SENATE BILL NO. 73 "An Act relating to the authority of the Alaska Industrial Development and Export Authority to issue bonds; and providing for an effective date." This was the first hearing for this bill in the Senate Finance Committee. Co-Chair Wilken referenced a letter to himself dated May 1, 2003 from Mike Barry, Chairman of the Board and Ron Miller, Executive Director of the Alaska Industrial Development and Export Authority (AIDEA)/Alaska Energy Authority (AEA). [Copy on file.] Co-Chair Wilken this letter provides answers to questions posed at the previous hearing on the issue of AIDEA bonds. Co-Chair Wilken stated that this bill "makes several changes to the AIDEA loan participation program and secondly, authorizes the Alaska Energy Authority to acquire the Healy Clean Coal project from AIDEA." He reminded the Members that AIDEA brought additional matters to his attention, which is reflected in a proposed committee substitute. Senator Bunde moved for adoption of CS SB 73, 23-GS1018\D, as a working draft. Senator Olson objected for an explanation. Co-Chair Wilken pointed out that page 2 lines 23 through 28 of the committee substitute contain the language of the original bill. The remaining language, he stated, is new. AT EASE 9:00 AM \ 9:01 AM MIKE BARRY, Chair, Board of Directors, Alaska Industrial Development and Export Authority, testified that this legislation is "for the good of the State." He reported that interest rates are lower then they have been in approximately 50 years, and because AIDEA holds a significant portion of its assets in government securities, as interest rates begin to increase, a "minus earnings" could occur for a period of time. He learned that loan participation with banks has historically provided the largest earnings for AIDEA and also directly relates to the AIDEA mission to diversify the State's economy and providing employment. He remarked that the loan participation program affects every region of the State and involves all financial institutions in the State. As a result of this situation, he expressed intent to expand the loan participation program and create more earning assets in the program. To accomplish this he offered suggestions, which he cited from the May 1, 2003 letter as follows. The proposed changes will enhance the loan program, bring a greater benefit to Alaskan businesses, increase AIDEA revenues, and increase the AIDEA dividend paid to the state. Specifically, the amendment proposes the following changes to the program. 1. Increases the percentage in loan participants by AIDEA from 80% to 90%. This provides a greater benefit for the borrower by allowing a larger portion of the loan to be amortized over a longer term than provided by the banks, thereby reducing debt service. 2. Increases the maximum dollar amount AIDEA can purchase per loan transaction from $10 million to $20 million, allowing AIDEA the opportunity to participate in larger financial transactions to the benefit of Alaska banks and businesses. 3. Allows for equity extractions to finance other business activities in Alaska that are not necessarily connected to the financed project. Many Alaskan entrepreneurs are involved in multiple businesses. Allowing a person to refinance an established business and extract equity for use in a new business will benefit the state economy immensely. 4. In order to resolve lending limit problems of financial institutions, the amendment allows AIDEA to purchase participations in existing qualified loans held by financial institutions. This change will provide an in- state solution for Alaska banks to resolve lending limit problems. Effectively, this frees up lending capacity so the banks can continue to extend short-term loans and lines of credit to their customers. 5. Allows for the establishment of a minimum interest rate regardless of AIDEA's funding source for loan participation, which is either bond proceeds or AIDEA funds. Currently, the funding source dictates the method of establishing an interest rate on the loan participation. If bond proceeds are used the interest rate is set in statue as AIDEA's cost to borrow plus an additional percentage to cover the loan servicing costs. If AIDEA uses its own funds the interest rate is determined by adopting the regulations and may be no less than the interest rate used if AIDEA were to issue bonds. Mr. Barry pointed out that the provision outlined in the first paragraph of the letter would be a reversion to the original statutes and initial method of operation. He informed that AIDEA performs independent underwriting investigation on all loans it purchases in addition to the underwriting performed by the issuing bank and therefore, AIDEA does not "simply rubber stamp" the loans. Because of these assurances, he stated that AIDEA should acquire