CS FOR SENATE BILL NO. 350(L&C) "An Act allowing a joint action agency to encumber property interests for security purposes; declaring certain joint action agencies to be political subdivisions for certain purposes; restricting the sale of property of the joint action agency; allowing the joint action agency to transfer property to security interest holders under a security interest or to other parties without legislative approval; and providing for an effective date." This was the first hearing for this bill in the Senate Finance Committee. Co-Chair Wilken stated that this legislation would enable the Four Dam Pool Power Agency (FDPPA) to refinance approximately $73 million in a loan owed to the Alaska Industrial Development & Export Authority (AIDEA). SENATOR GARY STEVENS, the bill's sponsor, characterized the legislation as "a highly technical bill" in that, in addition to providing FDPPA the ability to refinance a $73 million AIDEA loan and thereby to return that money to AIDEA for use in other areas, the refinancing would assist FDPPA in providing consumers in the communities of Ketchikan, Petersburg, Wrangell, and the Kodiak and Valdez-Glennallen areas by lowering interest, arbitrage, and administration costs associated with that loan. In addition, it would "enhance the options that are available to the FDPPA" and the aforementioned communities "regarding inter-ties and other activities." TOM LOVIS, Chief Executive Officer, Four Dam Pool Power Agency, stated that the Agency represents five communities throughout Alaska and consequently, a large number of electric consumers. These members were "the fortunate participants" in FDPPA's acquisition of four hydroelectric projects from the State in January 2002 that was funded by a $77 million loan from AIDEA via a Memorandum of Understanding (MOU) with AIDEA at a specified 6.5 percent interest rate. Now that FDPPA is a "fully operational organization" it is now able to secure funding that was not previously available to it. This alternative would allow FDPPA to refinance its AIDEA debt by means "of the bond market, using tax- exempt debt." Lowering the interest rate would result in savings of between $600,000 and $1.5 million a year on what is currently a $6.3 million debt service. FDPPA members would benefit from experiencing this ten to twenty percent debt savings on the current debt service. He noted that FDPPA members and its electric consumers support this proposal. Mr. Lovis reiterated that AIDEA would receive approximately $73 million that it could utilize to support other endeavors. The technical corrections included in the bill might appear complicated but "are relatively straightforward" as they would allow FDPPA to mortgage the properties, use the properties as security in a note with the private market, clarify FDPPA's ability to issue tax exempt debt for the acquisition of projects, retain the ability of the projects to continue to service member communities, and would allow FDPPA to lower costs to its consumers due to the resulting savings incurred by the refinancing. Co-Chair Wilken asked how much consumer rates might lower, in, for instance, the City of Petersburg, were this legislation approved. Mr. Lovis responded that wholesale power expenses might decrease by four or five percent. This might translate to a three-percent reduction for the consumer. Senator Dyson understood that, as reflected in Section 2, subsection (h) on page two, line 23, in order to accomplish the goal of the legislation, the FDPPA must be recognized as a political subdivision, similar to that of being a city. Mr. Lovis responded that in order to further the original loan between AIDEA and FDPPA, it was required that FDPPA be identified as a political subdivision in order to transfer State property to it. The intent of the definition language is to continue the use of that definition in order to provide security for the project and to allow for the issuance of the tax-exempt debt. The definition would be limited to the terms of the original Memorandum of Understanding (MOU) regarding those specific projects. Furthermore, continuance of the language would be a vehicle through which FDPPA could avoid registration and other expenses that might otherwise be required by the Securities and Exchange Commission. Senator Dyson understood therefore that this is a continuance of a definition that has been in practice rather than being new language. Mr. Lovis affirmed. For further clarification, Section 2, subsection (h) includes language that limits how FDPPA would be recognized as a political subdivision by incorporating the language, "Except as provided in this subsection, the agency is not a political subdivision of the state." Senator Dyson asked how this legislation might benefit the power intertie project. Mr. Lovis responded that the intertie project and other FDPPA projects would benefit from being provided alternative financing options. Co-Chair Wilken asked regarding FDPPA'a ability to use leased assets as security for such things as bonds as specified in Section 1, subsection (c) (6) on page two, line 17, as this is contrary to the ability of other authorities. (6) to use facilities, projects, and related assets owned, leased, operated by the joint action agency as security for