Legislature(2023 - 2024)SENATE FINANCE 532
03/15/2023 09:00 AM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| Presentation: Alaska Industrial Development Authority | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED |
SENATE FINANCE COMMITTEE
March 15, 2023
9:01 a.m.
9:01:34 AM
CALL TO ORDER
Co-Chair Stedman called the Senate Finance Committee
meeting to order at 9:01 a.m.
MEMBERS PRESENT
Senator Lyman Hoffman, Co-Chair
Senator Donny Olson, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Click Bishop
Senator Jesse Kiehl
Senator Kelly Merrick
Senator David Wilson
MEMBERS ABSENT
None
ALSO PRESENT
Randy Ruaro, Executive Director, Alaska Industrial
Development and Export Authority; Senator Cathy Giessel.
PRESENT VIA TELECONFERENCE
Amy Adler, Acting CFO, ADIEA, Anchorage; Geoffrey Johns,
Acting Chief Investment Officer, AIDEA.
SUMMARY
PRESENTATION: ALASKA INDUSTRIAL DEVELOPMENT AUTHORITY
Co-Chair Stedman commented that he had a conversation with
a colleague from the other body and had received a chart he
thought would be useful. He thought the chart might be
helpful when referencing capital appropriations. He
referenced a printed chart entitled "Swoop Graph - UGF
Only, FY24 Governor's Budget Compared to FY23 Management
Plan," (copy on file).
Co-Chair Stedman relayed that the committee would hear a
presentation from the Alaska Industrial Development and
Export Authority (AIDEA). He noted that the executive
director was new to the position. He had asked for AIDEA to
have frank discussions of the topics and noted that it was
working through some challenges that were present when the
executive director came to the position.
^PRESENTATION: ALASKA INDUSTRIAL DEVELOPMENT AUTHORITY
9:04:28 AM
RANDY RUARO, EXECUTIVE DIRECTOR, ALASKA INDUSTRIAL
DEVELOPMENT AND EXPORT AUTHORITY, introduced himself and
relayed that he had started his position on January 3,
2023.
Co-Chair Stedman asked Mr. Ruaro to discuss his background.
Mr. Ruaro discussed his background, which went back twenty
years in state government. He had worked in the legislative
office for former Governor Frank Murkowski and had worked
for former Governor Sarah Palin and former Governor Sean
Parnell. He had worked for Governor Mike Dunleavy as a
deputy chief and chief of staff. Before working in state
government, he had worked in private practice, previous to
which he had worked at the Ketchikan Pulp Mill and in
commercial fishing.
Co-Chair Stedman asked if Mr. Ruaro had worked in the
legislature.
Mr. Ruaro relayed that he had worked with Representative
Bill Williams, Representative Kyle Johanson, and for Co-
Chair Stedman.
Co-Chair Stedman thought Mr. Ruaro had a good, rounded
background in both areas of government.
Mr. Ruaro discussed a PowerPoint presentation entitled
"Alaska Industrial Development and Export Authority
Overview," (copy on file). He looked at slide 2, "AIDEA
Mission," and summarized that AIDEAs simple mission was to
create economic development and jobs. He noted that the
mission was easy to follow and the reasons, findings, and
policy were set out in statute by the legislature. He
relayed that the legislature had found that there was a
need for an entity such as AIDEA with financing ability to
help promote jobs and economic development.
Mr. Ruaro spoke to slide 3, "AIDEA Overview":
• Investing in Alaskans since 1967
• Alaska's Development Finance Authority
• Financially Self-Sustaining Public Corporation (no
GF by statute AS 44.88.190(b))
• The authority is a public corporation of the state
and a body corporate and politic constituting a
political subdivision within the Department of
Commerce, Community, and Economic Development, but
with separate and independent legal existence (Sec.
44.88.020).
• The purpose of the authority is to promote, develop,
and advance the general prosperity and economic
welfare of the people of the state, to relieve
problems of unemployment, and to create additional
employment (Sec. 44.88.070).
Mr. Ruaro showed slide 4, "AIDEA Program Highlights.
Mr. Ruaro turned to slide 5, "LOAN Participation Program
(LPP)":
The LPP provides long-term fixed rate financing to
Alaska's commercial businesses, through a qualified
financial institution, principally in support of
construction and economic growth in Alaska's
commercial real estate sector.
Current LPP Statistics:
• $422 million of program loans outstanding
• Total LPP loans outstanding has increased nearly 34%
over the last 5 years
• Current borrowers are represented by 28 different
industries
Current loans outstanding represent over 6.75
million sq. ft. of total commercial collateral
throughout the State of Alaska
Mr. Ruaro relayed that AIDEAs Loan Participation Program
(LPP) was a commercial lending program, and usually took on
roughly 70 percent of a loan with a participating bank. He
commented on the success of the program. He estimated that
AIDEA received almost 55 percent of its revenue from LPP.
He commented on the experienced staff in place and the goal
to continue to grow the program. He highlighted statistics
shown on the right-hand side of the slide, including $20
million in total amount of projects being financed and $410
million in loans outstanding. He commented that he was
aware of very few defaults.
9:08:28 AM
Mr. Ruaro considered slide 6, "Alaska's Ship Home-Porting
For Improvements Program (AK SHIP)," and noted that the
program helped in promoting ship-building in the state. He
hoped to expand the program. He was working with some
community development quota (CDQ) groups to get as many
ships built in Alaska as possible. He noted that AIDEA
owned the shipyard in Ketchikan and was looking at ways to
grow more business at the shipyard.
Mr. Ruaro displayed slide 7, and discussed the Conduit
Revenue Bond Program, through which AIDEA acted as a
conduit borrower with the principal and interest paid back
by a third party. He mentioned the Tanana Chiefs Conference
(TCC) facility as an example, with an over $126 million
bond issuance. He noted that AIDEA had been active in
healthcare but was talking with communities about
significant opportunities. He discussed a project related
to port development in Skagway, and his recent visit to the
community.
Senator Kiehl asked about the Conduit Revenue Bond Program
as well as the LPP and asked about positive and negative
experiences and the default rate on loans. He asked if
there had been any missed payments on the conduit bonds.
Mr. Ruaro answered "no" and was not aware of any missed
payments.
Senator Kiehl asked Mr. Ruaro to get back to the committee
with the default rate for LPP.
