Legislature(2015 - 2016)BUTROVICH 205
04/05/2016 03:30 PM Senate RESOURCES
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| Audio | Topic |
|---|---|
| Start | |
| Confirmation Hearing | |
| SB130 | |
| Continuation of Dor Overview of Alaska Oil and Gas Tax Reform | |
| SB129 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| + | HB 247 | TELECONFERENCED | |
| += | SB 130 | TELECONFERENCED | |
| *+ | SB 129 | TELECONFERENCED | |
| + | TELECONFERENCED |
SB 129-AIDEA: FUNDS; LOANS; PROGRAMS; DIVIDEND
4:32:36 PM
CHAIR GIESSEL announced consideration of SB 129.
JOHN SPRINGSTEEN, Executive Director, Alaska Industrial
Development and Export Authority (AIDEA), Anchorage, Alaska
introduced himself.
GENE THERRIAULT, staff, Alaska Industrial Development and Export
Authority (AIDEA), Anchorage, Alaska, introduced himself.
FRED PARADY, Deputy Commissioner, Department of Commerce,
Community and Economic Development (DCCED), Anchorage, Alaska,
introduced himself.
MR. SPRINGSTEEN said the focus of SB 129 is adding tools to
AIDEA to support oil and gas developers. This bill requests
creating an Oil and Gas Infrastructure Development Program/Fund
to support the oil and gas industry by making investments in
supporting infrastructure to include roads, pads, gathering
system, camps, and other facilities. This bill is not to make
investments in wells and reservoir development.
The infrastructure would provide support to increase oil and gas
production, bring new fields on line, attract new investment,
increase future state revenues, royalties and taxes, and support
energy security for the state.
4:34:50 PM
SENATOR WIELECHOWSKI said this is supporting the basic
infrastructure that nobody else wants to do, because they don't
get a return on it, and asked what kind of return AIDEA gets on
a road, for instance, that they invest in.
MR. SPRINGSTEEN answered that returns are deal by deal, but it
ranges from 6 percent to 12 percent, or potentially more
depending on what partner they are working with and what is on
the other side.
SENATOR WIELECHOWSKI asked why AIDEA would not invest in wells,
for example.
MR. SPRINGSTEEN answered there is "an expression of disinterest"
by oil and gas developers for AIDEA to participate below the
ground in the reservoir development.
SENATOR WIELECHOWSKI said that didn't make sense to him, because
that's where the money is, and asked why the state would want to
take away its ability to make extraordinary rates of return.
MR. SPRINGSTEEN answered that AIDEA provides a lot of support
for industrial developments in the State of Alaska and has other
vehicles for making those kinds of returns through royalty and
tax revenue.
SENATOR WIELECHOWSKI asked if he would object to an amendment
that allowed AIDEA the ability to invest in those sorts of
things.
MR. SPRINGSTEEN answered that it's a measure of what risks AIDEA
would engage in, what type of collateral is available for the
project, and what type of partners they have on the financing
side. There could be potential for that kind of participation,
but generally it's been AIDEA's role to provide support for
industrial development in Alaska rather than the actual
development itself. The Red Dog Mine road to port, for example,
is a partnership between the state and the Teck mining company,
where they focus on the resource development, because they have
specific expertise in it. AIDEA supports the infrastructure
consisting of the road, the port system, and the warehousing
system.
4:37:28 PM
SENATOR MICCICHE asked if AIDEA has any commercial industrial
loans with a variable rate based on profitability of the
person/company holding the loan.
MR. SPRINGSTEEN answered that AIDEA has entered into
transactions where they finance a deal and adjust the rate
considering the types of risks and collateral, but in deference
to its 735,000 shareholders, they need to be conservative in
their stewardship of the AIDEA funds.
SENATOR MICCICHE said he specifically asked about a variable
return rate based on profitability, which is a little different
than risk.
