                                                               
access  to  the  asset.  However,  there  are  times  in  project                                                               
development where it  would be better to be a  lender and be able                                                               
to leverage the investment with  money from a banking syndication                                                               
and require equity by the project sponsors.                                                                                     
                                                                                                                                
1:49:14 PM                                                                                                                    
SENATOR  OLSON  asked if  it  might  affect  cash flow  if  AIDEA                                                               
doesn't have ownership status. He cited the Red Dog Mine.                                                                       
                                                                                                                                
MR.  LEONARD clarified  that this  is one  more tool  to leverage                                                               
private  sector investment  for  specific projects.  It does  not                                                               
remove the ability for AIDEA to have ownership in a project.                                                                    
                                                                                                                                
1:50:55 PM                                                                                                                    
SENATOR STEDMAN referenced  page 10, lines 16-18,  relating to "a                                                               
liquefied natural  gas production  plant, system,  and affiliated                                                               
infrastructure on the North Slope  and a natural gas distribution                                                               
system and  affiliated infrastructure within the  Fairbanks North                                                               
Star  Borough." He  asked  why  the bill  is  restricted to  just                                                               
within the North Star Borough.                                                                                                  
                                                                                                                                
MR. LEONARD deferred to Mr. Davis.                                                                                              
                                                                                                                                
1:51:55 PM                                                                                                                    
MARK DAVIS,  Deputy Director,  Alaska Industrial  Development and                                                               
Export Authority  (AIDEA), Department of Commerce,  Community and                                                               
Economic Development (DCCED),  said he would review  the bill and                                                               
then address the question. First,  the bill amends the statute to                                                               
allow AIDEA  to provide  development project  financing; language                                                               
on page 3 adds that goal to the goals of AIDEA.                                                                                 
                                                                                                                                
The  substantive  change in  Section  7  on  page 9  proposes  an                                                               
amendment to  AS 44.88.172(a),  the economic  development account                                                               
of AIDEA.  The money in the  revolving fund, which has  a current                                                               
balance of  approximately $480 million,  is used to  own projects                                                               
or a portion  of a project. For example, AIDEA  owns just part of                                                               
the jack-up  rig and 100 percent  of the Red Dog  DeLong Mountain                                                               
Transportation System port and road.                                                                                            
                                                                                                                                
The proposed change authorizes AIDEA  to finance a project at the                                                               
mezzanine  level  with  security.  The  reasons  for  authorizing                                                               
project  financing relate  primarily  to  liability. The  jack-up                                                               
rig, for  example, is structured  like a loan, but  because AIDEA                                                               
has an  ownership interest it  is exposed to  certain liabilities                                                               
such as a death during  normal operations. By comparison, lenders                                                               
are traditionally not liable. He  cited the explosion in the Gulf                                                               
of Mexico  and pointed out  that the  owners have been  sued, but                                                               
the banks that  financed the project have not.  He described this                                                               
as a tool that AIDEA wouldn't use in every instance.                                                                            
                                                                                                                                
1:54:56 PM                                                                                                                    
MR. DAVIS  said the proposed change  [in Section 4] on  pages 7-8                                                               
would allow AIDEA  to calculate the dividends  separately for the                                                               
revolving loan  fund and the sustainable  energy transmission and                                                               
supply  (SETS)  development  fund  that  was  created  last  year                                                               
through passage of Senate Bill 25                                                                                               
                                                                                                                                
The proposed change  [in Section 5] on page 8  relates to changes                                                               
required  by the  Government Accounting  Standards Board  (GASB).                                                               
[It  updates  the  definitional language  for  "net  income"  and                                                               
"unrestricted net  income" in compliance with  GASB.] This change                                                               
was at the request of the chief financial officer of AIDEA.                                                                     
                                                                                                                                