Mr. Ruaro agreed to provide the information.
Mr. Ruaro highlighted slide 8, "AIDEA Project Financing":
Assists Alaskans through AIDEA's ability to develop,
own (in whole or in part) and finance installations
and facilities within the state, especially those
which advance economic development within a community,
borough, or region of the state.
Mr. Ruaro looked at slide 9, "Project Financing - Red Dog
Mine | DMTS," and thought the Red Dog Mine was AIDEAs most
successful project. He cited that the mines return was
close to $1 billion, and that the project was a major
driver of economic benefit and jobs. He mentioned NANA
Regional Corporation. He thought the mine had a 60 percent
shareholder hire rate in the region. He cited that while
the current mine was anticipated to run out in 2031, there
were two other deposits nearby on state land and Red Dog
Mine facilities could continue for many years.
9:12:33 AM
Senator Kiehl asked about the first bullet on the slide,
"Without AIDEA there would be no mine," and thought the
mine had been a responsible development. He referenced a
consultants report that had indicated that the mine would
have proceeded without AIDEA.
Mr. Ruaro argued that the mine had needed AIDEAs financing
to get started. He referenced legislation that had set up
the economic development program at AIDEA, and approved
bonding of $160 million for the infrastructure project. He
had talked with others that had been involved at the time
that indicated that the financing had not been available
without AIDEAs assistance.
Co-Chair Olson noted that the Red Dog Mine was in his
district and understood that after the market challenges
that existed in the 1980s there would have been enough
demand. He thought the project may have been possible
without AIDEA participation, although on a different
timeline.
Mr. Ruaro relayed that from what he had learned from
others, Cominco had not had the funding to start the
project.
Mr. Ruaro addressed slide 10 and discussed project
financing for the FedEx Hangar at the Ted Stevens Memorial
Airport in Anchorage. He cited that the project was
successful and anchored jobs. He mentioned the goal of
improving and expanding some facilities at the airport. He
cited a report that one in eight jobs in Anchorage was tied
to the airport. He noted that AIDEA had financed jet fuel
tanks at the airport when there had been a jet fuel crisis.
9:15:59 AM
Mr. Ruaro advanced to slide 11, "Project Financing - Ambler
Access Project." He explained that the road project was
what AIDEA was currently spending most of its time on
currently. He cited that the project was a 211-mile road
west off the Dalton Highway in the Ambler Mining District
along the Brooks Range. He mentioned the Alaska National
Interest Lands Conservation Act (ANILCA) and considered
that it was a right-of-way that Congress said should exist.
He shared that the project was in the pre-construction
stage and was in litigation. There was a $24 million field
program set to be underway in the current year, and the
project was focused on local hire for most of the jobs. The
hope was that Ambler would end up similar to the Red Dog
Mine.
Senator Kiehl looked at the two bullets at the bottom of
slide 11:
Through September 1, 2021:
3,256 mining claims purchased for mining
3,931 jobs in mining operations & $300 million
in wages for mining operations
Senator Kiehl asked if the mining claims were contained in
the Ambler District.
Mr. Ruaro relayed that the mining claims were not all
contained in the Ambler District, which was more to the
west end of the road.
Senator Kiehl asked Mr. Ruaro to address the proven and
probable reserves identified in the district that the road
would be accessing.
Mr. Ruaro did not have the information to hand, but agreed
to get the information. He thought it was important to note
that the road was being permitted, and the mines would have
a separate permitting process.
Senator Kiehl thought the previous slide had some baseline
economic data and it was possible to look at the values. He
commented on a significant difference.
Co-Chair Stedman asked Mr. Ruaro to provide the data.
Mr. Ruaro agreed.
Mr. Ruaro looked at slide 12, and discussed the future
development of the West Susitna Access Project, which was
an about 100-mile road with recreational values and mineral
values. The project was still in the very early stage, and
AIDEA was working on the National Environmental Policy Act
(NEPA) permitting. He mentioned potential for timber and
mining and thought the Department of Natural Resources
(DNR) had recently put out a notice for oil and gas
exploration possibilities. He thought the project could be
a unique area for recreational access and mineral values.
Co-Chair Stedman wondered if AIDEA was looking for federal
assistance in building the road for the project, and asked
if the road would be a dirt road like an oversized logging
road.
Mr. Ruaro relayed that the road would need to be more of a
significant industrial road to sustain the mining trucks.
He continued that AIDEA was also in discussion with the DNR
commissioner regarding federal assistance.
9:19:59 AM
Mr. Ruaro showed slide 13 and discussed future project
development for Alaska National Wildlife Refuge (ANWR) 1002
Leases. He noted that the efforts of getting the leases
into production was being litigated by the non-governmental
organizations (NGOs). He hoped to have an answer from the
judge about proceeding within the next month or two, but
currently progress had stopped. He thought there were
roughly 10.3 billion barrels of oil estimated to be
recoverable. He noted that there were state leases offshore
of ANWR in state waters, which were estimated to contain 2
billion barrels of oil. There were also Kaktovik Inupiat
Corporation lands, which were estimated to contain 1
billion barrels of oil; and the federal 1002 area had 7
billion barrels of oil estimated as recoverable. He shared
that AIDEA's plan was to move forward with an exploration
program and try to define the resource if it could get
through the court system.
Co-Chair Stedman asked if the project was for leases the
state had purchased.
Mr. Ruaro answered "yes, the leases had been purchased by
AIDEA.
Senator Kiehl thought the ANWR project seemed like a "one-
off," and everything else was someone in the private sector
doing development work with a little state support. He
referenced significant activity and corporate interest in
the basin, and asked why the project was so different.
Mr. Ruaro was not familiar with why more companies had not
bid on the ANWR leases. He thought there was clearly an
effort underway to litigate or even boycott any company by
NGOs and others if entities were thought to be too
aggressive in developing resources. He guessed that
companies had decided there were other places in the world
that were easier to drill, quicker to return, with avoiding
being put in the limelight by the NGOs as destroying the
Arctic.
Senator Kiehl had not found the oil industry to be easily
cowed when there was a resource thought to be economic. He
wondered why AIDEA, as a state investment bank, made direct
investment in the project rather than support a private
industry project.
