Legislature(2001 - 2002)
03/25/2002 09:08 AM House O&G
| Audio | Topic |
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON OIL AND GAS
March 25, 2002
9:08 a.m.
MEMBERS PRESENT
Representative Hugh Fate, Vice Chair
Representative Fred Dyson
Representative Mike Chenault
Representative Vic Kohring
Representative Gretchen Guess
Representative Reggie Joule
MEMBERS ABSENT
Representative Scott Ogan, Chair
COMMITTEE CALENDAR
HOUSE BILL NO. 423
"An Act relating to the Alaska Railroad; authorizing the Alaska
Railroad Corporation to provide financing for the acquisition,
construction, improvement, maintenance, equipping, or operation
of facilities for the transportation of natural gas resources
within and outside the state by others; authorizing the Alaska
Railroad Corporation to issue bonds to finance such facilities;
and providing for an effective date."
- MOVED CSHB 423(O&G) OUT OF COMMITTEE
SPONSOR SUBSTITUTE FOR HOUSE BILL NO. 190
"An Act levying and collecting a tax on certain North Slope
natural gas in place if certain requirements relating to its
sale and delivery are not met, and imposing a limit on the
Department of Natural Resources that relates to the issuance or
extension of oil and gas leases containing natural gas that is
capable of production in paying quantities; and providing for an
effective date."
- BILL HEARING POSTPONED
PREVIOUS ACTION
BILL: HB 423
SHORT TITLE:NATURAL GAS TRANSPORTATION BY ALASKA RR
SPONSOR(S): RLS BY REQUEST OF THE GOVERNOR
Jrn-Date Jrn-Page Action
02/13/02 2244 (H) READ THE FIRST TIME -
REFERRALS
02/13/02 2244 (H) O&G, FIN
02/13/02 2244 (H) FN1: (CED)
02/13/02 2244 (H) GOVERNOR'S TRANSMITTAL LETTER
02/13/02 2244 (H) REFERRED TO OIL & GAS
03/14/02 (H) O&G AT 10:00 AM CAPITOL 124
03/14/02 (H) Heard & Held
03/14/02 (H) MINUTE(O&G)
03/18/02 (H) O&G AT 9:00 AM CAPITOL 124
03/18/02 (H) -- Meeting Canceled --
03/25/02 (H) O&G AT 9:00 AM CAPITOL 124
WITNESS REGISTER
NEIL SLOTNICK, Deputy Commissioner
Office of the Commissioner
Department of Revenue
P.O. Box 110405
Juneau, Alaska 99811-0405
POSITION STATEMENT: Presented HB 423 and answered questions.
SENATOR JOHN TORGERSON
Alaska State Legislature
Capitol Building, Room 427
Juneau, Alaska 99801
POSITION STATEMENT: Provided information pertinent to HB 423.
PATRICK GAMBLE, President and CEO
Alaska Railroad Corporation (ARRC)
Department of Community & Economic Development
P.O. Box 107500
Anchorage, Alaska 99510-7500
POSITION STATEMENT: Testified on the impacts HB 423 might have
on the Alaska Railroad.
DANIEL R. FAUSKE, CEO/Executive Director
Alaska Housing Finance Corporation (AHFC)
Department of Revenue
P.O. Box 101020
Anchorage, Alaska 99510-1020
POSITION STATEMENT: Testified in support of the concept of HB
423 and answered questions.
JOE DUBLER, Finance Director
Alaska Housing Finance Corporation (AHFC)
Department of Revenue
P.O. Box 101020
Anchorage, Alaska 99510-1020
POSITION STATEMENT: Answered questions relating to HB 423.
JOHN WAGNER, Senior Partner
Kutak Rock LLP
(Address not provided)
POSITION STATEMENT: As tax counsel for AHFC, answered questions
relating to HB 423.
MICHAEL J. HURLEY, Senior Commercialization Specialist
ANS Gas Commercialization
Phillips Alaska, Inc.
P.O. Box 100360
Anchorage, Alaska 99501
POSITION STATEMENT: Testified in support of HB 423.
PAUL FUHS, Lobbyist
for Yukon Pacific Corporation
1635 Sitka, Number 301
Anchorage, Alaska 99501
POSITION STATEMENT: Testified in support of HB 423, but
requested an amendment.
DAVE MacDOWELL, External Affairs Manager
for Gas Activities in Alaska
BP Exploration (Alaska) Inc.
17600 Rosemont Drive
Anchorage, Alaska 99516
POSITION STATEMENT: Testified in support of HB 423.
PAM LaBOLLE, President
Alaska State Chamber of Commerce
217 2nd Street, Suite 201
Juneau, Alaska 99801
POSITION STATEMENT: Testified in support of HB 423.
ERIC WOHLFORTH, Attorney at Law
Wohlforth, Vassar, Johnson & Brecht, APC
900 West 5th Avenue, Suite 600
Anchorage, Alaska 99501
POSITION STATEMENT: As bond counsel, answered question
regarding Section 5 of HB 423, saying there is no reason the
definition couldn't be expanded.
ACTION NARRATIVE
TAPE 02-18, SIDE A
Number 0001
VICE CHAIR FATE called the House Special Committee on Oil and
Gas meeting to order at 9:08 a.m. Representatives Fate,
Chenault, Kohring, Guess, and Joule were present at the call to
order. Representative Dyson arrived as the meeting was in
progress. [Representative Ogan was excused.]
HB 423-NATURAL GAS TRANSPORTATION BY ALASKA RR
Number 0066
VICE CHAIR FATE announced that the committee would hear HOUSE
BILL NO. 423, "An Act relating to the Alaska Railroad;
authorizing the Alaska Railroad Corporation to provide financing
for the acquisition, construction, improvement, maintenance,
equipping, or operation of facilities for the transportation of
natural gas resources within and outside the state by others;
authorizing the Alaska Railroad Corporation to issue bonds to
finance such facilities; and providing for an effective date."
VICE CHAIR FATE invited Mr. Slotnick to explain the bill [which
was sponsored by the House Rules Standing Committee by request
of the governor].
Number 0101
NEIL SLOTNICK, Deputy Commissioner, Office of the Commissioner,
Department of Revenue, informed the committee that the
department has been working extensively with outside consultants
and the Alaska Railroad Corporation (ARRC), analyzing the
concept in HB 423, which is using the ARRC's exemption to the
"tax-exempt financing laws" in the Internal Revenue Code to
finance development of a natural gas pipeline in Alaska.
Number 0176
MR. SLOTNICK brought attention to a written presentation in
committee packets titled "Alaska Gas Pipeline Financing
Alternatives: Use of Tax-Exempt Financing through the Alaska
Railroad," dated February 7, 2002. Page 4, he pointed out,
depicts what are called official statements relating to the
offering in 1977 of some bonds issued by the City of Valdez for
the marine terminal for the Trans-Alaska Pipeline System (TAPS).
He cited those as an example of what is being discussed today:
conduit financing using a public corporation - in this case, the
ARRC, which is similar to the City of Valdez, a municipal entity
- to sell tax-exempt bonds to finance what is essentially a
private-enterprise transportation facility.
Number 0380
MR. SLOTNICK explained that in 1977, offerings were made by the
City of Valdez on the basis of the credit of the companies that
would be building the marine terminal. The City of Valdez
bonds, therefore, were backed by the credit of Exxon
Corporation. Although able to use its tax-exempt status to
issue the bonds, the city didn't bear any of the risk that the
marine terminal would prove unprofitable or that bondholders
could go against the City of Valdez.
MR. SLOTNICK noted that similarly, proposed here is that ARRC
use its tax-exempt status to issue bonds to finance the building
of a natural gas pipeline from Prudhoe Bay to markets in the
Lower 48. As to why Valdez could do this in 1977 but the state
must go through the ARRC, he explained that for one thing, the
1977 financing was only for the marine terminal. Valdez took
advantage of the ports-and-harbors exception to the rules
against using tax-exempt financing for private, for-profit
projects and was able to sell these bonds, and yet the companies
could retain ownership and back the project with their credit.