Section 10  amends the uncodified  law of  the state by  adding a                                                               
new  section. It  waives the  one-third lending  cap in  the SETS                                                               
fund for  the proposed development of  an LNG plant on  the North                                                               
Slope  that would  truck gas  to Fairbanks.  It would  also allow                                                               
AIDEA  to issue  a  loan for  this project  at  3 percent.  AIDEA                                                               
selected 3 percent  to lower the cost of the  debt service on the                                                               
project to  achieve the target  rate of  $10.33 per [mcf]  on gas                                                               
delivered to  Fairbanks. That interest rate  should approximately                                                               
track inflation over the 10-year  period. This section also gives                                                               
AIDEA up  to $150 million  in bonding authority,  whereas current                                                               
statute requires  legislative approval  to issue bonds  in excess                                                               
of  $10 million.  The  bonds in  this  particular scenario  would                                                               
probably be  used for  the distribution  system in  the Fairbanks                                                               
area.                                                                                                                           
                                                                                                                                
MR. DAVIS  explained, in response to  Senator Stedman's question,                                                               
that the  Fairbanks North Star Borough  is mentioned specifically                                                               
because the bill is designed  to provide distribution to the core                                                               
and  "medium"  areas within  that  borough.  The project  may  be                                                               
expanded  once it  is in  operation,  but the  core project  will                                                               
cover  only those  two areas.  The project  design is  to do  the                                                               
distribution of the gas at the same  time as the build out of the                                                               
plant.  The  reason  is  that   it  is  difficult  to  finance  a                                                               
distribution  system   without  a   gas  source,   and  similarly                                                               
difficult to build a gas  delivery project without a distribution                                                               
system.                                                                                                                         
                                                                                                                                
He summarized  that the bill  asks for legislative  permission to                                                               
make a 3 percent  SETS loan to the project of  up to $125 million                                                               
and gives AIDEA $150 million  in bonding authority to support the                                                               
distribution system.  There is also  a $50 million  general funds                                                               
request to  AIDEA for  the LNG  plant itself.  It is  designed to                                                               
lower  the cost  of  gas  delivered to  consumers,  which now  is                                                               
handled by the Alaska Energy Authority (AEA).                                                                                   
                                                                                                                                
2:00:35 PM                                                                                                                    
SENATOR STEDMAN  questioned the use of  such restrictive language                                                               
when  access  to  the  funds  could  be  controlled  through  the                                                               
process. He  acknowledged that it  was reasonable  to concentrate                                                               
distribution   initially,   but   expressed  concern   with   the                                                               
definitive language on  page 10, line 18, that  says, "within the                                                               
Fairbanks North  Star Borough."  He said  he was  struggling with                                                               
the concept  that people  in the  general area,  particular going                                                               
south towards Anchorage, would not have access to gas.                                                                          
                                                                                                                                
MR. DAVIS  clarified that the  language on page 10,  lines 17-18,                                                               
refers to  the distribution  system and does  not say  that AIDEA                                                               
could  not  deliver LNG  gas  anywhere  else.  The LNG  plant  is                                                               
designed to  be moveable so  in the future LNG  could potentially                                                               
be supplied  to other areas by  truck. The gas could  be sold but                                                               
the  distribution  system  would   be  within  the  borough.  The                                                               
Regulatory  Commission   of  Alaska  would  probably   issue  the                                                               
certificates of need within the  borough, which would account for                                                               
the language in the bill.                                                                                                       
                                                                                                                                
MR. DAVIS said the propane that  would be stripped off at the LNG                                                               
plant would  supply about 2,200  homes, and one of  AIDEA's goals                                                               
in working with AEA is to  sell that propane at a reasonable rate                                                               
to the homes outside the gas distribution system.                                                                               
                                                                                                                                
SENATOR  STEDMAN  asked  if  a community  that  was  outside  the                                                               
borough boundaries  could get  the same  financing from  AIDEA to                                                               
develop a distribution system.                                                                                                  
                                                                                                                                
MR. DAVIS answered no.                                                                                                          
                                                                                                                                
2:03:51 PM                                                                                                                    
SENATOR STEDMAN  warned the committee  to consider  carefully the                                                               
restrictive nature of  the bill, because all  Alaskans have equal                                                               
access to the wealth of the state.                                                                                              
                                                                                                                                
