Legislature(2015 - 2016)BILL RAY CENTER 208
05/27/2016 11:00 AM House RESOURCES
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| Audio | Topic |
|---|---|
| Start | |
| HB246 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 246 | TELECONFERENCED | |
| + | TELECONFERENCED |
HB 246-AIDEA: FUNDS; LOANS; PROGRAMS; DIVIDEND
11:07:06 AM
CO-CHAIR NAGEAK announced that the only order of business would
be HOUSE BILL NO. 246, "An Act creating the oil and gas
infrastructure development program and the oil and gas
infrastructure development fund in the Alaska Industrial
Development and Export Authority; relating to the interest rates
of the Alaska Industrial Development and Export Authority;
relating to the sustainable energy transmission and supply
development and Arctic infrastructure development programs of
the Alaska Industrial Development and Export Authority; relating
to dividends from the Alaska Industrial Development and Export
Authority; and adding definitions for 'oil and gas development
infrastructure' and 'proven reserves.'"
11:08:08 AM
FRED PARADY, Deputy Commissioner, Office of the Commissioner,
Department of Commerce, Community & Economic Development
(DCCED), noted he is the designee for the DCCED commissioner on
the board of directors of the Alaska Industrial Development and
Export Authority (AIDEA). He provided a PowerPoint presentation
titled, "AIDEA Oil and Gas Infrastructure Development Fund, HB
246," that he had previously begun on 3/16/16. Turning to slide
2, "Current AIDEA Financing Tools," he said HB 246 is an
opportunity to build out AIDEA's toolkit on behalf of the
735,000 shareholders that are the citizens of Alaska. Serving
on AIDEA's board are the commissioners of DCCED and the
Department of Revenue (DOR), and five successful Alaska business
people appointed by the governor. In addition to the board is
AIDEA's staff. Three funds are currently set up under AIDEA:
[the revolving fund] consisting of economic enterprise and
development accounts; [the sustainable energy transmission and
supply (SETS)] fund, and the Arctic infrastructure fund. In
addition to those three funds are two special appropriations
projects: the Interior energy project (IEP) and the Ambler
mining district industrial access project.
MR. PARADY noted that slide 3, "Geographic Project Diversity,"
is a snapshot of the geographic project diversity that is
monitored by the AIDEA board. He pointed out that the Northern
Region, depicted in purple, is the Ambler road, and the other
colors represent the distribution across the rest of the state.
He said AIDEA's duty is to serve the entire breadth and width of
the state.
MR. PARADY explained that slide 4, "Industry Diversification,"
is the source of HB 246. The pie chart on the slide represents
the total existing and approved capacity projects and loans as
of 10/31/15. Oil and gas, and oil and gas support, represent 14
percent or $110 million of AIDEA's financing. He said the board
is concerned that AIDEA is becoming concentrated in that area of
finance and recognizes that the oil and gas sector is capital
intensive. At 20 percent the mining sector is AIDEA's largest
but also longest standing investment, he said, and is the Ambler
road which has been in place for over 20 years and is a stable,
long-term investment with a stable, long-term return.
11:10:59 AM
MR. PARADY drew attention to slide 5, "AIDEA Financing Tools
after HB 246," noting it is a picture of the bill before the
committee. He said the proposed legislation would add a fourth
fund, the oil and gas infrastructure development fund.
Displaying slide 6, "Intent of HB 246," he explained that the
intent of this new fund is to continue infrastructure financing
by allowing AIDEA to have a dedicated fund so that AIDEA's
portfolio does not become unduly weighted to oil and gas. The
fund's intention is to: support small- and medium-sized oil and
gas developers statewide, increase production, bring new fields
online, attract new investment, increase future revenues, and
support investment for energy security.
MR. PARADY showed slide 7, "Eligible Oil and Gas Infrastructure
Projects," and said the infrastructure is defined as investment
and the projects themselves. Investment can be acquisition,
construction, or installation (including engineering). Projects
can be roads, pads, camps, processing facilities, gathering
systems, or other site improvement or equipment. The bill is
focused on above ground investment, he noted, not below ground
facilities. Projects must support fields that have proven
reserves, which is vital safeguard in the bill. Proven reserves
are defined as: analysis of geological and engineering data;
commercially recoverable under current economic conditions,
operating methods, and government regulations; and categorized
as developed or undeveloped.
MR. PARADY turned to slide 8, "Financing and Tax Credits," and
stressed that under the bill a developer opting to use AIDEA
financing for a project would no longer be able to use the
exploration and development tax credit [AS 43.20.043], the
production tax credit [AS 43.55.023], or the production tax
credit for exploration expenditures [AS 43.55.025]. However, he
pointed out, projects with past tax credits would still be
eligible for AIDEA financing.
11:13:15 AM
MR. PARADY moved to slide 9, "Market Based Interest Rates," and
said AIDEA would base interest rates on project risk; borrower
creditworthiness, which speaks to the borrower's experience in
the kind of project that is being developed; the owner and
financing partner commitments, which is the strength of the
financials; and the benefit to the state. Interest rates may be
higher for these oil and gas infrastructure projects due to the
inherent risk associated with the oil and gas industry.
MR. PARADY addressed slide 10, "Other Bill Components," stating
that HB 246 is an opportunity for AIDEA to standardize the terms
that are set in statute across all four of its funds. The bill
proposes that the three existing funds be allowed to loan up to
50 percent of an eligible project (currently 30 percent) or
offer a loan guarantee of up to $25 million (currently $20
million). These increased would strengthen AIDEA's ability to
participate in a project. The proposal would limit it to 50
percent so that AIDEA would not be in a controlling position.
As in current statute, amounts in excess of those limits would
require prior legislative approval.
MR. PARADY noted that the deputy commissioner of the Department
of Revenue (DOR), Jerry Burnett, is present and available to
answer questions and that Mr. Burnett serves on the AIDEA board
as the designee for the DOR commissioner.
11:14:43 AM
GENE THERRIAULT, Energy Policy and Outreach Director, Alaska
Energy Authority (AEA), Alaska Industrial Development and Export
Authority (AIDEA), Department of Commerce, Community & Economic
Development (DCCED), reviewed the sectional analysis for HB 246.
