Legislature(2009 - 2010)SENATE FINANCE 532

02/03/2010 09:00 AM Senate FINANCE


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09:04:12 AM Start
09:04:25 AM Presentations: Alaska International Airport System; Alaska Railroad Corporation
10:58:38 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Presentations: TELECONFERENCED
Patrick Gamble, CEO, Alaska Railroad Corp
Christine Klein, Deputy Commissioner of
Aviation
John Parott, Airport Manager, Ted Stevens
Anchorage International Airport
                 SENATE FINANCE COMMITTEE                                                                                       
                     February 3, 2010                                                                                           
                         9:04 a.m.                                                                                              
                                                                                                                                
                                                                                                                                
9:04:12 AM                                                                                                                    
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair  Stedman   called  the  Senate   Finance  Committee                                                                    
meeting to order at 9:04 a.m.                                                                                                   
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Lyman Hoffman, Co-Chair                                                                                                 
Senator Bert Stedman, Co-Chair                                                                                                  
Senator Charlie Huggins, Vice-Chair                                                                                             
Senator Johnny Ellis                                                                                                            
Senator Dennis Egan                                                                                                             
Senator Donny Olson                                                                                                             
Senator Joe Thomas                                                                                                              
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
None                                                                                                                            
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Christine   Klein,   Deputy    Commissioner   of   Aviation,                                                                    
Department of Transportation  and Public Facilities (DOTPF);                                                                    
John   Parott,  Airport   Manager,  Ted   Stevens  Anchorage                                                                    
International  Airport;  Patrick  Gamble, President  &  CEO,                                                                    
Alaska  Railroad  Corporation  (ARRC); Bill  O'Leary,  Chief                                                                    
Financial Officer, Alaska Railroad Corporation (ARRC)                                                                           
                                                                                                                                
PRESENT VIA TELECONFERENCE                                                                                                    
                                                                                                                                
None                                                                                                                            
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
^PRESENTATIONS: ALASKA INTERNATIONAL  AIRPORT SYSTEM; ALASKA                                                                    
RAILROAD CORPORATION                                                                                                            
                                                                                                                                
9:04:25 AM                                                                                                                  
                                                                                                                              
ALASKA INTERNATIONAL AIRPORT SYSTEM                                                                                           
                                                                                                                              
CHRISTINE   KLEIN,   DEPUTY    COMMISSIONER   OF   AVIATION,                                                                    
DEPARTMENT OF TRANSPORTATION  AND PUBLIC FACILITIES (DOTPF),                                                                    
introduced John  Parott, the Anchorage Airport  Manager. She                                                                    
related that the Alaska  International Airport System (AIAS)                                                                    
consists  of Anchorage  International Airport  and Fairbanks                                                                    
International Airport,  which share many  assets, resources,                                                                    
and capital  and bonding capabilities. The  AIAS has existed                                                                    
by statute  since 1961  because of  the need  for a  back up                                                                    
airport in case of bad weather.                                                                                                 
                                                                                                                                
Ms. Klein related  that both airports are major  hubs in the                                                                    
national  transportation   system.  Anchorage  International                                                                    
Airport is number 3 for cargo  in North America and number 5                                                                    
in the world. The aviation  industry in Alaska provides over                                                                    
47,000 jobs  statewide, $2  billion in  direct expenditures,                                                                    
and  $3.4  billion in  indirect  expenditures,  which is  40                                                                    
percent higher than the national average.                                                                                       
                                                                                                                                
Ms.   Klein  referred   to   a   handout  entitled   "Alaska                                                                    
International Airports System" (copy  on file). She stressed                                                                    
the importance of operating as  a "system" due to the unique                                                                    
conditions in Alaska.                                                                                                           
                                                                                                                                
9:07:56 AM                                                                                                                    
                                                                                                                                
Ms. Klein  turned to  slide 2  - Airport  System Advantages.                                                                    
She listed the advantages;  regulatory issues, location, and                                                                    
cost.  She highlighted  Alaska's global  advantage regarding                                                                    
payload versus range  - slide 3. Cargo aircraft  can stop at                                                                    
the Anchorage  or Fairbanks  airports with  a full  load and                                                                    
pick  up fuel.  She  listed  AIAS's competitors:  Vancouver,                                                                    
Seattle,   Los   Angeles,   Oakland,  San   Francisco,   and                                                                    
Sacramento.  She said  that AIAS  has  been very  successful                                                                    
keeping rates competitive.                                                                                                      
                                                                                                                                
Ms. Klein noted  that AIAS currently has  34 cargo carriers,                                                                    
and a very diverse mix.  New cargo carriers have joined AIAS                                                                    
recently; Great  Wall Airlines, World Airways,  and Quantas.                                                                    
There  are more  than  50 different  airlines  that use  the                                                                    
Anchorage Airport.                                                                                                              
                                                                                                                                
