Legislature(2007 - 2008)HOUSE FINANCE 519
04/12/2007 01:30 PM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| HB152 | |
| HB28 | |
| SB49 | |
| HB229 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | HB 28 | TELECONFERENCED | |
| + | HB 152 | TELECONFERENCED | |
| *+ | HB 229 | TELECONFERENCED | |
| + | SB 49 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE BILL NO. 229
An Act authorizing the Alaska Railroad Corporation to
participate in a project consisting of the acquisition,
construction, improvement, maintenance, equipping, or
operation of real and personal property, including
facilities and equipment, for the Kenai gasification
project, authorizing the corporation to issue bonds to
finance all or a portion of the project, and
identifying these as bonds for an essential public and
governmental purpose; and providing for an effective
date.
REPRESENTATIVE MIKE CHENAULT, SPONSOR, noted that Agrium
U.S., Inc. currently owns and operates an ammonia and urea
complex in Kenai, which is in danger of being permanently
shut down due to a lack of adequate natural gas feedstock.
Such a closing would have a harmful effect on the State
through loss of jobs and tax base. The Agrium Kenai
Gasification Project (the Project) addresses the issue by
bringing coal from Healy to Kenai where low emission coal
gasification and electricity generation plants would be
constructed, allowing Agrium to continue to operate the
fertilizer plants at optimal capacity.
Co-Chair Chenault pointed out that HB 29 authorizes the
Alaska Railroad Corporation (ARRC) to issue up to $2.6
billion dollars in tax-exempt bonds to finance a portion of
the Project which includes:
· Facilities & equipment for the transportation of
coal from Healy to Kenai; and
· Facilities & equipment for coal gasification &
electrical power generation adjacent to the Agrium
fertilizer plant located in Kenai.
Lower-cost debt for the Project would enhance the Project's
economics, increasing the feasibility. Payment of debt
service allocable to facilities and equipment that would not
be owned by ARRC would be provided through a long-term
contract or other agreement between ARRC and the Project's
owner or operator. Payment of debt services for rolling
stock, locomotives, track, facilities and other
infrastructure owned by ARRC would be paid for by ARRC
funds. Per AS 42.40.690, in no event would the general
credit of the State be pledged for the repayment of the
bonds.
Co-Chair Chenault continued, ARRC is uniquely suited to
participate in the Project by virtue of its ability to issue
tax-exempt debt as authorized by the federal Alaska Railroad
Transfer Act. A viable Project could mean significant
incremental revenues to ARRC through movement of up to an
additional 3 million metric tons of coal annually. The
Project would also generate compatibly priced surplus
electricity for the regional power grid, generate excess
carbon dioxide that could be used to enhance oil recovery
from the wells in Cook Inlet and continue to supply Alaska
business & organizations with fertilizer.
ARRC would have the flexibility to issue the bonds in a
single issuance or in several issuances. The ARRC Board of
Directors would be required to approve each bond issuance.
2:36:57 PM
PATRICK GAMBLE, PRESIDENT & CEO, ALASKA RAILROAD
CORPORATION, ANCHORAGE, advised that ARRC has never sold tax
free bonds before. This would be a conduit financing with
no liability or recourse to the State. It is a tool
provided to the ARRC transfer that is unique to the U.S. tax
code. It contains provisions reviewed by more than one law
firm, to determine the applicability of certain attributes
that in the 1986 tax code had been left unedited, suggesting
that the intent of Congress was straightforward in the way
that the tool could be used as economic development for the
State of Alaska. The mission of AARC is economic
development. ARRC sees the opportunity with Agrium as the
first time to put it to work for the benefit of the State &
as such, ARRC would become the conduit financers. ARRC is
involved operationally in the moving of coal. Part of the
$2.6 billion dollar request would be the purchase of
additional equipment to support the project.
2:39:53 PM
LISA PARKER, GOVERNMENT RELATIONS MANAGER, AGRIUM U.S.,
INC., reiterated that Agrium is committed to the Kenai
facility in keeping it operational. The current gas
contracts will expire in October 2007. She noted that they
are in negotiation for additional supply. She discussed the
declining supplies of natural gas in the Cook Inlet area.