a larger portion of those loans identified as "good credit", and beneficial to the AIDEA portfolio. He qualified that banks do not always offer a greater portion of the loans, although changes to statute would allow borrowers to request the more favorable terms that AIDEA is able to offer. He emphasized this would not change the loan to value, but rather the maximum allocation between the bank and AIDEA. Mr. Barry stated that the $10 million limitation has been in place for several years and he assured the increased limit would not be "used widely". He exampled the history of the loan participation program in which only two credits were acquired in the amount of $10 million. Senator Bunde asked if any pending projects would be impacted by this change. Mr. Barry knew of none. Mr. Barry continued with the third item listed in the letter and qualified that the loan extractions should be allowed so long as the investment is made into another Alaska business. He found in many smaller communities a "lack" on entrepreneurs and that one or two entrepreneurs could be operating several businesses. Senator Olson asked about any negative experiences with loan extractions. Mr. Barry responded that banks have informed AIDEA of "serious problems" without the loan extraction option, in attempting to service customers who own more than one business. Mr. Barry explained the forth item, which proposes to allow AIDEA to purchase loans from a financial institution in the event that institution reaches a limit in the amount of lending it could provide. He gave an example of a business with an existing loan from a bank plus an application for additional financing, which would exceed the credit amount the bank has established for each customer. He stated that in this instance the bank could "sell" a portion of the existing loan to either AIDEA or another lending institution, and that this usually occurs with "the very best customers" with good credit ratings and is called an "override". However, he informed that AIDEA is not getting many of these overrides to banks outside Alaska because current statute requires the banks to rewrite the loan before it could be sold to AIDEA. He stated that refinancing these loans is expensive for the Alaskan business and involve payment of fees, an appraisal, title insurance and other costs. This statutory change, he said, would allow AIDEA to purchase existing loans in addition to new loans. He relayed opposition to this proposal was voiced by one bank concerned that this change would allow its smaller competitors to be more competitive with them. He noted this is the only proposed change to AIDEA that has received opposition from a bank and that other banks have either abstained from commenting or fully support the changes. Mr. Barry explained the fifth item listed in the overview relates to changing the interest rate criteria. Currently, he stated that AIDEA prices its loans "on a very simple basis" for either a variable rate or a fixed rate, and the term of that fixed rate. He proposed to allow "risk based pricing" and described that AIDEA could charge a "slightly higher" rate for a loan offered at a 90 percent participation than a loan offered at an 80 percent participation because AIDEA would be involved in that loan for a longer term than the financial institution and subsequently increase the risk to AIDEA. He stressed that this proposal is different than the method that banks apply risk based pricing in grading an applicant's credit against another's credit. He predicted this would be discriminatory against residents of rural communities. Co-Chair Wilken pointed out the provision proposed in item two is also contained in Section 1 of SB 112; however, that legislation also includes language relating to the Red Dog Mine. Senator Olson asked if the third proposal could be implemented to subsequently allow Cominco to secure funding for some of its "less than profitable" ventures. Mr. Berry clarified this statutory change applies to the loan participation program of loans originated by banks, and that the equity would be extracted on behalf of the borrower, i.e. the bank's customer. He stated that AIDEA has no mechanism through the loan participation program to extract any equity from a borrower. Co-Chair Wilken referenced a letter dated April 24, 2003 from Marc Langland, President of Northrim Bank addressed to AIDEA [copy on file] requesting that AIDEA increase approval authority of the in- house credit committee from $3 million to $6 million. He asked if this matter was considered and whether it is addressed in the aforementioned five items. Mr. Barry clarified this is a regulatory issue, not requiring statutory changes, and that the board of directors would address the matter. Co-Chair Wilken relayed concern expressed by