He said Sections 1-3 of the bill reference AIDEA's net income
and how a dividend is paid to the state. These sections ensure
that the new fund being created would track the same mechanism
attached to the other funds for determining net income and
calculating the profit that goes back to the state.
MR. THERRIAULT explained that Sections 4-9 would add references
to the new fund to the existing statutes that detail the level
of interest that is to be levied on loans from the SETS and
Arctic infrastructure funds. Both of these existing funds were
established by the legislature within the past few years. The
mechanics of the existing language would not be altered by
adding the new fund into those existing sections of statute.
MR. THERRIAULT noted Sections 10-11 propose to make adjustments
to the existing participation limits for the SETS and Arctic
infrastructure funds. The value in keeping the participation
levels consistent across all the different funds is that it
would be more easily understood by enterprises interacting with
AIDEA for funding.
11:16:44 AM
MR. THERRIAULT said Section 12 is the new section of statute
that would create the new fund. The mechanism is a copy of the
structure that was used by the legislature to create the SETS
fund and the Arctic infrastructure fund. So, if the legislature
decides to provide AIDEA with a new tool, HB 246 copies the
sections of statute that are required to put a new tool into
place and have it operate under the same basic constructs as the
SETS and Arctic infrastructure funds. The language specific to
the new fund is on page 8, lines 3-4, and would mandate that
AIDEA develop a process to verify the existence of proven
reserves. That is a requirement that is very specific to this
fund and it would not apply to the other funds. The language on
page 8, lines 15-22, would require a project developer to choose
between securing infrastructure financing from this new fund or
apply for oil and gas development credits. The developer would
be free to choose one or the other, but would not be able to
take advantage of both means of state assistance once financing
is secured from the new fund. If a developer has taken
advantage of tax credits when exploring the reserve, proving up
the reserve, the developer would still be able to take advantage
of those. But, at the point when the developer locks in this
funding, the developer could no longer apply for continued
credits. That is a policy call for legislators to consider, he
said, and whether legislators want to recast that restriction in
a different way.
MR. THERRIAULT noted that page 8, lines 11-14, contain the
program limits above which legislative approval must be secured
prior to participation. The limits that would be established
here allow for project financing of up to one-half of the
development and a cap on a loan guarantee from the fund at no
more than $25 million. He reiterated that those limits are
being suggested by AIDEA and in Sections 10-11 AIDEA is
suggesting that the limits for the SETS and Arctic
infrastructure funds be adjusted upward to match that.
MR. THERRIAULT stated that Section 13 proposes a new statutory
definition for oil and gas development, including a link to a
proven reserve and a definition for proven reserve itself.
11:19:46 AM
MR. PARADY resumed the PowerPoint presentation. Addressing
slide 12, "AIDEA Due Diligence," he said that under AIDEA's
technical due diligence process, AIDEA sets out its procedures
[for verifying proven reserves]. Under AIDEA's financial due
diligence, AIDEA reviews creditworthiness and the financing
partner commitments and analyzes the economics, including stress
testing the project. The process also includes looking at the
benefits to the state. The process is managed by AIDEA's
internal staff along with hired consultants and specialists, and
the final decision rests with the AIDEA board.
MR. PARADY said slide 13, "Analysis & Decision-Making," depicts
AIDEA's decision making process. Phase 1 is the project
suitability assessment. Phase 2 is the feasibility analysis
which looks at whether the business plan and financing plans are
complete and whether there is local community support. Phase 3
is the deal structuring and due diligence where AIDEA tests the
business case, its technical aspects, management, and financial
approach, and looks at equity, security, and so forth. Phase 4
is finalization and close. He said AIDEA's staff is fiercely
devoted to this process and a look at AIDEA's history shows it
has been successful at managing project risk and securing its
assets even when it has hit turbulence.
11:21:31 AM
MR. PARADY reviewed slide 14, "Financing Repayment," stating
that AIDEA finances at market-based rates to reflect individual
project risk. Loans are repaid with interest. The interest is
where AIDEA earns revenue, that revenue is shared back to the
state in AIDEA's dividend, and some of the earnings are retained
to fund future projects. He said the graphic at the bottom of
the slide is a simplified view: AIDEA is asking the legislature
to establish the oil and gas infrastructure development fund,
AIDEA would finance projects, those would return revenue to
AIDEA, and AIDEA would pay dividends to the state.
MR. PARADY explained that the graph on slide 15, "AIDEA Entry
Point & Criteria," is a snapshot of where AIDEA's sweet spot is.
He pointed out that the vertical axis of the graph, "Risk and
Cost of Capital," goes from low to high, and the horizontal
axis, "Project Stage," goes from concept to development to
construction to operation. He noted that AIDEA is not in the
high risk seed capital business, not in venture finance, and not
in private equity. Rather, AIDEA comes in in that sweet spot in
the center where there is the operating experience, the capital
contribution, the final design has plans and specifications, the
permits are completed, the purchase agreements are signed, and
the sales agreements are signed. Once these are complete, AIDEA
helps move that project forward into construction and into long-
term financing.
11:23:07 AM
MR. PARADY displayed slide 16, "Summary," and summarized the
provisions of HB 246. He said the bill would add to AIDEA's
toolkit by giving AIDEA a specific program to finance oil and
gas infrastructure, which is a critical need for the state's
small- and mid-sized developers in this price environment.
Under the bill eligible oil and gas infrastructure would have to
have proven reserves and undergo AIDEA's established due
diligence review. The bill would require that the finance terms
be market based.
MR. PARADY concluded with slide 17, "Implementation Cost,"
explaining that implementing the program would require some
minor modification of regulations, which can be done in-house.
The program implementation cost and program management cost
would be absorbed by AIDEA. The modified fiscal note was
submitted to acknowledge the potential for fund capitalization
pending the legislature's decision to do so.
11:24:21 AM
REPRESENTATIVE SEATON asked whether the intention is to roll
that 14 percent of AIDEA's investment currently in oil and gas
into the new fund or whether that 14 percent would remain in
addition to the new fund.
MR. PARADY deferred the question to Mr. Springsteen.
