Legislature(2003 - 2004)
04/01/2004 09:07 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
CS FOR SENATE BILL NO. 350(L&C)
"An Act allowing a joint action agency to encumber property
interests for security purposes; declaring certain joint
action agencies to be political subdivisions for certain
purposes; restricting the sale of property of the joint action
agency; allowing the joint action agency to transfer property
to security interest holders under a security interest or to
other parties without legislative approval; and providing for
an effective date."
This was the first hearing for this bill in the Senate Finance
Committee.
Co-Chair Wilken stated that this legislation would enable the Four
Dam Pool Power Agency (FDPPA) to refinance approximately $73
million in a loan owed to the Alaska Industrial Development &
Export Authority (AIDEA).
SENATOR GARY STEVENS, the bill's sponsor, characterized the
legislation as "a highly technical bill" in that, in addition to
providing FDPPA the ability to refinance a $73 million AIDEA loan
and thereby to return that money to AIDEA for use in other areas,
the refinancing would assist FDPPA in providing consumers in the
communities of Ketchikan, Petersburg, Wrangell, and the Kodiak and
Valdez-Glennallen areas by lowering interest, arbitrage, and
administration costs associated with that loan. In addition, it
would "enhance the options that are available to the FDPPA" and the
aforementioned communities "regarding inter-ties and other
activities."
TOM LOVIS, Chief Executive Officer, Four Dam Pool Power Agency,
stated that the Agency represents five communities throughout
Alaska and consequently, a large number of electric consumers.
These members were "the fortunate participants" in FDPPA's
acquisition of four hydroelectric projects from the State in
January 2002 that was funded by a $77 million loan from AIDEA via a
Memorandum of Understanding (MOU) with AIDEA at a specified 6.5
percent interest rate. Now that FDPPA is a "fully operational
organization" it is now able to secure funding that was not
previously available to it. This alternative would allow FDPPA to
refinance its AIDEA debt by means "of the bond market, using tax-
exempt debt." Lowering the interest rate would result in savings of
between $600,000 and $1.5 million a year on what is currently a
$6.3 million debt service. FDPPA members would benefit from
experiencing this ten to twenty percent debt savings on the current
debt service. He noted that FDPPA members and its electric
consumers support this proposal.
Mr. Lovis reiterated that AIDEA would receive approximately $73
million that it could utilize to support other endeavors. The
technical corrections included in the bill might appear complicated
but "are relatively straightforward" as they would allow FDPPA to
mortgage the properties, use the properties as security in a note
with the private market, clarify FDPPA's ability to issue tax
exempt debt for the acquisition of projects, retain the ability of
the projects to continue to service member communities, and would
allow FDPPA to lower costs to its consumers due to the resulting
savings incurred by the refinancing.
Co-Chair Wilken asked how much consumer rates might lower, in, for
instance, the City of Petersburg, were this legislation approved.
Mr. Lovis responded that wholesale power expenses might decrease by
four or five percent. This might translate to a three-percent
reduction for the consumer.
Senator Dyson understood that, as reflected in Section 2,
subsection (h) on page two, line 23, in order to accomplish the
goal of the legislation, the FDPPA must be recognized as a
political subdivision, similar to that of being a city.
Mr. Lovis responded that in order to further the original loan
between AIDEA and FDPPA, it was required that FDPPA be identified
as a political subdivision in order to transfer State property to
it. The intent of the definition language is to continue the use of
that definition in order to provide security for the project and to
allow for the issuance of the tax-exempt debt. The definition would
be limited to the terms of the original Memorandum of Understanding
(MOU) regarding those specific projects. Furthermore, continuance
of the language would be a vehicle through which FDPPA could avoid
registration and other expenses that might otherwise be required by
the Securities and Exchange Commission.
Senator Dyson understood therefore that this is a continuance of a
definition that has been in practice rather than being new
language.
Mr. Lovis affirmed. For further clarification, Section 2,
subsection (h) includes language that limits how FDPPA would be
recognized as a political subdivision by incorporating the
language, "Except as provided in this subsection, the agency is not
a political subdivision of the state."
Senator Dyson asked how this legislation might benefit the power
intertie project.
Mr. Lovis responded that the intertie project and other FDPPA
projects would benefit from being provided alternative financing
options.
Co-Chair Wilken asked regarding FDPPA'a ability to use leased
assets as security for such things as bonds as specified in Section
1, subsection (c) (6) on page two, line 17, as this is contrary to
the ability of other authorities.