9:11:30 AM                                                                                                                    
                                                                                                                                
Ms.  Klein referred  to slide  5, the  comparison of  AIAS's                                                                    
competitive rates,  both for terminal  rent and  for landing                                                                    
fees. Landing fees  reached a high point of  $1,700, but are                                                                    
now lowered  to about  $1,200. For the  first time  in eight                                                                    
years, AIAS has been able to  lower costs in order to remain                                                                    
competitive.                                                                                                                    
                                                                                                                                
9:13:04 AM                                                                                                                    
                                                                                                                                
Ms.  Klein  spoke  about the  strengths  of  having  diverse                                                                    
business revenues -  shown on slide 6. She  pointed out that                                                                    
the  largest source  of income  is from  landing fees.  Fuel                                                                    
flowage  fees  are  the second  largest  source  of  income,                                                                    
followed  by  terminal  rents.   Revenue  sources  are  very                                                                    
diverse.                                                                                                                        
                                                                                                                                
Ms. Klein spoke  about AIAS's expenses. She  noted that debt                                                                    
service of about $50 million  makes up the highest cost. The                                                                    
current total debt is about $600 million.                                                                                       
                                                                                                                                
9:14:21 AM                                                                                                                    
                                                                                                                                
Ms.  Klein shared  information about  the cargo  operations,                                                                    
the majority of  AIAS's revenue source - slide  7. The graph                                                                    
shows the growth rate for all-cargo aircraft landings.                                                                          
                                                                                                                                
Ms.  Klein  skipped ahead  to  slide  9, a  graph  depicting                                                                    
combined  passenger  and  cargo certificated  maximum  gross                                                                    
take-off weight  (CMGTW) from FY  06 until FY 10.  She spoke                                                                    
of   declines  and   increases  during   those  years.   She                                                                    
emphasized  that  Anchorage Airport  was  the  first in  the                                                                    
country to identify  problems and respond to  them. The drop                                                                    
in  April  2009 was  due  to  the  eruption of  the  Redoubt                                                                    
Volcano. The  green line shows  a slight increase in  FY 10.                                                                    
She  reported  the  first positive  increases  in  cargo  in                                                                    
thirty months in November and December.                                                                                         
                                                                                                                                
9:18:03 AM                                                                                                                    
                                                                                                                                
Ms.  Klein  described  the monthly  enplanements  (passenger                                                                    
numbers) as shown  on slide 8. The numbers  have been fairly                                                                    
stable with an increase last summer followed by a drop.                                                                         
                                                                                                                                
Ms.  Klein reported  that  slide 10  shows  the annual  fuel                                                                    
consumption  by  air  carriers  at  Anchorage  International                                                                    
Airport.  She  reported  on  a  recent  upturn  which  is  a                                                                    
positive sign. She shared aircraft landing statistics.                                                                          
                                                                                                                                
Ms.  Klein   showed  slide  11  -   Fairbanks  International                                                                    
Airport's annual fuel consumption from  FY 04 through FY 10.                                                                    
She spoke of a decline during  FY 05 through FY 07, followed                                                                    
by an increase and recovery.                                                                                                    
                                                                                                                                
9:21:33 AM                                                                                                                    
                                                                                                                                
Ms. Klein shared information about  total regional freight -                                                                    
slide 12.  Most airports  were 10-40  percent down  in cargo                                                                    
and passengers;  Alaska was 23  percent down.  She described                                                                    
freight  reductions from  various regions.  In November  and                                                                    
December  Alaska's cargo  increased  by  11 percent,  higher                                                                    
than most airports. She listed regional reductions.                                                                             
                                                                                                                                
Ms.  Klein  highlighted  ways that  AIAS  responded  to  the                                                                    
declines  - slide  13. She  listed ways  that AIAS  remained                                                                    
competitive  and assessed  the competition.  She spoke  of a                                                                    
reduction in the operating budget  by $7 million, as well as                                                                    
a hiring freeze and nine layoffs.                                                                                               
                                                                                                                                
Ms. Klein reported on the  results of AIAS's commitment to a                                                                    
new  operating  agreement  and   the  addition  of  six  air                                                                    
carriers - slide 14. A  new business model has been adopted,                                                                    
as well.                                                                                                                        
                                                                                                                                
9:27:02 AM                                                                                                                    
                                                                                                                                
Ms. Klein shared improvements made  at the Fairbanks Airport                                                                    
- slide 15.  There was an increase in  winter passengers and                                                                    
cargo flights.  She reviewed the  status of  construction in                                                                    
the  Fairbanks  terminal,  which  came  in  on-schedule  and                                                                    
under-budget  and was  financed without  the use  of general                                                                    
funds or  federal funds -  slide 16. She mentioned  four new                                                                    
heavy cargo positions.                                                                                                          
                                                                                                                                