Mr. Ruaro thought the AIDEA action was directed by the
board in order to make sure the state preserved the
opportunity in ANWR that Congress had provided, rather than
the possibility of no one bidding on the leases. There was
nothing to prohibit AIDEA from partnering with the private
sector at a later date. There were only two lease sales
directed by Congress in the 2017 tax act, and AIDEA wanted
to make sure the opportunity was preserved for the state.
He commented that potential revenues were tens of billions
of dollars.
9:23:51 AM
Mr. Ruaro showed slide 14, "AIDEA Financial Highlights."
Mr. Ruaro turned to slide 15, "AIDEA 2022 Financial
Highlights," and cited that AIDEA had net income of $35.8
million and 28 years of positive annual net income. The
AIDEA dividend was increasing, with $17.9 million in the
current year and $463 million in total dividends since
1996. There had been a 67 percent increase from 2017 to
2021, and he thought the dividend had a record of strong
positive returns. He thought in most years the dividend was
close to the 50 percent maximum and was 47 percent on
average.
Mr. Ruaro considered slide 16, "Where Does AIDEA Get Its
Money?" He explained that AIDEA received revenue from three
locations: its loan participation program, project
investments like the Red Dog Mine, and some reserves that
returned revenue.
Mr. Ruaro displayed slide 17, which showed a financial
summary for FY 22. He identified that AIDEA had a net
position at the beginning of the year of $1.4 billion. He
cited that AIDEA had investments, securities, loans,
assets, Snettisham, power lines, and the Red Dog Mine.
Co-Chair Stedman asked about the net income
increase/(decrease) in fair value of investments of
negative $48 million, which was in the right-hand column.
Mr. Ruaro deferred the question to AIDEA staff. He thought
the information might be a partial reflection of the write-
down of the Mustang Project.
9:26:29 AM
AMY ADLER, ACTING CFO, ADIEA, ANCHORAGE (via
teleconference), believed that the $48 million referenced
on slide 17 was the change in fair market value of AIDEA
investments on June 30.
Co-Chair Stedman asked about the investments.
Ms. Adler referenced AIDEAs investment portfolio, which
was primarily externally managed.
Co-Chair Stedman asked for more information including three
to four years of performance of the portfolio. He asked
about the Snettisham Project, and asked if Snettisham was
reverting to the utility and how it would impact AIDEA.
Mr. Ruaro relayed that the Alaska Electric Light and Power
(AEL and P) Company would have the opportunity to purchase
Snettisham at the end of the loan. He thought the loan had
12 years left. He had spoken with AEL and P, which had
indicated it would continue with the existing payment plan
and consider purchasing the asset at the end of the life of
the loan.
Co-Chair Stedman asked if AIDEA would retain ownership of
Snettisham if AEL and P did not purchase it.
Mr. Ruaro answered in the affirmative.
Co-Chair Hoffman asked about assets and requested a list of
development projects including investments and a breakdown
of the $461 million in development projects.
Co-Chair Stedman asked Ms. Adler to assist with a breakdown
of the balance sheet and projects that comprised the $461
million.
Ms. Adler agreed to get back to the committee with the
information.
Co-Chair Stedman asked for a brief explanation regarding
the $219 million of deferred inflows of resources as listed
on the slide.
Ms. Adler explained that the deferred outflows of resources
was primarily related to employee pension and also the
Snettisham Project. She offered to provide more detailed
information at a later time.
Senator Bishop asked for explanation of Snettisham revenues
and expenses.
Ms. Adler did not have the information at hand and agreed
to provide the information at a later time.
9:30:02 AM
Mr. Ruaro highlighted slide 18, which showed an operating
budget summary. He cited that the operating budget was a
fairly benign budget. He noted that there would be a few
changes going forward, most of which were related to the
increased need by the Alaska Energy Authority (AEA) to
process significant amounts (close to $2 million) in
Infrastructure Investment and Jobs Act (IIJA) funds. The
funds were coming with a possibility of several hundred
million more coming in grants, and there were some
increased receipts for personnel services. He thought AEA
was asking for five positions in the budget in the current
year, which he thought could increase quickly. He noted
that AEAs budget flowed through AIDEAs budget, and
AIDEAs budget included AEAs personnel and costs.
Senator Wilson asked about AIDEA personnel and asked Mr.
Ruaro to discuss the workflow and work culture, including
retention and recruitment.
Mr. Ruaro viewed the work environment as very positive. He
relayed that he had a small group of good staff, comprised
of six to eight senior staff that he met with twice weekly.
He thought AIDEA had a very healthy work environment. He
relayed that he had an open management style, with everyone
involved in issues and projects.
Co-Chair Stedman asked if there had been a culture change
since Mr. Ruaro had started in his leadership role.
Mr. Ruaro could not speak to the prior environment but
emphasized that everyone was treated respectfully and AIDEA
was seeing similar recruitment and retention issues as
other agencies. He was happy with his core staff and the
work product. He considered that everyone was working as a
team.
Co-Chair Stedman asked if there were positions that still
needed to be filled.
Mr. Ruaro identified that there were two open positions
that were anticipated to be hired within the following two
weeks.
Co-Chair Stedman asked for Mr. Ruaro to get back to the
committee with information about the timeline of the hiring
process. He shared concerns that the state bureaucracy was
so cumbersome that it took too long to accomplish the
hiring, which sometimes resulted in loss of potential
employees.
Mr. Ruaro relayed that AIDEA had a statute that allowed for
expedient hiring. He acknowledged that it had taken some
time to hire individuals for certain positions. He thought
there were some good candidates, and the agency would be
hiring for some positions in the next week.
9:34:39 AM
Senator Bishop asked if any of the positions being hired
were out of state.
Mr. Ruaro relayed that all of AIDEAs positions were in-
state work at the office and all of the candidates were in-
state.
Mr. Ruaro looked at slide 19, "AIDEA Dividend Information,"
and relayed that AIDEA's dividend for the FY 24 budget was
unique.
Mr. Ruaro addressed slide 20, "What Does AIDEA Do With Its
Profits?" He offered background that revenue came into
AIDEA and was reinvested as programs or issued as dividends
as the statutory 20 percent to 50 percent of annual income.
Mr. Ruaro advanced to slide 21, "AIDEA Annual Dividend
Overview," and cited that AIDEA had a strong record of
dividends, with 47 percent of net income as the norm
provided to the treasury, with $464 million over 28 years.
