SENATE BILL NO. 171 An Act relating to the contracting and financing authority of the Alaska Industrial Development and Export Authority, giving approval of the issuance of the authority's revenue bonds, and delaying the termination date of the authority's business assistance program; and providing for an effective date. Co-chair Pearce directed attention to SB 171 which she explained contains AIDEA authorization for an Anchorage International Airport fueling facility and reauthorization and delay of sunset for the business assistance program. She then directed attention to revised amendment no. 1, advising that it would add the Mat-Su, Port MacKenzie, Midrex project. The Co-chair further referenced amendment no. 2 to delete the word "revenue" from authorization for the fueling facility. Senator Kerttula requested a brief recess. RECESS - 9:50 a.m. RECONVENE - 10:05 a.m. RILEY SNELL, Executive Director, AIDEA, Dept. of Commerce and Economic Development, came before committee. Co-chair Pearce observed that she had spoken to both amendments 1 and 2 while the bill was in Senate Labor and Commerce, but no changes were made in the legislation at that time. Mr. Snell explained that the first provision of the bill relates to the Anchorage Fueling and Service Company--a consortium of airlines operating the fueling system at the Anchorage Airport. He noted that a large contingent of airline officials and a representative of MAPCO were present to speak to the project. He then introduced members of that contingent. JOHN OLSON, Deputy Director, Development, AIDEA, Dept. of Commerce and Economic Development, came before committee. He explained that the consortium contains a "wide cross- section of principal users of Anchorage International Airport, including foreign flag carriers, domestic and . . . even some air taxi operators . . . ." In response to a question from Co-chair Pearce regarding international carriers that have pulled out of Anchorage, Mr. Snell explained that "they are still obligated financially to meet some of the debt of the company." The existing agreement also contains a step-up requirement. Should a carrier fail or cease to operate in Anchorage, the carrier would be obligated by two or three times its commitment to satisfy financial requirements. AIDEA would negotiate that type of arrangement in the new financing as well. Mr. Olson directed attention to charts and packets containing background information and letters of support. He then asked that TOM MUSHOVIC, Partner, Signature Flight Support, explain the various components. Mr. Mushovic pointed out that fuel presently flows to Anchorage via one of three methods: 1. Rail car from North Pole--MAPCO fuel coming to the Anchorage area. 2. The Nikiski pipeline containing Chevron and TESORO products. 3. Marine shipment via barge or tanker from anywhere in the world. All commercial jet aviation fuel reaching Anchorage comes via one of the above means. Within the city, fuel flow to the airport is by one of two methods: 1. The Alaska Railroad from the downtown core. 2. The AFSC cross-town pipeline from the Port of Anchorage. One of the benefits of the proposed project is that, once constructed, the new terminal will allow interception of product from the Nikiski line. That will free up capacity on the cross-town line and allow for a more equitable supply of fuel to the airport. There are times when rail car and cross-town delivery barely meets needs. The new terminal and interception from the Nikiski pipeline will allow the cross-town pipeline to satisfy demand. Need for rail cars from the Port of Anchorage to the airport will be diminished. The present airport facility is a combination of three old tank farms. The site now occupied by AFSC will be demobilized and a new operation and maintenance station located thereon. That is the second phase of the proposed project. The primary phase consists of construction of a new tank farm, consisting of three, 100,000 barrel tanks. That effectively increases supply from two to twelve days of fuel. Other components (control building, pump house, filter building etc.) would also be part of the project. Co-chair Pearce asked if the project includes reconstruction of the existing cross-town pipeline. Mr. Mushovic answered that the only pipeline cost included in the request is extension of the six-inch line to the new facility. The cost of the tie in from the Nikiski line will be borne by TESORO. Senator Sharp commented that while the cost to be borne by TESORO might be a minor part of the project, it could give a competitive advantage to one refiner over another. Mr. Mushovic assured that the project does not provide a competitive advantage to anyone. It "opens up the supply of fuel to the airport." At the present time, all fuel is passed