9:29:51 AM                                                                                                                    
                                                                                                                                
JOHN   PAROTT,  AIRPORT   MANAGER,  TED   STEVENS  ANCHORAGE                                                                    
INTERNATIONAL AIRPORT, turned  to slide 17 to  report on the                                                                    
completion  of construction  on  Anchorage Airport's  A &  B                                                                    
Concourses. He  shared 2008 ACI  cargo traffic  statistics -                                                                    
slide  18. Anchorage  is  currently  fifth in  international                                                                    
cargo trade.                                                                                                                    
                                                                                                                                
Mr.  Parott  reported on  the  specific  economic impact  to                                                                    
Anchorage  from the  Anchorage Airport  - slide  19. A  2007                                                                    
Institute  of Social  and  Economic  Research (ISER)  report                                                                    
listed  18,000  jobs  at  or  related  to  the  airport.  He                                                                    
described the  annual total economic impact  as $2.3 billion                                                                    
flowing through Anchorage and the state - slide 20.                                                                             
                                                                                                                                
Mr.  Parott  showed,  by airline,  the  economic  impact  of                                                                    
international cargo at the Anchorage  Airport - slide 21. He                                                                    
shared the successes and bright  spots in the airport market                                                                    
- slide 22.  In the past the airport has  not had to provide                                                                    
incentives  for  international  carriers. Now,  there  is  a                                                                    
reduced  fee structure  for China  Airlines. Japan  Airlines                                                                    
operated 17  charters this past  season. Concessions  at the                                                                    
Anchorage Airport was recognized as a "Top Performer".                                                                          
                                                                                                                                
9:36:26 AM                                                                                                                    
                                                                                                                                
Mr.  Parott  spoke  of  marketing  team  highlights  at  the                                                                    
Anchorage  Airport  -  slide  23.  Marketing  materials  and                                                                    
methods were  improved and coordinated. He  termed the Cargo                                                                    
Transfer Authority as important and "value added".                                                                              
                                                                                                                                
Mr. Parott summarized  the statistics from FY 09  and FY 10,                                                                    
so far,  as compared to  prior years  - slide 24.  He shared                                                                    
future plans  - slide  25. He spoke  again of  "value added"                                                                    
services. He  said most  of the  revenue comes  from landing                                                                    
fees and fuel flow. He  shared AIAS's goals to continue with                                                                    
capital  improvements,  such  as runway  7-R  extension.  He                                                                    
spoke  of  continued efforts  with  the  marketing team.  He                                                                    
mentioned  that  Kulis  International  Guard  Base  will  be                                                                    
incorporated into the airport property.                                                                                         
                                                                                                                                
9:43:21 AM                                                                                                                    
                                                                                                                                
Co-Chair  Hoffman  was  interested   in  how  the  Anchorage                                                                    
International Airport  services Alaskans. He  requested more                                                                    
information   on   whether    air   cargo   operations   and                                                                    
enplanements  include Alaska  destinations  such as  Barrow,                                                                    
Kotzebue, Nome,  Dillingham, Sitka,  etc. He  commented that                                                                    
the airport was a good  design for flights headed south, but                                                                    
did  not  necessarily  serve   rural  passengers  headed  to                                                                    
villages. He termed the concourse "unuser-friendly".                                                                            
                                                                                                                                
Mr. Parott  recognized and shared  those concerns.  He spoke                                                                    
of improvements  in the concourse for  regional carriers and                                                                    
the addition  of a  hot food  service for  rural passengers.                                                                    
The  fuel  flow numbers  by  regional  carriers tend  to  be                                                                    
dwarfed  by  the  international  carriers.  The  enplanement                                                                    
numbers do  include regional and domestic  passengers. Rural                                                                    
passengers no  longer board after  a long outside  walk, but                                                                    
now use an inside gate.                                                                                                         
                                                                                                                                
Co-Chair Hoffman  asked if the  current system was  now user                                                                    
friendly  for rural  passengers.  Mr.  Parott believed  that                                                                    
significant progress  had been made. He  offered to continue                                                                    
to make improvements.                                                                                                           
                                                                                                                                
9:50:42 AM                                                                                                                    
                                                                                                                                
Senator  Thomas  asked  how much  airport  fuel  comes  from                                                                    
Alaska and  what the  price of fuel  was. Ms.  Klein replied                                                                    
that  Alaska produces  49 percent  of the  fuel consumed  at                                                                    
AIAS.  She  related  that  obtaining   Alaskan  fuel  was  a                                                                    
challenge due to availability. It  is difficult to track the                                                                    
price  of  fuel  because  airlines pay  for  it  themselves.                                                                    
Alaska's   fuel   cost    is   significantly   higher   than                                                                    
competitors' costs.                                                                                                             
                                                                                                                                