MR. SLOTNICK pointed out that "our" opportunities today to sell
tax-exempt financing are limited to public projects such as
schools, roads, or "other things that you'll typically see the
state or municipalities selling bonds for."
Number 0480
MR. SLOTNICK referred to the limited exception used by Valdez in
1977 and reported that in the Tax Reform Act of 1986, Congress
narrowed that exception further; if Valdez tried [today] to
finance such a ports-and-harbors project, it would have to
retain ownership.
MR. SLOTNICK specified that under discussion today is the model
of ARRC selling bonds, but having the ownership and risk stay
with the private companies, which are the producers or pipeline
companies that actually build and own the line.
Number 0546
MR. SLOTNICK explained why the railroad has a special exemption.
In the [Alaska] Railroad Transfer Act of [1982], when the
federal government transferred ownership of the Alaska Railroad
to the state, a last-minute provision was added that exempts the
railroad from the requirements of what were then called
industrial development bonds - now called private activity
bonds.
MR. SLOTNICK read from the Alaska Railroad Transfer Act,
"Obligation issued by such entity shall be deemed to be
obligations of the state but not obligations within the meaning
of section 103(b)(2) of the Internal Revenue Code." He
indicated this gives the railroad an exemption to the rules that
otherwise would require the entity selling the industrial
development bonds as a conduit to retain ownership of the
facilities.
MR. SLOTNICK reported that furthermore, there is no cap here on
the amount of bonds that could be sold. Student loans can be
sold by the state, for example, but are capped. He added, "I
think the State of Alaska has a $185 million cap, ... and that's
always spoken for by AHFC [Alaska Housing Finance Corporation],
by AIDEA [Alaska Industrial Development and Export Authority],
and by Alaska Student Loan [Corporation], as well as by
municipalities."
Number 0739
MR. SLOTNICK pointed out that despite the Alaska Railroad's
unique exemption in the United States Code, it doesn't have
authorization under state law to issue bonds. It has to come
back to [the legislature] before issuing any bonds at all, and
it doesn't have specific authorization to issue bonds for
development of a natural gas pipeline. He therefore urged
passage of HB 423.
MR. SLOTNICK suggested that bond counsel Eric Wohlforth of
Wohlforth, Vassar, Johnson & Brecht, who was on teleconference,
could offer expertise regarding both the Alaska Railroad
Transfer Act and the financing that took place on the Valdez
marine terminal, should there be technical questions.
Number 0851
MR. SLOTNICK turned attention to the financing modeling and why
it might be something the producers would be interested in. He
said tax-exempt financing is always cheaper than taxable
financing. People who buy the bonds don't have to pay taxes on
the interest from the bonds; therefore, the bonds can be sold at
a much cheaper interest rate. Generally, the market will price
tax-exempt bonds 20-25 percent cheaper than taxable bonds.
MR. SLOTNICK estimated that if this were financed today on a
"project-finance" basis, the spread in interest rates between a
taxable and a tax-exempt project-finance bond would be roughly 2
percent. For example, if the market priced this project at
about 8.5 percent taxable, he said, "we would think it would be
about a 6.5 tax-exempt."
Number 0955
MR. SLOTNICK noted that the producers would have many financing
options for this project. For instance, rather than having the
bonds based on the project itself, they could be based on the
balance sheet of the corporations, which would provide a cheaper
rate because of the more solid guarantee. Tax-exempt bonds sold
based on the corporate credit would be, again, roughly 20-25
percent cheaper than taxable bonds.
MR. SLOTNICK explained that because of the numerous options,
presenting a model and figuring out the amount of savings was
difficult; nonetheless, he was presenting a model that assumes a
$17 billion project that is 70 percent debt-financed and 30
percent equity-financed, which requires someone to come up with
cash before the bonds are brought to market. The market doesn't
want to see 100 percent debt financing, he explained, but wants
someone taking risks other than the purchasers and investors in
the bonds used to finance a project. He cited the Alliance
Pipeline that transports natural gas from Alberta to Chicago as
an example of a project with that [70-30] structure.
MR. SLOTNICK noted that using the foregoing assumptions, the
model has $14.25 billion in bonds issued in a tax-exempt
scenario. "That's more than the 70 percent if you're doing the
quick math in your head," he pointed out, "but that's because
you also sell bonds to finance the interest payments during the
period of construction." He said he would provide the figures
for a taxable scenario for comparison.
Number 1128
MR. SLOTNICK continued with the model. He referred to the
gross-interest difference referenced in the packet, but said it
is a meaningless figure because interest is tax-deductible.
What should be compared is the after-tax difference in cost to
the companies of tax-exempt versus taxable financing. To make
it meaningful, he said, one needs to "present-value it" back to
today's dollars. This is a 25-year project, he pointed out, and
future dollars aren't worth as much as dollars in hand today;
therefore, in this model it is "present-valued" back to the
start of the project, with a resulting savings to the producers
"in 2007 dollars" of more than $1 billion for tax-exempt
financing.
Number 1239
MR. SLOTNICK highlighted an important element of the model: the
expectation that the producers would enter into ship-or-pay
contracts. He explained:
That would be the basis of ... taking this credit to
market. That's the way the Alliance Pipeline was
done, is that the producers entered into ship-or-pay
contracts, meaning that even if ... the project
doesn't get built or is delayed, there is a
requirement that the producers come up with the money
that would be backing the bonds. That's why there ...
would always be the credit of the producers behind
such a project.
Number 1280
MR. SLOTNICK reported that [the Department of Revenue] had
worked closely with an "investment banker" firm to do this
modeling. Not only had the department's economist run models,
but economists and analysts at the firm of Goldman Sachs had
assisted and run some models as well. Mr. Slotnick said he
wasn't sure whether the analyst from Goldman Sachs was on
teleconference that day to answer questions, but if there was a
question he himself couldn't answer, he could get back to the
committee later with the answer.
Number 1336
MR. SLOTNICK explained [Section 2] of HB 423. He reiterated
that the Alaska Railroad has a unique authorization in federal
law that allows it to issue bonds to finance this project, but
doesn't have that authority in Alaska law. [Section 2]
therefore requests an amendment to AS 42.40.250, the enabling
Act for the Alaska Railroad, to add a paragraph [(13)] to the
list that provides authority for the railroad to issue the
financing "for the acquisition, construction, improvement,
maintenance, equipping, and operation of facilities for the
transportation of natural gas resources within and outside the
state without regard to whether the facilities are [or] will be
owned in while or in part by the corporation or located on land
owned by the corporation."
Number 1426
MR. SLOTNICK explained Section 3. He said AS 42.40.630
describes that the railroad can issue bonds with legislative
authorization and can pay for those bonds through its own
revenues or with state or federal grants. He remarked, "But
here, of course, we're going to require that the railroad pay
for these bonds through means of a contract entered into with
the gas-producing entities. So we wanted to put that directly
into the law, as well, for these bonds that would be sold under
the previous authorization that I've just described."
MR. SLOTNICK noted that Section 4 just states clearly that these
bonds are for a public purpose, which is a requirement to issue
tax-exempt bonds. Section 5 gives the actual authorization for
ARRC to sell these bonds.
Number 1485
MR. SLOTNICK brought attention to the fiscal note from ARRC,
which describes ARRC's estimated contractual costs for issuance.
He explained, "Those costs would be paid for by the bond
proceeds, but nevertheless they would be a cost that would ...
have to go through the railroad; so, therefore, we put in the
fiscal note with that estimate in it."
MR. SLOTNICK turned attention to the fiscal note from the
Department of Revenue, saying the department has put in a small
fiscal note for this upcoming fiscal year. He explained:
The purpose of this money is to RSA [use a
reimbursable services agreement] to the railroad so
that the railroad can enter into contracts with a
financing team. The railroad should have the same
kind of access to the same kind of outside consultants
that we at the Department of Revenue have whenever we
go to the market to sell bonds.