MR. SPRINGSTEEN replied that generally AIDEA enters into fixed
rate loans, but in the case of the Red Dog Mine road and port
facility, an annual assessment is part of the arrangement; there
is also some participation in terms of a kicker for an uptick in
zinc prices, for instance. It is gauged to the metrics of the
particular industry rather than the profitability of the
company, which is out of their control.
SENATOR MICCICHE said he would like to learn more of whatever
AIDEA can share about the difference between risk and
profitability for the Red Dog arrangement.
MR. SPRINGSTEEN responded that he will provide what is
publically available and, under their confidentiality statute,
they can provide additional information as long as he complies
with the statute.
4:39:50 PM
MR. SPRINGSTEEN said in his view, AIDEA has roughly 735,000
shareholders, the population of the State of Alaska, who are
represented by the Alaska State Legislature, an institutional
shareholder in the governor, a seven-member board appointed by
the institutional shareholder, and the AIDEA staff managing the
day-to-day business. AIDEA currently has three funds and two
special appropriation projects. Today the majority of AIDEA's
core day-to-day business of providing capital and partnering
with industry to help drive the state's economic engines is done
through its Revolving Loan Fund. He explained that the Revolving
Loan Fund has investments across the state, which are relatively
aligned with industry and commerce in the state.
CHAIR GIESSEL said that Senator Micciche noted that he left the
Kenai Peninsula off of his map of investments.
SENATOR STOLTZE noted that was to ensure the fish could reach
the Mat-Su area.
MR. SPRINGSTEEN said he would adjust that. He said the Revolving
Loan Fund has a diversified portfolio of investments and Alaska
businesses and operates under the prudent investor rule. It has
historically made select investments that support oil and gas
development in the state: a loan for a drill rig in Cook Inlet
with Blue Crest, road and pad construction on the North Slope,
and a loan for a camp in Deadhorse. Additional investments by
the Revolving Loan Fund in projects that support oil and gas
development could outweigh what is currently a diversified
portfolio.
4:41:39 PM
SENATOR MICCICHE said he was unaware that AIDEA had invested in
a car wash.
MR. SPRINGSTEEN replied that there are multiple Alaska Laser Car
Washes and many are in Anchorage; they participate through their
loan participation program primarily. He said the oil and gas
industry continues to be a crucial contributor to the state and
for AIDEA to continue supporting it, it would be beneficial for
it to have a separate tool and fund solely focused on supporting
oil and gas development by making investments in infrastructure.
Infrastructure investment means roads, camps, pads, processing
facilities, gathering systems, and similar above-the-ground
assets. Among the criteria AIDEA uses to qualify projects, the
infrastructure investment must be for a field with proven
reserves, because that serves as part of the collateral.
He said the definition in the bill uses the Society for
Petroleum Engineers definition. Representative Hawker and
industry representatives want this definition aligned with
Alaska statute and the SEC definition.
4:43:36 PM
MR. SPRINGSTEEN said SB 129 has an opt-out provision in section
12. If a developer uses this program, he would opt out of
certain tax credits going forward. He knew from conversations
with industry representatives that they are resistant to this
provision. However, use of the program would be at their option.
SENATOR COSTELLO asked if that provision exists for companies
that are accessing AIDEA loans in the diversified portfolio.
MR. SPRINGSTEEN replied that it does not exist currently.
SENATOR COSTELLO asked if there are federal guidelines dictating
what a diversified portfolio has to look like.
4:45:12 PM
MR. SPRINGSTEEN answered the fund is managed using conversations
with their chief financial officer, ratings agencies and the
board about maintaining a well-diversified portfolio following
the prudent investor rule; it's not a strict federal guideline.
CHAIR GIESSEL said he alluded to the "proven reserves" term and
asked if it was correct that companies asked to use the state
statute definition.
MR. SPRINGSTEEN answered yes; they were asked to align with
existing statutory definitions.