Senator  Thomas asked  about some  of the  landings at  AIAS                                                                    
such  as Federal  Express. He  referred to  slide 24,  which                                                                    
shows a downward trend in the  numbers of landings in FY 09.                                                                    
Mr. Parott  reported an  upward trend  the past  few months,                                                                    
which, if it continues, would bring FY 10 above FY 09.                                                                          
                                                                                                                                
Senator Thomas  requested information from last  year's AIAS                                                                    
budget for capital projects. Mr.  Parott listed one project,                                                                    
a  runway extension  and  resurfacing  project, which  would                                                                    
total close to $100 million.                                                                                                    
                                                                                                                                
9:53:53 AM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman requested  future  predictions related  to                                                                    
AIAS. Ms.  Klein shared  that she was  leaving her  job. She                                                                    
predicted a very  slow recovery. She stated  that the budget                                                                    
was  balanced through  June 31.  Cargo  recovery projects  a                                                                    
modest  2  percent  increase for  this  year.  The  combined                                                                    
passenger and cargo green line  on the graph should increase                                                                    
very slowly  due to changes  in the business model.  She did                                                                    
not see a return to previous levels for several years.                                                                          
                                                                                                                                
9:56:22 AM                                                                                                                    
                                                                                                                                
Senator Ellis  thought that overall,  AIAS was doing  a good                                                                    
job. He shared  small complaints about the  airport, such as                                                                    
a lack  of hooks in the  stalls and nowhere to  put computer                                                                    
bags  in   the  bathroom.   He  suggested   installing  more                                                                    
electrical outlets  for today's modern technology  needs. He                                                                    
also  expressed frustration  about  lack of  a  cab line  in                                                                    
front of the terminal.                                                                                                          
                                                                                                                                
10:01:02 AM                                                                                                                   
                                                                                                                                
Mr.  Parott said  he  would tend  to  those suggestions.  He                                                                    
offered to take another look at the cab situation.                                                                              
                                                                                                                                
Co-Chair  Hoffman  asked a  question  on  behalf of  Senator                                                                    
Menard who  suggested that luggage  carts be free  of charge                                                                    
like they are at European and Asian airports.                                                                                   
                                                                                                                                
Mr.  Parott explained  that international  travelers in  the                                                                    
customs area are provided a  free cart because they have not                                                                    
yet  been in  the vicinity  of a  money exchange  center. In                                                                    
Europe  and  Asia,  advertising  on  the  carts  offset  the                                                                    
expense  of  providing them  for  free.  That idea  has  not                                                                    
worked  for  the  Anchorage  Airport.  He  noted  that  most                                                                    
airports  in  the  United  States   charge  for  carts.  The                                                                    
Anchorage  Airport   works  to  keep  prices   down  because                                                                    
Alaskans travel  with more baggage  than most  travelers. He                                                                    
offered to continue to look at the issue.                                                                                       
                                                                                                                                
10:04:17 AM                                                                                                                   
                                                                                                                                
Senator Huggins  appreciated the  wild game displays  at the                                                                    
airport, the  improvements in the  rental car area,  and the                                                                    
facilities for the military. He  spoke highly of the customs                                                                    
area at  the Anchorage Airport.  He encouraged Ms.  Klein to                                                                    
look at the north  terminal parking expansion. He questioned                                                                    
if only 49 percent of the jet fuel came from Alaska.                                                                            
                                                                                                                                
Ms. Klein  said that was  correct. She related  that Alaskan                                                                    
fuel came from Tesoro, Flint  Hills, and Petro Star. Senator                                                                    
Huggins  asked   about  the  cost   of  fuel   from  Alaskan                                                                    
refineries  versus  the  cost from  refineries  outside  the                                                                    
state.  Ms.  Klein  responded  that  fuel  comes  from  many                                                                    
sources and the  issue is complex. She reported  that she is                                                                    
working with  the airlines and the  refineries to facilitate                                                                    
improvements.  She thought  the  spot price  differed by  20                                                                    
cents.                                                                                                                          
                                                                                                                                
Senator Huggins  asked which was  more favorable.  Ms. Klein                                                                    
replied  that  it  was currently  more  favorable  at  other                                                                    
airports.  Senator  Huggins  wondered  if  the  airport  was                                                                    
subsidizing fuel. Ms. Klein responded that it was not.                                                                          
                                                                                                                                
