HB 74-AIDEA: LNG PROJECT; DIVIDENDS; FINANCING  4:08:44 PM CHAIR OLSON announced that the final order of business would be HOUSE BILL NO. 74, "An Act relating to development project financing by the Alaska Industrial Development and Export Authority; relating to the dividends from the Alaska Industrial and Export Authority; authorizing the Alaska Industrial Development and Export Authority to provide financing and issue bonds for a liquefied natural gas production system and natural gas distribution system; and providing for an effective date." 4:09:01 PM CHAIR OLSON explained that the committee previously heard this bill and public testimony has been closed. He explained that the liquefied natural gas (LNG) and trucking of LNG and propane was removed from this bill, and therefore what remains in the proposed committee substitute (CS) for HB 74 is the authority to allow the Alaska Industrial Development and Export Authority (AIDEA) the ability to provide direct financing on projects. 4:09:33 PM REPRESENTATIVE REINBOLD moved to adopt the proposed committee substitute (CS) for HB 74, labeled 28-GH1738\N, Bailey, 3/20/13, as the working document. CHAIR OLSON objected for the purpose of discussion. 4:10:08 PM TED LEONARD, Executive Director, Alaska Industrial Development & Export Authority (AIDEA), Department of Commerce, Community, & Economic Development (DCCED), introduced himself. MARK R.DAVIS, Deputy Director, Infrastructure Development, Alaska Industrial Development and Export Authority (AIDEA), Department of Commerce, Community & Economic Development (DCCED), introduced himself. MR. LEONARD summarized that for the past three years AIDEA has been working with the legislature to help modernize the tools AIDEA has to use. He offered his belief that this bill contains one tool to assist AIDEA in development projects. This vehicle will assist AIDEA in working with the banking industry in Alaska, as partners on development projects. For example, he related that AIDEA's loan participation program has been wildly successful, with over $468 million of financing for Alaska businesses. He offered his belief that this tool will assist AIDEA in moving forward with banks and by helping AIDEA match financing to specific projects. He explained in some instances AIDEA should own a portion of a project, such as major infrastructure industrial road projects in which numerous entities use the project. However, in some instances, it makes more sense for AIDEA to promote the project through financing. Certainly, reasons exist in which AIDEA would not want to own a portion of the projects, such as for mineral projects. In those instances, AIDEA might be involved in promoting a mill in an area to provide major resource development; however, AIDEA may not want to take on environmental risks. As the financier, AIDEA's role is as the lender but not in dismantling a project, reclamation of tailings, or other aspects of a mining project. He concluded that this direct financing will provide risk mitigation since AIDEA would not be involved as an owner. Finally, he offered that this tool will be a very efficient and effective vehicle to work with Alaska's financial institutions to promote projects in Alaska. 4:13:24 PM REPRESENTATIVE JOSEPHSON was unsure of what it meant to finance a project but not own it. He understood the economic or legal reasons, but he was unsure of the separation. MR. DAVIS replied he believes AIDEA's issue is not to avoid risk but to manage risk. He explained that when investing in a large-scale project that may be extended, the financing entity does not have any day-to-day authority over the project, but could become unintentionally liable for an operator's mistake. Therefore, traditionally, lenders don't have liability for the project, but owners do. Further, if AIDEA were to act as an owner, AIDEA would need to engage in more transaction costs, which are costs that don't move the project forward, but cost the state money. CHAIR OLSON provided an example in which AIDEA owns a rig, but every time it is used the rig hits gas. He offered his belief the company is on its fourth well. MR. LEONARD clarified that AIDEA has collateral on Buccaneer's rig moving out, but not for the on-land operation. 4:15:58 PM REPRESENTATIVE JOSEPHSON recalled that AIDEA participates in loan assistance programs. MR. LEONARD answered that AIDEA has three main programs, including the loan participation program, in which AIDEA partners with banks on loans. He summarized that AIDEA can buy up to 90 percent of the loan up to $20 million. In essence, AIDEA partners with banks on these loans to provide long-term financing. In response to a question, he clarified that is different than direct financing. MR. LEONARD explained that the second program is AIDEA's development financing, in which AIDEA provides financing for projects, but must have an ownership stake. Thus AIDEA can either invest in a project via a limited liability corporation (LLC) or have direct ownership. Over the last couple of years one of the tools AIDEA has worked with the committee on has been the ability to own investments through corporations instead of direct ownership. Third, AIDEA can also issue bonds for projects using its revenue bond or conduit bond program. However, this bill would allow AIDEA the ability to provide financing for projects and instead of having an ownership stake in a project, AIDEA would provide direct financing for the project - with no intention of direct ownership - or AIDEA could provide guarantees on a project. For example, if a bank wanted to partner with AIDEA, the corporation could layer a guarantee of the financing for the project. MR. DAVIS concurred. 