If the decision is made to continue working on the issue, it
is estimated the project would come on line in five to six
years, but will need additional natural gas contracts to
keep the project on line in the mean time.
2:43:04 PM
Co-Chair Meyer clarified that the amount of bonding would be
approximately $2.6 billion dollars. Mr. Gamble observed
that there would probably be more than one bond release. He
reiterated that the State will not be at risk.
Representative Crawford spoke in support of the legislation,
while asking about assurance during the process with regard
to mitigating issues & cost factors.
2:45:25 PM
Ms. Parker explained that Agrium had met with environmental
firms being considered to address permitting. With regard
to the CO2 and coal dust are the issues to be addressed
during the permitting process. Agrium is also in discussion
with the Port of Anchorage and the Railroad. Nikiski plant
would have covered storage for the coal. The CO2 is used
for making urea; Agrium is committed into looking at ways of
capturing unused CO2. The Department of Energy has
identified about 300 million barrels of oil that could be
recovered in the Cook Inlet. If it can not be used for
enhanced oil recovery, there are other methods to capture
the CO2. Excess CO2 will be addressed during phase 2(b).
Representative Crawford asked when the State would know that
an assurance had been met. Ms. Parker observed that
permitting requires enclosed facilities.
2:49:56 PM
Vice Chair Stoltze asked the dollar amount for the
improvements. Mr. Gamble replied that $2 billion would go
to Agrium and $600 million to the Railroad, including
contingency and inflation for the capital costs.
Vice Chair Stoltze questioned if the proposed location was
the best choice. Mr. Gamble responded that timing is an
issue. As a preferred site, the ability to guarantee that
Agrium and the Alaska Railroad are ready to operate is the
issue. He added that additional spurs could be prepared for
implementation.
2:53:09 PM
Vice Chair Stoltze noted, the proposed statute addresses
specifically the route. He thought that the planning
process could be averted if it did not go through Anchorage.
Co-Chair Chenault asked if there were reasons that it would
not be advantageous to the Railroad, to look at both
options. Mr. Gamble explained that would not have
significance on the bonding side or the ability to move the
coal. The significant impact would be for Agrium's
development plan. With the most certainty, the better the
market takes the risk & pre-approved is most advantageous.
Any doubts regarding a spur to Port McKenzie would have an
impact on bonds and timing.
2:58:03 PM
Ms. Parker added that putting together the business plan,
there is an existing coal mine at Healy & it is known that
there is a Railroad that can deliver product to the Port of
Anchorage. Point McKenzie has open space and does not have
a spur line or an environmental impact statement.
Additionally, they do not know how a spur line would be
financed. It is better to move forward on certainty than to
speculate on what might happen and when it might occur.
2:59:30 PM
Vice Chair Stoltze pointed out the uncertainty operating
through downtown Anchorage. Mr. Gamble replied that to work
with the Agrium project, Port McKenzie would have to be
ready to move in the above mentioned timeframe.
3:01:01 PM
Representative Gara summarized his concerns. He worried
that the intent was to sequester the carbon emissions
underground. Coal produces twice as much carbon emissions
than natural gas. He asked for further assurance that the
majority of the emissions would be contained, pointing out
that there is nothing in the RCA rules that allows sanctions
based on the emissions.
Ms. Parker responded that based on the engineering of the
project, the difference for current and projected CO2 is an
increase of about 10 percent. Agrium is committed to
minimizing and sequestering the CO2 emissions. She pointed
out that Agrium has a track record; there exists a similar
situation in a small Agrium facility in Texas and they sell
the sequestered CO2.
Representative Gara indicated that if the Legislature
provides the bonding now, they would have no control over
what happens in Phase 2. He knew that Agrium was between a
"rock and a hard place". He commented on the number of
variables, however, stressed the importance of addressing
the excess carbon emissions. Ms. Parker noted that over the
past 5 years, there has been a decline to the industry and a
loss of jobs and that the only way to restore those jobs is
to move ahead with the project. The hope is to have no CO2
emissions.