Number 1580
MR. SLOTNICK continued with the department's fiscal note. He
said all entities that sell bonds engage a financial advisor and
bond counsel for these complicated transactions; there are lots
of laws governing them and lots of financial considerations
about structure and timing, for example, that require an
expert's advice. Frequently, contracts with financial advisors
or bond counsel are done on a "deal contingency" basis: "when
the deal is done, that's when they collect their money." That
is how the Department of Revenue pays its financial advisor and
bond counsel, he noted.
MR. SLOTNICK cautioned, however, that although ARRC could
probably procure outside consultants on this basis, he believes
ARRC should avail itself of advisors whose pay isn't necessarily
contingent on having a deal go forward. If, for some reason,
the deal being discussed was not in the best interest of the
state and the Alaska Railroad, it would be best if the advisor
had no incentive to keep that information quiet.
Number 1644
MR. SLOTNICK continued with the fiscal note:
My suggestion here is that it's a small amount of
money, $50,000 for the next two years to RSA over to
the railroad for it to obtain advisors that can work
with the railroad on how best to structure this, how
best to go forward to market. And if ... those
advisors end up putting in more time than is covered
by this, well, I'm not too worried about that.
They'll be willing to do that. ...
If this goes forward at all, this is going to be a
very big deal, and advisors and consultants are going
to be willing to give the railroad all the help that
[it] needs.
MR. SLOTNICK reiterated that he'd feel more comfortable "if the
railroad's financing team was not out there with its pay
contingent on the deal, that we had a contract in place to make
clear that these advisors were working on behalf of the
railroad." He continued:
I think the Department of Revenue is willing to RSA
this money to the railroad. The railroad is not under
the Executive Budget Act and didn't put in a fiscal
note itself for these advisors; we agreed to do that
on their behalf, but we do think that is a step that
should be taken. ... I've met with the railroad. I
appeared before the railroad board last week. We've
explained this fiscal note to them.
MR. SLOTNICK concluded by discussing suggestions made:
We've also suggested to the railroad that perhaps we
should assemble a committee of the state entities that
have a lot of experience in issuing tax-exempt bonds.
Besides the Department of Revenue, that would include
AIDEA, which has a history of doing conduit bonds like
this, and it is an industrial development agency, ...
and then Alaska Housing [Finance Corporation]; ...
it's actually the biggest issuer of tax-exempt bonds
in this state, so they have a lot of experience and a
lot of good staff.
So my suggestion to the railroad was, as it's pushing
forward with this and working on this project and this
deal, that they consult with this committee. And I
talked to Bob Poe [executive director of AIDEA]. I
talked to Dan Fauske [chief executive officer (CEO)
and executive director of AHFC]. We're all willing to
provide whatever help the railroad needs. And so I
made that suggestion to the railroad board last week.
Number 1781
VICE CHAIR FATE called upon Senator Torgerson, noting that he is
the chair of both the Senate Resources Standing Committee and
the Joint Committee on Natural Gas Pipelines.
Number 1810
SENATOR JOHN TORGERSON, Alaska State Legislature, came forward
to testify. He told members:
I just mainly wanted to inform the committee that a
lot of what you just heard about hiring outside
counsel to look at this is something that we've
already done. Legislative Council authorized a goodly
sum of money to do this. I went out with an RFP
[request for proposals], as the chairman of the joint
committee on pipelines, and we selected a Washington,
D.C., firm ... named Hogan & Hartson, the largest law
firm in Washington, a very reputable firm. They are
going through and doing the first "due diligence" on
... whether or not the railroad actually has the
authority.
It comes down to some fundamental questions, which
I'll share with the committee, that I've asked them:
Most generally, ... does the railroad have
extraterritorial powers? Does the law that the
federal government authorized, the [Alaska Railroad]
Transfer Act, say that the railroad has powers to loan
money anywhere in the state or in a foreign country?
I realize a lot of this would be done through ... an
American firm, and Alaska-based, maybe, and what they
do with their money after that is maybe no business of
ours, as long as it has something to do with the
pipeline. So ... it will, in fact, be building
something in a foreign country, but it may be under
the obligation of ... another entity. ...
The question really is, ... in the transfer Act -
which was really clear on the property that was owned
by the Alaska Railroad, and which was decided with
legal descriptions and so forth, this was just ... one
little paragraph in that transfer Act - did it mean
that the railroad could do anything it wanted to
outside of that area?
Number 1916
SENATOR TORGERSON highlighted five questions he'd asked [Hogan &
Hartson] to respond to initially. First, can the Alaska
Railroad provide tax-exempt financing for that portion of a
pipeline within Alaska? Second, can it provide such financing
for a portion of a pipeline outside of Alaska - in Canada, other
states, the Far East, or Mexico? He noted that any incentive
might "tip a few more projects over the edge as far as being
economical."
SENATOR TORGERSON continued with the five questions. Third,
could it provide such financing for that portion of a project
that isn't a part of the pipeline, such as extraction plants in
Alaska, Canada, or the Lower 48; "liquefication" plants in
Alaska; or "regassification" plants in the Far East or Mexico?
Fourth, can it provide financing for more than one project? He
mentioned the need for suggestions on how to do that.
Number 1979
SENATOR TORGERSON noted that the fifth question, one of the
larger ones, is whether a letter ruling from the Internal
Revenue Service (IRS) is needed. He added, "Once we get those
done, then it'll be our job, and this committee's job, to look
at the impacts this will have on our corporate tax structure, if
any, the ad valorem taxes of our municipality - our 20 mills,
which we share with local governments." He told members:
I want this to work, but this is a big question. This
is a lot of money. And we need to make sure ... that
we have all the information that we can. So I expect
an initial ruling back from this law firm in about
three weeks, which I'll be glad to share [with] the
committee. And I'll make our consultant available to
the committee. And I have no idea what you're going
to do with the bill, but if anywhere we need to do it,
I'll be glad to make ... this person available, plus
we'll be having hearings through the Joint Committee
on Natural Gas Pipelines.
Number 2054
VICE CHAIR FATE expressed hope that some of those questions will
be answered by the time HB 423 gets to [the Senate Resources
Standing Committee]. He thanked Senator Torgerson, noting that
those questions were ones the committee had been going to ask.
Number 2088
PATRICK GAMBLE, President and CEO, Alaska Railroad Corporation
(ARRC), Department of Community & Economic Development,
testified via teleconference, noting that with him was Bill
O'Leary, chief financial officer for ARRC. He told members:
At this early stage in the process, while everybody's
getting the legal issues sorted out, the railroad and
the executive staff for the railroad are ...
intentionally maintaining a pretty low profile with
regard to taking steps to move forward at the present
time, steps that would include hiring advisors or
structuring the organization in some way other than
its current structure, in anticipation of this
project.
And we do that deliberately because while there have
been ... some great suggestions that have been made,
such as Neil Slotnick's suggestion to have a committee
with AIDEA and AHFC and [Mr. Slotnick] and his folks,
together with the railroad, these are all probably
good ways that we could evaluate to move forward when
the time comes.
The bottom line is that the railroad really can't take
any official steps until its board of directors
authorizes us to sell the bonds. And that step, of
course, has not been taken, and it's going to be
awhile, probably, before it is taken, because the
board is in the process of getting better educated on
this whole issue itself.
At our last board meeting, as [Mr. Slotnick]
mentioned, we had AHFC sort of gives us a "Bonds 101,"
a peak under the tent at what the corporation is in
for, should ... the decision be made to move forward
on this. And the board is in the business of
preparing to authorize us to take the first steps.
Their presentation was very helpful in ... helping us
to determine what kind of organizational impact this
overall project would have on the railroad.