Mr. Ruaro looked at slide 22, "2022 Declared Dividend," He
explained that the 2022 declared dividend, which was in the
current years budget, was $17,904,000 in cash or assets.
Shortly before he had been hired, the board passed a
resolution that the dividend would be that amount in cash
or assets.
Mr. Ruaro spoke to slide 23, "Budget Amendment for
Dividend. He explained that the slide showed the budget
amendment provided by the Office of Management and Budget
(OMB) to the committee was for roughly $13,904,000
allocated to the value of the Mustang Road, which would be
returned back to DNR and the state. He explained that the
dividend was unique as it was the first time in AIDEAs
history it was including an asset rather than cash.
Co-Chair Stedman thought the committee might have questions
on slide 23. He noted that the presentation would address
the Mustang Project, and suggested Mr. Ruaro wanted to
defer questions until the slides were discussed. He thought
the Mustang Road was a project that had been challenging
for the state. He thought it might be easier for the public
to follow if Mr. Ruaro offered a brief history of the
project.
Mr. Ruaro thought his staff could offer a brief chronology
of the project.
9:38:18 AM
Co-Chair Hoffman asked Mr. Ruaro to review the $17.9
million dividend, and asked if he had indicated that $4
million was in cash. He thought in previous years the
dividend had been as high as $26 million, and all of the
close to $1 billion in dividends had been in cash.
Mr. Ruaro answered affirmatively.
Co-Chair Hoffman asked if the board made the decision to
give a dividend in assets and asked how it was allowable.
He asked if there was a law that allowed for the dividend
to be provided in land. He thought the reason the state
wanted a return on investment was so the state could have
the cash to allocate to the citizens of Alaska. He thought
it seemed as though the state invested cash in AIDEA and
now getting another asset that would not potentially
realize income that the legislature could spend. He asked
Mr. Ruaro to comment before beginning to discuss the
Mustang Project.
Mr. Ruaro affirmed that the board made the decision, and by
statute the board was authorized to declare a dividend. In
the resolution of December 2022, the board took the steps
of declaring a dividend with the inclusion of an allocation
of value to an asset.
Co-Chair Hoffman asked under what authority the board had
to give dividends via investment, which he did not think
was something the state had originally intended.
Mr. Ruaro relayed that there was a specific statute that
gave the board the authority to declare dividends.
Co-Chair Hoffman relayed that he was well aware of the
statute, and wanted to know how the board determined the
dividend would not be cash.
Mr. Ruaro was not present at the board meeting but assumed
that the board had debated and voted on the structure of
the dividend, which was the normal process.
Co-Chair Stedman asked Mr. Ruaro to address the Mustang
Project and then return to the topic of the dividend. He
thought the committee would find that there was another
agency involved. He thought clearly a dividend that was not
cash was cumbersome for the committee to deal with,
particularly in the capital budget.
Co-Chair Stedman asked for an overview and history of the
Mustang Project.
9:42:57 AM
GEOFFREY JOHNS, ACTING CHIEF INVESTMENT OFFICER, AIDEA (via
teleconference), introduced himself and discussed his
background. He relayed that he had been an AIDEA employee
and had been involved in the Mustang Project since August
2019. He explained that the Mustang Project and AIDEAs
involvement began in 2011 to 2012. At the time there had
been a suite of diverse working interest owners and
interested parties. The primary company he would address
was the Brooks Range Petroleum Corporation (BRPC), which
was a working interest owner and main operator of Mustang.
He relayed that he would discuss the Southern Miluveach
Unit (SMU) and the Mustang Projects as synonyms.
Mr. Johns continued that BRPC had begun development on the
Mustang Project in 2012 when they attempted to drill wells
to assess available resources on SMU. From 2012 through
2015 BRPC had provided DNR with an annual plan of
development, which it was ultimately unsuccessful to meet
for a suite of reasons.
He relayed that AIDEA had gotten involved in the Mustang
Project in 2013, when it passed a resolution (Resolution
G1208) to fund up to $20 million related to the
construction of the Mustang Road and Pad. He continued that
BRPC had constructed the road including a pad for about $26
million to $27 million. He continued that in 2014, AIDEA
advanced (through resolution) an additional $50 million to
the development of the Mustang Project, which was to be
part of a broader $250 million development.
Mr. Johns continued that the additional funds were to be
raised through an Asian entity. The other ownership groups
were Alpha Energy Holdings and CES Oil Services. He
recounted that the project had run into challenges in 2015
with the precipitous decline in commodity prices.
Ultimately the project had been put into warm standby in
the period, while the working interest owners and AIDEA
tried to work out how to advance financing to the project.
The additional funding through he Southeast Asian entity
had not materialized. In combination with a veto of tax
credits, the project had insufficient cash.
9:47:27 AM
Mr. Johns continued that through various resolutions, in
2017 AIDEA provided a bridge loan of $2.5 million that was
related to one particular well that was flow-tested and
certified by DNR to be able to produce in economic
quantities which preserved SMU as a unit. Subsequently
AIDEA had provided an additional loan of an approximately
$300,000 line of credit to sustain the project through
depressed commodity prices. At the time, AIDEA was also in
negotiations with BRPC and other interest owners to change
its involvement in the project from equity owner to senior
secured lender, which ultimately took place in May of 2019.
He continued that AIDEA had provided a $64 million loan to
an entity to Caracol Petroleum, which was owned by a
Singapore entity called Alpha Energy.
Mr. Johns continued that in the fall of 2019, BRPC
approached AIDEA and informed it was unable to meet its
debt service payment of $3.1 million (due on October 1) and
asked for forbearance. Because the project drilling had not
advanced, the decision was made to not provide forbearance
and to issue notice to cure. He continued that BRPC was
unable to cure the default on the loan and notices of
default were issued.
Mr. Johns recalled that at the time, BRPC was still seeking
to produce oil and ultimately did in November 2019. There
was a period of production for 20 days and BRPC produced
approximately 11,000 barrels of oil. Production had to be
ceased because BRPC was unable to capture the gas and
reinject it back into the reservoir before reaching the
limits of its gas flaring permit. In December the project
was placed in warm standby again. As the senior secure
lender, AIDEA was working with the new ownership group to
refinance the project and get it started.