JOHN SPRINGSTEEN, Executive Director, Alaska Industrial
Development and Export Authority (AIDEA), Department of
Commerce, Community & Economic Development (DCCED), replied the
intent is for anything that is in the revolving fund to remain
in the revolving fund. So, anything in the oil and gas
infrastructure development fund would be separate, apart, and
new development. [Note to the reader: Mr. Springsteen was
speaking via teleconference and due to audio difficulties his
testimony was often difficult to discern and, at times, could
not be discerned.]
REPRESENTATIVE SEATON inquired as to the anticipated percent of
AIDEA's portfolio once the oil and gas infrastructure is
combined with the rest.
MR. SPRINGSTEEN responded it depends on what the capitalization
of the fund would be. If the fund were capitalized with $200
million then it would raise the 14 percent to one-third [33
percent]. But, he reiterated, it would be in a program and fund
separate and apart from AIDEA's relatively more conservative
revolving fund.
11:26:15 AM
REPRESENTATIVE TARR observed on slide 14 that a loan is repaid
with interest and the earned revenue comes back to the state in
the form of a dividend. She asked whether AIDEA has a standard
return on investment for accepted projects; for example, the
permanent fund tries to have a 7 percent return on investment.
MR. SPRINGSTEEN answered that AIDEA's core mission revolves
around providing funding which will support jobs creation and
retention, and economic development in the state. Over the long
term AIDEA has had a rate of return of roughly 5 percent when
looking at the initial $380 million of capitalization, then
growing the assets within AIDEA, and then returning $381
[million] of dividends to the state over that time.
11:28:01 AM
REPRESENTATIVE HERRON requested an explanation of the language
on page 8, line 24, of the bill that states, "but may not be
more than 30 years."
MR. THERRIAULT replied 30 years was selected because it was felt
that the infrastructure that would be loaned for would have a
30-year life. It is not wanted to make a loan for a period of
time that is beyond the expected life of the asset.
11:28:40 AM
REPRESENTATIVE JOHNSON referred to page 8, lines 11-[14], of the
bill which state, "(1) provide financing that constitutes more
than one-half of the capital cost of the oil and gas
infrastructure development; or (2) guarantee a loan for an oil
and gas infrastructure development if the amount of the
guarantee exceeds $25,000,000." He understood this would mean
$25 million could be loaned and therefore it would only be
projects that are under $50 million.
MR. PARADY believed the key word is "or" on line 12, so AIDEA
would be limited to $25 million or to 50 percent. He deferred
to Mr. Springsteen to answer further.
MR. SPRINGSTEEN responded that his interpretation is the same as
Mr. Parady's.
REPRESENTATIVE JOHNSON inquired whether a project would have to
be $50 million or under in order for AIDEA to provide a loan or
loan guarantee. He further inquired whether there would be a
maximum that AIDEA could loan. He presumed the state would own
more than half the project and would have a better leverage
position in terms of the equity in a project.
MR. THERRIAULT pointed out that page 8, line 8, states, "Unless
the authority has obtained legislative approval". So, he said,
those are the limits that AIDEA itself can go up to. If there
is a project that exceeds those limits AIDEA would have to come
back and get specific legislative approval.
11:30:38 AM
REPRESENTATIVE CHENAULT understood that unless AIDEA had
authority from the legislature it could not exceed those limits.
He said he has concerns about attorney general approval and
about the other funds and how they are currently set up and
whether the bill is matching language. He requested a response.
MR. THERRIAULT drew attention to the document in the committee
packet titled, "Proposed ways to address concerns expressed on
HB 246." He recounted that after briefing the committee about
the bill during regular session, he and his colleagues talked to
several committee members individually, heard the concerns, and
worked on potential ways of addressing those concerns, all of
which are detailed in this document.
11:32:10 AM
REPRESENTATIVE TARR returned to page 8, lines 11-14, of the
bill. She understood AIDEA [would not be allowed to] provide
financing that constituted more than one-half of the capital or
provide a loan guarantee that exceeded $25 million. She
understood Representative Johnson's question to be that he was
linking those two as if half would mean that that was $50
million. But, she continued, one is project financing and one
is the loan guarantee. She asked whether she is correct in
understanding that a loan guarantee for $25 million could be a
much more substantial loan than a $50 million loan.
MR. THERRIAULT deferred the question to Mr. Springsteen.
REPRESENTATIVE TARR reiterated her understanding regarding page
8, lines 11-14. She understood that a loan guarantee of $25
million represents some portion of a loan and therefore that
loan could exceed $50 million.
MR. SPRINGSTEEN confirmed Representative Tarr is correct in her
understanding. For example, he said, a third party could
provide a loan of $100 million, but the maximum amount that
AIDEA could guarantee would be $25 million. Regarding the
question of a loan from AIDEA to a developer, he said AIDEA
would be limited to not more than 50 percent, and this would be
separate and apart from the guarantee.
11:34:48 AM
REPRESENTATIVE SEATON noted that if the project financing can be
50 percent of, say, $400 million, then a loan of $200 million
would be authorized under the bill's existing language, given
that no legislative approval comes in with the bill's current
language. The language needs to be changed, he posited, if the
intent is that an individual loan is limited other than by the
50 percent without legislative approval.
MR. SPRINGSTEEN answered that part of what AIDEA is trying to
address is the scale of some of these new developments, but also
to gauge the appetite of the legislature for what type of
participation AIDEA should have. These new developments could
be in the hundreds of millions of dollars when looking at the
top side, bottom side, reservoir, and the infrastructure.
MR. PARADY offered his understanding that the difference between
those lines is that the financing might include bonding tools or
other tools, and line 13, paragraph (2), is guaranteeing a loan.
MR. SPRINGSTEEN agreed.
MR. THERRIAULT clarified that this proposed mechanism is the
same as what the legislature established for the SETS and Arctic
infrastructure funds. The difference is that the percentage is
up to 50 percent, [and the loan guarantee] is $25 million. The
SETS and Arctic infrastructure funds were originally listed at
$20 million for the loan guarantee. So, the mechanism is the
same, but the dollar amounts are different.