SENATOR  OLSON  asked for  confirmation  that  these AIDEA  funds                                                               
would not be  available to someone living in  Clear, Anderson, or                                                               
Nenana.                                                                                                                         
                                                                                                                                
MR. DAVIS responded that, under the  terms of the bill, gas could                                                               
be trucked to all those communities.                                                                                            
                                                                                                                                
SENATOR OLSON said he was talking about a distribution system.                                                                  
                                                                                                                                
MR. DAVIS  responded that the distribution  system would probably                                                               
be limited  to inside  the borough  boundaries given  the density                                                               
issues and financing the distribution  system. With help from the                                                               
Alaska Energy Authority, AIDEA is  exploring a way to deliver LNG                                                               
and  propane  to other  communities.  However,  there isn't  that                                                               
capability with the first build out of the plant.                                                                               
                                                                                                                                
2:05:37 PM                                                                                                                    
CHAIR DUNLEAVY agreed with the  thrust of members' questions; the                                                               
capital focus is within the borough.                                                                                            
                                                                                                                                
MR. DAVIS confirmed that the capital  focus is in the borough for                                                               
distribution.                                                                                                                   
                                                                                                                                
SENATOR MICCICHE  highlighted that it  is a small  capacity plant                                                               
and that Fairbanks would most likely  use all of the estimated 24                                                               
mcf/day capacity.                                                                                                               
                                                                                                                                
MR. DAVIS  confirmed that  the micro plant  could be  expanded in                                                               
the future depending on demand. The  current goal is to get it up                                                               
and running in 30 months.                                                                                                       
                                                                                                                                
2:07:39 PM                                                                                                                    
SENATOR OLSON asked  if he would agree that lending  at 3 percent                                                               
is tantamount to giving free money to the project.                                                                              
                                                                                                                                
MR. DAVIS disagreed  that it would be free, because  the loan has                                                               
to be paid back.                                                                                                                
                                                                                                                                
SENATOR OLSON  asked what  commercial lending  institutions think                                                               
about this sort of project financing.                                                                                           
                                                                                                                                
MR. DAVIS said  AIDEA has a letter of interest  from a consortium                                                               
of  banks, some  of  which  are local,  that  would  lend on  the                                                               
project.                                                                                                                        
                                                                                                                                
2:09:48 PM                                                                                                                    
MR.  LEONARD added  that the  $150 million  bonding authority  is                                                               
based on  market rate plus 25  basis points for AIDEA  to run the                                                               
bonds and  work with the  project. There  is a $125  million SETS                                                               
loan  at 3  percent and  in  actuality the  market for  long-term                                                               
rates  on bonds  is projected  to  be in  the 2.88  percent to  3                                                               
percent  range  as well.  That  was  part  of the  discussion  in                                                               
selecting 3  percent. This  isn't unique; in  the past  AIDEA has                                                               
kick-started projects with a lower fixed interest rate.                                                                         
                                                                                                                                
2:11:35 PM                                                                                                                    
SENATOR  MICCICHE asked  if he  would agree  that AIDEA  and SETS                                                               
exists  philosophically  to  reduce  residual  lending  risk  for                                                               
projects  that  are   of  value  to  Alaskans  and   may  not  be                                                               
commercially competitive.                                                                                                       
                                                                                                                                
MR. DAVIS said yes.                                                                                                             
                                                                                                                                
2:13:02 PM                                                                                                                    
CHAIR DUNLEAVY  asked if the  language would have to  be modified                                                               
if the model were to be used in the future.                                                                                     
                                                                                                                                
MR. DAVIS agreed it would.                                                                                                      
                                                                                                                                
SENATOR  MICCICHE  clarified  that distribution  under  the  bill                                                               
would  be  the  smaller  diameter pipelines  that  run  from  the                                                               
transmission line to the home.                                                                                                  
                                                                                                                                
MR. DAVIS agreed.                                                                                                               
                                                                                                                                