3:07:06 PM
Representative Gara asked if Agrium would support language
addressing that intent. Ms. Parker could not commit until
the drafted language was before the corporation.
3:08:03 PM
Representative Hawker questioned the advantage to Agrium to
use the Railroad for financing as opposed to the commercial
market.
BILL O'LEARY, (TESTIFIED VIA TELECONFERENCE), CHIEF
FINANCIAL OFFICER, ALASKA RAILROAD CORPORATION, ANCHORAGE,
stated that tax exempt financing bonds through the Alaska
Railroad Corporation would have a significant impact &
benefit, dependant on the market conditions at the time.
Representative Hawker asked if the essential government
purpose test must be met [for bonding]. Mr. O'Leary
observed that the transfer language included provisions
regarding tax exempt debt, which appear to exempt the Alaska
Railroad Corporation from the federal tax rules. He felt
that the Agrium project would fit into that category,
resulting in a federal exemption.
3:11:39 PM
Representative Hawker inquired which exemption that would
fit under. Mr. O'Leary noted that rules regarding tax
exempt debt were changed in 1996 with the rewrite of the tax
code, curtailing the use of industrial development bonds.
Limits on the amount of bonds issued for private activity
uses were added. Mr. O'Leary stated he has worked with a
number of bonding companies, reiterating that the project
would be tax exempt debt.
3:12:57 PM
Representative Hawker referenced Section 4, putting a
requirement on the State that the bonds issued would be an
essential government purpose. He asked if that would be a
conflict in intent. Mr. O'Leary did not think so, stating
that the more strength to the argument taken to the Internal
Revenue Service (IRS), the better it would be. Supporting
the project using the Railroad's tax exempt debt furthers
the benefit to the project and ARRC.
Representative Hawker advised that productive assets would
be acquired for Agrium with the $2 billion dollar funding
amount and the Alaska Railroad Corporation receiving $600
million dollars.
Representative Hawker stipulated that the bill provides
conduit authority. He asked if the State of Alaska would be
compensated for that benefit to the company. Mr. O'Leary
stressed that the public benefit would be generated through
the Kenai by support of the continuance and operation of a
large employer in that area. The coal access would have a
significant benefit to the Railroad and the Railroad then
returns benefits to the State. ARRC would be compensated
for hauling the coal from Healy. A fee could be negotiated
for the use of the bonding with Agrium. Mr. O'Leary did not
think language regarding a fee needed to be added to the
bill, but rather would be part of the negotiation between
the Alaska Railroad and Agrium in the fee structure.
Ms. Parker added that Agrium would not object to assurance
that a fee would be paid for the issuance of the bonds.
Mr. Gamble pointed to language on Page 3, Line 21, relating
to fees, noting that additional language could be added to
address Representative Hawker's concern. Representative
Hawker did not see the State receiving any compensation
other than a reimbursement to the Railroad. Mr. Gamble
acknowledged that language could be adjusted in that
Section.
3:20:04 PM
Representative Hawker referred to the argument that
compensation to the State would be the increased
compensation to ARRC, again benefiting the State. He
questioned if the magnitude of the transaction would move
the Railroad toward solvency, providing a dividend to the
State of Alaska. Mr. Gamble stated that revenue earned by
the Railroad should remain with the Railroad. The federal
law clearly indicates that. However, there comes a time
within development and within the law that there needs to be
a way discussed to address projects within the State that
have a Railroad purpose and that the State would intend to
fund such projects within the Department of Transportation &
Public Facilities without violating the Transfer Act.
3:22:43 PM
Representative Hawker asked if the intent would be to enter
the market as a competitive or negotiated bond sell. Mr.
O'Leary clarified that different conditions would be
reviewed, but he envisioned a negotiated sell.
3:24:55 PM
In response to a question by Vice Chair Stoltze, Mr. Gamble
explained that federal law was reviewed and language
tightened to clarify what was meant in the Transfer Act.
Representative Kelly questioned the amount of risk assumed
by the Railroad. Mr. Gamble responded that there would be a
risk assessment in determining the interest rates, which
amounts to the full faith and credit of Agrium's wholeness.