REPRESENTATIVE SEATON said it is legislative approval that is
being talked about. He held that there is no cutoff, there is
no legislative approval, as long as it is under 50 percent of
the project. He added he does not think that is what was meant
if it is being said that there is some limit before the
legislature must approve something, because the way it is
written here the $25 million only applies to a loan guarantee,
it does not apply to direct financing and direct financing is
only limited by 50 percent of the billion dollars if AIDEA had
$500 million in the fund.
MR. PARADY confirmed that is correct with the caveat that AIDEA
cannot take three-quarters, or 60 percent, or 100 percent of a
project, the maximum it can go is 50. The limitation comes from
the strength of AIDEA's balance sheet and what the bond market
will do. If it is a flat-out loan where AIDEA is loaning its
funds, then AIDEA is limited to the $25 million. The limitation
on financing would stem from the bond evaluation in the market.
11:38:33 AM
REPRESENTATIVE TARR posited that the alternative to the proposed
language would be something on page 8, line 12, where it would
say "cost of the oil and gas infrastructure development not to
exceed a certain amount". This way there would still be those
two limitations - 50 percent of the capital or not to exceed
$300 million or some appropriate number. She asked whether
AIDEA has thought about what that appropriate number would be if
that were to be under consideration.
MR. SPRINGSTEEN replied that AIDEA's guiding principle is the
Prudent Investor Rule, so AIDEA looks for diversifying its
investment. To have a concentration in one project, given the
tools that are available, is not the intent. The goal is
seeking diversity in AIDEA's entire portfolio across all Alaska
and its industries.
REPRESENTATIVE TARR posed a scenario of being in a low price
environment without a lot of activity, making it so there is
more interest or desperation for wanting someone to start a
large project. She asked whether limited activity in a low
price environment could influence or skew what Mr. Springsteen
was just suggesting in regard to diversity within AIDEA's
portfolio and the Prudent Investor Rule.
MR. SPRINGSTEEN responded that when looking at any opportunity
AIDEA goes in first with the idea that it is protecting the
interests of its 735,000 shareholders. When AIDEA is making a
loan or making another form of investment, there are protections
to secure the investment and repay the shareholders with
interest in the form of dividends to the state.
11:41:31 AM
REPRESENTATIVE JOSEPHSON said he wants to ensure Representative
Chenault's question gets answered.
MR. THERRIAULT returned attention to the document titled,
"Proposed ways to address concerns expressed on HB 246." He
said Concern 1 was expressed by Representative Hawker regarding
the word "reserves" on page 7, line 17, of the bill. Because
evaluating the oil and gas reserves is being talked about, there
is some potential for confusion on whether this line is talking
about financial reserves or oil and gas reserves. He said this
could be clarified by adding the word "financial" [after the
word "established"].
MR. THERRIAULT noted Concern 2 was brought up by Representative
Seaton and was regarding whether AIDEA financing might leave
AIDEA and the state responsible for dismantlement, removal, or
remediation of the infrastructure. This can be clarified and
some protection put in the bill, he said, by inserting a new
subsection on page 8, line 25, [which states: "(d) The authority
may provide financing for an oil and gas development only if the
authority will not be responsible for the dismantlement, removal
or remediation cost of the oil and gas development."] He said
this could be offered as an amendment or rolled into a committee
substitute. He added AIDEA does not intend to take on that
responsibility and appreciates the opportunity to clarify that.
11:43:25 AM
REPRESENTATIVE HERRON said he appreciates the proposed language
for addressing Concern 2, but inquired whether AIDEA has talked
with the Department of Natural Resources (DNR), Department of
Law (DOL), or the Alaska Oil and Gas Conservation Commission
(AOGCC) about this language. He asked whether it is clear as to
who is responsible for dismantlement, removal, and remediation,
and, if so, where those funds are located.
MR. THERRIAULT answered that AIDEA worked with the Department of
Law on this language. He said he thinks the existing system
that assigns responsibility for that would exist, and AIDEA is
just clarifying that as it comes in it is not suggesting to take
on any of that responsibility. He added that AIDEA is not
proposing anything that would disrupt the existing system that
makes those determinations.
REPRESENTATIVE HERRON surmised, then, that there is in statute a
system that specifically says there is going to be someone
responsible and there is a mechanism to pay for it.
MR. THERRIAULT replied he believes so and that it is in the oil
and gas leasing regulations. He said AIDEA will check with DNR
to get a specific answer.
REPRESENTATIVE HERRON suggested there should be a reference
within the bill so it is clear during debate along the way that
this is known.
11:44:56 AM
REPRESENTATIVE JOHNSON inquired how that would be handled in a
bankruptcy situation where the company defaults and the state
is, basically, a 50 percent owner. He offered his belief that
in such a situation the state would be unable to dodge this.
MR. SPRINGSTEEN responded that in prior activity that AIDEA has
engaged in and future activity that AIDEA will engage in, when
AIDEA looks at a project it has three major "legs to the stool."
One is the project cash flow and the ability to recover any type
of investment that AIDEA made. Another is the level of
collateralization, the market value, a projected future
potential sale - an orderly sale - and making sure that there is
coverage there. Then, to the extent that AIDEA needs additional
coverage, AIDEA would also look to an independent guarantee that
AIDEA would want from the different parties.
MR. THERRIAULT stated that the suggested language to be added is
basically giving instruction to AIDEA to get proper
indemnification against that potential responsibility before the
lending could take place.
11:46:40 AM
MR. THERRIAULT addressed Concern 3, noting it was brought up by
Representative Hawker in regard to "proven reserves" and the
definition of commercially recoverable. He said AIDEA worked
with the representative and his staff to come up with suggested
language that would be added at the end of the existing sentence
on page 8, line 24, of the bill. [This language would state:
"In providing financing under AS 44.88.880, the authority shall
require a loan to value ratio of 75 percent or greater and, if
proven reserves constitute a portion of the value, the proven
reserves shall be reduced by ten percent in calculating the
value of the proven reserves and the reduced quantity shall be
valued based on the average price of oil or gas actually paid
during the preceding 12 month period, or if less, the price the
Department of Revenue forecasts for the next succeeding 12 month
period."]