CHAIR GIESSEL asked if they had not offered any amendment to the
legislation in the other body.
MR. SPRINGSTEEN said that is correct. He said that it's
important for AIDEA to evaluate the risks of a project, itself,
in terms of interest rates. Among these are: the operating
performance of the field, the size of the field, projected costs
and cash flow, capabilities of the operation, borrower credit
worthiness, commitments by the owner and by financing partners
who are backing the field development, their expectation of
financial returns, collateral to be made available to AIDEA, and
the benefit to the state, including tax and royalty revenue, and
employment.
CHAIR GIESSEL asked what capacity AIDEA has to evaluate the
project itself under review for investment.
MR. SPRINGSTEEN answered because AIDEA has a broad portfolio of
investments throughout the state, it has some amount of limited
expertise, but sometimes they call in specific technical
expertise for reservoir evaluation and evaluation of the plans
for development that don't exist within AIDEA.
SENATOR COSTELLO said language on page 5, section 9, makes it
sound like AIDEA can have different interest rates for each
program, and his explanation made it sound like the entire fund
would have a particular interest rate. She asked if there was a
problem with the language.
MR. SPRINGSTEEN responded that the interest rates are based on
each particular project, but that language would be clarified.
4:48:39 PM
He said language in the Sustainable Energy Transmission and
Supply (SETS), the Arctic Infrastructure Development
Program/Fund and the oil and gas infrastructure programs allow
investment of up to 50 percent or guarantee of a loan up to $25
million for an eligible project. The SETS and Arctic
Infrastructure current limits are 33 percent or $20 million with
legislature approval for amounts above that. He handed the
presentation over to Mr. Therriault to do a sectional analysis.
4:49:13 PM
MR. THERRIAULT said the real meat of the bill in setting up the
new fund is in section 12. Sections 1-3 add the new fund to
AIDEA's existing suite of funds with respect to calculation of
the dividend to the state.
Sections 4-9 also add the new fund into the sections of statute
that talk about the interest that is to be charged for the
different programs. Sections 4-8 are all existing statutory
language. Section 9 is where specific language is added to give
AIDEA the flexibility through regulations to set interest rates
reflecting the risk on the particular project they are being
asked to invest in.
4:50:54 PM
CHAIR GIESSEL noted that the Working Group spoke with ING and
Bank of America last summer, and that is something they take
into account as well.
MR. THERRIAULT said sections 10-11 propose to adjust existing
limits for SETS and the Arctic development Program/Fund. Right
now the limits are for projects above 33 percent participation
or a loan guarantee above $20 million. For the new fund they are
proposing a limit of up to 50 percent or a loan guarantee of up
to $25 million. AIDEA thinks there is some benefit to having
consistent limitations across the different investment tools
just for ease in understanding where the limits are. However,
this is a separate policy call for the legislature to make.
Section 12 establishes the new fund. The statutory framework
follows along with the framework that was used when the
legislature established the SETS Fund and the Arctic
Infrastructure Development Program/Fund. A provision specific to
this fund is the requirement that a project proposer would have
to select between using this loan mechanism and continuing to
access oil and gas credits. That is also spelled out in this
section.
Section 13 provides definitions. Fleshing out the definition of
"proven reserve" is one of the things they anticipate doing by
taking proposed language back to the House Resources Committee.
He explained that a concern with the SEC definition of "proven
reserves" is that it looks at the previous 12-year price for
commodities. Some House members also want to look forward at
what the anticipated price is going to be, if in fact the
reserves are going to be used as part of the collateral for the
loan. The final portion of section 13 says the definition of oil
and gas infrastructure is surface infrastructure and for proven
reserves. That is the end of the bill.
4:55:03 PM
CHAIR GIESSEL found no questions on the sectional analysis.