Mr. Johns continued that AIDEA had passed an additional
resolution related to the attempted restructuring. The
owners had failed to meet the conditions on the signed term
sheet, and as a result AIDEA had commenced foreclosure
proceedings on the project. The project was placed into
cold shutdown, at which time the pad and the oil pipeline
were de-inventoried of all hydrocarbons and sensitive
electronic equipment were moved offsite for secure storage.
9:51:32 AM
Mr. Johns recounted that throughout the summer of 2020,
AIDEA continued to work with the working interest owner
group at another attempt to refinance and restructure the
development. At the AIDEA September board meeting there
were representations made by the ownership group that it
was prepared to proceed with the negotiated deal. Based
upon the information, AIDEA had proceeded with a non-
judicial foreclosure in late September of 2020. At the
time, there was a resignation of the operator of BRPC, and
AIDEA foreclosed on its working interest in the form of
real and personal property and became the 90.1 percent
working interest owner of the Mustang development.
Mr. Johns explained that immediately upon foreclosure, the
entity AIDEA was dealing with decided to change the nature
of the pre-negotiated deal. He continued that AIDEA had
been unable to proceed and took steps for Mustang Holdings
(the entity created and wholly owned by AIDEA) to become
the named operator of SMU and commenced satisfying all
regulatorily required insurance and bonding. For the
previous two years, AIDEA had been working to secure a new
deal for the redevelopment of the Mustang Project. In
August 2021, the board approved to commence a competitive
bid and sale process. He detailed that AIDEA had signed
non-disclosure agreements with 8 to 10 interested parties.
Since that time, AIDEA had been negotiating with one
interested party and remained in conversation in the hopes
of successful resolution to the Mustang Project.
9:54:23 AM
Co-Chair Stedman referenced the $2 million loan, and asked
if the loan was in payment of property tax.
Mr. Johns did not have the information at hand regarding
the $2 million bridge loan.
Co-Chair Stedman thought the information was in an audit,
which he could have printed for the committee.
Co-Chair Hoffman thought the audit that Co-Chair Stedman
referenced was done by the Legislative Budget and Audit
Committee. He asked if Mr. Johns could provide his
testimony in writing, with notation of the resolutions that
had been referenced. He thought the information was
important and thought the committee should have written
copies.
Co-Chair Stedman asked to walk through the timelines to
avoid confusion. He agreed that a written copy of the
testimony would be helpful in addition to the audit.
Senator Kiehl thought it sounded as though AIDEA owned 90
percent of the road. He asked how much money AIDEA had put
in.
Co-Chair Stedman asked to walk through the forthcoming
slides that addressed the project and circle back to issues
around the road.
9:57:09 AM
Mr. Ruaro showed slide 24, "Mustang Road."
Mr. Ruaro turned to slide 25, "Southern Miluveach Unit
(SMU) & Mustang Project," which showed a map of the SMU,
which was located in between the Willow Project and the
Pikka Project and a number of other developments. He cited
that the area was a strategic location and the road
connected into the other developments. The Mustang Road was
about 4 miles long and the Mustang Pad was about 17 acres
in size.
Mr. Ruaro considered slide 26, which showed a photograph of
an aerial view of the road as it led to the pad and
connected into an existing road.
Mr. Ruaro displayed slide 27, "Mustang Road Timeline:
• CY 2012
o Q4: AIDEA Board approves $20 million investment
in
• Mustang Road LLC for the road and pad
project
• AIDEA Board Resolution G12-08
• Total cost estimate of $25 million
• Brooks Range Petroleum Corporation (Brooks
Range) to fund $5 million & any cost
overruns
• CY 2013
• Q1-Q3: Mustang road & pad constructed, completed
in July 2013
• AIDEA Board approves cost reimbursement
agreement with Brooks Range re: SMU
• AIDEA Board Resolution G13-01
• DNR grants Brooks Range a 5-year early entry
authorization
Mr. Ruaro mentioned Co-Chair Hoffman's comments and agreed
to get copies of the board resolutions and timeline.
Co-Chair Hoffman asked to get information regarding the
voting record for the resolutions.
Co-Chair Stedman thought that some of the information would
be included in the audit. He thought the minutes of the
meetings would be useful.
Mr. Ruaro continued to review slide 27.
Co-Chair Stedman asked about the last bullet on the slide.
Senator Bishop asked about slide 26, and asked if the blue
line was representative of the Mustang Road.
Mr. Ruaro thought the blue line denoted the length of the
Mustang Road.
Senator Bishop asked if the darker line was the Mustang
Road.
Mr. Ruaro answered affirmatively.
Mr. Ruaro highlighted slide 28, "Mustang Road Timeline
(cont.)"
• CY 2017
• Q1: Brooks Range assigns Mustang Road LLC (MR
LLC) easement to AIDEA
• Q2: AIDEA Board approves acquisition of 100%
membership interests of MR LLC
square4 AIDEA Board Resolution G17-06
• Q4: MR LLC and Brooks Range enter into a Road
and Pad Use Agreement
• Q4: AIDEA informs DNR that the Authority has
acquired 100% of the membership interests in MR
LLC and asks for the assignment of ADL 419880
from Brooks Range
• CY 2018
• Q2: Brooks Range and Oil Search Alaska (OSA)
enter into a month-to-month SMU Infrastructure
Use Agreement
10:01:04 AM
Co-Chair Hoffman asked about the first quarter of 2017 when
the Mustang Road was assigned to AIDEA. He asked if there
was any value to the transfer.
Mr. Ruaro deferred the question to Mr. Johns.
Mr. Johns noted that the timeline was before his tenure but
thought there was not any value related to the transaction.
He noted that an entity, Mustang Road, LLC, was structured
related to the potential road and use pad agreement and
recovery of $20 million in investment revenues that AIDEA
had provided to BRPC. There was also a nominal working
interest that Mustang Road, LLC had at the time in the SMU
of 1 percent.
Co-Chair Hoffman asked if AIDEA had requested the easement.
Mr. Johns relayed that he needed to look for further
information in the board resolution and documentation
related to the transfer and assignment of the easement.
Co-Chair Stedman explained that the committee preferred
additional documentation rather than having Mr. Johns make
a misstatement.
