Legislature(2007 - 2008)SENATE FINANCE 532
05/09/2007 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| HB109 | |
| HB133 | |
| HB229 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | HB 133 | TELECONFERENCED | |
| += | HB 229 | TELECONFERENCED | |
| += | SB 104 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| = | HB 109 | ||
HOUSE BILL NO. 229 am
"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 and Port MacKenzie rail link, 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."
This was the first hearing for this bill in the Senate Finance
Committee.
10:14:39 AM
LALANYA SNYDER, Staff to Representative Mike Chenault, the
bill's sponsor, explained the bill as follows.
The purpose of this bill is to authorize the Alaska
Railroad Corporation to issue up to $2.9 billion in tax-
exempt bonds to finance a portion of the Kenai Gasification
project. The project will bring coal from Healy to Kenai
where low emission coal gasification and electricity
generation plants would be built next to the Agrium plant.
The project will also generate electricity for South
Central Alaska. It will generate excess carbon dioxide that
could be used to improve oil recovery from the wells in
Cook Inlet and continue to supply fertilizer to Alaska.
Payment of debt service for facilities and equipment that
would not be owned by the Railroad would be provided
through a long term contract or other agreement between the
Railroad and the project's owner or operator.
Ms. Snyder advised the Committee that an amendment adopted on
the House floor allowed the potential for the rail line to be
extended to Port MacKenzie. If shipping the coal from Port
MacKenzie instead of Anchorage was deemed infeasible, the line
would only extend to Anchorage. The bond issuance amount was
increased from $2.6 billion to $2.9 billion by the adoption of
that amendment.
10:17:28 AM
PATRICK GAMBLE, President and Chief Executive Officer, Alaska
Railroad Corporation, Department of Commerce, Community and
Economic Development, testified via teleconference from an
offnet location and announced that the Railroad had a twofold
interest in this legislation. First, from an operational
perspective, being able to increase the Railroad's ability to
transport coal mined in Healy to an offload point where it would
be available to the Agrium fertilizer plant would be a "good
sound business" move.
Mr. Gamble stated that "the "second component of our interest"
pertained to the federal Alaska Railroad Transfer Act which
provided the Railroad the "authority to issue tax free bonds on
behalf of the State economic development, which is the mission
of the Railroad."
Mr. Gamble noted that while this bonding authority has been
authorized in the past, it has never been utilized.
Mr. Gamble specified that this proposal would provide "a general
authorization to use our tax-free bonding capability as a
financial tool in order to improve the business case for
Agrium," if they deem the Railroad extension project to be a
viable option. Even if authorized, the Railroad's Board of
Directors would be required to approve each bond issuance.
Mr. Gamble disclosed that, were the decision made to proceed
with the project, "as a partner and financier, we would then
expect to receive some sort of a fee for the ability to provide
this financing."
10:19:49 AM
Mr. Gamble communicated that, after careful consideration, the
Alaska Railroad Corporation and its Board of Directors have
concluded that the actions proposed in this bill would be "good
business" for both the Railroad and the State.
10:20:08 AM
Co-Chair Stedman asked the risk exposure the Railroad might
experience from underwriting the bonds.
10:20:39 AM
BILL O'LEARY, Vice President and Chief Financial Officer, Alaska
Railroad Corporation, Department of Commerce, Community and
Economic Development, testified via teleconference from an
offnet location to discuss the Railroad's risk exposure. The
proposal currently specifies that some of the authorized amount
be directed toward Railroad assets such as locomotives, hopper
cars and other infrastructure improvements necessary to support
this transportation initiative. The debt that would be issued
for those assets would have recourse to the Railroad.
Mr. O'Leary clarified, however, that the vast majority of the
debt that would be authorized under this legislation would be
recoursed to Agrium or whatever entity Agrium might joint
venture or partner with as the operator of the facility.
Mr. O'Leary stated that the current estimate for the non-
Railroad debt is approximately $2.4 billion dollars.
10:22:33 AM
Mr. O'Leary explained that the Railroad would be working with
Agrium or the entity created for the project to develop a
financial plan for selling the bonds. The standard bond issuance
process would include a competitive selection process for
choosing the numerous investment banking firms that would be
required in a transaction of this size.
Mr. O'Leary reiterated that the Board would be required to
approve any debt issuance.
10:23:25 AM
Co-Chair Stedman asked for further information about the action
taken by the House that added $300 million to the scope of the
project.