2:14:07 PM                                                                                                                    
GENE  THERRIAULT,  Deputy   Director,  Alaska  Energy  Authority,                                                               
Department  of  Commerce,   Community  and  Economic  Development                                                               
(DCCED), explained  that the language  specific to  the Fairbanks                                                               
North Star Borough recognizes that  to get the product flowing in                                                               
the state it is necessary  to ensure sufficient aggregated demand                                                               
to justify  building the plant.  The governor has stated  that he                                                               
envisions the plant  ultimately being an asset for  a much larger                                                               
geographic area of the state.                                                                                                   
                                                                                                                                
Regarding the  questions about distribution outside  the borough,                                                               
he said  the SETS  fund has an  additional $125,000  million that                                                               
any entity  could make application  to for  the build out  of the                                                               
energy infrastructure.  The language of  the bill would  not have                                                               
to be modified.                                                                                                                 
                                                                                                                                
2:16:57 PM                                                                                                                    
SENATOR  OLSON  asked  what  he   envisions  in  5-10  years  for                                                               
distribution of energy to small  communities like Tanana, Galena,                                                               
Ruby, and Nulato.                                                                                                               
                                                                                                                                
MR. THERRIAULT  replied there have been  expressions of interest,                                                               
but it's  the volume operation  that will potentially  reduce the                                                               
price  enough  that  it  would   be  affordable  to  those  rural                                                               
settings.                                                                                                                       
                                                                                                                                
He added  that the plant  does not produce propane;  it separates                                                               
the propane. He  explained that roughly 2 percent of  the raw gas                                                               
that  comes to  the  plant  for processing  is  propane and  that                                                               
volume rises and falls relative to the volumes of LNG.                                                                          
                                                                                                                                
2:20:28 PM                                                                                                                    
SENATOR  OLSON asked  if  there were  any  provisions to  provide                                                               
energy  relief to  small  communities like  Wiseman  when gas  is                                                               
trucked from the North Slope,  realizing there is no distribution                                                               
system.                                                                                                                         
                                                                                                                                
MR. THERRRIAULT  discussed the mechanics of  distributing bottled                                                               
propane and  a small-scale piped  distribution system for  LNG to                                                               
serve residential  needs. He said  it would be important  to look                                                               
at the  economics of  the system compared  to the  volume served,                                                               
and AIDEA could help the community with those calculations.                                                                     
                                                                                                                                
SENATOR OLSON  asked if the  propane would be separated  from the                                                               
gas  on the  North  Slope  and trucked  separately  from the  LNG                                                               
trucks.                                                                                                                         
                                                                                                                                
MR.  THERRIAULT  confirmed  that  the propane  would  be  shipped                                                               
separately from the  LNG. He noted that propane  had been shipped                                                               
in volume for decades.                                                                                                          
                                                                                                                                
SENATOR OLSON asked when he could  tell the mayor of Wiseman that                                                               
he could take delivery of the first shipment of propane.                                                                        
                                                                                                                                
MR. THERRIAULT said  he would encourage the mayor to  be in touch                                                               
with himself or Mr. Strandberg.                                                                                                 
                                                                                                                                
2:24:34 PM                                                                                                                    
SENATOR MICCICHE  asked if he  would be correct in  assuming that                                                               
communities up  and down the  river but  not on the  river system                                                               
would be limited to propane.                                                                                                    
                                                                                                                                
MR. THERRIAULT  agreed that  was basically  correct but  that the                                                               
technology was developing rapidly.                                                                                              
                                                                                                                                
2:25:41 PM                                                                                                                    
CHAIR DUNLEAVY announced that he would hold SB 23 in committee.                                                                 

Document Name Date/Time Subjects
SB 37 Sponsor Statement.pdf SL&C 2/5/2013 1:30:00 PM
SB 37
SB023 Sectional Analysis.pdf SL&C 2/5/2013 1:30:00 PM
SB 23
SB023 Full Bill_version A.pdf SL&C 2/5/2013 1:30:00 PM
SB 23
SB 37.pdf SL&C 2/5/2013 1:30:00 PM
SB 37
SB023 Transmittal Letter.pdf SL&C 2/5/2013 1:30:00 PM
SB 23
SB0023-1-2-011613-CED-Y.pdf SL&C 2/5/2013 1:30:00 PM
SB 23