4:18:31 PM REPRESENTATIVE JOSEPHSON asked if this bill is not passed, whether AIDEA would still consider ownership in projects such as the Niblack Project in Southeast Alaska or whether the lack of direct financing would end the possibility of involvement. MR. LEONARD said it becomes a potential in how to consider the project, since risk assessment is a portion of the project. It could change the cost of the financing; however, he suggested that changing this type of financing tool does not change the projects or the amount of the investment. Instead, this bill provides a tool that AIDEA believes is more effective. Therefore, no; it would not change AIDEA's ability to participate in the Niblack Project, but it would carry more risk with the financing of the project. MR. LEONARD recalled an advantage previously discussed, such that with direct financing the transactional cost is much less than for ownership. He explained AIDEA would need to spend more money to write up, in essence, a partnership, than it would spend through direct financing, and as Mr. Davis mentioned, all different scenarios must be considered when AIDEA is a partner versus being limited as a financier. 4:20:27 PM REPRESENTATIVE JOSEPHSON asked what other development projects AIDEA is considering for direct financing. The one that came to his mind was the rare earth project. MR. DAVIS answered that AIDEA is considering direct financing for any industrial plant it may wish to finance due to operational issues, as well as for financing opportunities. He stated that AIDEA might not do a project because AIDEA tries to work with the private sector, and with project financing, AIDEA can attract commercial bank financing; however, if AIDEA is an owner, it seeks equity partners such as investment banking. Thus, AIDEA would be limited in the type of banking it could approach. Thus, AIDEA would tend to use direct financing when it would like to work with commercial banks; and use financing when it would like to invest in a plant or facility with a limited life. Additionally, as Mr. Leonard said, AIDEA would invest when it did not see a purpose for state ownership of the infrastructure, but again, as previously mentioned with a road with access needed, AIDEA may wish to require ownership interest in order to require the influence. 4:22:05 PM MR. LEONARD outlined three projects AIDEA would consider for direct financing, including Ucore, Prince of Wales; Niblack; or oil production facilities and industrial facilities, which would be more effective with direct financing than with ownership. REPRESENTATIVE JOSEPHSON recalled that AIDEA has done direct financing with hotels and office buildings. MR. LEONARD answered yes. MR. DAVIS clarified the projects in question really weren't direct financing, but loan participation since those projects are tied to commercial real estate and cannot be used for other purposes; however, it is difficult since AIDEA needs secured interest which is easier to do with real estate since it has an appraised value than with a chattel. He clarified that AIDEA has participated in hotels and bed-and-breakfast operations throughout the state and on investment through loan participation in a production facility in Sitka. He also mentioned AIDEA has office building projects in Fairbanks, Anchorage, and Juneau. 4:23:31 PM REPRESENTATIVE JOSEPHSON asked whether Mr. Davis has a sense of the reason the enabling act for AIDEA restricted it to development projects with an ownership interest. MR. DAVIS answered that his research indicated that AIDEA's statutes were based on a West Virginia development authority, using a model of project ownership. It appears this model was popular in the 60s and 70s; however, there has been a change in the U.S. such that New Jersey, Massachusetts, and Indiana have moved to project financing. That doesn't mean that having ownership interest isn't a bad tool, so AIDEA is merely asking to have all the tools. 4:24:30 PM MR. LEONARD explained that AIDEA can still influence projects with direct financing if a state interest exists. For example, one of the reasons to have ownership of the rig mentioned earlier was to keep it in Alaska waters. He said that could still be done with direct financing through contracts in the loans. MR. DAVIS offered his belief that not moving out of the jurisdiction would represent a reasonable commercial covenant. 4:25:43 PM REPRESENTATIVE REINBOLD moved to report the proposed committee substitute (CS) for HB 74, labeled 28-GH1838\N, Bailey, 3/20/13, out of committee with individual recommendations and the accompanying fiscal notes. There being no objection, CSHB 74(L&C) was reported from the House Labor and Commerce Standing Committee.