10:23:33 AM
Mr. Gamble explained that the amendment adopted by the House
pertained to the Port MacKenzie transportation component. While
several transportation options were considered during the
history of this legislation, two are "still in play". One
involves improving an existing line to the Port of Anchorage and
constructing a coal transfer facility which would transfer coal
from a train to a covered coal pile. That coal would then be
transferred onto a barge and transported to Nikiski.
Mr. Gamble stated that the other, and "preferable",
transportation option would include utilizing vast empty acreage
at Port MacKenzie. This option "looks very attractive in the
abstract". It would allow an efficient dock and offloading
process to be "designed from scratch". Unfortunately, the rail
line does not currently extend to Port MacKenzie. The $300
million added to the bill by the House would allow further
review of this option, including a determination of whether
having to extend the rail line 40 miles from Willow to Port
MacKenzie might affect its viability.
Mr. Gamble communicated that another key consideration is
whether the Port MacKenzie rail line extension and port
development could be "synchronized" with the timeline Agrium has
identified for its plant expansion and "the transfer of its
energy source" from gas to coal gasification.
Mr. Gamble stressed that even though the Port of Anchorage is
the known and available option, the Port MacKenzie option is
considered the better choice both for Agrium and other interior
resource development projects which could benefit from having
access to this tidewater port.
Mr. Gamble noted that the financing component of the bill does
not specify how the debt service of the project would be
structured. This would allow the financing team, once engaged,
to begin the "long process" associated with designing the
financing aspect of the project. Conducting a study on the Port
MacKenzie transportation option would alleviate some of the
questions that might arise during discussions with potential
financing partners and buyers. The study would also "improve the
chances of getting an environmental impact study (EIS) started"
in regards to getting a rail line to the Port MacKenzie land.
10:28:02 AM
Mr. Gamble concluded his remarks by specifying that the Railroad
strongly supports further consideration of the Port MacKenzie
option.
10:28:13 AM
Co-Chair Stedman questioned the reason the $300 million was
offered as a Floor amendment rather than being included in the
original bill or adopted during the committee hearing process.
Mr. Gamble credited this as being a timing issue. Even though
the Port Mackenzie transportation option was one of the numerous
transportation options originally considered, it did not
materialize as a strong option until Agrium's plant and energy
source projects and the project financing structure became more
defined.
10:29:48 AM
Co-Chair Hoffman asked that a copy of the Alaska Railroad
Corporation's current financial statement be provided to the
Committee. He also sought information about the Railroad's long-
term expansion plans and other projects being considered.
10:30:36 AM
Mr. Gamble affirmed that this information would be provided. The
Railroad seeks local community participation when considering
expansion plans and other projects. Status reports are also
provided to the Legislature annually. Additional information
would be provided upon request.
Co-Chair Hoffman asked whether the Corporation has developed a
list of long-range projects. If so, he would appreciate that
information.
Mr. Gamble affirmed that the information would be provided. One
of the projects on the list is to move the existing rail line,
which runs through the middle of Fairbanks, to a less congested
area. Similar action is being considered for other communities
including Wasilla.
Co-Chair Hoffman asked whether the list is prioritized.
Mr. Gamble responded in the negative.
Co-Chair Hoffman asked "why not?"
10:32:12 AM
Mr. Gamble expressed that the size and scale of each project,
the length of time required to conduct a project EIS, and the
need to identify a funding source makes it difficult to
prioritize the list. Therefore, the Corporation advances work on
projects "in parallel". Experience indicates that while one
project might advance ahead of others today, in a year's time,
it may lag behind.
10:32:58 AM
Co-Chair Hoffman asked that action on the bill be delayed until
the requested information could be reviewed.
10:33:07 AM
Senator Thomas asked the anticipated timeline for this "big
project"; specifically how the money would be allocated and when
the Agrium plant might convert to coal gasification.
10:33:40 AM
Mr. Gamble deferred to representatives from Agrium USA, Inc.
10:33:50 AM
LISA PARKER, Government Relations Manager Agrium USA, Inc.
testified via teleconference from an offnet location and
communicated the expectation that the timeline "for bringing
this project on line" would be 2011 or 2012. Specific "gates"
have been identified. Once a gate is reached, the project would
be re-evaluated and a determination made regarding whether to
continue advancing the project. The next evaluation is scheduled
for the summer of 2007. If the project is approved at that
point, the next evaluation would be conducted a year later.