Number 2198
MR. GAMBELL continued:
The railroad's position is, we've also got a railroad
to run and ... run it safely, and that's first and
foremost our consideration. And this would be a large
addition to what we are currently very busy doing. So
there are some significant impacts that would accrue
to the railroad, and we're quietly doing our homework
with regard to those kinds of things. But, formally,
we are not out hiring anyone at the present time.
We're sort of keeping our powder dry but getting a lot
smarter, so that when the time comes, we can move
forward in concert with those others that ... will
support us and move with us and give us assistance.
And as you well know - and I've said this a couple of
times before - the railroad has been instrumental in
some of the key development moves in the state in the
past, and this is simply a continuation ... of that
history, to be able to ... possibly do this again in
the future in a very big way. And so we stand ready,
willing, and able to step up to the plate ... and do
that when the time comes.
Number 2284
VICE CHAIR FATE referred to Mr. Gamble's mention of the
responsibility of the railroad and to previous mention by
Senator Torgerson of multiple projects. He asked whether a
bonding capacity of $17 billion, if entirely utilized, would
interfere with the operation of the railroad, and whether [ARRC]
would be able to bond any other projects.
MR. GAMBLE said that is a legitimate question that needs to be
developed more fully. He added:
I can tell you that there would be a considerable
amount of additional business in actually moving the
pipe, ... just plain railroad business. The capacity
of the railroad to move those very heavy, long lengths
of pipe, and the additional structure that it would
take in terms of cars, so as not to compete with the
current business that we ... have, including our
passenger service in the summertime - you know, we
don't want to kick them off the line - we would see
the possibility ... of some improvements - in terms of
our capacity to be able to handle all the additional
work at the same time - as possibly being a precursor
to ... actually moving the pipe.
And in that sense, there may be some project-kinds of
improvements, to say the parts of the rail line that
haven't been rebuilt as we've been rebuilding our
infrastructure, maybe improvements to some of our
bridges. As you know, those ... can be weak points
when you're hauling very heavy items. And, of course,
the maintenance of our line is directly proportional
to the weight and frequency of heavy trains crossing
that line, which would be significantly increased.
So ... the original idea of the bonds, when this was
put into the transfer Act, was for railroad
development. And we certainly would have to take a
close look at what further development ... the
railroad might need ... in order to make sure its
infrastructure can provide the robustness that's
required for the safety and capacity that's going to
be called for in this very large project.
Number 2438
DANIEL R. FAUSKE, CEO/Executive Director, Alaska Housing Finance
Corporation, Department of Revenue, came forward accompanied by
Joe Dubler. He noted that on teleconference should be Eric
Wohlforth; Steven Kantor [President, Arimax Financial Advisors],
financial advisor to the corporation; and John Wagner [Senior
Partner, Kutak Rock], special tax counsel. He said these were
the same individuals present before the railroad board a week
ago, as Mr. Slotnick had referenced. He suggested that Mr.
Wagner, in particular, could address questions posed by Senator
Torgerson in regard to the ability to build pipelines in Alaska
as well as Canada.
MR. FAUSKE brought attention to a handout in committee packets
titled "Presentation to the House Special Committee on Oil and
Gas by Alaska Housing Finance Corporation," dated March 25,
2002. He explained that as requested by the committee, it was
the same packet [AHFC] had produced for the railroad except for
the title page.
MR. FAUSKE referred to the page labeled "AHFC Team
Participants." Besides people present and on teleconference, he
noted, the team included others [Judith DeSpain, Deputy
Executive Director, AHFC; Michael Buller, Chief Administrative
Officer, AHFC; and Ken Vassar, Senior Partner, Wohlforth,
Vassar, Johnson & Brecht].
MR. FAUSKE referred to the next page, "AHFC Team." He indicated
AHFC averages $500 million to $900 million a year in various
types of bond transactions. He said the assembled team had been
together for some time, and "assists us in performing all this
activity." [The Management and Finance team list included the
AHFC executive staff, the AHFC finance department, and Arimax
Financial Advisors. The Legal Team included Wohlforth, Vassar,
Johnson & Brecht, "Leading Bond Counsel in Alaska"; Kutak Rock,
"One of the nation's leading municipal bond tax firms"; and
Hawkins Delafield & Wood, "The nation's largest law firm devoted
exclusively to municipal bonds."]
Number 2545
MR. FAUSKE brought attention to the next page of the handout,
"$13.153 Billion in Bonds Issued by AHFC," noting that it
provides a brief history and details the amount of bond work it
has done. He said [for tax-exempt bonds] there were 101
negotiated transactions and 25 competitive transactions, for a
total of $9.017 billion; there also were about $4.136 billion in
taxable bonds [from 70 negotiated transaction]. In addition,
AHFC is involved in short-term debt issuance of "Euro commercial
paper," although he said, "We no longer have the Euro commercial
paper program; we brought all that onshore [in] ... '99." In
addition, he noted, are [repurchase] agreements in varying
amounts.
MR. FAUSKE turned attention to the next page, "Non-Housing Bonds
Issued by AHFC." He noted that so-called tobacco settlement
bonds were $116 million in 2000 and $126 million in 2001;
university [dormitory] bonds were $33 million [in 1997]; state
capital project bonds under SB 360 totaled about $300 million
[$196 million in 1999 and $74 million in 2001]; and the Robert
B. Atwood Building bought in downtown Anchorage [required bonds
of $40 million in 1999].
Number 2606
MR. FAUSKE discussed the next page, labeled "AHFC has issued
more bonds than any other issuer in Alaska"; he pointed out that
its graph relates to Mr. Slotnick's testimony and various
issuers of bonds in Alaska. It shows that AHFC is certainly a
key player [at 31.6 percent of tax-exempt debt in Alaska from
1992 to 2002], as are other entities. He noted the activity
across Alaska by not only state institutions, but also by
municipal governments, boroughs, the Alaska Student Loan
Corporation, and others.
Number 2626
MR. FAUSKE referred to the cap mentioned by Mr. Slotnick that is
imposed on tax-exempt bond financing; he informed members that
the cap now has been raised to $220 million. All those entities
doing private-activity bonds compete against it. As for the
issue addressed in HB 423, he said:
The beauty of this transaction is that it is not under
that cap. So that would be a significant advantage,
because for a deal of this size - I believe the bill
states $17 billion - that would tie up that private-
activity bond cap for "pretty much ever." There would
be no ability to do that project in an effective
manner and also allow [AHFC], AIDEA, [Alaska] Student
Loan [Corporation], North Slope Borough, Kenai
Borough, [or] any of the other entities that need to
apply for pieces of that cap for their tax-exempt
authorization.
So the ability for this bond transaction to be outside
that is absolutely key to its success and its ability
to function without undue harm being created to the
other issuing entities across the state of Alaska.
Number 2675
MR. FAUSKE brought attention to the next page of the handout,
"The Bond Issuance Process." Selection of the appropriate
[professionals] is key to that process, he said, whether
financial, tax, legal, or financing-specific experts. He again
noted that Mr. Kantor, AHFC's financial advisor, was on
teleconference to answer questions.
MR. FAUSKE recalled that WEFA [Wharton Economic Forecasting
Associates, now combined into DRI-WEFA] had been brought on to
analyze the legitimacy of the figures produced by the tobacco
industry in relation to what the settlement payments to all the
states would be. He indicated WEFA was an outside quantitative
analyst that gave support to the states and eventually to AHFC
in creation of the Northern Tobacco Securitization Corporation
to issue the bonds, so that there would be verifiable data to
take to the investors - in the process of putting a bond package
together, to provide an indication of the payment schedules and
of the validity and security for those payments - prior to
purchase of the bonds.
MR. FAUSKE suggested this present case would be no different:
experts would analyze the validity of the project and the
financing structure, to offer additional security and comfort
levels for those getting involved in the transaction.
Certainly, he said, there would be special tax counsel; he again
noted that on teleconference was a person whose services [AHFC]
has used many times, Mr. Wagner of Kutak Rock, a well-known firm
that does tax counsel work for Exxon[Mobil Corporation]. There
also would be bond counsel, he said, which the firm of
Wohlforth, Vassar, Johnson & Brecht provides for the corporation
and other entities around the state. Furthermore, there would
be disclosure counsel, engineering specialists, investment
advisors, and other specialty consultants, to name a few.