through the Port of Anchorage and subsequently turned around and brought out to the airport. Interception of product from the Nikiski line will not give a competitive advantage to either TESORO or Chevron. That interception merely opens up the cross-town pipeline, allowing MAPCO to more freely increase delivery. Co-chair Pearce asked if TESORO provided a letter of support for the project. Mr. Snell explained that he had talked with TESORO representatives who indicated support. A letter will be forthcoming. Senator Sharp recalled testimony in previous years indicating that the cross-town pipeline is in disrepair. He then inquired concerning the remaining life of the line. Mr. Mushovic said that the line from the Port of Anchorage to the airport is in excellent condition and is expected to last 25 to 30 years. It was constructed in the early 1960s. Co-chair Pearce echoed statements by Senator Sharp, advising that current testimony on the pipeline is a departure from that of the past. Prior testimony from the municipality indicated that the pipeline had environmental problems. Mr. Mushovic acknowledged a situation in 1988-89 when the line developed a leak near Chester Creek. The leak was caused when construction on C Street relocated the line and damaged it with construction equipment. That is the only situation that has caused concern. In response to a question from Senator Rieger asking who would manage the tank farm, Mr. Mushovic said that if AFSC remains the operator, it would also manage the facility. Senator Rieger next asked what arrangements would be made to protect the state investment. Mr. Snell explained that while design and construction oversight, operation, maintenance, and liability are vested in AFSC, AIDEA will conduct annual maintenance and operating budget review. AIDEA also reserves the right to conduct periodic inspections to ensure that the facility is kept up to standard. Senator Rieger asked if all partners in the consortium would jointly and severally guarantee the debt. Mr. Snell responded negatively. He then reiterated earlier comments regarding step-up provisions, requiring that a member of the consortium assume two or three times the ratio of the member's investment should the member airline fail or leave the area. In response to an additional question from Senator Rieger, Mr. Snell indicated that AIDEA's operating budget would cover the cost of staff assigned to oversee the project. Any third-party costs for independent analysis would be borne by the developer. Co-chairman Frank asked why AIDEA would be the owner on the proposed projects rather than merely the financier. Mr. Snell explained that the principal reason is to take advantage of IRS tax-exempt bond issues for governmental entities that provide infrastructure development for ports, harbors, or airports. In order to obtain that benefit, ownership must be vested in the governmental entity. Senator Sharp asked who would be responsible for clean up of the old tank farm. Mr. Snell said that AIDEA would not be responsible. AIDEA will seek indemnification from prior existing conditions. Senator Rieger then asked who would be responsible for environmental issues relating to the three new tanks. Mr. Snell said that responsibility would inure to the fueling consortium through contract provisions. Senator Rieger suggested that strict liability law may prohibit that. Mr. Snell acknowledged the concern. He explained that for that reason the consortium is responsible for design, construction, maintenance, and operation. There will thus be only one party liable over the course of the project. Contract provisions will fix responsibility for spills, cleanup, etc. with the consortium. The airport, as the land owner, would also come into play should the consortium have difficulty in meeting its obligation. Senator Rieger asked if harm would be done to the legislation if indemnification from environmental issues was added. Mr. Snell reiterated that responsibility would be fixed in contract. If AIDEA does not receive that assurance, it will not proceed with the project. Discussion followed between Co-chair Pearce and Mr. Snell regarding possible environmental problems at the existing facility. Mr. Snell stressed that the proposed project would be located on new land which would be base-line studied to determine that there is no existing contamination. Ongoing monitoring programs would ensure that no contamination occurs. Further discussion followed regarding demobilization efforts at the existing facility. Senator Kerttula commented on past efforts relating to the right-of-way leasing act. Experts testified that well- written contracts are more powerful instruments in terms of giving direction than are state statutes. Discussion followed regarding planned demolition