MR. SPRINGSTEEN said AIDEA performs its due diligence process
prior to investment. These include technical due-diligence,
reviewing the field and reserves, the operator, the development
plan, what type of infrastructure is being requested to support
the developments, financial due diligence, which includes a look
at credit worthiness, commitments, collateral, project
economics, and financial stress testing. Equally important are
benefits to the state for job creation and revenue. In addition
to AIDEA staff, they hire financial and technical experts and
the AIDEA board makes the final investment decision.
He explained the four phases of their decision-making process:
1. Suitability assessment for alignment with AIDEA's mission
2. Project feasibility analysis
3. Structuring a deal and performing detailed due diligence for
the project.
4. Finalizing closing agreements and contracts.
4:56:28 PM
In terms of financing repayment generally, Mr. Springsteen said,
upon the establishment of the fund, AIDEA makes investments
based on market rates to reflect project risk and benefits to
the state. Loans are repaid with interest and AIDEA pays a
dividend to the state.
He walked them through AIDEA's general framework for best-fit
products (slide 15). On the bottom axis was the project stage
going from concept to development to construction to operation.
The left axis is risk and cost of capital (which generally run
together). The curve represents the idea that as one moves
through the different project stages, the risk is being reduced,
so one should be eligible for less expensive sources of capital.
The line on the top bar represents early stage projects
(generally equity heavy) and late stage projects (can
accommodate more debt).
The orange boxes on the curve delineate the different types of
capital available at different stages of the project. In the
concept stage there is seed capital, which can take the form of
grants or equity. Then as a project is de-risked, it becomes
available for venture finance, which is still very expensive,
but for projects going through concept to development maybe less
expensive than the initial equity. Further down in the
construction stage a project may be eligible for a private
equity investment and, as it moves through the process, be
eligible for longer term construction loans and long-term debt
and bonds, which can be less expensive.
The big blue box illustrates what AIDEA looks for in a best fit
project near the construction stage. So, generally these six
factors are: operation experience, capital contribution (stuff
that has been done previously), final design (plans and
specifications), complete permits, signed purchase agreements,
and signed sales agreements. It's generally much easier for
developers with signed sales agreements to raise capital,
because they have a destination for a product as opposed to an
"if you build it they will come" type of approach.
4:59:07 PM
In summary, Mr. Springsteen said, this bill will support a
specific program in AIDEA to finance oil and gas infrastructure.
The fields for which infrastructure would be built must have
proven reserves and meet AIDEA's criteria based on its due
diligence process. Finance terms would be market-based
considering the project risks, commitments, and benefits to the
state.
He said that AIDEA originally submitted a zero fiscal note
saying it would absorb program costs with existing resources,
but they understand the legislature is considering HB 247 and SB
130, which if approved, would direct $200 million to this
program. The board believes that the program in and of itself is
valuable, but any capitalization would just make it more
effective.
CHAIR GIESSEL, referring to slide 15, asked if oil companies
have signed sales agreements.
MR. SPRINGSTEEN answered that would be one of the first things
that AIDEA would look at for other industries and developers.
It's less of an issue in this circumstance with a commodity
market able to sell at ANS West Coast price or some similar
price. Slide 15 illustrated the general framework for vetting of
all projects.
SENATOR MICCICHE said when one thinks about overall state risk,
he wondered with the two bill numbers right next to each other,
why SB 129 wasn't a piece of SB 130. Because SB 129 risks the
legislature encumbering the state with another $200 million, but
not touch credits. Did they consider that as another risk to the
state, because he does?
MR. SPRINGSTEEN answered, on behalf of the board, that there is
an interest in having this be a separate program, because of the
increasing balance and diversification issues in their Revolving
Loan Fund. Having this program move forward was an important
step for the Authority, the funding being a separate question.
SENATOR MICCICHE asked if AIDEA has the ability to do everything
in this bill without the carrot on page 8, lines 15-22 (Section
12), and why, because it would have been a simpler bill to move
this section into SB 130. He was trying to understand the
strategy.