Number 2850
MR. FAUSKE advised members that in developing an optimal
financing structure, coordination with the users of the project
is essential. As pointed out earlier, this is conduit
financing; the absolute credit and ability to pay is "structured
within the firms of the industry," and in this case,
Exxon[Mobil], BP, and Phillips are the three primary players.
MR. FAUSKE recounted that while he was with the North Slope
Borough, "we would issue bonds on behalf of the North Slope
Borough." Although those were general obligation (GO) bonds, he
also was involved in conduit financing to develop a solid-waste
treatment facility. When he met with rating agencies and
investment [firms], one of the first things he'd ask was what
the underlying credit of BP and ARCO were; in those days, the
North Slope Borough's tax structure was such that 94-95 percent
of its tax revenue came from two or three major [oil] firms.
MR. FAUSKE said the first question to ask, therefore, is what
the underlying credit is; in the instance of ARRC's issuing of
the bonds on behalf of the producers, as contemplated in HB 423,
the credit of the producers is what is [important]. He remarked
that the three major oil companies are "large players" on an
international scale.
Number 2898
JOE DUBLER, Finance Director, Alaska Housing Finance
Corporation, Department of Revenue, addressed an earlier
question about ARRC's issuing bonds for its own purposes. He
explained that because the $17 billion - or whatever the number
ends up being - in bonds won't use the railroad's credit but
will look to the oil companies for their credit ratings, the oil
companies' ability to access the bond market shouldn't be
affected at all.
Number 2920
MR. FAUSKE mentioned the type of structure and the numerous
options, noting that Mr. Slotnick's model, to his belief, has a
four-year construction schedule. He emphasized the need to have
the oil companies involved because there would be interim short-
term financing, in many cases, for construction costs. That
could be accomplished in a number of ways. For instance, an
"equity infusion" could be put in place by the industry; he
noted that Mr. Slotnick's model uses 30 percent equity.
MR. FAUSKE said the individual financial structures of the
issuing entities would need to be looked at regarding how they
want to see the short-term financing. They might opt to have
ARRC issue bond anticipation notes (BANs), which are short-term,
low-interest-bearing credit used for interim financing, "which
are then taken out longer term by bonds." Or some entity fairly
heavy in cash might decide to use cash financing for its piece.
TAPE 02-18, SIDE B
Number 2985
MR. FAUSKE explained that even though it's a big project, it
will use the same financial strategy used in smaller deals. It
relates to how firms and issuers maximize their abilities to
enter the bond market in the most efficient manner so that the
best cost savings are generated. Carefully matching
construction financing with long-term financing ends up being
critical to the overall success of the project. If one reason
to go to the tax-exempt market is because of savings, it is
critical to have a well-planned financing timetable so that
money is available when needed to supply that efficiency.
Number 2937
VICE CHAIR FATE asked what the timeframe is to put the package
together.
MR. FAUSKE answered that there are some legal parameters
regarding authorization as to when to actually issue the bonds.
Consulting with Mr. Dubler, he said it is 60 or 90 days, to his
belief, regarding disclosure items and presentation of the
official statements. "To put together documents, we generally
allow 45 to 60 days," he added. He said the ability to get into
the market is actually a fairly quick process if all members of
the team are in place and know their roles; it could be a matter
of weeks or months, "maybe a couple of months at the outset," to
do the first phase. He remarked:
I would never advocate - and I don't think anyone here
would - that you'd be out on the street selling $17
billion worth of bonds at one sale. It'd be just too
big. One thing, it would just inundate ... the U.S.
market of tax-exempt [financing]; ... it'd be hard to
... disburse that number of bonds in an effective
manner. And, also, it probably wouldn't match the
construction cycle. You wouldn't need all that money
upfront. So you'd want to stage yourself going out so
that you'd maximize the economies of scale when
selling those [bonds].
Number 2857
VICE CHAIR FATE added that one must stay ahead of "the power
curve in the permitting and the licensing procedures that are
going to take place, which take a much longer period of time."
MR. FAUSKE agreed. He then addressed local support. Regarding
selling bonds to build a trans-Alaska natural gas pipeline, he
said it isn't something he would anticipate a great deal of
"disharmony" about, although there could be some. He offered
his perception, from what is in the papers and "on the street"
that it would be viewed quite positively by the public.
However, information to the public may be limited because the
petroleum companies won't be required legally to reveal
construction and drilling schedules, for example.
Number 2770
MR. FAUSKE turned attention to rating agencies. Long before
issuing the first bonds, he said, "you" are going to be meeting
with the three major rating analysts - Moody's, Standard &
Poor's, and Fitch - to outline the proposals; discuss the bonds;
and discuss the structure, even prior to the selection of
underwriting firms. Prior to issuance, then, there will be a
rating, by the rating agencies, on those bonds. That is
critical because it establishes the level of risk, which
[determines] the amount of interest paid on those coupons or
bonds being issued.
Number 2725
JOHN WAGNER, Senior Partner, Kutak Rock LLP, testified via
teleconference, noting that his law firm is special tax counsel
to AHFC. In response to Vice Chair Fate's question about the
timetable for getting into the market, he said the tax laws have
restrictions regarding how quickly one must start using bond
proceeds. He explained:
One of the rules is that you have to expect to use ...
85 percent of the proceeds within three years.
Obviously, this is a very long-term project, so these
bonds will have to be issued in trenches, based upon
the engineers' expectations of the use of money. Our
firm happened to be underwriters' counsel on the
Valdez financings many years ago, ... [which] occurred
over a period of time for that very reason.
Number 2684
REPRESENTATIVE KOHRING thanked Mr. Fauske and Mr. Dubler for
their work and for the staff's outstanding job over the years.
He commended them for doing such an exemplary job at AHFC. He
suggested the need to support elements of government that do a
good job; he said AHFC certainly is one of those, being one that
actually makes money for the State of Alaska, although the
legislature has seen fit to take some of that money as a
"reward" for doing a good job. He recommended that AHFC
continue, along with ARRC, to advise the legislature regarding
this bond-issuance process.
Number 2620
MR. FAUSKE addressed marketing of the bonds, which he said is
critical. Selling a bond is selling a product, he explained. A
deal of this size will involve a great many "large,
institutional investors" such as insurance companies or pension
trust funds. In addition, AHFC's schedules include a process it
has initiated - going out to retail investors. "In other words,
we have a special timeframe that we offer up, on our bond
transactions, where Alaskans get a priority scheduling at a time
where they buy bonds," he said, noting that on "the tobacco
deal," 50 percent of the $126 million was done under retail
transactions. He added:
We've found it to be a good piece of business. [It]
... gives Alaskans an opportunity to ... be in that
marketplace. And something with a credit rating that
I would assume this is going to have is generally a
pretty good investment. And it's back to that public
support issue, as well as to give Alaskans an
opportunity to make sure that they're purchasers.
Number 2547
MR. FAUSKE explained that the process doesn't end the day the
last bond is sold. He said:
You've got disclosure and continuing disclosure on
those bonds for years to come, absolutely out through
the life of the bonds. And without knowing the
structure of this - whether they're 10-year or 15- or
20-year bonds - you're certainly going to be in the
marketplace, because you're going to be doing
refinancings or refundings of bonds, potentially,
depending on what interest rate markets do.
But also, ... any disclosure issues or any ...
questions involving the bonds would come back to the
issuing entity and its ... experts that it has on
staff for disclosure items, to answer those questions
to the purchasers of the bonds.
Number 2512
MR. FAUSKE asked Mr. Wagner to respond to Senator Torgerson's
testimony about "the ability of financing outside the borders of
Alaska."