MR. THERRIAULT noted that as AIDEA loans money out or
participates in this kind of lending, AIDEA would be secured in
the assets themselves, but another line of security for the
lending would also be the reserves that are being proven up or
that are being proposed to be produced. Given that the values
in commodity prices can swing tremendously, AIDEA has come up
with language to evaluate those that would require looking at
the average price of the oil and gas actually paid during the
preceding 12-month period and comparing it to the expected price
going forward and taking the lesser of those two. This would be
a conservative way of evaluating those reserves, if they are to
be considered part of the collateral at all. He offered his
belief that AIDEA has come up with language that is acceptable
to Representative Hawker and his staff.
11:48:18 AM
REPRESENTATIVE JOHNSON offered his understanding that only the
ground up would be looked at. He concluded that the state could
end up owning its own reserves if those are part of the
collateral.
MR. SPRINGSTEEN answered that just in terms of securing any type
of investment, AIDEA would ensure some form of collateral. So,
AIDEA could be in a situation where it does not have an asset
that is under ownership, and then it would look toward an
orderly sale to another party for future development in that
asset. He reiterated that AIDEA would not want to be without
access to various forms of collateral.
MR. THERRIAULT added that Representative Johnson is correct that
this lending is only for surface infrastructure, it is not for
any of the investment down the hole. But it is a realization
that the potential hydrocarbon to be produced from that surface
infrastructure is a potential asset that AIDEA could have secure
part of the loan or be pledged, and AIDEA would not want to
limit its ability to use that to secure the state's position.
11:49:57 AM
REPRESENTATIVE JOHNSON said he is looking at a worst-case
scenario in which there is a default. He continued:
And so as part of our collateral, that would come back
to us because it'd be in violation of their leases.
So we're using our own resource as collateral for a
loan that we're going to end up getting back anyway.
So ... I can't see using the resource or the oil or
the gas, whatever is there, as collateral. We're
going to end up owning that anyway in a bankruptcy
because of the fault of the lease. So, I don't see
where that has a lot of value to us in terms of
collateral, we need to resell it anyway.
MR. THERRIAULT replied that if it defaults back to the state, it
is correct that DNR could resell that asset and that money would
come into the general fund. He explained that AIDEA is looking
to make sure to its financial advisors that AIDEA is securing
the assets of AIDEA and ensuring that the economic enterprise of
AIDEA is secure.
11:51:07 AM
REPRESENTATIVE JOHNSON understood, then, that AIDEA would own
oil and gas reserves in a default situation.
MR. THERRIAULT replied that, as indicated by Mr. Springsteen,
AIDEA would look to sell those.
MR. PARADY offered his understanding that that is existing
authority within AIDEA's present structure, only in a collateral
sense. Regarding default of the lease during bankruptcy, he
offered his understanding that that lease does not automatically
default back to DNR. He requested Mr. Springsteen to further
clarify this.
MR. SPRINGSTEEN responded that that is correct. He said the
scenario posed by Representative Johnson is an extreme situation
in terms of everything absolutely going to pot. One of the
occupations of AIDEA is to be able to provide patient capital
funds in order to support development within the state and act
in the interest of AIDEA's 735,000 shareholders. He stated his
belief that collateral that is made available to help secure any
type of investment that is made is not "the type of thing we
should refuse." He added, "We've also taken that collateral in
terms of circumstances where there's a (indisc.) within the
state, and that's simply because we need to over-collateralize
in the interest of our shareholders."
11:52:53 AM
REPRESENTATIVE SEATON allowed that this is beyond his level of
expertise here, but posited that when getting into a bankruptcy
situation where a well has been drilled that is capable of
commercial production, then that lease does not expire. Thus,
that would be a collateral that would go to the secured
creditors in a bankruptcy situation and so he is unsure that the
state would automatically get back that lease. The lease would
fall as an asset through the bankruptcy court, he continued to
posit, so it would be prudent for [AIDEA] as an investor to have
it be a secured asset so it does not fall to some investment
company someplace else. He requested AIDEA to provide the
committee with a legal analysis of bankruptcy situations and
what happens to leases, especially if a lease has had a well
drilled on it. He offered his belief that if a well has been
drilled, the lease would be held in perpetuity at that point in
time as an asset.
11:54:17 AM
REPRESENTATIVE SEATON then addressed the language being proposed
under Concern 3 that would add at the end of the existing
sentence on page 8, line 24, of the bill: "In providing
financing under AS 44.88.880, the authority shall require a loan
to value ratio of 75 percent or greater and, if proven reserves
constitute a portion of the value ...." In regard to 75 percent
or greater, he posited that that would be over the 50 percent
valuation of the project and he is unsure whether it is 75
percent or greater, or 75 percent or less. He requested a
clarification of the restriction of 50 percent valuation to the
loan project versus the 75 percent talked about under Concern 3.
MR. SPRINGSTEEN answered that if there were a loan made and it
is 50 percent with a partner, then in terms of securing any type
of investment, AIDEA would have to meet that 75 percent
criteria. He said, "So, it ultimately goes for collateralizing
an investment." For example, he said it would take, at a
minimum, $100 million of assets and value to secure a $75
million investment.
11:55:54 AM
REPRESENTATIVE SEATON said that is over 50 percent of the
valuation if talking about 75 percent. He allowed he may be
confused with the way the language is here, but if it is being
said that AIDEA shall require a loan value ratio of 75 percent,
then it seems like that is beyond the 50 percent.
MR. THERRIAULT clarified that the 50 percent is the level of
investment in the specific project, the surface infrastructure
that is being talked about. The language related to Concern 3
is talking about what collateral AIDEA gets. An enterprise, a
business, could pledge other assets that it has, such as office
buildings, as collateral. Collateral can be things outside of
the infrastructure that is being financed. So, AIDEA is looking
to over-collateralize the loan. For example, when a person gets
a home loan, the house itself is pledged as an asset but the
bank may require the borrower to pledge another piece of
property as additional collateral against the loan.
MR. PARADY pointed out that apples and oranges are being mixed
here - the 50 percent is the participation rate, the 75 percent
is the collateralization rate, and they are not related to each
other.
11:57:33 AM
REPRESENTATIVE TARR noted that in the bill this proposed new
language would be placed in subsection (c), which is the
limitation of not to exceed 30 years, and the proposed new
language would be the collateral portion of it. Given how the
proposed language is currently written, she said she is trying
to figure out whether it would have to be to a company that is
actually in production or just has proven reserves, because of
the language that states, "and the reduced quantity shall be
valued based on the average price of oil or gas actually paid
during the preceding 12 month period". She inquired whether
that is the average price "as we use it and not relative to
economic activity of the company seeking the loan."