10:35:25 AM
Co-Chair Stedman, who considered it "odd that we would have a
$300 million Floor amendment", asked the Department of Revenue
to further address this issue. Something of this "magnitude"
should have been addressed during the committee process.
10:35:51 AM
JERRY BURNETT, Legislative Liaison and Director, Division of
Administrative Services, Department of Revenue, informed the
Committee that the Department had not been involved in the
discussions about the bill or about adding $300 million to it.
Mr. Burnett advised, however, that the bill would not affect the
State's debt capacity or credit rating, as the project would be
funded with "pure non-recourse project financing conduit revenue
bond type financing." The $300 million added by the Floor
amendment would have recourse to the Railroad.
10:36:45 AM
Co-Chair Stedman asked whether the Department had any interest
in how the Railroad, which is considered "a separate entity from
the State", operated.
Mr. Burnett pointed out that the Railroad, as an independent
corporation, "has specific authorization for their bonding"
under the Railroad Transfer Act. They are able to utilize this
type of bond structure "on their own."
10:37:29 AM
Co-Chair Hoffman understood, however, that "the State of Alaska
would be financially responsible" if the Corporation was unable
to pay the bonds.
Mr. Burnett replied that "the recourses would be against the
assets of the Railroad. There is no moral obligation or other
State credit support in this legislation."
10:38:13 AM
Co-Chair Hoffman qualified this as the reason he requested a
copy of the Railroad's financial reports. It is doubtful whether
the Railroad's "assets are sellable or marketable to anyone
else" or whether anyone else "would accept and operate the
Railroad to pay off this large debt." Thus, "the next person in
line will be the State of Alaska."
Co-Chair Hoffman deemed this a "fiduciary responsibility" the
Committee and the Department of Revenue should consider when
discussing a project of this nature. He expected the Department
to provide "a straight answer" when questioned about the issue.
10:39:18 AM
Co-Chair Stedman asked Mr. O'Leary to provide further
clarification on the issuance of the bonds and the recourse in
respect to the $2.3 million bonding authority and the $300
million component.
10:39:43 AM
Mr. Gamble interjected to acknowledge that the issue was
confusing. The bonding authority in the bill is a general
authority in accordance with the Federal Transfer Act; it
specifies that the Railroad's Board of Directors and the
Legislature must approve any sale of bonds by the Alaska
Railroad Corporation. However, the bonds could not be sold until
the entity assuming the debt service was identified.
Mr. Gamble reiterated that identifying the entity which would
assume the debt service is not required at this stage of the
game. The first step is to simply receive authorization from the
Legislature to consider utilizing the Railroad's bonding
ability. The most recent of several such authorizations was in
respect to funding the Alaska Gas Pipeline. No one had been
identified to assume debt service in that instance either.
Mr. Gamble continued as follows.
In this potential sale, there are three separate
components: the Agrium component, the amendment component,
and then the smaller component that the Railroad would have
recourse to, that I think Mr. O'Leary referred to when he
talked about us buying assets and then being responsible
for the payment of funds that might be borrowed to buy
assets. And in that sense, the recourse would be to the
Railroad. The remainder, if it were chosen, and that has
not yet been decided either, if the Railroad were chosen to
actually do the financing, it would be conduit financing
with no recourse to the Railroad.
And also I might mention that these projects are not in
competition with any other projects, whether they're
current Railroad projects that are already on the books or
ones that could be anticipated in the future.
These financings are independent and because we're not
capped, hum, we're not prioritizing nor are we precluding
the option of continuing to work other large projects with
other options for financing those projects as well. That is
a strength of this tool that the State has, and one we're
very interested in working with the State to use for
continued economic development. With that as sort of an
overview, Mr. Chairman, thank you. And I'll pass the more
detailed portion of your question to Mr. O'Leary.
10:43:09 AM
Co-Chair Stedman asked that Mr. O'Leary also address the non-
recourse element associated with this issuance; specifically how
the State or the Railroad might be affected "if Agrium was to go
insolvent and default on their bonds."
10:43:40 AM
Mr. O'Leary stressed that the portion of the bond issuance that
would be recoursed to the Railroad was "the smallest piece of
this proposed transaction." That debt would be recoursed to the
assets owned by the Railroad if the Railroad was unable to pay
their portion of the debt.