Ms. Klein  explained that  airports bid  long-term contracts                                                                    
for  the  volumes  of  fuel  they expect  to  use.  If  that                                                                    
calculation changes  suddenly they must purchase  spot fuel,                                                                    
which  is   more  expensive.  Recently,  there   was  sudden                                                                    
increase in  flights and fuel  was not available and  it was                                                                    
more expensive due to shipping.                                                                                                 
                                                                                                                                
Senator Huggins  spoke of a  concern of not  having adequate                                                                    
fuel. He wondered if Ms. Klein shared that concern.                                                                             
                                                                                                                                
10:08:57 AM                                                                                                                   
                                                                                                                                
Ms. Klein  did have a concern  about the refined Jet  A fuel                                                                    
supply in Alaska.  The commissioners from DOT,  DEC, and DNR                                                                    
are looking for solutions.                                                                                                      
                                                                                                                                
Co-Chair Stedman requested  follow-up information about fuel                                                                    
production and refinery location in recent years in Alaska.                                                                     
                                                                                                                                
Senator Thomas asked a question  for Senator Egan who had to                                                                    
leave  the meeting.  He  wondered if  the  8 percent  number                                                                    
regarding  FY 09  revenue income  from investment  income is                                                                    
typical of airport operations in other states.                                                                                  
                                                                                                                                
Ms. Klein noted that investment  income has decreased in the                                                                    
past  year.  She  deferred  to  the  comptroller  to  answer                                                                    
further.                                                                                                                        
                                                                                                                                
Senator Thomas  asked about the  cost of fuel as  it relates                                                                    
to royalty oil. He reported  that Flint Hills maintains that                                                                    
the premium for  royalty oil increases the cost  of fuel. He                                                                    
requested Ms. Klein's opinion.                                                                                                  
                                                                                                                                
10:12:12 AM                                                                                                                   
                                                                                                                                
Ms.  Klein  could  not  comment  about  contract  agreements                                                                    
between  the state  and the  refineries. She  suggested that                                                                    
pricing  is a  concern and  Alaska must  remain competitive.                                                                    
Pricing  is  not  controlled  by  the  airport,  but  rather                                                                    
contractual    business    obligations    between    private                                                                    
businesses.                                                                                                                     
                                                                                                                                
Senator Huggins asked  if moving the airport is  part of the                                                                    
strategic  plan.   He  asked  where  MatSu   fits  into  the                                                                    
strategic plan.                                                                                                                 
                                                                                                                                
Ms. Klein responded that airport  construction is costly. In                                                                    
the last  40 years there  have only been two  major airports                                                                    
constructed  in  the  United  States.  Since  Anchorage  and                                                                    
Fairbanks have  just improved airport capacity,  it would be                                                                    
difficult  for  the state  to  finance  a new  airport.  She                                                                    
suggested that  private enterprise  could come in  and build                                                                    
another airport.                                                                                                                
                                                                                                                                
Senator Olson  expressed concern about his  constituents and                                                                    
the  need  to  focus  on Alaskans'  needs.  He  wondered  if                                                                    
"leveling   the   playing   field"  included   having   "135                                                                    
operators" paying the same landing fees as "121 operators".                                                                     
                                                                                                                                
Co-Chair  Stedman  requested  definitions of  121  and  135.                                                                    
Senator Olson explained that 135  operators are smaller than                                                                    
121 operators, who  can carry cargo and  passengers, such as                                                                    
Alaska Airlines.                                                                                                                
                                                                                                                                
Ms. Klein  noted that AIAS  is very focused on  rural Alaska                                                                    
and  has   put  much  attention  on   the  smaller  regional                                                                    
carriers.  The  lighter  aircraft receive  the  benefits  of                                                                    
lower rates and  fees.  She noted that there  was still work                                                                    
to do on  the terminal infrastructure to  make things easier                                                                    
for regional carriers and passengers.                                                                                           
                                                                                                                                
ALASKA RAILROAD CORPORATION                                                                                                   
                                                                                                                              
10:20:00 AM                                                                                                                 
                                                                                                                              
PATRICK   GAMBLE,   PRESIDENT   &   CEO,   ALASKA   RAILROAD                                                                    
CORPORATION (ARRC),  referred to a handout  entitled, "About                                                                    
the Alaska  Railroad" (copy  on file).  He noted  that there                                                                    
was  also  a  memorandum  on bonding  debt,  which  answered                                                                    
questions from a previous meeting  (copy on file). He turned                                                                    
to slide  3 -  Alaska Railroad quick  facts. The  only items                                                                    
that  have shown  an increase  are the  total assets  of the                                                                    
railroad and  the average age of  employees. Everything else                                                                    
has decreased.  He described  the historical  downward trend                                                                    
beginning in FY  05. The projected net earnings  are down by                                                                    
about 19 percent in FY 09.  He predicted that FY 10 would be                                                                    
the toughest  year yet. The  corporation has  been preparing                                                                    
for FY  10 for  several years,  which today's  briefing will                                                                    
show.                                                                                                                           
                                                                                                                                