of existing facilities and use of the land thereafter. Co-chair Pearce next directed attention to amendment no. 2 which she explained was requested by AIDEA. The amendment would delete the word "revenue" on page 1, line 12. Mr. Snell explained that use of the word "revenue" limits the ability of the authority to use its general obligation powers to finance projects. Revenue financing is based strictly upon the credit of the participants in the project. AIDEA seeks the flexibility to deliver "the cheapest capital cost to the project." Providing that AIDEA gets the type of security it seeks from developers, the authority wants the ability to use its general obligation powers. Under that arrangement, the faith and credit of the authority is obligated by issuance of the bonds. Senator Kelly expressed a preference for issuance of revenue bonds over general obligation bonds. Senator Rieger voiced his discomfort as well, advising that a $40 million obligation represents a substantial portion of AIDEA's net worth. Senator Kelly asked if AFSC could finance a $40 million project without AIDEA backing. End, SFC-93, #49, Side 1 Begin, SFC-93, #49, Side 2 Mr. Snell advised that while it could be done, it would require a joint and severable relationship with the airlines to obtain financing. FRED KETZEBACK, Director, Fuel Administration, Alaska Airlines, and Chairman, AFSC, came before committee. He explained that the consortium could obtain financing but it would not be as favorable as the tax-exempt arrangement through AIDEA. Increased financing charges would be passed along to the airlines in fuel costs, etc. Mr. Snell observed that since revenue bonds are based on the credit of the developer, they entail greater financing costs than do general obligation bonds. The difference between the two depends upon weekly market conditions, but it could range 25 to 50 basis points in interest rates (a quarter to one-half percent). Senator Frank voiced his understanding that in issuing general obligation bonds, AIDEA was, in effect, taking a greater risk and passing the benefit on to the borrower. Mr. Snell observed that AIDEA would charge the developer a higher rate for use of general obligation bond authority. While a higher fee would be paid, the developer would get the overall benefit of cheaper money. Senator Frank voiced concern regarding the additional risk. He then asked if the authority had proceeded in this manner on other projects. Mr. Snell told members that general obligation powers were used at Unalaska and the Skagway Ore Terminal. The Red Dog Mine at Kotzebue was a revenue bond issue. Senator Frank questioned whether such use of general obligation bond authority was good policy. Co-chair Pearce asked why the international airport system did not seek to utilize federal funds for the project, retaining ownership within the airport while allowing the consortium to operate it. Mr. Snell said that he was not aware that the project would be eligible for such funding. Discussion followed between Senator Rieger and Mr. Snell concerning AIDEA charges on general obligation versus revenue bonds. Mr. Snell said that costs are usually negotiated. For issuance of general obligation bonds for Federal Express, AIDEA charged 85 basis points beyond the cost of money. Ownership was also retained by the authority. Senator Kelly asked if the original recommendation from AIDEA was for issuance of general obligation bonds. Mr. Snell concurred. He suggested that use of the word "revenue" was most likely a drafting error. In response to a question from Senator Rieger, Mr. Snell explained that under a revenue bond issue AIDEA would have to retain ownership to keep tax-exempt financing in place. Senator Frank voiced his understanding that regardless of whether the project proceeds as a revenue or general obligation bond issue, should default occur, AIDEA would assume financial responsibility. Mr. Snell concurred, advising that if the authority did not do so its reputation in the marketplace would be severely damaged. He added that because the proposed project involves both foreign and domestic carriers as well as Federal Express and UPS, it collectively has good credit. Co-chair Pearce next directed attention to bill provisions relating to extension of the business assistance program. Mr. Snell explained that the provision extends the sunset date to 1996. Material changes in the program were made last session at the request of banking institutions and the authority to make the program more usable and to fulfill a need for small loans in rural Alaska. Mr. Snell urged that the sunset extension be approved. Co-chair Pearce directed attention to revised amendment no. 1. She explained that the amendment would place both the amount of aircraft fueling facility bonds