5:02:38 PM
FRED PARADY, Deputy Commissioner, Department of Commerce,
Community and Economic Development (DCCED), Juneau, Alaska, said
he serves on AIDEA's board, and explained that the package of
bills arose out of board direction. AIDEA monitors what is in
slide 4 in the context of diversification of their portfolio.
The basic premise is that with oil and gas risk tipping up over
14 percent, it's become the dominant factor in their
diversification. The block for mining, which represented 20
percent of the fund, is almost exclusively the Red Dog Project,
which is a maturing concern, and does not pose the same risk
profile. The idea was to create a separate fund so the risk
could be separate and not have it overwhelm the Revolving Loan
Fund.
MR. SPRINGSTEEN added that the Revolving Loan Fund supports some
other very important programs for the state including their
Commercial Finance Program, where they engage in loan
participations. A federal credit union or a commercial bank
works directly with borrowers and AIDEA can provide very cost
effective financing for up to 90 percent of a loan.
SENATOR MICCICHE said he didn't want to remotely sound
confrontational, but the percentage of total existing, approved
capacity projects has several sectors in the 10-11 percent
range.
MR. PARADY said looking forward, and seeing the turmoil in the
oil and gas industry, and the kind of projects coming in the
door for evaluation, this sector appears to be significant to
the board. AIDEA has already been working with Brooks Range
Petroleum on the Mustang Project, and BlueCrest Energy on the
Cosmopolitan Project. AIDEA has already been involved in this
sector. The opportunity is significant, as well, but they don't
want to unbalance the basic composition of the Revolving Loan
Fund.
SENATOR MICCICHE said he didn't have a problem with the concept,
but he worries that with AIDEA some things have gone good and
some things have gone bad. It's the nature of the business. He
is trying to understand the focus and worries about the state's
additional exposure.
CHAIR GIESSEL said the fiscal note is dated April 1, and the
last sentence is, "Capitalization of the fund is contingent on
the passage of SB 130 or HB 247." She said the $200 million was
not in a fiscal note before and asked if the $200 million is
still in the other two bills.
MR. SPRINGSTEEN answered yes.
5:07:03 PM
CHAIR GIESSEL asked if they could pull $200 million from SB 130
because it's actually in SB 129.
MR. THERRIAULT explained that the original fiscal note that came
with the bill from AIDEA was zero, because it was just setting
up the mechanism and they know AIDEA can absorb all of that
cost, because it has been through the process twice with SETS
and the Arctic Fund. The modified fiscal note was to acknowledge
that there was this other legislation out there, plus a proposed
budget amendment that would actually appropriate money into the
fund. But that appropriation is clearly a separate policy call.
This new updated fiscal note acknowledges that the cost of
setting up the fund is still zero, but through other action the
legislature takes, money may be put into the fund. AIDEA
believes there is value to the creation of the fund, itself. If
money is put into the fund it becomes a more valuable tool.
SENATOR COGHILL asked if the 50 percent in sections 10 and 11 is
for all three funds and if there had been pressure to go from
one-third to 50 percent in the other funds and it there is an
actual project out there looking for 50 percent participation.
5:09:04 PM
MR. SPRINGSTEEN answered the conversations are for AIDEA to be
an equal partner rather than a minority partner in program
development, whether it's Arctic infrastructure, SETS, or oil
and gas infrastructure development.
SENATOR WIELECHOWSKI said the bill mentions Arctic development
and asked how "Arctic" is defined.
MR. SPRINGSTEEN answered that it runs along the Yukon and down
to the Aleutian Chain roughly. It is a line through the middle
of the state. However, a provision under the Arctic
Infrastructure Development Program/Fund supports financing of
port developments in south Alaska that support Arctic
development.
5:10:33 PM
SENATOR WIELECHOWSKI asked if he means all of Alaska.
MR. SPRINGSTEEN answered "sort-of."