Mr. Gamble  commented that the Alaska  Railroad is different                                                                    
from other  state agencies -  slide 4. It  is not a  part of                                                                    
the Executive Budget  Act, and its employees are  not in the                                                                    
state system. The  railroad is more like  a private business                                                                    
and needs  to make a  profit, which is its  capital program.                                                                    
This model enables the railroad  to respond in a competitive                                                                    
market.                                                                                                                         
                                                                                                                                
10:23:55 AM                                                                                                                   
                                                                                                                                
Mr. Gamble skipped to slide  6 in order to emphasize safety.                                                                    
He discussed statistics related to safety.                                                                                      
                                                                                                                                
Mr.   Gamble  shared   strategies  involved   with  security                                                                    
management - slide 7. The  railroad is making use of federal                                                                    
dollars for security purposes and  is using a camera system.                                                                    
Many agencies  do inspections or provide  exercises in order                                                                    
to promote security.                                                                                                            
                                                                                                                                
10:26:15 AM                                                                                                                   
                                                                                                                                
Mr. Gamble discussed the 2009  budget background - slide 13.                                                                    
There  was an  unsettled environment  related to  fuel costs                                                                    
and fuel  volume. He predicted  a further drop in  volume by                                                                    
Flint Hills.                                                                                                                    
                                                                                                                                
Mr.  Gamble reported  that  the 2009  budget  was for  $16.8                                                                    
million. There  was a reduction  in passengers,  a reduction                                                                    
in fuel volume, and higher fuel  prices, which led to a loss                                                                    
of  net earnings  of  19  percent. He  noted  that this  was                                                                    
unaudited   information.  He   discussed  the   impact  from                                                                    
personnel eliminations and expenses related to reductions.                                                                      
                                                                                                                                
Mr.  Gamble  explained  that   slide  14  depicts  personnel                                                                    
impacts. He  reported on a  hiring freeze from 2007  to 2009                                                                    
where  200  positions   were  eliminated.  Eight  management                                                                    
positions were  eliminated, management  pay was  frozen, and                                                                    
departments were reorganized.                                                                                                   
                                                                                                                                
Mr. Gamble  showed the ARRC fund  flow model of 2009  data -                                                                    
slide 15. It shows how the  railroad gets its money and what                                                                    
it does with it.                                                                                                                
                                                                                                                                
10:31:26 AM                                                                                                                   
                                                                                                                                
BILL  O'LEARY,  CHIEF  FINANCIAL  OFFICER,  ALASKA  RAILROAD                                                                    
CORPORATION  (ARRC), began  with  slide 16  -  a history  of                                                                    
freight  revenue from  2004 -  2008,  which is  half of  the                                                                    
total  revenue  for  the  Alaska   Railroad.  It  shows  the                                                                    
difference  between  the  expected  budget  and  the  actual                                                                    
budget  in 2009.  There was  a significant  weakness in  the                                                                    
petroleum haul  from North Pole and  Flint Hills refineries.                                                                    
There  were also  weaker results  from  the interline  barge                                                                    
service. Income from coal exports was a positive number.                                                                        
                                                                                                                                
Mr. O'Leary  reported that slide  17 is a graph  showing the                                                                    
fuel  shipment  history on  the  Alaska  Railroad by  Mapco,                                                                    
Williams Petroleum,  and Flint  Hills Resources from  1994 -                                                                    
2009.  There was  a strong  growth curve  averaging about  9                                                                    
percent up  until 2003,  followed by  a loss  which averaged                                                                    
about 8 percent annually.                                                                                                       
                                                                                                                                
10:33:52 AM                                                                                                                   
                                                                                                                                
Mr. O'Leary talked about slide  18 - the exportation of coal                                                                    
in metric tons by year. Coal  is mined in Healy and moved on                                                                    
the railroad to Seward where  it is shipped to international                                                                    
destinations. He reported  that 2009 was a  record year, and                                                                    
even better  results are expected  for 2010. He  mentioned a                                                                    
possible  lawsuit  related to  the  Clean  Water Act,  which                                                                    
could have an effect on the budget.                                                                                             
                                                                                                                                
Mr. O'Leary  reported that slide 19  shows passenger revenue                                                                    
grew until  2008 and  then had a  decline. Slide  20 depicts                                                                    
real estate revenue, the most consistent performer.                                                                             
                                                                                                                                