MR. THERRIAULT replied it is just the prevailing prices. If the
reserves that will be produced by this infrastructure are going
to be used as any component of the collateral, this speaks to
how those are going to be valued. He said AIDEA tried to come
up with something that Representative Hawker and his staff felt
was adequate and on the conservative side.
11:58:46 AM
REPRESENTATIVE SEATON inquired whether the language "shall be
reduced by ten percent" is talking about the value of the oil
but not the economics of the extraction. Posing a scenario of a
project needing financing that is fairly expensive, he asked
whether it is the Trans-Alaska Pipeline System (TAPS) average
oil price or the Alaska North Slope West Coast (ANS WC) average
oil price. He posited that a highly expensive project may be
way over valued if it is only the ANS WC price and not the
economics of the project. He requested that the committee
receive a "white paper" with further explanation in this regard.
MR. THERRIAULT drew attention to the portion of the proposed new
language that states "in calculating the value of the proven
reserves". He said the cost of actually producing would be
subtracted from that so the economics of producing from that
potential field would be taken into account.
MR. SPRINGSTEEN added that in any circumstance, through its due
diligence process AIDEA is examining the economics of the
development in relation to price fluctuations.
REPRESENTATIVE SEATON stated that, while he appreciates this
discussion, he would like for language to be added that makes it
clear that it is not just ANS West Coast prices, it is the
economics of the project as well, because they could be
significantly different than just a generalized pricing.
MR. SPRINGSTEEN agreed to do so.
12:00:48 PM
MR. THERRIAULT addressed Concern 4, which was brought up by
Representative Chenault. He recounted that when the SETS fund
was set up there was a concern that somehow it would become a
mechanism that could come into play to finance a large diameter
pipeline across the state to deliver oil or gas for export. He
said that is not the intent here and so AIDEA could insert
similar language that makes it clear that AIDEA is financing
infrastructure to get oil and gas into production and it would
be wanted for that production to be delivered. Precluding
delivery into the ENSTAR Natural Gas Company system is not
wanted, so AIDEA worked with Representative Chenault's staff to
come up with suggested language that would be added to page 8,
line 30, after the word "established" [and which states ", but
excluding a natural gas pipeline project, thirty inches in
diameter or larger, for transporting natural gas from the North
Slope or Cook Inlet to market"].
12:01:47 PM
MR. THERRIAULT explained that Concern 5 deals with the transfer
of assets [between funds]. The language [on page 6, lines 25-
29, of the bill] talks about AIDEA having the latitude to
transfer assets, and AIDEA believes the existing latitude in the
suggested language is preferred. It mirrors what is granted for
the SETS fund and the Arctic infrastructure fund and AIDEA would
suggest that the proposed oil and gas fund should operate in the
same manner.
12:02:21 PM
REPRESENTATIVE HERRON observed that for Concern 5 AIDEA wants to
stay with the same language and does not propose a potential
solution as was done for the other concerns. He said he is very
concerned that this provision may allow AIDEA to transfer funds
that may be negative to the other two funds. He therefore
suggested that AIDEA come up with a solution rather than
sticking with its present position.
MR. THERRIAULT replied that there is no suggestion that the
existing $110 million in the revolving loan fund would be
transferred to capitalize the [proposed oil and gas
infrastructure development] fund. However, he explained, within
each fund there needs to be the latitude that if giving a loan
guarantee or doing financing with bonding, a subaccount can be
set up and assets can be transferred into that subaccount to
assure that as funds come back, as bonds are paid back, there is
the flexibility to do that type of thing. He deferred to Mr.
Springsteen to address whether there is any anticipation that
there would be transfer between the funds.
12:04:00 PM
MR. SPRINGSTEEN said he is having difficulty hearing what is
being said and requested Mr. Therriault to restate the question.
MR. THERRIAULT reiterated he is speaking in regard to Concern 5
which is in regard to AIDEA having the ability to transfer
funds. He noted the proposed language mirrors the mechanism
established in the SETS and Arctic infrastructure funds and
[AIDEA's] suggestion is that there is not a problem here that
needs to be fixed and that AIDEA needs to maintain some
flexibility to set up subaccounts within the fund to assure
lenders, bond holders, that they get repaid. There is no intent
on AIDEA's part to transfer money from this fund into the
revolving loan fund or vice versa, he said. He requested Mr.
Springsteen to speak to that.
MR. SPRINGSTEEN explained there is the ability with the SETS and
Arctic infrastructure funds to move funds in between - to
"interfund" - and this would mirror that same type of language.
He said he understands the legislature's desire to limit that
and maintain funds solely within the oil and gas infrastructure
development funds. He said AIDEA can work toward a solution for
that.
12:05:57 PM
REPRESENTATIVE HERRON stated he can support the transfer of
monies between the other three funds, but when it comes to oil
and gas infrastructure he fears that this fund potentially could
become the big boy on the block and the other three would be on
the back bench. He requested that AIDEA propose a solution to
Concern 5 rather than keeping the language as proposed in the
bill.
MR. SPRINGSTEEN agreed to get back to the committee.
12:07:06 PM
MR. THERRIAULT discussed Concern 6, which was brought up by
Representative Chenault. He noted that HB 246 speaks about
contracting for outside services and in regard to hiring outside
legal counsel the bill speaks specifically about getting the
approval of the attorney general. He related that initially he
had thought the bill copied the same language from the SETS and
Arctic infrastructure funds, but instead the language in the
bill is slightly different. He said AIDEA's proposal here is to
go back and use the same language that is in the SETS and Arctic
infrastructure funds so that it mirrors the same mechanism the
legislature put into those other two funds.
REPRESENTATIVE CHENAULT said he thinks the proposed language
works, but his concern is why put one more step in there of
having the attorney general approving oil and gas issues for
AIDEA. He posited that the AIDEA board has the expertise and
the ability if it needs counsel, to go out and get counsel.
Since AIDEA has proven this in the past, he asked why put that
extra step in there on oil and gas issues.