MR. WAGNER responded:
Senator, I know it's one of the questions you asked of
Hogan & Hartson, so I don't mean to, in any way,
interfere in what they're going to look at for you.
But there is ample evidence, in at least the Lower 48,
of states or their local municipalities issuing bonds
and using the proceeds to finance facilities that are
located outside the state and, in some cases, even
outside the territory of the United States, that is,
in foreign countries, particularly in Canada, where
this is done a lot by publicly owned utilities, not
investor-owned, but ... actually political
subdivisions themselves, and they finance portions of
hydroelectric lines and ... such from Canada.
So, for what it's worth, there is ... ample precedent
in the ... other states for the use of bonds to
finance facilities that are located outside the
territory of the state where the issuer is located.
Number 2441
VICE CHAIR FATE asked whether there is a general legal
precedent.
MR. WAGNER answered:
I can think of two things offhand. One is, there's an
actual case from, I believe, ... the supreme court of
the State of Michigan, where a county in Michigan
issued tax-backed bonds and built a retirement
facility in Florida. And they gave a preference to
Michigan residents. But the supreme court in Michigan
said that it was OK for a county in Michigan to build
and own and operate a retirement home in Florida. ...
The others really involve utilities. Like I said,
they're not privately owned utilities, but public
utilities, which there are a lot of ... in the Midwest
and the Seattle-Northwest area. And they routinely
... have issued bonds ... and used the bond proceeds
to finance their participation interest in,
particularly, transmission of electricity. And it's
also in the case of natural gas pipelines. But those
are not done pursuant to treaties; those are just done
pursuant to their general authority.
Number 2364
VICE CHAIR FATE asked whether the natural gas pipelines are
private pipelines.
MR. WAGNER replied that the pipelines are, in most cases, owned
by a partnership. Or if they're owned by a private company,
then the utility is actually financed in a "participation or a
partial ownership in that pipeline."
VICE CHAIR FATE indicated he wanted to establish that it doesn't
involve a public utility like the power lines do. "In other
words, there's two separate things that you're dealing with
there," he added.
MR. WAGNER said that's right.
Number 2317
MR. DUBLER referred back to Vice Chair Fate's question regarding
scheduling. He clarified that there is no legal requirement to
go to market within a certain number of days. He said what Mr.
Fauske had referred to, however, was that there appear to be
significant legal questions about what authorization the Alaska
Railroad really has under the section Mr. Slotnick referred to
earlier, and whether that sweeping language would authorize a
pipeline or a project of this magnitude.
MR. DUBLER said "there's a pretty good feeling from ...
everybody" that a $100 million [issuance] would not be a
problem; however, a $17 billion tax-exempt issuance will draw
attention at the federal level. He said the legal issue Mr.
Fauske was referring to, to his belief, was that ARRC should
ensure, before going any further towards financing this project,
that all its legal opinions from tax counsel are "in line." He
offered the good news that it won't take as long as it will take
the engineers to come up with a way to build the pipe. He added
that the financing will not hold this project up.
Number 2249
MR. FAUSKE offered his position on HB 423:
I speak out in support of the bill and the concept of
the bill in getting all the pieces put in place. The
main question that seems to be being asked is, "Well,
what's the IRS going to do?" Well, nobody knows what
the IRS is going to do. I've looked at this; I've
listened to others that [have] more expertise in areas
of law.
MR. FAUSKE said it seems the transfer Act is fairly simple but
gives a lot of authority. He suggested the IRS will analyze it
"from a variety of positions." He remarked that Congress
appears to be coming out in support, as is the President. He
mentioned "issues of national energy policy, coupled with issues
of national security" and said:
So I think it's not a matter of simply the IRS, in my
opinion, just saying, "Well, no, we can't do this
because of ... the effect that it has on the tax-
exempt bond market." My response to that was, "Well,
how much money does it cost to send the Seventh Fleet
someplace to go deal ....?" So when we're talking
about the ability of Americans to issue tax-exempt
bonds to fund projects, I think it has to be coupled
with this area of national interest.
I think it's also imperative that we, as a state, put
ourselves in a position to do something. Every year,
AHFC comes before you and we get authorization to
issue bonds going out into the future. Whether we
issue them or not, we come to you and explain to you
what the issues are, what the market's looking like,
what the needs of Alaskans are, and we ask you to
please give us authorization up to the hundreds of
millions of dollars, so that when it's time to go to
market, we have the ability to do that.
I view this no differently. It's a ... large number,
but there's a great step that the legislature can take
in putting Alaska in a position to do something -
because once this thing starts to go, I think it's
going to be imperative, too, that the U.S. Congress
understand that the state is supporting this and in
... position.
MR. FAUSKE reiterated that things can happen quickly. There is
a need to be in a position to act, especially if trying to
capture market conditions on a particular day. Acknowledging
possible amendments, he concluded, "I think the basic principle
is absolutely sound. And from a financing perspective, this is
absolutely doable, and it'd be a wonderful thing to get involved
in ... and watch the state go forward with this."
Number 2095
REPRESENTATIVE GUESS agreed, but noted that page 3, lines 22-28,
specifies a route in the bonding [section], which seems
counterintuitive to the legislation's whole purpose. She asked,
"If we're going to let the market drive how we should build the
pipeline - and, you said, things can change and move, and we
should be able to capture market conditions - why, in financing,
would we specify a route?"
MR. FAUSKE answered that he'd assume something in the language
must say where the pipeline will be. He deferred, however, to
Mr. Slotnick or someone else from the administration to deal
with the specifics.
VICE CHAIR FATE expressed appreciation to Mr. Fauske for what
the AHFC has done. He announced that he planned to move the
bill that day. He agreed it is not only another tool, but also
an indication that the State of Alaska wants to move forward
with a gas pipeline project. He remarked that Representative
Guess's point is a good one that might generate an amendment.
Number 1977
REPRESENTATIVE KOHRING clarified that although he appreciates
the great work AHFC is doing, he isn't necessarily supporting
the legislation.
Number 1941
MICHAEL J. HURLEY, Senior Commercialization Specialist, ANS Gas
Commercialization, Phillips Alaska, Inc., came forward in
support of HB 423. He offered the company's initial view that
the ability to use conduit financing has the potential to
benefit a natural gas pipeline. He cautioned, however, that
additional clarity in several areas will be needed. "We are
continuing with our own due diligence, in efforts to evaluate
the impacts of the proposal more fully," he told members. "In
the meantime, we support the passage of the legislation, which
would provide the authorization necessary, should this become a
viable alternative."
Number 1873
MR. HURLEY, in response to Representative Chenault's request
that he elaborate on concerns, said a lot of the concerns had
been brought up in earlier testimony; there are still
outstanding questions about extraterritoriality and many other
issues. He pointed out that many issues about the financing
itself will need to be answered closer to when the actual
financing occurs; many will be reactions to the bond market, he
indicated, and will relate to how comfortable the people are who
will be buying the bonds. He added:
As you know, we've been working over the last year,
year and a half, now, but our focus has been very much
on trying to create an economically viable project.
We've looked - very cursory level - at financing. As
Mr. Slotnick pointed out earlier, there are lots of
different options available to companies of our size
and breadth. How we're going to structure the
financing on this is ... still very much up in the
air, from a company standpoint.
We believe this [bill] is helpful. We believe that it
has the potential to be of benefit. But right now,
we're concentrating on trying to get a project that is
actually economically viable, because we may have
bonding authority, but if we don't have a viable
project, it won't do us much good.
Number 1745
PAUL FUHS, Lobbyist for Yukon Pacific Corporation (YPC), came
forward to express support for HB 423 and request an amendment.
He called attention to [page 3] lines 23-28, referenced earlier
by Representative Guess, which says in part that [the proceeds
of the bonds] shall only be used for a pipeline that
"approximately follows the right of way of the Trans Alaska
Pipeline System from Pump Station 1 on the North Slope to Delta
Junction, and the Alaska Highway from Delta Junction to the
Alaska/Yukon Territory border." He explained, "Once again,
without any apparent justification, we're seeing legislation
which limits Alaska's options for the way that it might develop
its natural gas."