Mr. Ruaro looked at slide 29, "Mustang Road Timeline
(cont.)":
• CY 2019
• Q1: DNR grants Brooks Range a 20-year private,
non-exclusive Mustang Road easement (ADL
419880)
• Q2: Oil Search Alaska (OSA) applies for an
easement covering the entire length of the road
crossing Brooks Range's and ConocoPhillips'
leases
• Q3: OSA submits a supplement to the easement
application addressing pump house pad location
and a water source access road
• Q3: Brooks Range, via letter to DNR, states
that the OSA easement application directly
conflicts and overlays the Mustang Road
easement (ADL 419880) and does not consider and
protect the pre-existing easement
Mr. Ruaro added that Oil Search Alaska and BRPC disagreed
on the ability to use the road.
Co-Chair Hoffman asked about the transfer of the Mustang
Road easement in the first quarter of 2019, and whether it
was the same easement that was granted to DNR in 2017.
Mr. Ruaro deferred the question to Mr. Johns.
Mr. Johns thought the clarification would need to be
reviewed because the matter was specific to BRPC and
understanding between the two different easement transfers.
10:05:02 AM
Senator Kiehl thought Mr. Johns had shared that in 2019,
AIDEA had converted its ownership to that of a senior
secured lender. He asked for more details.
Mr. Johns explained that in 2018, AIDEA commenced
conversations with BRPC and its working interest owner
group, specifically Caracol Petroleum, which was owned by a
Singapore-based entity called Alpha Energy Holdings. In May
of 2019, through transaction documents, AIDEA had
restructured its involvement in the project from equity
owner to senior secured lender in the form of a $64 million
loan, a separate $6 million loan, and the assumption of a
DOR loan of approximately $16 million, which was subject to
the audit discussed earlier.
Co-Chair Stedman asked about the collateral on the loans.
Mr. Johns stated that the collateral on the loans was
principally the real property, which included leases of SMU
and other North Slope leases, as well as personal property
in the form of equipment, bank loans, and other items.
Co-Chair Stedman asked if there were any letters of credit
involved in the transaction.
Mr. Johns stated, not to my knowledge, and relayed that
he would confirm his statement.
Mr. Ruaro addressed slide 30, "Mustang Road Timeline
(cont.)":
• CY 2020
• Q1: DNR grants OSA a 5-year entry authorization and
a 35-year easement term
• Decision limited to determination whether
granting easement will be of greatest economic
benefit to Alaska and resource development
• Access states OSA shall coordinate with other
lease and easement holders and shall not
unreasonably interfere with access or
operations in leases held by other operators.
• Q1: Brooks Range files appeal concerning the DNR
decision granting the overlapping easement
• Basis of the appeal is that the granting of the
easement to OSA, a 3rd party, constituted a
taking of the private property (the Mustang
Road) without consent or compensation
• The appeal filing automatically stays the
overriding easement decision; however, the
then-DNR
• Commissioner, under 11 AAC 02.606(a), removes
the automatic stay, which remains removed until
the appeal is adjudicated
• Q2: AIDEA and OSA entered into a Memorandum of
Understanding and Cost Reimbursement Agreement to
develop a financing plan for surface infrastructure
including access roads and pads for the development
of the Pikka Unit
• AIDEA Board Resolution G20-24
Co-Chair Stedman asked for clarification about the
commissioner that removed the automatic stay.
Mr. Ruaro clarified that it had been the DNR commissioner.
He continued to address the slide.
Mr. Ruaro advanced to slide 31, "Mustang Road Timeline
(cont.)":
• CY 2021
• Q2: DNR transfers the Mustang Road easement
(ADL 419880) to Mustang Holding LLC
• CY 2022
• Q2: Mustang Holding LLC assumes Brooks Range
easement appeal re: OSA (now Santos) overriding
easement granted by DNR
• Mustang Holding LLC is granted opportunity
to provide a supplement to the appeal
• OSA (Santos) is granted a rebuttal to the
supplement
• Q3: Mustang Holding LLC comments on Santos
export pipeline Right of Way Application (ROW)
• Q4: DNR grants OSA (Santos) pipeline ROW
• Q4: AIDEA declares a $17.9 million dividend in
cash or assets
• AIDEA Board Resolution G22-15
10:10:00 AM
Co-Chair Stedman asked Mr. Ruaro to repeat the information
on slide 31.
Mr. Ruaro read from the slide to address the events in
2022.
Co-Chair Stedman thought Santos got use of the road with no
compensation.
Mr. Ruaro answered affirmatively.
Co-Chair Stedman asked if Mustang Holdings, LLC were the
new owners of the road.
Mr. Ruaro answered affirmatively.
Co-Chair Stedman asked what holding AIDEA had in Mustang
Holdings, LLC.
Mr. Ruaro believed that AIDEA was the owner/operator of the
LLC. He deferred to Mr. Johns to confirm the points.
Co-Chair Stedman asked Mr. Johns to address if Mustang
Holdings, LLC was AIDEA.
Mr. Johns answered affirmatively, and explained that AIDEA
had created Mustang Holdings, LLC to hold the assets that
were acquired in the 2020 non-judicial foreclosure.
Co-Chair Stedman asked for a definition of LLC.
Mr. Johns explained that LLC signified limited liability
corporation.
Co-Chair Stedman referenced lost cash. He asked about
Santos renumeration back to AIDEA. He asked for
clarification about the dividend.
Mr. Ruaro wanted to clarify that Santos contributed to the
maintenance of the road.
Co-Chair Stedman assumed that Santos paid a nominal fee for
wear and tear to the road.
Mr. Ruaro agreed.
10:13:32 AM
Co-Chair Hoffman asked about the importance of the
easement.
Mr. Ruaro explained that the easement right allowed for the
use of the road.
Co-Chair Hoffman asked what the road was used for.
Mr. Ruaro informed that the road was used for access to the
Pikka Unit and access to the Mustang Pad. He thought the
road was tied into ConocoPhillips pads.
Co-Chair Stedman asked if Santos had any interest in the
Mustang pad, or if its interest lay in physical assets
beyond Mustang that it would want to use the road for.
Mr. Ruaro answered affirmatively.
Co-Chair Olson asked how the decision was made for use of
the road without compensation. He found it bothersome and
discussed a multi-national for-profit company using the
road without compensation.
Mr. Ruaro had not studied the matter extensively but
understood that Oil Search Alaska, LLC had filed an
application and designated a general land use permit (which
brought rights of use) that overlapped the easement and the
road. The commissioner had granted the authorization, which
brought with it the right to use the road.