bonds, notes, mortgages, enhancement devices, or other obligations. Mr. Lovis responded that, "there are such things as capitalized leases and other such arrangements … that can be used as fixed assets in the course of an operation." Long-term leases for certain maintenance equipment and other equipment would be recognized as collateral. Co-Chair Green countered that "a long-term lease should be recognized as a debt." Mr. Lovis expressed that while there would be a debt obligation attached to it; a piece of leased equipment on the premises would be recognized as security. Co-Chair Green asked for further clarification as to how the term "or operated" as specified in subsection (c)(6) would qualify as security. Mr. Lovis exampled that facilities utilized by the agency "in the course of an operation that might be provided by members of the agency or participants in the power sales agreement" would qualify as security. Co-Chair Green asked that an example be provided. BOB LERESCHE, Financial Adviser, Four Dam Pool Power Agency, testified via teleconference from an offnet site, and stated that this is standard language written by underwriters that appears in most mortgages. An example would be a dispatch center that belongs to a local utility but which is operated by the FDPPA. Were an entity to replace the FDPPA, they would have the right to operate that center in order to operate the dam. Co-Chair Green asked for verification that operated property could act as security. Mr. LeResche confirmed that the right to operate that leased facility would be recognized as an asset as it has value to the operation. Senator B. Stevens posed a hypothetical situation in regards to the leased asset question as follows: a power grid transmission is owned by an association, but leases capacity on that power grid to an energy trading company. The energy trading company recognizes that leased power capacity as an asset and uses it as security with which to borrow money. He asked how that leased capacity on a power line could be considered an asset. SFC 04 # 66, Side A 10:42 AM Mr.LeResche responded that the rights that accompany that lease, whether it is a capitalized lease or an operating lease, would be recognized as an asset and could be used a collateral as "it is something of value that the organization is paying for." Senator B. Stevens understood therefore that in a situation in which a Joint Action Agency, such as the FDPPA, leased twenty percent of a power transmission grid that had a line capacity valued at $100 million dollars, the joint action committee could acquire a $20 million line of credit. Mr. LeResche responded that were he a banker he would not issue a $20 million line of credit in that situation. Senator B. Stevens argued that that is how the language could be interpreted. Mr. LeResche countered that the right to transmit twenty percent of the power available on that line for a certain amount of time would be recognized as an asset as it is worth something. Mr. Lovis interjected that in this instance, "the ability of the asset to continue to provide the services expected under the operation of the agency" does have value. "The use of the line, the ability to secure for the purposes of a mortgage, and the ability to continue to provide the services associated with the projects through equipment that may be leased" in order "to continue to use the power productive capabilities of the agency" could be recognized as security for a note. This is the intent of the language. Senator B. Stevens voiced being uncomfortable in recognizing leased assets as security as "the assumption is being made that the rights of the lease could be transferable." Mr. LeResche responded that "the lease hold interest" rather than the leased asset, is what would be identified as the collateral. He stressed that "this legislation does not provide any new rights to the lessee" and that this kind of collateralization must be specified in the lease. Many leases include language that specifies that the lease could be reassigned upon permission of the leaser. Senator Bunde accepted that there would be value in a lease that involved transmission. Furthermore, he noted that stranded power and stranded gas are undervalued because no transportation of that energy is currently available. Therefore, were a lease written with agreement that the lessee's rights could be transferred would have financial value. Co-Chair Wilken furthered that a lease "would provide the ability to realize a revenue stream that supports the bond." Mr. Lovis concurred that it is "a vehicle to ensure the continued capability and operability of the other assets associated with the hydroelectric project." Co-Chair Wilken stated that "therein is the value." Senator B. Stevens continued to voice concern that an entity could specify that a leased asset could provide collateral for borrowing more money. He suggested that the word "leased" be eliminated from the legislation. Co-Chair Wilken stated that further discussion in this regard would transpire before Committee action on the bill occurs. Co-Chair Green requested that further clarification be provided in regard to new language in Section 3, subsections (J) and (K). Co-Chair Wilken stated that the bill would be HELD in Committee in order to address these concerns.