MR. FUHS provided a partially handwritten amendment containing
three options, which read [original punctuation provided]:
1. Page 3 Line 23 to 28 Delete entire sentence
starting with "the proceeds of the bonds etc.
2. OR: Line 25 that include "but are not limited
to" a pipeline
3. OR Line 28 add "or a route to tidewater in
Southcentral Alaska or for a spurline to Southcentral
Alaska or other parts of Alaska".
Number 1633
MR. FUHS pointed out that without an amendment, there will be no
opportunity to consider the developments which Senator Torgerson
spoke of; to use this financing for a stand-alone "to tidewater"
project in Alaska; to use it for a "Y" line, as has been
discussed; or to use it for a spur line to Southcentral Alaska
if, indeed, a trans-Canada pipeline is ever built. Regardless
of any option's merits, he said, nobody has yet presented
anything that says it is a "slam-dunk" to go one way or another.
MR. FUHS reminded members that two weeks ago, YPC presented
information on a smaller project that YPC believes is economic.
"Since that time," he reported, "we have not received any
information from anyone saying that these numbers are wrong. We
haven't seen anything on the trans-Canada pipeline, although I
guess we're supposed to get that by March 31, was ... the latest
information."
MR. FUHS returned attention specifically to HB 423 and said:
If you do amend it, then it would bring it in line
more with the resolution which was passed two weeks
ago out of this committee, where you said, "We also
want to include the potential of LNG [liquefied
natural gas] to the U.S. as one of the potential
markets."
It would also bring it in line with [U.S.] Senator
Murkowski's amendment that he got to the federal
legislation, also saying that an Alaska project - an
LNG project - would not be precluded by that
legislation.
Number 1594
MR. FUHS discussed the three options in his proposed amendment
[text provided previously]. He explained that the problem with
the first approach, deleting the last sentence, is that the
financing could be used for an "over-the-top" pipeline. The
second option might do the same. The third option is more
specific, perhaps addressing the concern voiced by Mr. Fauske
that it should state what the financing is being used for.
Number 1550
REPRESENTATIVE JOULE pointed out that the third option says
"or", whereas everything he has heard before has been "and/or".
He added that the desire is to not "put ourselves in a
straightjacket."
MR. FUHS said that would be fine, and that ["and/or"] is the
intention.
Number 1515
REPRESENTATIVE GUESS inquired about the wording "or a route to
tidewater or a route to Southcentral Alaska". She voiced
concern about specifying it because certain people want certain
routes. She asked, for a route to tidewater in Southcentral
Alaska, whether [this third option] would prohibit it.
MR. FUHS answered that "tidewater" would mean Kenai or Valdez,
so it is generic.
[Several members concurred that "tidewater" is generic.]
Number 1456
DAVE MacDOWELL, External Affairs Manager for Gas Activities in
Alaska, BP, testified via teleconference. He told members:
We're supportive of this bill because there is a
possibility that it could reduce financing costs for a
gas pipeline, but even more generally because it's
indicative of the creative thinking that must be done
to help move a project forward.
An Alaska gas pipeline project is an immense
challenge, as you all know - very expensive, very
complex, very risky, and as of yet not commercially
viable. We're encouraged, therefore, by all efforts
to seek ways of addressing these challenges.
The proposal to use the Alaska Railroad Corporation as
a vehicle to finance the pipeline with tax-exempt
bonds is certainly a creative approach that, if
possible, could help move towards lowering project
costs. Now, given the creative nature of this
approach, more work and assurance will likely be
needed before bond investors would have sufficient
confidence to invest in such bonds. However, if this
confidence were achieved, lower financing costs could
translate into lower pipeline tariffs. Lower tariffs,
in turn, lead to higher netback prices and thus
improved economics and more revenue for the state.
A cost-competitive transportation system, along with
an efficient federal regulatory framework and a clear,
predictable fiscal regime, are all necessary
requirements for the creation of a commercially viable
project.
BP Alaska is intrigued by the concepts outlined in
this bill and is currently evaluating the potential
benefits it may bring to a project. Meanwhile, we
would ask this committee to support passage of this
legislation.
Number 1306
PAM LaBOLLE, President, Alaska State Chamber of Commerce, came
forward to testify in support of HB 423, which she characterized
as another tool regarding possible opportunities for a gas
pipeline. She added, "We're very encouraged that there is a lot
of thinking along this line, and we are in support of the
legislation."
Number 1241
MR. SLOTNICK came forward again to respond to Representative
Guess's question regarding why a route is specified in Section
5. He said:
To answer that question, I'd like to just draw your
attention to the fact that Section 5 is part of the
uncodified law. It's the actual authorization for the
railroad to sell bonds. The codified law, the change
that we gave in statute to the authority of the
railroad, doesn't in any way constrain the discretion
as to where the route would be - you know, what types
of projects the railroad could sell bonds for.
But when you're taking the actual authorization to go
to market, we considered this language and thought
that it was perhaps more appropriate to constrain the
railroad's discretion here to the project that ... at
this time is under discussion with the producers.
It's the project that we have modeled in-house; that's
where we were able to come up with the numbers. We've
run the numbers. We know what the financing looks
like. We know what project we're specifying here.
So, when we thought we'd come to the Alaska
legislature for a part of the uncodified law
specifying that you can go out and sell bonds, we
thought it'd be better to say what project you can
sell bonds for.
And we could ... ask Mr. Wohlforth - I believe this
language came from ... his firm - whether he believes
an open-ended authorization to sell bonds would have
any repercussions with the market. I don't think it
would, but I'd like to get his opinion on that, if
that's what this committee's pleasure is.
But generally, when you're giving an authorization
like that, you're going to do it for a project that
you've been in discussions [about], that's been
modeled, that's identified. And I would say that this
authorization could be supplemented when someone else
brings a project that meets those kind of criteria to
you; it could be withdrawn if this project isn't the
project that goes forward. But the reason we wrote it
this way is because this was the project we were
considering.
VICE CHAIR FATE requested that Mr. Wohlforth respond.
Number 1068
ERIC WOHLFORTH, Attorney at Law, Wohlforth, Vassar, Johnson &
Brecht, APC, testified via teleconference, saying, "There is no
legal reason why the definition could not be expanded, if it was
the committee's desire to do so."
Number 1053
VICE CHAIR FATE said this describes a "bullet" pipeline, which
isn't the intent. He agreed with concerns expressed that if the
language were adhered to, it may be not even allow a lateral
[spur] or a valve or anything else. He said he was glad to hear
Mr. Wohlforth's testimony that legally he could see no problem
with a conceptual amendment to allow for other things to be
built, whether a lateral line, a pipeline elsewhere, or a valve
somewhere on the Yukon River, for example.
Number 0976
REPRESENTATIVE KOHRING requested elaboration regarding why the
ARRC, if it is putting forth this bond issue, isn't incurring
the risk, which is being incurred instead by the major
companies.
MR. SLOTNICK answered:
The reason is that, by contract, the railroad will not
assume any risk. And the bondholders are all made
aware of that before the bonds are sold. It is stated
in several places in what's called an official
statement, which is the offering that goes out to the
investors, to the bond holders, and becomes part of
the contract with ... the investors. It will be
stated in capital letters that there is no recourse to
the railroad, to the State of Alaska, or to either or
both of them as far as if there should be any default
on the bond. The only place they can turn to would be
the credit of the project or the credit of the
corporations, depending on how this is structured.
Number 0864
REPRESENTATIVE KOHRING referred to the use of the proceeds of
the bond sales and said he knows the intent is to make them
available to the private sector, to use that money to finance
the construction of a line. He asked whether those monies also
could be used by the State of Alaska to build that line.
MR. SLOTNICK answered yes.