CHAIR GIESSEL said it sounds like the federal Arctic Policy
Commission definition of the Arctic is being used, but somewhere
something is written down that it includes the reach of
infrastructure outside of that defined Arctic area.
MR. SPRINGSTEEN said yes. The idea that ports are not
necessarily independent of each other that there is cooperation
between the different types of facilities that ultimately ports
in Southeast Alaska are beneficial and can support the Arctic
area.
CHAIR GIESSEL added that Seward was an example of an industrial
port and Vigor operates a shipyard in Ketchikan.
5:11:50 PM
SENATOR MICCICHE said he needed to go to another meeting and
wanted to make a final statement. He worries about what the
executive director of the Alaska Municipal Bond Bank told them
at the last Finance Committee meeting: that Alaska's bonding
capacity is maxed out. He worries about being further encumbered
with the current $4.1 billion problem they are dealing with and
has become extremely conservative on creating new funds.
However, he would keep an open mind.
MR. SPRINGSTEEN mentioned that AIDEA has a long history of
issuing conduit revenue bonds where AIDEA is named as the
issuer, but the bonds themselves are backed solely by the
project revenue. Those were the first tools used by AIDEA before
it had an account of its own. AIDEA's Revolving Loan Fund is
separate from the state and it has maintained its AA-plus bond
rating, a fact that was recently affirmed by Standard and
Poor's.
SENATOR MICCICHE thanked him for the explanation and said he was
more worried about the initial fund capitalization.
5:13:33 PM
SENATOR COGHILL said Alaska would be doing oil and gas
development for a long while, but he struggles with the reach
into SB 130 and asked about industry's perspective.
MR. SPRINGSTEEN answered there was resistance from industry
representatives to not being eligible for tax credits going
forward if the AIDEA program was utilized.
SENATOR WIELECHOWSKI said he sees that AIDEA gets two things out
of this investment: the return on the investment, which is 6 to
12 percent, but also potential jobs being created and new oil.
He asked if Mr. Springsteen had some sort of analysis on how
much other benefits the state has accrued from AIDEA's
investments and a forward-looking forecast.
MR. SPRINGSTEEN responded that they do track jobs that come
along with AIDEA funding as well as the returns it receives.
They have not performed an analysis of additional taxes and
royalties, but they could do that.
SENATOR WIELECHOWSKI said the sooner he could get that
information the more helpful it would be to his case.
MR. THERRIAULT added that he will supply a definition of
"Arctic." He clarified that SB 129 sets up the fund. The fiscal
note acknowledges a proposal to put money into it, but passage
of this legislation by itself doesn't endow it with the $200
million. That is contingent on other policy calls.
SENATOR COSTELLO followed up on her earlier question about using
the "program" in section 5, because the SETS Fund and the Arctic
Fund are referred to in statute as "the AIDEA programs," and
said she found that "program" was used correctly.
| Document Name | Date/Time | Subjects |
|---|---|---|
| AGDC Board Factsheet.pdf |
SRES 4/5/2016 3:30:00 PM |
AGDC Board |
| AGDC-Resume-Joey Merrick.pdf |
SRES 4/5/2016 3:30:00 PM |
AGDC Board |
| SB129 ver A.PDF |
SRES 4/5/2016 3:30:00 PM |
SB 129 |
| SB129 Transmittal Letter.pdf |
SRES 4/5/2016 3:30:00 PM |
SB 129 |
| SB129 Sectional Analysis.pdf |
SRES 4/5/2016 3:30:00 PM |
SB 129 |
| SB 129 Presentation to SRES 4.5.16.pdf |
SRES 4/5/2016 3:30:00 PM |
SB 129 |
| DOR Presentation to SRES-4-2-2016.pdf |
SRES 4/5/2016 3:30:00 PM |
SB 130 |
| SB129 Fiscal Note-DCCED-AIDEA-04-01-16.pdf |
SRES 4/5/2016 3:30:00 PM |
SB 129 |