and the proposed Midrex bonds in the title. It would further authorize a facility for use by Midrex Corporation. DON MOORE, Borough Manager, Matanuska-Susitna Borough, came before committee. He explained that the Midrex project would be located in upper Cook Inlet at Point MacKenzie. Midrex Corporation is an American corporation and a wholly owned subsidiary of Japan's Kobe Steel. Midrex utilizes a process by which iron ore is directly reduced into a metallized product for steel making and foundry applications. The process uses large amounts of natural gas. Approximately 92% of the natural gas is used for chemical feedstock. Only 8% is used as combustible fuel. That is important in light of the pending federal BTU tax. Senator Kelly asked if the plant could be operated by another energy source. Mr. Moore said that while another energy source could be used to operate the system, the process requires the carbon and hydrogen in natural gas as the chemical reductant. The resulting product is marketed in the Pacific Rim. Although there are 42 similar plants throughout the world, there are none "on the west coast of either of the Americas." As the third world electrifies, the Pacific Rim market will grow larger. The Midrex process creates feed stock for electric arc furnaces and will be shipped to other parts of the world. The product does not compete with scrap metal. It assists the scrap industry. With increasing metal standards for steel, reprocessed scrap metal is not of sufficient quality for modern construction. Feed stock is thus added to the scrap to bring it to standard. The capital investment for the proposed plant is approximately $200 million. The facility would employ 120 full-time employees. During construction, employment would be considerably higher than that. The stability of the United States and the Alaskan labor market are attractive features for investment. There are currently only three such plants located in North America. The borough has 5,000 acres of land at the site and has made a commitment of that land. The product is compatible with coal. Coal from the Wish Bone Hill project, should it commence operation, could be loaded and transported from the same site. Mr. Moore described the effort as "authentically a free- trade-zone project." Iron ore from outside the state (the West Coast and South America) would be processed for shipment to Japan. Co-chair Pearce voiced her understanding that the Municipality of Anchorage refused the Mat-Su Borough request to be part of the proposed Anchorage free- trade zone. She then asked if Mat-Su had submitted a federal application for a separate zone. Mr. Moore said that Mat-Su has not yet applied for free-trade-zone status. In response to comments by the Co-chair indicating that establishment of such zones takes considerable time, Mr. Moore said that the zone was not "absolutely necessary" to the project. Mr. Snell added that time needed to bring the proposed plant into service would be sufficient for processing a free-trade-zone application. Mr. Moore stressed the advantage of locating at Point MacKenzie: 1. A close supply of natural gas. 2. Available low-cost industrial land. 3. Deep-water port site with a Corps of Engineers 404 permit. 4. Strategically positioned for emerging Pacific Rim markets. 5. Stable politics and labor force. He next directed attention to the proposed budget for the $50 million project. In response to a question from Co- chair Pearce, Mr. Moore explained that the $50 million represents only the "public loan portion of the infrastructure." The Midrex plant would involve private enterprise investment. AIDEA backed bonds would provide for the dock and conveying system. Senator Kelly asked if the bonds would cover a boat loading facility or a dock that could be expanded for other uses such as the Alaska State Ferry, passenger ships, etc. Mr. Snell explained that the concept at this time is to design something for the client. Funding above and beyond Midrex debt service would require a clear demonstration that there were other sources of funds to cover that portion. Responding to an additional question from Senator Kelly regarding land arrangements, Mr. Moore explained that the arrangement would not be entirely cost free. A lease, which is yet to be negotiated, would be involved. Senator Kelly voiced reluctance to approve financing for the project without a firm lease in place. Mr. Snell observed, "This is a positioning effort . . . to demonstrate to private sector participants that we are prepared to participate in infrastructure development." The authority would only commit funds after review of a financing plan that identifies all costs and all sources of funds. That would include land use and the lease with the borough. When questioned further by