Wells Fargo in a letter dated April 25, 2003 from Executive Vice President James L. Cloud to AIDEA [copy on file] relating to item five and the need for an understanding of the proposal's intent. Mr. Barry reiterated that another bank opposed this proposal and that Wells Fargo "chose to take no stand" on the matter. Senator Olson removed his objection to the motion and the committee substitute Version "D" was ADOPTED. Senator Taylor requested the record reflect that he joined the meeting at 9:04 am. Co-Chair Wilken noted this legislation also addressed the Healy Clean Coal project. Mr. Barry explained the committee substitute would provide statutory authority for the Alaska Energy Authority (AEA) to acquire the Healy Clean Coal asset. He informed that the transfer of AEA to AIDEA did not include authority for AEA to initiate new projects without legislative consent. He stated that the AIDEA Board of Directors also acts as the board of directors for AEA, although AIEDA and AEA are separate companies with separated accounting. He stated that AIDEA owns Healy Clean Coal, a generating asset located along the Railbelt, and that AEA owns another generating asset, called Bradley Lake, and a transmission asset, called the Alaska Intertie, both also located on the Railbelt. He expressed intent to transfer Healy Clean Coal from AIDEA to AEA in the future so all State-owned energy assets located along the Railbelt would be in the same company. He indicated a potential conflict of interest of the board of directors in addressing these assets separately and noted possible "flexibility" in locating all the assets within one company. He assured that if the transfer were arranged, AIDEA would present the proposal to the Legislature for approval and that the change in this legislation would provide advanced notice of intent. Co-Chair Wilken asked the extent of the "distress" of the Healy Clean Coal project in the intent to transfer the asset to AEA. Mr. Barry replied that as a new chair of AIDEA, he would not have perceived a conflict with the board of directors if the Healy Clean Coal project were not in distress. He qualified that no conflict has been identified to date; however, precautions should be taken against future conflict. Co-Chair Wilken announced intent to hold the bill in Committee at this hearing. SARA FISHER-GOAD, AIDEA, testified that Brenda Applegate, Controller, AIDEA and Sue Weimer of the AIDEA Credit Department were available on teleconference to answer questions. Senator Olson asked if any implications resulted from the transfer of AEA to AIDEA. He recalled a letter of intent drafted by parties involved in the Healy Clean Coal Project [copy not provided]. Mr. Barry stressed that some "serous issues" must be resolved before a transfer of the Clean Coal project could occur. He listed permits issued to AIDEA for operation of the project that may or may not be transferable, and an outstanding agreement with Golden Valley Electric Association. He remarked that no transfer would be attempted without input from the Association and noted a meeting was planned between the boards of both organizations. Senator Olson asked the relationship between Golden Valley Electric Association and the Healy Clean Coal project. Mr. Barry told of a power sales agreement reached in 1991, which was terminated in April 2003 by the Golden Valley Electric Association; however, a settlement agreement resulting from litigation filed in 1999 is still valid. He assured that neither AIDEA nor the Golden Valley Electric Association is attempting to avoid their obligations. Senator Hoffman commented that the language of Section 2 appears "broad and open ended" and asserted he would not support this provision unless he knew specifically if a purchase or lease were under consideration and the conditions of that proposal. The language of Section 2 reads as follows. Sec. 2. AS 44.83.080 is amended by adding a new paragraph to read: (16) to acquire, by purchase or lease, a coal-fired electric generation project owned by the Alaska Industrial Development and Export Authority that qualified for federal financial participation under P.L. 99-190, as amended. Senator Hoffman understood that the Healy Clean Coal project was not earning a profit, in part because of high operating costs. He expressed the need to know of the conditions of an AIDEA purchase to identify the State's obligation and whether further debt would be incurred. He wanted to know if AIDEA would "cut it's losses" if the project were unprofitable and subsequently write down those losses. He also informed that federal legislation related to the project is unresolved. Mr. Barry responded that the provision in Section 2 does not actually request the transfer, but rather notifying "the world" that such an acquisition could