Co-Chair Stedman asked if the practice of the general land
use permit was normal or rather a creative land use by the
commissioner.
Mr. Ruaro had never heard of the practice but acknowledged
that he had not had a lot of experience with DNR
authorizations.
Co-Chair Stedman asked Mr. Johns to address general land
use permits and accessing state owned assets for only
paying maintenance costs.
Mr. Johns understood that it was the only instance in which
a third party had been granted an overriding easement on
another parties previously owned asset and pre-approved
easement.
10:16:52 AM
Senator Merrick asked who the DNR commissioner was at the
time the authorization was granted.
Mr. Ruaro thought it was Commissioner Corri Feige.
Co-Chair Stedman wanted to discuss the funding.
Co-Chair Olson wondered how much money the state put into
the Mustang Road via project financing loans, bridge loans,
and tax credits. He wondered how much had been paid back in
dividends minus the value of the asset. He noted that the
road was across wetlands and assumed it would not be used
save for those accessing the oil fields.
Co-Chair Stedman asked to refer the question to Mr. Johns.
He additionally queried any assessments of value of the
road. He wondered how the value of the road had changed
over time.
Mr. Johns reiterated that in approximately 2012, AIDEA had
provided a $20 million loan to BRPC specifically for
construction of the approximately 4.5-mile Mustang Road and
17-acre Mustang pad. The total construction of the two
elements was approximately $26 million, $16 million of
which was applied to the Mustang Road. He referenced an as-
built valuation performed in 2016, and an independent
third-party evaluation of the road performed in November
2021.
Co-Chair Stedman mentioned the importance of the monetary
values.
Mr. Johns relayed that the most recent valuation of the
road was $13.9 million.
10:20:25 AM
Co-Chair Stedman estimated that the total cost was $26
million.
Mr. Johns answered yes. He noted that in the 2013
dollars, $15 million to $16 million was specific to the
road.
Co-Chair Stedman wanted to know what the total cash outflow
was, and the inflows in order to know the net amount. He
asked about who had received the substantial credits that
had been available.
Mr. Johns relayed that there was a history of some credits
received by an entity involved in the project. He offered
to provide the details along with the other information
that was requested by the committee. He cited that more
recently, Mustang Operations Center 1 (MOC 1) received a
sum of $12 million in the two most recently provided tax
credit payments through DOR.
Co-Chair Stedman asked if Mustang LLC or AIDEA got
renumerated any credits through collateral or financial
transactions or if all the credits went to other parties.
Mr. Johns clarified that AIDEA was the owner of Mustang
Holding LLC, and Mustang Holding LLC owned the entity
referred to as MOC 1, and the MOC 1 entity had received the
$12 million in tax credit payments.
Co-Chair Stedman asked Mr. Johns to help the committee
understand the data that it would be spending. He made note
of the importance of the committees understanding of the
cash inflows and outflows, including tax credits. He asked
for a footnote of the assessment, and when the write-down
appeared on the books. He wanted a clear timeline and clear
information on cash.
Senator Kiehl asked about the 2019 conversion, when there
was mention of a $16 million loan assumption by DOR. He
asked about the original source of the loan and whether
AIDEA had provided cash or assets in exchange for assuming
the loan.
Mr. Johns relayed that it would be necessary to review
documentation related to the loan to provide the details.
10:24:26 AM
Mr. Ruaro addressed Senator Kiehl's question and noted that
the source of the loan was also a subject of the
legislative audit. He thought the audit would identify the
exact source of the DOR loan.
Co-Chair Stedman affirmed that the audit, in combination
with the other data, would create a clear picture of the
information.
Co-Chair Hoffman considered the asset of $13.9 million for
the road and the $4 million in cash that the state would
receive as a dividend. He did not understand how one would
pay with an asset, which was listed as payable in FY 24. He
noted that the $35.8 million statutory net income of AIDEA
was the highest in 8 years. He considered that instead of
keeping 50 percent of the net income, AIDEA would be
keeping 90 percent or more. He asked how the board was
planning to use the additional revenue. He wondered about
the difference in expenditures from the previous year.
Mr. Ruaro was not aware of an identified spending
allocation for the funds.
Co-Chair Hoffman asked Mr. Ruaro to look at the proposed
budget spending, whether there was a $14 million increase,
and where it was proposed to be allocated. He asked for a
list of the board members and locations, as well as a list
of job responsibilities.
Co-Chair Stedman considered the $17 million dividend paid
in cash and the road asset. He questioned what the state
would do with the road when it was transferred to the
state.
Mr. Ruaro affirmed that the road would divert in ownership
to DNR; which could retain ownership and charge an access
fee or release, sell, or dispose of the road.
Co-Chair Stedman surmised that the committee could have a
conversation with DNR regarding the $13.9 million dividend.
10:28:43 AM
Co-Chair Hoffman emphasized that the legislature was the
entity that appropriated funds. He continued that the
legislature oversaw AIDEA, and pondered whether the
legislature had the flexibility in the budget process to
say that it wanted a cash dividend.
Co-Chair Stedman thought the question should be directed to
the Division of Legal and Research Services.
Co-Chair Hoffman thought it would seem as though the
legislature would have the option as the AIDEA Board was
not the appropriating body.
Co-Chair Stedman agreed. He thought if the legislature
wanted a transaction between DNR and AIDEA to release any
of the road, perhaps DNR should buy the road from AIDEA.
Mr. Ruaro understood that the road was in a strategic
location for access to both the Pikka Unit and the Willow
Project. He thought there would be a need for the pad and
the road.
Co-Chair Stedman thought Santos would prefer not to build
its own road. He thought there was a quagmire to unwind.
Senator Kiehl asked, given the commissioners decision
about non-exclusive access on the surface, how much ability
was there to make money off the strategic position of the
road.
Mr. Ruaro thought Senator Kiehl had posed a good question.
He considered that there was access needed and staging use
of both the pad and the road, but he was unsure how to
value the uses.
Co-Chair Stedman mentioned an appraisal of the road of
roughly $13 million. He thought it would be nice to have a
general idea of the cost to replace the road. He noted that
it was possible to pick up the material and engage in
reclamation of the land if desired.