Senator Kelly, asking if the proposed legislation represents a commitment, Mr. Snell answered: I look at it, Senator, certainly, as legislative authorization to proceed with the project. But, certainly, it's not an indication that there's a done deal. AIDEA will examine the financial feasibility of the project, the economics, the risk, etc., and assure that Midrex has the ability to repay the debt prior to commitment. Senator Rieger asked if the remaining $150 million investment would be made before or after dock construction. Mr. Snell said that there would probably be parallel construction efforts. Site development is likely to be ongoing as port development commences. Senator Rieger next inquired concerning the extent of the guarantee from Kobe Steel. Mr. Snell acknowledged that that had not yet been negotiated. Discussion followed concerning the triangular shipping route for raw and processed materials. Co-chair Pearce inquired regarding a resolution from Midrex Corporation. Mr. Snell advised of a board of directors' resolution authorizing development of the project with the Mat-Su Borough and Midrex. In response to a question from Senator Rieger concerning ownership of the dock and loading facility, Mr. Snell noted IRS code advantages for tax-exempt financing under public ownership. Public ownership also makes sense in terms of possible multiple users. Further discussion followed regarding 1986 changes in the Internal Revenue Service Code. Mr. Snell observed, "About the only thing that remains for tax-exempt financing anymore are ports and harbors and airports." Additional comments followed by Mr. Snell concerning possible share costs under a multiple use arrangement. Co-chair Pearce voiced her intention to move both SB 16 and SB 171 from committee at the same time. She then directed attention to SB 171 and inquired regarding disposition of revised amendment no. 1, relating to Midrex. Senator Kelly inquired concerning the tax status of the proposed airport fueling facility. Mr. Snell explained that if the project is owned by AIDEA, it would be exempt from municipal taxation. If owned by Anchorage Fueling and Service Company, it would be subject to taxation. Senator Kelly expressed a preference for adoption of revised amendment no. 1 but not amendment no. 2--pertaining to deletion of language concerning "revenue bonds." He then formally MOVED for adoption of revised amendment no. 1 relating to Midrex. Senator Rieger OBJECTED. He voiced support for the concept of the project, but noted lack of supporting information, questioning whether it was ready to proceed. Senator Kerttula said that if the project does not meet all criteria, it will not proceed under AIDEA. He expressed concern that delay of authority might mean loss of "this year" in terms of timing as well as ultimate loss of the opportunity. Mr. Snell concurred in comments by Senator Kerttula. The legislation represents a positioning effort whereby Alaska may compete for the project and demonstrate AIDEA's willingness to participate in infrastructure development. That development poses a major cost component to the developer. Senator Rieger reiterated support for the project, but again suggested that authorization appears to be premature. He voiced reluctance to vote on a $50 million issue based on little information. Co-chair Frank indicated need to review terms and conditions that would have to be met before AIDEA would proceed. Co-chair Pearce pointed to the fact sheet from AIDEA and limitations built into AIDEA statutes. Senator Kelly raised concern regarding lack of information on Mat-Su Borough involvement. He asked what the borough would be devoting to the project. Mr. Moore explained that borough ordinances establish set rates and maximums for lease of borough land. The borough could both forgive lease payments and levy a property tax on the development. It seeks the development on behalf of the state and the jobs for the local economy. Co-chair Pearce requested that Senator Kelly withdraw his motion for adoption of revised amendment no. 1 and asked that Mr. Snell obtain a copy of the resolution passed by AIDEA as well as additional information concerning action intended to be taken by the board once authorization is provided. Co-chair Frank voiced his understanding that bonds issued by AIDEA would be repaid by revenue from the Midrex operation. Aside from the tax-exempt benefit of the bonds for port construction, no subsidy would be involved. He then registered his support for the project, saying that such capital development should be encouraged. Senator Kelly WITHDREW his motion for adoption of revised amendment no. 1 and reiterated need for further information on Mat-Su Borough involvement. ADJOURNMENT The meeting was adjourned at approximately 11:25 a.m.