Mr.  O'Leary  related  that slide  21  depicts  controllable                                                                    
expenses which were reduced by  $8 million over the last two                                                                    
years.  He  explained  that  slide   22  shows  a  graph  of                                                                    
unaudited  net  income.  In  2009,  that  amount  was  $13.6                                                                    
million.                                                                                                                        
                                                                                                                                
Co-Chair  Stedman asked  about expectations  for operational                                                                    
cash  flow. Mr.  O'Leary replied  that corporate  net income                                                                    
was  $13.6 for  FY  09,  and $8  million  of  net income  is                                                                    
budgeted for FY 10, which would  result in a loss of roughly                                                                    
$4  million. Co-Chair  Stedman emphasized  that it  was cash                                                                    
flow from  operations, not net  income. Mr.  O'Leary agreed,                                                                    
but added that there would be positive cash flow.                                                                               
                                                                                                                                
Mr. Gamble  clarified that  was the  amount made  from train                                                                    
operations,  principally made  of up  labor costs  and fuel.                                                                    
Co-Chair  Stedman  noted  that  item was  reflected  in  the                                                                    
chart.                                                                                                                          
                                                                                                                                
10:38:17 AM                                                                                                                   
                                                                                                                                
Mr. O'Leary turned  to slide 23 -  balance sheet highlights.                                                                    
He  emphasized that  the railroad  has  managed its  balance                                                                    
sheet  even with  diminished earnings.  The  asset base  has                                                                    
grown, liquidity is  good, and debt is low -  $27 million of                                                                    
recourse  debt. There  is about  $157  million remaining  on                                                                    
bonds  backed by  federal monies.  The ARRC  generated $31.2                                                                    
million in total cash in 2009.                                                                                                  
                                                                                                                                
Mr.  Gamble  explained  slide  24 -  the  2010  preview.  He                                                                    
pointed out  that FY 10  would be a  tough year. There  is a                                                                    
pending  lawsuit  and  Flint  Hills  continues  to  decline.                                                                    
Passenger numbers are expected  to drop again. The challenge                                                                    
is to  continue expense  reductions in  an effort  to offset                                                                    
revenue declines. The bottom of  the chart shows projections                                                                    
for operating  and capital expenses. The  capital program is                                                                    
more robust due to federal entitlements.                                                                                        
                                                                                                                                
10:40:40 AM                                                                                                                   
                                                                                                                                
Mr.  Gamble   related  that  slide  25   shows  the  capital                                                                    
investment  2010-2014   five-year  plan.  The   railroad  is                                                                    
currently  in  the  second five-year  plan  from  2008-2012.                                                                    
There  are three  large capital  projects: the  Tanana River                                                                    
Bridge for $100 million;  the line rebuild between Anchorage                                                                    
and  Fairbanks; and  a collision  avoidance  system for  $75                                                                    
million.                                                                                                                        
                                                                                                                                
Mr. O'Leary noted that slide  26 shows a breakout of capital                                                                    
spending by fund  source. The biggest piece is  from the FTA                                                                    
monies and bond  proceeds. Slide 27 further  breaks down the                                                                    
capital funding sources.                                                                                                        
                                                                                                                                
10:42:27 AM                                                                                                                   
                                                                                                                                
Mr. O'Leary  pointed out that  slides 28 and 29  show ARRC's                                                                    
five-year plan  for capital projects. Mr.  Gamble noted that                                                                    
the  reports  are  required  by law  and  are  submitted  to                                                                    
legislative offices yearly.                                                                                                     
                                                                                                                                
Mr. O'Leary  related that there  were a number of  slides on                                                                    
the employee benefit package,  defined benefit pension plan,                                                                    
and retiree medical trust fund. He  jumped to slide 39 - the                                                                    
2009 status  of benefit trust  funds. He reported on  a good                                                                    
recovery  since the  crash  of 2008.  Before  the crash  the                                                                    
pension fund  was 114  percent funded  and the  medical fund                                                                    
was 75 percent  funded. He expected both to  be fully funded                                                                    
by the end of FY 09.                                                                                                            
                                                                                                                                
Mr. Gamble called slide 40  "wild cards" which could lead to                                                                    
possible gains and losses. He  spoke of environmental issues                                                                    
and legislation as potentially negative factors.                                                                                
                                                                                                                                
10:44:53 AM                                                                                                                   
                                                                                                                                
Co-Chair Stedman expressed  appreciation for the information                                                                    
in the presentation which would  allow the committee to make                                                                    
good  decisions. He  requested  information  about the  fuel                                                                    
component of  ARRC's business. Mr. Gamble  elaborated on the                                                                    
relationship  of fuel  to ARRC;  he called  ARRC a  mover of                                                                    
fuel,  comparable to  the pipeline.  Flint Hills  previously                                                                    
provided 50 percent of the  fuel. Currently, ARRC expects to                                                                    
move half  of that  amount. There  is concern  about getting                                                                    
fuel back on its feet, or  finding more business such as the                                                                    
pipeline or  offshore drilling. The  plan is to  hunker down                                                                    
for  the next  two years  in anticipation  of the  next five                                                                    
years. Mr.  Gamble pointed out  that corporate health  is in                                                                    
good shape.                                                                                                                     
                                                                                                                                