Mr. Ruaro relayed that AIDEA could try to get a replacement
cost estimate.
Co-Chair Stedman thought the estimate would be helpful.
10:31:32 AM
Co-Chair Hoffman asked for fees and permits costs to be
included in the estimate. He queried the total cost of
building an alternative road.
Co-Chair Stedman asked for a time frame to be included.
Mr. Ruaro agreed to work on the information requested by
Co-Chair Hoffman and Co-Chair Stedman.
Co-Chair Stedman thought DNR could be helpful in assembling
the information.
Senator Bishop thought Mr. Ruaro had indicated that there
was at least one interested party looking at purchasing the
whole project.
Mr. Ruaro answered affirmatively.
Senator Bishop asked if an individual could view the assets
if they wanted to sign an non-disclosure agreement (NDA).
Mr. Ruaro answered affirmatively.
Co-Chair Stedman pondered the purchase of the Mustang Pad
and leases and asked about road access.
Mr. Ruaro thought the assets were severable and could be
sold individually or together. He continued that AIDEA was
actively trying to find the best solution for the project
that resulted in the most return possible. He did not think
the return would reach 100 percent or anywhere close.
Co-Chair Stedman asked about the general land use permit,
which was available but perhaps never used, and wondered if
it could be repealed.
Mr. Ruaro was not certain of the terms of the permit.
Co-Chair Stedman thought the committee needed the
information and mentioned the loss of $13.9 million.
Mr. Ruaro relayed that there was a large amount of detail
and backup information that AIDEA would put together to
assist the committee. He commented on the quantity of
information.
Co-Chair Stedman knew that Mr. Ruaro was working hard to
unwind the issue, which he had inherited. He mentioned
previous discussions.
10:35:28 AM
Mr. Ruaro spoke to slide 32, "2022 Dividend
Details/Components":
• Total $17,904,000 in Cash and Assets
• Cash: $4.0 million
• Assets: $13.9 million
• Mustang Road*
Co-Chair Olson asked if DNR was currently responsible for
the road maintenance.
Mr. Ruaro believed that Mustang MOC 1 was responsible, and
that Santos was performing some maintenance to the road.
Co-Chair Stedman thought Mr. Ruaro was not referring to
AIDEAs Musting Holding LLC.
Mr. Ruaro answered no, and indicated that MOC 1 was a
subsidiary.
Co-Chair Olson considered AIDEA, which was given a grant of
$300 million in the 1960s to get started. He mentioned a
recent critical report by some senior economists in the
area that indicated that if the funds had been invested
there would have been a current balance of over $10
billion. He thought it looked as though there was not a
good rate of return in the state's investment from the
1960s. He considered budget requests put before the
committee. He mentioned the West Susitna Access Road and
thought AIDEA should look at the project with a streak of
pessimism.
Mr. Ruaro informed that AIDEA was engaged in a full
rebuttal of the report and thought there were inaccuracies,
such as the Red Dog Mines ability to move forward without
any assistance from AIDEA. He relayed that AIDEA was
reviewing the historical and fiscal facts and would have a
full rebuttal report at some point soon. He emphasized that
AIDEA disagreed with the statements and conclusions in the
report.
Co-Chair Stedman looked forward to seeing the rebuttal. He
asked if AIDEA had hired a consultant to help with the
analysis.
Mr. Ruaro informed that North Economics had been engaged
and AIDEA staff were also researching the historical and
fiscal facts. He anticipated a strong rebuttal of the
report.
10:39:09 AM
Senator Merrick thought it seemed as though the AIDEA Board
was making some significant decisions. She asked for more
information about the board composition and selection
process.
Mr. Ruaro informed that the board had seven members,
including two commissioners from DOR and the Department of
Commerce, Community and Economic Development. He listed Mr.
J. Dana Pruhs as the chair of the board. There were five
public members appointed by the governor.
Senator Merrick asked about the length of terms for board
members.
Mr. Ruaro believed the term was four years.
Mr. Ruaro showed slide 33, "THANK YOU."
Senator Kiehl appreciated the work AIDEA had done as the
state's investment bank for a lot of small businesses and
viable projects. He acknowledged that the banking business
could be high risk when it came to development projects. He
shared the concern about AIDEA radically expanding the risk
when starting to build things without identified assets or
deposits. He expressed significant concern.
Co-Chair Stedman referenced his request for Mr. Ruaro to
come discuss the Mustang Project.
Mr. Ruaro thanked the committee for the opportunity to
present and relayed that AIDEA would follow up with all the
backup material that had been requested. He commented that
AIDEA had been involved in a range of projects from low-
risk to high-risk. He noted that the high-risk projects
(such as the Red Dog Mine) came with a high value return,
and he thought the projects were worth the risk.
Co-Chair Stedman thanked AIDEAs staff. He discussed the
agenda for the following day.
ADJOURNMENT
10:42:44 AM
The meeting was adjourned at 10:42 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 031523 AIDEA Senate Finance FINAL v2.pdf |
SFIN 3/15/2023 9:00:00 AM |
|
| 031523 AIDEA Response Exhibit A - HB0526G.PDF |
SFIN 3/15/2023 9:00:00 AM |
HB 526 |
| 031523 AIDEA Response Exhibit B - GASB_63_SUMMARY.pdf |
SFIN 3/15/2023 9:00:00 AM |
SB 63 |
| 031523 3.31.23 AIDEA Response to SFIN Hearing 3.15.2023.pdf |
SFIN 3/15/2023 9:00:00 AM |
|
| 031523 AIDEA Response Exhibit D - AIDEA Board Resolution Minutes.pdf |
SFIN 3/15/2023 9:00:00 AM |
|
| 031523 AIDEA Response Exhibit E - SolstenXP Mustang Road Valuation Report - 11.24.2021.pdf |
SFIN 3/15/2023 9:00:00 AM |
|
| 031523 AIDEA Response Exhibit C - AIDEA Board Resolution re Mustang Project.pdf |
SFIN 3/15/2023 9:00:00 AM |
|
| 031523 AIDEA Response Exhibit F - Easement Transfer Request.pdf |
SFIN 3/15/2023 9:00:00 AM |
|
| 031523 AIDEA Response Exhibit G - Mustang Holding LLC & Mustang Project Timeline as of March 30, 2023.pdf |
SFIN 3/15/2023 9:00:00 AM |