MR. THERRIAULT agreed and said AIDEA's proposal is to default
back to the language used in the other two funds.
12:08:37 PM
MR. THERRIAULT lastly addressed Concern 7, stating AIDEA has no
suggested fix for this concern. He recounted that there were
some questions about whether it is appropriate to adjust the
participation limits for the SETS and Arctic infrastructure
funds so they mirror the suggested limits for the proposed new
oil and gas infrastructure development fund. He said AIDEA
believes it would be easier for the enterprises seeking AIDEA's
support to understand if those limits are the same across the
different financial tools. However, he continued, that is a
separate policy call of the committee's.
12:09:22 PM
REPRESENTATIVE TARR said it makes sense in the context of the
new fund because those would be more expensive projects
potentially. She asked what the thinking was in making the
adjustments to the other two funds.
MR. THERRIAULT responded it is just so they are consistent. The
other funds are currently one-third and $20 million. The loan
guarantee [proposed in the bill] would be an adjustment of $5
million [raising it to $25 million] before AIDEA would have to
get legislative approval and the 33 percent would be raised to
50 percent.
REPRESENTATIVE TARR inquired whether the current boundaries on
the other two funds have limited AIDEA's ability to invest in
any projects under those funds.
MR. THERRIAULT answered that the other two funds have not been
capitalized, so there has not been activity.
12:10:26 PM
REPRESENTATIVE JOSEPHSON said his sense of HB 246 is that "it's
designed to soften the fact that the administration doesn't
think the tax credit portfolio can be sustained." Given the
policy call on that is as unclear as anything he has ever seen,
he inquired whether this bill is something that the
administration wants to advance if there is not reform of the
credit system.
MR. PARADY replied he will leave the coming decision on oil and
gas tax credits to the appropriate body. He said HB 246 stands
alone. The bill would add a tool into AIDEA's toolkit to
support the small- and medium-sized sectors of Alaska's oil and
gas industry and is irrespective of the tax credit issue.
MR. THERRIAULT brought attention to the pie chart on slide 4,
saying it depicts the investment out of the "economic activity
fund" and shows that the [oil and gas account] is up to 14
percent. He said HB 246 was initiated by the board's concern
that AIDEA has approached, or will soon approach, the limit for
investing in oil and gas infrastructure; AIDEA is no longer able
to do that and keep a blended portfolio in this economic
development portfolio.
12:12:26 PM
REPRESENTATIVE SEATON asked whether it is anticipated that the
credit certificates [that have already been] issued for projects
would provide a basis for a loan as far as infrastructure and
the cost of a project. There would be an interaction between
something that has gone forward and a new program here, he said.
He understood the current proposal is that if a borrower had
received credits those would still be there. He asked whether
AIDEA would use those as a financing mechanism or a financing
collateral base for a loan from AIDEA.
MR. SPRINGSTEEN responded that in the past AIDEA has used tax
credits as collateral for loans. He said there is some
consternation around double dipping, and he offered his
understanding that this language was put in to resolve some of
the thoughts around double dipping in the state programs. He
said there is language in state statute regarding a preference
to make loans to projects that do not have other forms of state
support, but he stated his understanding that modifications
could be made for effectiveness.
12:14:16 PM
REPRESENTATIVE SEATON said he is not hearing an answer and that
he is not trying to put himself on one side of the answer or
another. But, he continued, if people have tax credits that are
not the basis of the loan amount that AIDEA is going for, the
committee should have an answer as to whether those tax credits
can be used for the collateral for financing. He posited that
that is something the committee should determine as the bill is
considered.
MR. SPRINGSTEEN answered that AIDEA's revolving funds program
can take tax credits as collateral, but under this program AIDEA
would not be able to.
REPRESENTATIVE SEATON said that is the clarity he wanted to find
out.
12:15:20 PM
MR. THERRIAULT drew attention to the fiscal note dated 2/5/16
and pointed out that page 2 makes reference to the potential of
the loan fund being capitalized. He explained that that would
be tied to passage of a separate piece of legislation and it is
up to policymakers to make the determination of whether that
does pass. However, he continued, there is value to creating
the loan fund even if it is not capitalized because setting up
the mechanism would allow AIDEA to do some conduit financing
utilizing the direction that is given for this fund. If the
other legislation is passed and dollars are put in to capitalize
the fund, it just becomes a more valuable tool, but that is a
separate policy call for legislators.
12:16:45 PM
REPRESENTATIVE SEATON returned to page 8, lines 11-13, of the
bill and asked whether AIDEA will be coming back to the
committee with a proposal for a dollar limit on line 12 for not
more than half of the capital cost of the above ground
infrastructure development and put a limit on that before it
requires additional legislative approval.
MR. PARADY replied that AIDEA could do so, but that as an AIDEA
board member he would note that that language is the existing
language in the other funds and AIDEA's management to that limit
stems from AIDEA's ability to bond. He offered his belief that
the necessary conservative fiscal constraints are in place and
that they have been adhered to by the board. He said the
committee could pick a number, say, $500 million or something,
to require that if something scales to that size the legislature
wants to see it first. But, he continued, AIDEA's ability to
finance in those levels is limited by AIDEA's balance sheet and
the bond market's assessment of AIDEA's balance sheet. He
deferred to Mr. Springsteen to elaborate further.
MR. SPRINGSTEEN, in regard to the scale of these types of
investments and being able to leverage and the strength of the
different types of tools and attracting outside capital, stated
that he is concerned about them not being able to provide the
access to the capital that is sufficient to work alongside some
of these development projects.
12:18:50 PM
REPRESENTATIVE SEATON inquired as to what "providing financing"
means, such as whether that is direct AIDEA money or strictly
AIDEA oil and gas money. He presumed that that is what Mr.
Springsteen's answer meant and not bringing other financial
partners into a financing package. For example, he understood
[AIDEA] has $25 million in Buccaneer Energy's Endeavour [jack-up
rig], but that the whole package had other partners.