10:48:49 AM                                                                                                                   
                                                                                                                                
Senator  Thomas  commented  on moving  the  southern  bypass                                                                    
project  forward.  He   requested  information  about  Flint                                                                    
Hills' plans.  Mr. Gamble addressed the  southern bypass. He                                                                    
reported  that  he recently  met  with  the assembly  for  a                                                                    
discussion  about  the  southern  bypass. There  will  be  a                                                                    
meeting  to  "scope the  project",  which  will lead  to  an                                                                    
Environmental Impact Statement (EIS).                                                                                           
                                                                                                                                
Senator  Thomas  drew  attention to  the  Healy  Subdivision                                                                    
issue  and requested  more information  about  how the  land                                                                    
would be released  by the railroad and  returned to original                                                                    
owners. Mr. Gamble recognized those concerns.                                                                                   
                                                                                                                                
10:51:52 AM                                                                                                                   
                                                                                                                                
Senator Olson  spoke, as a  pilot, about the  frustration of                                                                    
the inability  to get fuel.  He recalled that  the Anchorage                                                                    
Airport ran out of fuel and  could not provide fuel for some                                                                    
of the  carriers. He wondered  if the railroad cut  costs by                                                                    
decreasing  the number  of cars  carrying  fuel. Mr.  Gamble                                                                    
agreed that  the number of  cars were decreased due  to less                                                                    
refined  fuel being  produced. He  reported  that he  called                                                                    
Flint  Hills  who said  the  airport  contract stipulated  a                                                                    
certain amount of fuel. Flint  Hills wanted to shut down the                                                                    
third tower in the refinery in  order to cut costs and until                                                                    
the contract requested more fuel.                                                                                               
                                                                                                                                
Senator  Olson said  his information  was  from the  private                                                                    
sector. He wondered  about the status of  claims against the                                                                    
railroad.  Mr.  Gamble  related   that  the  issue  of  land                                                                    
ownership is  the "lightening rod  issue". He  stressed that                                                                    
ARRC  is the  steward  of  the land  and,  according to  the                                                                    
Corporate Act, cannot sell land.                                                                                                
                                                                                                                                
Senator  Olson restated  the question.  He was  referring to                                                                    
private  landowners   whose  property  is  crossed   by  the                                                                    
railroad. Mr. Gamble  used the North Pole  as a hypothetical                                                                    
example. If  the railroad were  moved, the  vacated property                                                                    
would  go  back to  the  state.  It  would be  necessary  to                                                                    
involve the  attorney general  because, currently,  there is                                                                    
no  legal way  to  dispense that  property  to the  adjacent                                                                    
landowners.                                                                                                                     
                                                                                                                                
10:56:54 AM                                                                                                                   
                                                                                                                                
Senator  Huggins  agreed  that   the  railroad  was  a  good                                                                    
economic  weather  vane.  He  listed  examples.  Mr.  Gamble                                                                    
reiterated that he  thought the railroad was  a good weather                                                                    
vane  because  most  of  its  business  deals  with  Alaskan                                                                    
issues. He gave  examples. He emphasized that  there was not                                                                    
much the  railroad could  do until  the economy  changes and                                                                    
goods and services move again.                                                                                                  
                                                                                                                                
10:58:38 AM                                                                                                                   
                                                                                                                                
Co-Chair  Hoffman  requested  a  history  of  Flints  Hills'                                                                    
providing fuel to the airport.  He surmised that there was a                                                                    
fuel  storage  problem at  the  airport.  He also  requested                                                                    
information  about the  railroad's fuel  capacity and  costs                                                                    
over the last five years.                                                                                                       
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
The meeting was adjourned at 10:59 AM.                                                                                          
                                                                                                                                
                                                                                                                                

Document Name Date/Time Subjects
AIAS legis Update 2010.02.02 final.pdf SFIN 2/3/2010 9:00:00 AM
02_03_2010 Senate Finance Cmte briefing.pdf SFIN 2/3/2010 9:00:00 AM
SOA Debt Book 12-31-09 Letter.pdf SFIN 2/3/2010 9:00:00 AM
ARRC
2010_02_09 DOT response to questions.pdf SFIN 2/3/2010 9:00:00 AM
DOT Aviation
2010 02_17_10 ARRC response to questions.pdf SFIN 2/3/2010 9:00:00 AM