(6) to use facilities, projects, and related assets owned,
leased, operated by the joint action agency as security for
bonds, notes, mortgages, enhancement devices, or other
obligations.
Mr. Lovis responded that, "there are such things as capitalized
leases and other such arrangements … that can be used as fixed
assets in the course of an operation." Long-term leases for certain
maintenance equipment and other equipment would be recognized as
collateral.
Co-Chair Green countered that "a long-term lease should be
recognized as a debt."
Mr. Lovis expressed that while there would be a debt obligation
attached to it; a piece of leased equipment on the premises would
be recognized as security.
Co-Chair Green asked for further clarification as to how the term
"or operated" as specified in subsection (c)(6) would qualify as
security.
Mr. Lovis exampled that facilities utilized by the agency "in the
course of an operation that might be provided by members of the
agency or participants in the power sales agreement" would qualify
as security.
Co-Chair Green asked that an example be provided.
BOB LERESCHE, Financial Adviser, Four Dam Pool Power Agency,
testified via teleconference from an offnet site, and stated that
this is standard language written by underwriters that appears in
most mortgages. An example would be a dispatch center that belongs
to a local utility but which is operated by the FDPPA. Were an
entity to replace the FDPPA, they would have the right to operate
that center in order to operate the dam.
Co-Chair Green asked for verification that operated property could
act as security.
Mr. LeResche confirmed that the right to operate that leased
facility would be recognized as an asset as it has value to the
operation.
Senator B. Stevens posed a hypothetical situation in regards to the
leased asset question as follows: a power grid transmission is
owned by an association, but leases capacity on that power grid to
an energy trading company. The energy trading company recognizes
that leased power capacity as an asset and uses it as security with
which to borrow money. He asked how that leased capacity on a power
line could be considered an asset.
SFC 04 # 66, Side A 10:42 AM
Mr.LeResche responded that the rights that accompany that lease,
whether it is a capitalized lease or an operating lease, would be
recognized as an asset and could be used a collateral as "it is
something of value that the organization is paying for."
Senator B. Stevens understood therefore that in a situation in
which a Joint Action Agency, such as the FDPPA, leased twenty
percent of a power transmission grid that had a line capacity
valued at $100 million dollars, the joint action committee could
acquire a $20 million line of credit.
Mr. LeResche responded that were he a banker he would not issue a
$20 million line of credit in that situation.
Senator B. Stevens argued that that is how the language could be
interpreted.
Mr. LeResche countered that the right to transmit twenty percent of
the power available on that line for a certain amount of time would
be recognized as an asset as it is worth something.
Mr. Lovis interjected that in this instance, "the ability of the
asset to continue to provide the services expected under the
operation of the agency" does have value. "The use of the line, the
ability to secure for the purposes of a mortgage, and the ability
to continue to provide the services associated with the projects
through equipment that may be leased" in order "to continue to use
the power productive capabilities of the agency" could be
recognized as security for a note. This is the intent of the
language.
Senator B. Stevens voiced being uncomfortable in recognizing leased
assets as security as "the assumption is being made that the rights
of the lease could be transferable."
Mr. LeResche responded that "the lease hold interest" rather than
the leased asset, is what would be identified as the collateral. He
stressed that "this legislation does not provide any new rights to
the lessee" and that this kind of collateralization must be
specified in the lease. Many leases include language that specifies
that the lease could be reassigned upon permission of the leaser.
Senator Bunde accepted that there would be value in a lease that
involved transmission. Furthermore, he noted that stranded power
and stranded gas are undervalued because no transportation of that
energy is currently available. Therefore, were a lease written with
agreement that the lessee's rights could be transferred would have
financial value.
Co-Chair Wilken furthered that a lease "would provide the ability
to realize a revenue stream that supports the bond."
Mr. Lovis concurred that it is "a vehicle to ensure the continued
capability and operability of the other assets associated with the
hydroelectric project."
Co-Chair Wilken stated that "therein is the value."
Senator B. Stevens continued to voice concern that an entity could
specify that a leased asset could provide collateral for borrowing
more money. He suggested that the word "leased" be eliminated from
the legislation.
Co-Chair Wilken stated that further discussion in this regard would
transpire before Committee action on the bill occurs.
Co-Chair Green requested that further clarification be provided in
regard to new language in Section 3, subsections (J) and (K).
Co-Chair Wilken stated that the bill would be HELD in Committee in
order to address these concerns.
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