Can AIDEA prop up this economy?
Alaska is fortunate indeed to have something like the Alaska Industrial Development and Export Authority. AIDEA is similar to the Alaska Permanent Fund and Alaska Housing Finance Corporation, but less well-known by the public. It represents a deliberate policy choice by Alaskan leaders in the 1980s to set aside some oil and gas revenues and invest them for special purposes.
The Permanent Fund's ultimate purpose, aside from paying dividends, is still somewhat unclear. Alaska Housing Finance Corp., which the state seeded with about $2 billion initially, helps provide lower-cost home mortgages and public housing, functions which AHFC performs admirably. AIDEA's purpose is to serve as a financing mechanism for business and economic development, and following the collecting of functions of the Alaska Energy Authority under AIDEA, financing energy projects as well. Like AHFC, we believe AIDEA performs this job very well, given the challenges at hand. We wonder now whether too much is being laid at AIDEA's doorstep.
No other state has anything quite like AIDEA. Most states, if not all, have public financing entities which serve as vehicles for tax-exempt financing, which AIDEA also does. But like they did with AHFC, Alaskan leaders seeded AIDEA with appropriations of petroleum revenues in the 1980s to create an asset base to undertake financing of its own. Several hundred million dollars were invested. No other state has done that, and no other state has a state corporation with the financial strength and broad range of purpose as AIDEA.
A sidenote: The "Export" in the corporation's name was added in the 1980s when a special export financing function was created by state law within AIDEA. As it has turned out, this has been little-used, if ever, because other export financing mechanisms are available. But the name has stuck. AIDEA's relationship with the Alaska Energy Authority is interesting, however. Legally, the AEA still exists. It owns assets, has a budget, and carries debt. Its administration has been merged into AIDEA, however, so that AEA staff work in AIDEA's offices. AIDEA's executive director is the executive director of the AEA; the AIDEA board and AEA board are the same. Board meetings are held in tandem, so that the board convenes as AIDEA; it does its business; and it then adjourns and reconvenes as the Energy Authority board. In recent years the legislature has transferred most of the state's other energy programs to AIDEA/AEA. Together, the organizations are a financial juggernaut.
However, there may be limits to what even AIDEA and AEA can be asked to do. When economic development projects and their private sector partners run into trouble, it seems increasingly that AIDEA, with its deep pockets, is the saviour of last resort. It's important to note here that AIDEA has one very important program that is not only important for the economy, but also now provides the cash income to support more routine economic development projects. That is the Authority's business loan participation program, in which AIDEA partners with banks to provide long-term financing. This has been very successful, and profitable, for the Authority, banks, and borrowers.
Let's now discuss some of the projects currently on AIDEA's plate, and the challenges, as well as discussing past projects.
Here are snapshots of projects on the plate now:
Gateway Forest Products: This has been in the news recently. Gateway built a veneer plant to make a "value-added" product from low-quality wood harvested in Southeast. The product had good market acceptance, but the company went into bankruptcy last year due to financial problems that have dogged it—a delay in completing the plant, higher-priced wood supply, a related sawmill operation closed due to poor lumber prices. The veneer plant closed last December after a refinancing effort failed and the company ran out of cash. AIDEA isn't involved in Gateway now, though the authority would have been part of the refinancing group had that gone forward. More recently, AIDEA has offered to buy the facility so that the plant facilities and mill aren't purchased, dismantled, and shipped out of state.
Ketchikan Shipyard: This is a ship-repair facility owned by AIDEA and operated by a private company, Alaska Ship & Drydock Co., a local firm. The yard was originally built by the state Department of Transportation and Public Facilities in the early 1980s to have a repair facility within the state for Alaska Marine Highway System ferry vessels. The idea has always been for a private operator to run the shipyard and do work for other customers, so that Alaska vessels operators don't have to go to the Pacific Northwest for repairs and overhauls, and more of the repair expenditures stay in the state. Two previous operators couldn't make a go of the shipyard, however, and it closed for a period in the early 1990s. DOTPF was able to bring in AS&D for another go at it in 1993, and also transferred ownership of the yard to AIDEA. Since then AS&D has done a number of ship repair projects, but it now needs a long-term lease to continue building the business. The yard has a floating drydock suitable for large vessels but inefficient for smaller vessels (which is the bulk of the market). What's needed is a ship-lift unit, which would allow the yard to efficiently handle smaller projects (and also have work on two vessels underway at the same time). AS&D may also bring in a partner, the company says. AIDEA is discussing a possible transfer of ownership of the yard to either Ketchikan Gateway Borough or the City of Ketchikan.
Alaska Seafood International: ASI was sold last year to Sunrise Capital, a New York-based investment company that specializes in turning around troubled companies. AIDEA built the plant buildings for the seafood plant, a $48 million investment for the Authority. The buildings are leased to the company. Overall, the project involves $125 million in investment, including AIDEA's portion. The original business ran into trouble when its principal backer, a Taiwanese investment group, pulled out just as the plant was being completed and production was starting.
Starved for operating money, the plant closed soon after it was started. AIDEA scrambled and put together a rescue operation, hammering the Taiwanese into honoring their commitment until a reorganization could be accomplished. That was done, and the restructured company had Sunrise come in at 51 percent and assume management control. Ownership shares of the Taiwanese and an investor group dwindled, and AIDEA had to assume a 29 percent equity share. This has now dropped to about 20 percent because Sunrise has put more capital in, which resulted in others being affected. Interestingly, Bank Sino-Pac, one of the Taiwanese investors, has decided to also invest more cash along with Sunrise to maintain its equity percentage. This indicates confidence in the business. ASI is now retooling to make its seafood production lines more efficient, and the plant is temporarily closed while the modifications are being done.
