SSTA 2/6/96 SB 222 AIDEA OPERATIONS/PROJECTS/LOANS  CHAIRMAN SHARP called the Senate State Affairs Committee to order at 3:32 p.m. and brought up SB 222 (AIDEA) as the first order of business before the committee. RILEY SNELL, Executive Director, AIDEA, provided the committee with a sectional analysis of SB 222. He said the principal parts of the bill are found in section 2, the bonding authority, which allows them to issue bonds in order to finance loan participation, as well as development finance projects that the authority undertakes under different sections of its statutory powers. Under the sunset authority of July 1, 1995, the Authority is only authorized to do refunding bonds. This section is necessary for them to continue to meet the economic demands of the mission of the authority. Sections 7 - 12 deal with the Business Assistance Program. These modifications are being brought forward as a result of numerous work sessions and discussions with the banking institutions and small business operators around the State. As a result of significant changes to the federal SBA program, AIDEA would like to modify the existing statute to accommodate and provide capital for the small businesses located in urban and rural Alaska. MR. SNELL said that the loan guarantee would be paid by the Authority 90 days after the loan is placed in default. It is a major condition in order to accommodate the banks' ability to go forward and liquidate existing collateral to make the program attractive for their use. Number 75 Section 18 seeks legislative authorization for additional financing on the Red Dog project. The Authority is seeking $60 million to finance expansion to aid the transportation system facilities serving the Red Dog Mine. The principal would be used to expand additional storage capacity of ore that is stored during winter months at the port. The project is important to the Northwest Arctic Region. It currently employs about 350 people, representing 15 percent of all the jobs in the Northwest Arctic Borough, as well as creating 60 - 70 new jobs as a result of the expansion. This project was originally authorized by the legislature in 1987 and construction commenced in 1989. Since the original investment, the project has performed as required under all the financial terms and conditions that were placed on it by the Authority. MR. SNELL said the section 19 is the authorization for the Authority to acquire Snettisham from the federal government, a total of $100 million. This has been a long negotiated sale the State undertook in the mid 1980's. It is also associated with the acquisition of the Eklutna Power project outside of Anchorage. That project would be acquired by the three local utilities in the Anchorage area: Chugach Electric, ML&P, and MEA. These acquisitions would divest the federal government's holdings of power projects in Alaska. They believe with the proper structuring of the financing that the project will be good for the State. For the consumers of the Juneau and Douglas area, they should be able to maintain existing rates. The alternative of not proceeding with the project quickly creates rate impacts and ultimate ownership in the private sector. In addition, there is section 17 which repeals certain project authorizations worth approximately $40 million of bond authorizations that was given to the Authority to participate in financing of the aircraft fueling facilities at Anchorage International Airport. As a result of the parties not agreeing on how to structure the financing, mostly revolving around environmental indemnification issues, the Airport Fueling Consortium members elected to undertake the project on their own, without the assistance of AIDEA's tax exempt financing abilities. They are also asking for the repeal of the legislative authorization for AIDEA to issue up to $50 million in bonds for the Midrex Facility which was originally proposed to be located at Point Mackenzie but never commenced. Number 154 CHAIRMAN SHARP asked if there was a way for the legislature to maintain some control of the loans up to $10 million. MR. SNELL responded that the $10 million authorization was to assist in development finance projects, not in the loans, themselves. These projects are ones the Authority owns outright, like Red Dog and the Unalaska Dock Facility in Skagway. They were given these powers in 1992 or 93 and there is a three year sunset provision. SENATOR DONLEY said he didn't see a sunset provision now. RANDY SIMMONS, Assistant to MR. Snell, said that there was no sunset provision for the $10 million limit. SENATOR DONLEY said that sunset provisions are healthy, because they guarantee things get revisited. Number 188 SENATOR LEMAN asked if $100 million was close to the appraisal value of the Snettisham project. MR. SNELL said that figure is close and is from a formula negotiated between the State and the Federal Power Administration as to how to set the price for the project acquisitions. They are doing a risk assessment and looking at deferred maintenance. The actual purchase price is approaching $83 million. The balance of the fund could be used to create reserves and replacement fees for future equipment failures. Number 213 SENATOR LEMAN referred to the transmittal letter that says not having the bonding authority that expired on June 30 has severely restricted AIDEA's ability to assist key development projects and asked if they had missed any opportunities. MR. SNELL said there are currently customers waiting for AIDEA to participate. SENATOR PHILLIPS asked how much capital would be tied up if they were all authorized. MR. SNELL said the rule of thumb is that you need $1.50 of revenues to support $1.00 of acquisition. Number 250 CHAIRMAN SHARP asked what section 14 intended. MR. SIMMONS said that section clarified the definition of the loan participation, itself. It doesn't change