Mr. O'Leary specified that the largest piece of the transaction
relates to Agrium.
Mr. O'Leary explained "that, by statute," bonds issued by the
Alaska Railroad Corporation "cannot be backed by the full faith
and credit of the State of Alaska. So, there is no recourse to
the State." This would be expressly included in the
documentation accompanying any such bonds.
10:45:00 AM
Mr. O'Leary clarified that his references to Agrium in this
discussion should be interpreted to represent either Agrium or a
joint venture or partnership involving Agrium in regards to this
project. The bonds sold to support this project "would have
recourse only to the assets of that entity". There would be no
recourse to either the Railroad or the State.
Mr. O'Leary pointed out that if that entity fails to meet its
debt service obligation, "the lenders would look to the assets
of that entity."
Mr. O'Leary noted that while the management of the Railroad must
recommend and the Board of the Railroad must approve the sale of
the bonds, "the marketplace" would have the "ultimate control on
this." Prior to the sale of the bonds, "the marketplace would
opine as to whether they believe that the project and this
entity will be able to pay those bonds back." If the
determination is positive, the bonds will sell; otherwise, they
would not.
10:46:40 AM
Co-Chair Stedman voiced disbelief that the marketplace could be
so "efficient that once they decide to issue double A, triple A
bonds, they never get downgraded and never go into default."
Nonetheless, he understood that if there was a default on this
issuance, it would not impact the Railroad's ability to issue
bonds in the future. "It wouldn't affect their rating, wouldn't
affect the State in any way. It would just be a $2.4 billion
collapse all in the laps of Agrium."
Mr. O'Leary stated that even though "this would not be a
positive thing for the Railroad," there would be no "legal
recourse to the Railroad's assets." The bonds would never be
sold with the "Railroads' assets as the security or supporting
it" simply because the Railroad's balance sheet and revenue
streams could not "support something of this magnitude."
10:48:08 AM
Co-Chair Hoffman pointed out that there have been [unspecified]
bonds sold in the past that have not been repaid. This
undermines one's confidence that bonds receiving the financial
market's "seal of approval …are guaranteed to be paid back."
Co-Chair Hoffman then questioned why the Legislature must
approve the sale of these bonds if the State would not be held
liable.
Mr. O'Leary responded that Alaska Statutes require Legislative
approval in order for the Alaska Railroad "to issue public
debt".
Co-Chair Hoffman declared that "there has to be a reason for
that." He shared the belief that the Legislature has "a
fiduciary responsibility for many of the corporations that are
under us, even though we don't approve your budgets. You are a
State corporation, and then by being a State corporation, I
believe that the State of Alaska is ultimately responsible."
Co-Chair Hoffman voiced that while this may be argued, in his
opinion, the "corporation is owned by the State of Alaska" and
therefore an entity that the Legislature could "decide to keep
or decide to sell." Thus, were to Legislature to approve the
sale of these bonds and there were a default, "the State of
Alaska would be responsible. We do have a fiduciary
responsibility to make sure that the State of Alaska is
protected."
10:50:35 AM
Senator Elton asked whether the $300 million added by the House
amendment would solely support the construction of the spur line
from Wasilla to Port Alexander or whether it would also provide
finding to support the transfer facility "between the rail and
marine link."
10:51:59 AM
Mr. Gamble stated that "the $300 million is the all-in cost for
the Railroad component". It would accommodate both the spur line
and "the operational activities that would occur at the end of
the spur line" at Port MacKenzie. This would include the off-
loading and coal pile facilities as well as on-site maintenance.
The local government would be providing the land and Agrium
would be responsible for the barge loading and dock improvements
"specific to the project."
10:52:47 AM
Senator Elton asked that Agrium be provided an opportunity to
discuss whether incorporating the Port MacKenzie spur into the
project would increase their costs.
Co-Chair Stedman stated that that information would be provided
during the next hearing on the bill.
10:53:22 AM
Senator Thomas understood that Agrium was considering switching
its power source from gas to coal gasification because of the
limited amount of gas available in South Central Alaska. Thus,
he raised concern that this switch would be detrimental to
further exploration and development of gas in Cook Inlet. It
might also negatively affect consideration of running a spur
gasline from the North Slope to the area.
10:54:17 AM
Co-Chair Stedman ordered the bill HELD in Committee.
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