The business concept of this plant is challenging. ASI's original promoters felt a high-tech, high-volume seafood plant in Anchorage could make prepared "ready to heat" seafood meals under private label agreements with major retailers and institutional chains. A big part of this is that the plant was to be equipped with the latest in processing technology to lower costs and offset the Alaska "cost" penalty. Sunrise has shown this to be a viable concept, with initial sales to Sam's Clubs and other buyers. The only real weakness in the plan, ironically, is supply. It may be difficult to efficiently get whitefish (pollock and cod) to the plant from the Aleutians, where most of those fish are caught. The state's established seafood industry has also been skeptical of this venture, arguing that the best place for a plant like this is in the Pacific Northwest, where it will be close to suppliers of packaging and other materials. The Alaskans who back the plant, including AIDEA, think it could work here. If it does, it will be a valuable contribution to Anchorage's employment base (creating about 450 jobs, ultimately) and possibly paving the way for other high-tech processing plants. AIDEA has a lot riding on this venture. Part of the Authority's deal in the restructuring is to temporarily forego rental payments on the buildings. For this, AIDEA received an equity share. AIDEA could sell that share but might also retain it for any earnings. The buildings do have an alternate use as warehouses, but at about half the value of their use in seafood manufacturing.
Healy Clean Coal Project: This is a 50 Megawatt new-technology coal power plant at Healy, south of Fairbanks near Denali National Park. It is owned by AIDEA but was to be operated by Golden Valley Electric Assoc. of Fairbanks, who had also agreed to buy the power. The plant was completed for $297 million in 1997 and operated for about two years before being shut down because of a dispute over reliability of the new coal-burning and environmental systems. Aside from the startup, the plant performed a year-long series of tests for the U.S. Dept. of Energy, which had funded $117 million of the plant costs, to demonstrate the new slagging combustor developed by TRW and a new emissions-control system developed by Babcock and Wilcox. After the DOE test period, the plant, in 1999, went into a 90-day operating test that was required under the agreement between GVEA and AIDEA. The results of that test are a subject of dispute.
AIDEA and independent consultants hired to review the operating test say the plant and its systems performed generally as expected. GVEA said it did not. Golden Valley wants AIDEA to do a complete retrofit of the plant, removing the new technology systems and replacing them with conventional coal-burning systems. That would cost about $80 to $100 million. AIDEA feels a "limited retrofit" to solve certain problems identified with the new technology is more appropriate. That would cost far less. AIDEA is anxious to get this plant back into operation because it is now a nonperforming asset. The plant is costing the authority about $9 million a year in debt service on bonds and other costs.
Other "challenged" AIDEA assets: AIDEA has two other development assets that are experiencing problems:
Seward Coal Loading Terminal: AIDEA purchased a 49 percent interest in the Seward coal loading facility for $6.933 million. This was done to ease debt payments for Suneel Alaska, which is owned by Hyundai Marine, to reduce the cost of shipping Alaska coal to Korea. However, Usibelli Mines, Inc. recently lost its coal export contracts, and this will affect the Seward facility.
Skagway Ore Loading Terminal: In 1990, AIDEA purchased the Skagway ore loading terminal from White Pass Railway for $25 million. The facility was used through most of the 1990s by Anvil Range Mining Corp., which operated the Faro Mine in Yukon Territory. Anvil suspended shipments of ore concentrates in 1998 and filed for bankruptcy.
Several of AIDEA's big economic development projects have fared well and are earning money for the Authority:
Red Dog Mine: AIDEA built the road and port infrastructure for the Red Dog Mine in Northwest Alaska, and the mine is now the world's largest lead/zinc mine. Mineral production in the region is set to expand when base metals market conditions improve. This is one of AIDEA's outstanding success stories. Because of it, about 522 good-paying, full-time jobs were created, and the economy of the Northwest Alaska region has been lifted. Red Dog also now provides about $4 million of the $7 million annual budget of the Northwest Arctic Borough.
In 1987 AIDEA sold $103 million in tax-exempt funds to finance the original road and port for the mine. In 1997, AIDEA sold another $150 million in bonds to finance an expansion of the port. The Authority's total investment is now approximately $267 million. The expansion has allowed Teck/Cominco, operator of the mine, to expand the output of its mill at the mine by 35 percent.
AIDEA and Teck/Cominco are now working on a long-term project to build an extension of the port loading facility into deeper water, to allow direct loading of ore vessels (concentrate must not be shuttled out to vessels offshore). Project costs are between $148 million and $178 million, depending on different scenarios for the extension. Pre-permitting and environmental studies are underway. The expansion would also result in the port being capable of becoming a regional port facility, with bulk fuel storage for local communities. If the project goes ahead, it could be ready for use in 2009. Expansion of the port is critical if other mine development projects planned by Teck/Cominco in the Red Dog area are to proceed. The current port is inadequate to handle expanded volume. Note: Teck/Cominco recently indicated they are abandoning the port expansion effort (at least temporarily); however, work on the EIS will continue.
Although zinc and lead prices have been very low recently and Red Dog has actually operated at a loss last year and this year, the company has no plans to shut down the mine. Because the tariffs and use charges paid to AIDEA by the company are based on volume, the operation has continued to be an important source of revenue for the Authority.
Federal Express Hanger: AIDEA sold $28 million in tax-exempt funds in 1992 to finance a maintenance hanger for large 474 cargo jets. The facility is under a 20-year lease to Federal Express Corp. The hanger has led Federal Express to make other investments at Ted Stevens International Airport.
Anchorage Cargo Port: AIDEA helped finance this privately owned project, a joint-venture of Lynx Group and the Williams Companies. This is a third-party air cargo transfer and warehouse facility at Anchorage's airport. It has been successful, and plans to expand.
Source: "Bradners' Alaska Economic Report," August 5, 2002, No. 14/02.