occur. He assured that legislative authority would be required for such a purchase. He furthered that feasibility studies to determine such matters as whether the permits could be transferred, have not been conducted to date. Mr. Barry asserted that the fact that the Healy coal project is not a profitable operation is not in dispute. During the previous year and in 1999, he stated that AIDEA "took a very significant write down on impairment of assets" to account for the losses. He emphasized the board of directors' intent to make every effort to determine whether this resource generating capability could be utilized for the benefit of the State of Alaska. Senator Hoffman asked the amounts of the two write-downs. Mr. Barry replied that he joined the Board in January and was not familiar with the details. He estimated the first write down was $131 million and the second was approximately $66 million. Senator Hoffman opined that a decision must be made quickly and that conducting studies would be "prolonging the agony". He stressed the need for AIDEA and the Legislature to act as "prudent business people", noting that Golden Valley Electric Association is "already cutting their losses" and that the State should do the same. Co-Chair Wilken announced intent to hold this bill in Committee. Amendment #1: This amendment inserts "and to a municipal tax exemption for certain assets and projects of the Alaska Industrial Development and Export Authority" to the title of the bill. The amended language reads as follows. "An Act relating to powers of the Alaska Energy Authority to acquire a coal-fired electric generation project from the Alaska Industrial Development and Export Authority, to exemption from the State Procurement Code for contracts related to a coal-fired electric generation project that the Alaska Energy Authority acquires from the Alaska Industrial Development and Export Authority, to regulations of the Alaska Industrial Development and Export Authority, to the authority of the Alaska Industrial Development and Export Authority to issue bonds, and to a municipal tax exemption for certain assets and projects of the Alaska Industrial Development and Export Authority; and providing for an effective date." This amendment also inserts a new bill section on page 6, line 5 to read as follows. Sec. 11. Section 19, ch. 117 SLA 2000, is amended to read: Section 19. Section 3 of this act takes effect July 1, 2012 [2004]. New Text Underlined [DELETED TEXT BRACKETED] Senator B. Stevens moved for adoption. Co-Chair Wilken objected for clarification. Senator B. Stevens explained this amendment relates to changes made to the companion bill, HB 112, which imposed a repeal of the sunset date. He stated this amendment represents a compromise in that it would not repeal the exemption of the DeLong Mountain transportation system, but rather extend the exemption to the year 2012. He noted this date also marks the end of the pilot agreement between the Northwest Arctic Borough and Cominco in which payments are made to the Borough in lieu of taxes. He expressed that he disagrees with the State tax assessor's position that the transportation system is not a State-owned asset, held by AIDEA. Co-Chair Wilken objected to this amendment on the grounds that it "brings before this Committee, some significant policy calls and we can deal with those in House Bill 112. If we bring it into this bill, it adds nothing to the bill; in fact detracts from the bill and detracts from the discussion and the benefit that this bill provides." He assured he was committed to addressing HB 112. Senator Taylor thanked the sponsor of the amendment, expressing that he shares the concerns. He recalled the Legislature reaching the initial agreement and remarked that a "deal was a deal," whether or not he supported it at the time. Senator Hoffman supported the amendment as well. He shared that AIDEA reports the single largest revenue producer of this project is Cominco Alaska Red Dog Mine and that Cominco has a nonexclusive priority right to use the DeLong Mountain transportation system. He commented that the Legislature must consider how its actions affect the corporation and the bond ratings. A roll call was taken on the motion. IN FAVOR: Senator Olson, Senator B. Stevens, Senator Taylor, and Senator Hoffman OPPOSED: Senator Bunde, Co-Chair Green, and Co-Chair Wilken The motion PASSED (4-3) The amendment was ADOPTED. Senator Taylor stated that the extension of the exemption date reflects only one portion of the provisions in HB 112. The definition of a roadway and the purposes of a transportation corridor, he noted are not addressed in the committee substitute to SB 73. Co-Chair Wilken announced the matter would be addressed at a later date. Co-Chair Wilken ordered the bill HELD in Committee.