how the program is run. They participate in a percentage of the loans that a bank brings forward to them; so their customer is the bank. CHAIRMAN SHARP asked if there was any State land or rights of way along the Red Dog road and what value is the road to the State. MR. SNELL answered that the road is classified as industrial use highway and is limited only to industrial users. The area is a mineral rich area and there are other potential projects that could come on line to using the same port facilities as the Red Dog. There is a mixture of land ownership (between the State of Alaska, the federal government, and native corporations). CHAIRMAN SHARP asked if they had looked at the feasibility of additional debt on the Red Dog's additional 36 percent production capacity. This would increase AIDEA's share of the debt by 62 percent over what they have now. MR. SNELL replied that with the additional expansion and the new discoveries, the economic life of the project is easily 50 years. As a result of the expansion, it will be the largest zinc/lead mine in the world. In addition to that, the quality of the product is probably as high as any operating mine that exists in the world. In addition to that, the credit worthiness of Cominco, Ltd. has substantially improved. They believe that with properly structured financing, this would be a credit worthy investment. CHAIRMAN SHARP asked if the State could use the road to access other development. MR. SNELL said that was correct and that the agreements were in place with all the land ownership participants that it was a public facility, but it was classified as an industrial use highway. Number 315 MR. SNELL said the SBA is not able to guarantee as much of a loan as they previously were able to do. It has been reduced from 80 percent and their fee structure is substantially higher which makes it harder for small businesses to use it. CHAIRMAN SHARP commented that what surprised him was that AIDEA was guaranteeing not only the principal of the loan, but also the interest payment. MR. SNELL clarified they are proposing only a 90 day grace period to allow the bank to liquidate the collateral. Number 332 SENATOR DONLEY said he biggest concern was removing the provision requiring the a majority of ownership be Alaskans for these programs. He said this was a provision they fought hard to get and he strongly opposed taking it out. He was also concerned with the new section 7 where the federal government steps out and we are stepping in. The state is supposed to be cutting down on bureaucracy. He hated to see expansion again into an area where businesses might default as they did in Anchorage in the 80's. He said that he thought AIDEA was doing a great job since then. SENATOR LEMAN asked if AIDEA had made a decision on the $60 million (on Red Dog). MR. SNELL said they were in early discussions with the company on the structure of the financing. They have commissioned the Stanford Research Institution to do an independent financial analysis of the project with the additional AIDEA debt and additional company debt that would be involved to determine that the project economics work as viewed from an outsider. They also must have certain findings before the project can proceed. They must find that the applicant has the ability to repay to debt, that the amount of money the State is participating with has adequate returns, and about eight more findings that the Board of Directors would be required to make prior to issuing the authority to proceed into the project. The legislature would also have to authorize the project. Number 382 SENATOR LEMAN asked for some documentation of what they had gone through so far. MR. SNELL said he would provide him with that. SENATOR LEMAN asked if there needed to be additional congressional action to allow use of the road for other developments. MR. SNELL answered no further action would be needed. SENATOR LEMAN asked if it would have to be a resource extraction industry. MR. SNELL said that was correct. SENATOR LEMAN asked if he thought development was reasonably possible within the next decade. MR. SNELL replied that there were two or three projects: the Kennicott, for one, and bringing the Arctic Slope coal reserve down into the Red Dog port area, for another. CHAIRMAN SHARP asked if the original $103 million AIDEA bonds on the Red Dog facilities obligated the full faith and credit of AIDEA. MR. SNELL replied that it had the full faith and credit of the State of Alaska. CHAIRMAN SHARP asked if the additional $60 million would be the same. MR. SNELL said no, they are proposing that that be backed only by the Authority. CHAIRMAN SHARP asked about the Snettisham project. MR. SNELL answered that was covered by the full faith and credit of the State. CHAIRMAN SHARP asked why would the full moral obligation of the State be used instead of just AIDEA. MR. SNELL replied if they were adding another $60 million to the Red Dog obligation, it would dilute the ability of the Authority to issue other debt using its' moral obligation. MR. SNELL explained that with reasonable reserves and replacements built into the Snettisham project there should be minimal exposure to the State. CHAIRMAN SHARP asked if they would have a take-or-pay power sales agreement in their hand before they culminate the deal with the feds. MR. SNELL answered yes. Number 435 CHAIRMAN SHARP asked who would run Snettisham. MR. SNELL answered that the local utility (AEL&P) would run it. CHAIRMAN SHARP said they would prepare a CS and would show it to him before they take action on it. SENATOR LEMAN asked Senator Duncan if it was reasonable to have AEL&P take over management of Snettisham. SENATOR DUNCAN said that AEL&P believes that, as well as the City of Juneau. CHAIRMAN SHARP asked for the installed capacity at Snettisham. MR. SNELL answered 78 megawatts, compared to 109 megawatts at Bradley.