REPRESENTATIVE KOHRING remarked that one of his concerns is that
if the bill passes without stricter parameters that would
preclude the state from using those monies, "that might be the
means with which the state could actually engage in a big
capital project sponsored and funded and constructed by the
government, which is something I philosophically disagree with,
because it would be along the lines of the Seward grain
terminal, the Delta barley project, things of that nature that
have proven to be boondoggles." He said he might offer an
amendment at some point that would add language to prohibit the
state from using those proceeds.
Number 0757
VICE CHAIR FATE asked whether there were further questions of
the testifiers, and then thanked Mr. Slotnick and Mr. Wohlforth.
He asked whether there was further testimony; there was no
response. He closed public testimony and returned attention to
possible amendments.
Number 0711
REPRESENTATIVE JOULE reiterated the desire, other than what was
written in Mr. Fuhs's proposed amendments, to say "and/or" and
then address the issue of the route to tidewater or Southcentral
Alaska or other parts of Alaska.
Number 0677
VICE CHAIR FATE suggested a conceptual amendment, on page 3,
line 25, after "pipeline", to have it say "that is not limited
to but approximately follows". The addition would be the phrase
"that is not limited to [but]".
REPRESENTATIVE GUESS noted that it would be the second option in
the proposed amendments provided by Mr. Fuhs. She acknowledged
the desire to have flexibility, but said she believes this
legislature has made it clear that the flexibility wouldn't
include "going north" [for an "over-the-top" pipeline route].
VICE CHAIR FATE remarked that there has been not only state
legislation passed which prohibits that route, but also federal
legislation; therefore, language already prohibits that northern
route. That was his thinking in providing the conceptual
language that didn't deal with the northern route, he explained.
Number 0523
REPRESENTATIVE JOULE remarked, "So long as that's covered." He
pointed out, however, that the federal legislation is pending.
He asked whether, for that reason, the amendment shouldn't be
more specific.
Number 0464
VICE CHAIR FATE called an at-ease at 10:37 a.m. [End of Tape
02-18, Side B.]
TAPE 02-19, SIDE A
Number 0001
VICE CHAIR FATE called the meeting back to order at 10:40 a.m.
Number 0026
VICE CHAIR FATE offered conceptual Amendment 1, on page 3, line
25, after the word "pipeline", to add "that is not limited to
[but]". [Thus it would read, in part, "include a pipeline that
is not limited to but approximately follows the right of way".]
Vice Chair Fate asked whether there was any objection.
Number 0099
REPRESENTATIVE CHENAULT objected for discussion purposes,
expressing concern that it still specifies a route.
VICE CHAIR FATE explained that the conceptual amendment says it
isn't limited to a specified route.
REPRESENTATIVE CHENAULT withdrew his objection.
Number 0165
VICE CHAIR FATE announced that there being no further objection,
conceptual Amendment 1 was adopted.
Number 0184
REPRESENTATIVE KOHRING began discussion of what he would offer
as conceptual Amendment 2. He restated his concern about having
the bond proceeds be used for the State of Alaska to build a
pipeline on its own, rather than having private entities use
those dollars to do so. He conveyed his belief that the process
should be strictly market-based, and that the state shouldn't
build a line just because of needing revenues from it; rather,
the pipeline should be privately constructed, but only if the
market demands and warrants it. He said he doesn't believe the
state should be involved in the business of constructing major
capital projects of this nature.
Number 0261
REPRESENTATIVE KOHRING therefore offered conceptual Amendment 2,
to strike "Alaska Railroad Corporation" and substitute "State of
Alaska" on page 3, line 25. He said it appears it is just
excluding the Alaska Railroad Corporation, and he would like to
expand that to include the State of Alaska.
Number 0316
VICE CHAIR FATE pointed out that it would change the intent
because ARRC is the bonding entity. It states clearly that ARRC
will not be the owner. He suggested that the conceptual
amendment should retain the Alaska Railroad Corporation,
therefore, with the State of Alaska as an addition.
REPRESENTATIVE KOHRING replied, "However we need to wordsmith
that to accomplish my intent in the amendment, I'd be pleased to
do that."
Number 0385
REPRESENTATIVE JOULE objected to conceptual Amendment 2.
REPRESENTATIVE GUESS indicated she objected as well.
REPRESENTATIVE JOULE requested that Mr. Slotnick and someone
from the AHFC inform the committee about the ramifications.
Number 0416
MR. SLOTNICK suggested in order to accomplish Representative
Kohring's goals, the words "Alaska Railroad Corporation" should
remain, but the words "or the State of Alaska" should be added.
That way, there would be ownership by entities other than the
railroad or the state.
REPRESENTATIVE KOHRING thanked Mr. Slotnick for his
clarification.
Number 0445
REPRESENTATIVE GUESS inquired whether that would preclude the
state's being a partner in the pipeline. She added that she
didn't believe so, from her reading, but just wanted to ask.
MR. SLOTNICK answered that it would require some thought. He
read in part from page 3, beginning on line 24:
The proceeds of the bonds described in this section
shall be used only for facilities that are owned by
one or more entities other than the Alaska Railroad
Corporation ...
He alluded to the fact that if conceptual Amendment 2 were
adopted, it would be entities other than the state. If the
state were a partner in any of those facilities, he said, it
would seem to him that the proceeds of the bonds couldn't be
used on those facilities. This would, therefore, remove the
state from any ownership role of facilities financed by these
bonds.
Number 0527
REPRESENTATIVE KOHRING said that is the intent of his amendment.
REPRESENTATIVE JOULE asked why Representative Kohring would want
the state out of it, at this point.
REPRESENTATIVE KOHRING asked whether Representative Joule was
referring to owning a facility to be constructed with the bond
proceeds.
VICE CHAIR FATE rephrased the question, asking whether he would
object to any equity interest in the pipeline, without outright
ownership, which is what the proposed amendment implies.
Number 0582
REPRESENTATIVE KOHRING said no, but added that he doesn't
believe the state should be constructing and in ownership of
facilities, including a gas pipeline. The amendment is intended
to prevent that from happening. He expanded on his answer:
I just see the state getting involved in another
potential and very expensive boondoggle here, and we
might feel more inclined to build this facility,
whether we really need the facility or not - whether
the market warrants it or not.
And if we end up spending billions of dollars to build
this gas pipeline and we find out that ... the demand
for our gas ... was not there, then we might look
back, in hindsight, that it was a wasted investment,
and it'll end up being as we've seen before with other
state-funded projects like the Seward grain terminal,
the Delta barley project, the agriculture operation
out at Point MacKenzie in my area, and others. So,
that's my concern.
Number 0682
REPRESENTATIVE GUESS explained that she objected to conceptual
Amendment 2 not necessarily because of disagreement with
Representative Kohring's concerns, but because she believes the
question should still be on the table of whether it is in the
state's best interest to have some equity interest in this
pipeline, especially given the amount of revenue that can be
generated from transportation "and the fact that we did not
choose to do that in TAPS." Furthermore, she indicated, because
of market forces she doesn't foresee the state's being able to
"just go and build a pipeline on its own." She agreed with
Representative Kohring's concern, but said she didn't believe
this was the place to address it.
A roll call vote was taken. Representatives Kohring and
Chenault voted to adopt conceptual Amendment 2. Representatives
Guess, Joule, and Fate voted against it. [Representative Dyson
was absent.] Therefore, conceptual Amendment 2 failed by a vote
of 2-3.
Number 0823
REPRESENTATIVE GUESS moved to report HB 423, as amended, from
committee with individual recommendations and the attached
fiscal notes. There being no objection, CSHB 423(O&G) was moved
out of the House Special Committee on Oil and Gas.
VICE CHAIR FATE thanked participants for the good discussion.
He pointed out to Representative Kohring that other bills, not
yet fully heard, deal with ownership of the pipeline; he
suggested that discussion could be held when they are heard.
ADJOURNMENT
Number 0896
There being no further business before the committee, the House
Special Committee on Oil and Gas meeting was adjourned at 10:50
a.m.
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