The Railroad's faith and credit as a conduit financer would
be at risk, but they would not be responsible in a default
situation.
In response to a question by Representative Kelly, Mr.
Gamble reiterated that the nature of the Railroad allows
them to bond, since they do not fall under the State cap.
ARRC will have to meet the IRS test for this. When
considering the provisions in the relationship with Agrium,
the key phrase is "for Railroad purposes"; that is
important. If it proves successful, then the tool can be
used for economic development.
3:29:57 PM
Representative Kelly asked how large a company Agrium is.
Ms. Parker replied that Agrium sales in 2006 were $4.2
billion dollars; in the proposed project, Agrium would
assume other partners.
Representative Kelly noted for the record, previous
discussion regarding non-statutory pollution requirements.
He stated that Alaska has stringent federal and State
requirements regarding pollution controls. He did not see
anything imposed upon Agrium that is not by statute or by
law required.
3:31:51 PM
Representative Kelly asked about the economics of the
project. Ms. Parker responded that Agrium is close to
getting a business plan together, making their decision by
July 2007. If the funds are not lined up, the project will
be dropped. If it does not work with the Railroad to issue
the tax free bonds, Agrium will look at other options.
3:33:43 PM
Representative Gara revisited the emissions issue. He
advised that coal burns "dirty" compared to natural gas.
Alaska is a high producing carbon dioxide state, listed as
#13 in the Nation. He questioned about re-injecting carbon
dioxide and the portion of left over emissions. Ms. Parker
recalled that about 42% of the CO2 was used in the urea
process, but she offered to clarify the number & get back to
Representative Gara.
Representative Gara remembered that coal produces twice as
much CO2 as the natural gas. He asked if the re-injection
part would result in something comparable to a natural gas
plant. Ms. Parker replied that based on current technology,
the use of coal today has changed drastically. Depending on
the use of excess CO2, Agrium would hope to have less CO2
emissions than currently generated.
Representative Kelly pointed out that the State is running
out of gas in the Cook Inlet; he wanted to guarantee that
the coal industry would be able to build a power plant. He
stressed that the Alaska coal is low sulphur.
3:37:26 PM
Representative Hawker said he was supportive of the bill,
pointing out that it does provide for financing. He
requested that the State Debt Manager from the Department of
Revenue be present to respond to questioning on the entire
proposal, providing professional counsel on what would be a
commercially reasonable fee structure for a significant
economic advantage to a corporate enterprise. Co-Chair
Meyer agreed.
Representative Kelly pointed out that anything with a
significant capital expansion often requires payment up
front. He asked if something bad happened, would the
Railroad assume the $600 million dollars.
3:39:52 PM
Mr. O'Leary responded that there are two components of the
legislation. Agrium would be responsible for the debt and
that there would be no-recourse to the Alaska Railroad; the
other piece is in regard to the assets owned by ARRC and
that the Alaska Railroad would be responsible for repayment
of debt to those assets. AARC would be responsible for
facility and infrastructure and any financing related to the
assets & debt repayments.
3:41:58 PM
SCOTT HAMANN, (TESTIFIED VIA TELECONFERENCE), KENAI,
testified in support of the bill. He thought it would be a
win-win opportunity for the entire Kenai Peninsula and
ultimately, the entire State of Alaska by providing great
infrastructure. He urged support of the legislation.
JEFF MILLS, (TESTIFIED VIA TELECONFERENCE), KENAI, testified
in support of the bill. He noted that it would help move
energy and feed stock down the Kenai Peninsula in order to
expand the energy base. He also voiced support for the Port
MacKenzie option. He noted concern that AARC would serve as
the conduit for Agrium. He proposed an alternative
scenario, where AARC and Agrium work together to build a gas
plant to provide feed stock for a variety of industries,
summarizing that if the State is going to spend $2 billion
dollars, it should support a variety of industries.
3:45:11 PM
PUBLIC TESTIMONY CLOSED
HB 229 was HELD in Committee for further consideration.
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