12:19:39 PM
MR. SPRINGSTEEN responded that in terms of the Red Dog Mine road
and port system that supports the Red Dog Mine, for a portion of
the capital for that infrastructure, AIDEA did access the bond
markets for some of the money that would need to be invested to
build out the road and the port conveyor and warehouse system
that is in Northern Alaska. So, AIDEA would request to continue
to have access to those types of bonding tools to support
infrastructure development in the state, especially when there
are some limitations on the capital for this type of
infrastructure.
12:20:32 PM
REPRESENTATIVE SEATON, in regard to providing financing that
constitutes more than one-half of the capital cost for a
development, asked whether providing capital under this bill
would be limited to money from the fund or to the whole package
that AIDEA might put together with external financiers, whether
they are foreign financiers, hedge funds, or whatever. If
bonding is being exercised in addition to the capital from here,
whether it is being said that the limit is 50 percent of the
project funding coming directly from the oil and gas
infrastructure development fund, but that AIDEA could utilize
bonding and take the other 50 percent of the funding and be 100
percent supplier of the capitalization for a project. He
presumed that is beyond where AIDEA would be, but said he is
trying to determine what the structure would be in the statute
and what that would allow.
12:21:49 PM
MR. SPRINGSTEEN answered it would be a 50 percent participation
limit for any tool that AIDEA brings to bear for a project; a
combination of an AIDEA investment, whether a loan or similar
type of equity investment, in addition to any bonding that would
be done. For example, a 50 percent participation for a $400
million project would be $200 million facilitated by AIDEA, and
that $200 million could potentially consist of $30 million of
AIDEA capital plus $170 million in bonding. He said that is
just an example of how each type of new investment has its own
terms, conditions, and structure.
12:22:49 PM
REPRESENTATIVE TARR observed that slide 4 shows the projects and
loans through 10/31/15. She presumed that even though AIDEA
uses many steps along the way before involving itself in a
project, oil and gas projects would be riskier investments than
manufacturing, healthcare, or restaurant opportunities. She
asked whether that would be a reason to be concerned relative to
the other investments.
12:23:26 PM
MR. SPRINGSTEEN replied that AIDEA looks at the cash flow
coverage, the collateral, and the guarantees that would need to
be in place in order to protect AIDEA's 735,000 shareholders.
There could be a slightly higher risk profile, but AIDEA is
looking to get back the original investment plus interest for
its shareholders. Also, he said the board discussed having a
separate program so that the revolving fund can continue being a
general supporter of all Alaska businesses and industries. This
program and fund would be a little more toward the single
objective of supporting oil and gas industry in Alaska.
MR. THERRIAULT pointed out that the interest rate that would go
with this fund would be a little bit higher because it is a
little bit higher risk.
12:24:31 PM
REPRESENTATIVE CHENAULT inquired whether the legislature has
limited the actual bonding capacity of AIDEA. He understood it
was $400 million or something like that.
12:25:01 PM
MR. SPRINGSTEEN responded that AIDEA may need to request volume
capital allocation for a project - a revenue bond through AIDEA
versus a conduit bond that relies solely on project cash flow.
He said he would have to engage bond counsel to get an answer.
12:25:38 PM
REPRESENTATIVE CHENAULT understood there are many instruments
and many different bonding capacities that can be done, but said
he thought that the legislature had at one time set a limit on
total bonding capacity and that may mean all the instruments or
all the bonding pieces that AIDEA has. Continuing, he said he
does not know if AIDEA is unlimited where it can bond for
anything it wants to.
JERRY BURNETT, Deputy Commissioner, Office of the Commissioner,
Department of Revenue (DOR), regarding the question of total
bonding authority, said there is legislation before the House of
Representatives this year that references the $400 million
annual cap on bonding authority. It is not a total cap on
bonding authority, he stated, but an annual cap of $400 million.
12:26:47 PM
REPRESENTATIVE JOSEPHSON related that Mr. Springsteen said
something that gives him some pause, although it may have been a
hypothetical. He recalled that when Representative Seaton asked
about a financing package under [page 8], line 11, paragraph
(1), Mr. Springsteen mentioned maybe $170 million would be
financed through third parties and maybe [AIDEA] would put up
$30 million. He observed that [page 8], line 13, paragraph (2),
would cap the guarantee of a loan at $25 million and stated that
that things seem counter-intuitive. He said it seems like it is
riskier to actually provide $30 million than to guarantee a loan
of $25 million. He requested Mr. Springsteen to clarify this.
12:27:29 PM
MR. SPRINGSTEEN answered that in a direct investment AIDEA looks
to the cash flow, the collateral, and the guarantee. In the
circumstance of a $25 million guarantee, AIDEA would be the
guarantor for another investor. So, it is a different risk
profile and could potentially be a higher risk, and that's the
reason for the guarantee amount of $25 million, he indicated.
12:28:15 PM
REPRESENTATIVE SEATON drew attention to page 7, line 17, of the
bill regarding the financial reserves. He said he understands
the financial reserves for bonding or for loan guarantees. He
inquired about the purpose of reserves for actual loans; for
example, whether they are for defaulting on loans.
12:29:05 PM
MR. SPRINGSTEEN replied that the establishing of reserves would
be for issuing bonds, and by establishing a reserve AIDEA could
work with a lower interest rate for the project.
12:29:35 PM
CO-CHAIR NAGEAK stated the committee will meet tomorrow,
5/28/16, to take public testimony on HB 246.
[HB 246 was held over.]
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB246 Ver A.pdf |
HRES 5/27/2016 11:00:00 AM |
|
| HB246 Sectional Analysis.pdf |
HRES 5/27/2016 11:00:00 AM |
|
| HB246 Fiscal Note-DCCED-AIDEA-01-14-16.pdf |
HRES 5/27/2016 11:00:00 AM |
|
| HSE RES HB 246 - AIDEA Oil and Gas Infrastructure Development Fund presentation.pdf |
HRES 5/27/2016 11:00:00 AM HRES 5/30/2016 11:00:00 AM HRES 5/31/2016 11:00:00 AM HRES 6/1/2016 11:00:00 AM |
HB 246 |
| AIDEA's HB 246 proposed language to address legislative concerns 5.26.16.pdf |
HRES 5/27/2016 11:00:00 AM HRES 5/30/2016 11:00:00 AM HRES 5/31/2016 11:00:00 AM HRES 6/1/2016 11:00:00 AM |
HB 246 |