Legislature(2001 - 2002)
04/09/2002 01:58 PM House FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
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.
NEIL SLOTNICK, DEPUTY COMMISSIONER, DEPARTMENT OF REVENUE,
spoke in support of the legislation. He observed that the
initial review indicated that public financing could not be
used for private activity. There are some exceptions to
that rule, with a private activity cap for $225 million
dollars, which the State does have access to. That cap is
almost always fully subscribed to because Alaska Housing and
Finance Corporation (AHFC) use it for some of THEIR housing
finance needs. None of the exceptions fit into something as
large as a gas pipeline. Mr. Slotnick pointed out that
there was one other exception and that there could be a
"special congressional" exception to the requirement.
Mr. Slotnick noted that is where is was left when some
outside advisors, bond counsel and the investment bank,
Goldman and Saks, came to the Department of Revenue and
informed the State of a special State exception that already
exists in federal law, the Railroad Transfer Act. He
pointed out that a copy of that statute had been included in
member's packets, USC Title 45, Chapter 21, the Railroad
Transfer Act, Section 12.07.A6A. (Copy on File). The
exception allows the railroad to borrow money on a tax-
exempt basis for purposes, which would include the financing
of a transportation project of a natural gas pipeline. In
addition, the Railroad would not have to take ownership of
the pipeline.
Mr. Slotnick explained that would be termed "conduit"
financing. He referred to Page 4 of the handout and the
financing of the marine terminal by the City of Valdez.
That City, using its tax-exempt financing status, did the
financing but Valdez did not have to undertake the ownership
of the marine terminal. They did not have to use their own
credit-at-risk to issue bonds. The bonds are guaranteed by
the credit of the underlying companies. The State is using
the same analogy to explain what can be done for the gas
pipeline. The law in the Railroad Transfer Act is a unique,
special exception that does not have the same limitations of
other practices trying to do private activity financing.
Mr. Slotnick explained how the financing would move forward
in the market. He referred to the Canadian gas pipeline.
That project was 70% debt and 30% equity, which is about the
most debt that the market would allow the State of Alaska to
undertake. The market wants to guarantee that there is a
principal behind the financing that has its own capital at
risk. Tax-exempt financing runs at about 20% - 25% less
than taxable financing.
Mr. Slotnick referenced the "Alaska Gas Pipeline Financing
Alternatives" handout. (Copy on File). He noted Page 12,
"Taxable versus Tax-Exempt: Gross Interest Cost". He
commented that the best way to determine the savings is by
preparing a present value analysis. There would be
approximately a $1 billion dollar savings if the producers
had access to tax exempt financing through the Railroad. He
reviewed some of the assumptions used in preparing the
analysis:
· The credit would be backed by companies
through a ship or pay contract.
· If project financing was used, it was assumed
that there would be approximately an 8.5%
interest rate with 6.5% tax exempt;
· Four year construction period; and
· Twenty-five year bond issue.
Mr. Slotnick explained why the State legislation was
necessary even with the federal authorization. The feds
gave the authority, but when the State purchased the
Railroad, it did not give authority to issue bonds for a gas
pipeline transportation project. The legislation authorizes
the sale of bonds in the market for a project that is backed
by contracts with the producers.
JEFF BROWN, (TESTIFIED VIA TELECONFERENCE), GOLDMAN AND
SACKS, spoke in support of the legislation. He observed
that there would be a 20-year amortization on the debt. The
Governor's number of $1 billion dollars could be larger
given more aggressive assumptions. He complimented the
Alaska State Department of Revenue for their detailed work.
In response to a question by Vice-Chair Bunde, Mr. Slotnick
noted that producers do not feel that there is enough
incentive. The Department's assumptions were based on a $17
billion dollar project and a $3 barrel of gas would have led
the State to the same conclusion.
Vice-Chair Bunde estimated that a substantial return on the
investment would be needed.
Mr. Slotnick did not know what the hurdle rate would be for
the producers.
Representative Davies observed that there are concerns
regarding the application of the Railroad Act.
Mr. Slotnick noted that the IRS has not been consulted on
the issue.
ERIC WOHLFORTH, (TESTIFIED VIA TELECONFERENCE), ECONOMIST,
ANCHORAGE, explained that it was adequate and complete for
the Railroad to undertake tax exempt financing of the gas
line when the Legislature authorizes that project. The
Railroad lacks the power to issue bonds; consequently, the
bill is needed. Once the bill passes, the Railroad would be
legally able to move forward with the pipeline-financing
project.
Representative Davies asked about the issues around the IRS
re-authorization.
Mr. Wohlforth explained that the federal authorization path
cleared without conflicts or ambiguities. It was clarified
that there could not be specific exemptions. There is no
doubt that there is clear authority to undertake the
project.
Representative Hudson asked about the problem between the
Railroad and the pipeline and the restrictions upon the
Railroad's use of the tax-free borrowing capacity.
Mr. Wohlforth advised that the financing of a gas pipeline
is within the charter authority of the Railroad and the
Railroad was authorized to undertake financing for that
purpose. It would be used for transportation.
Representative Hudson asked who would own the $1 billion
dollar asset.
Mr. Wohlforth explained that the gas pipeline would remain
within the ownership as if no public financing had taken
place and would be a pass through, non-recourse financing.
It would be a financing not involving the change of
ownership. There would be legal support of the bonds, but
it would not allow any transfer of ownership.
Representative Hudson asked clarification that the State
would no longer have the asset value of $1 billion dollars
if the Railroad secures the tax-free funds.
Mr. Wohlforth agreed and added that the State would not have
ownership in the gas pipeline were financed.
Representative Croft asked if it was assumed was that the
producers would own it.
Mr. Wohlforth thought that question should be left to
Department of Revenue.
Mr. Brown added that the shippers for the oil companies
would own the pipeline and that they would be able to take
the depreciation benefits on the pipeline. He explained
that was important because:
· The ownership is a huge economic issue; and
· The Governor's Pipeline Counsel recommended
that the State not own the pipeline.
Representative Croft asked if the "shippers" were the people
who own the right to the oil.
Mr. Brown commented that the shippers could either be those
who own the oil or the "ultimate" customers.
Representative Croft understood that the more financially
secure the entity, the less advantage they get from the
status. He asked if it was correct that a corporation as
solvent as Exxon, would receive less of a benefit than an
independent pipeline company.
Mr. Brown agreed that was a "fair assumption". With most
big projects, there is an advantage to the user of the
pipeline in order for it to be project financed. That
minimizes the expensive equity put in. Different companies
will look at it differently. Initially, only a few
companies were registered but as it became a success, twenty
or thirty companies came on board. That is why companies
appreciate doing their own balancing rather than using a
project balance sheet.
Representative Croft asked the different models created
between a company owned by an independent versus the
producer.
Mr. Brown noted that if an AAA oil company were financing it
long term and using relatively less debt, versus a BBB
pipeline company, the benefit would be very different.
Representative Whitaker asked if the mid-point savings would
be $1 billion dollars over a twenty-year time period and if
it would be weighted equally over the course of the twenty
years.
Mr. Slotnick stated that was not accurate as that is not the
manner in which the municipal bond market works. The full
advantage of the tax exemption is not yet provided.
Bondholders do not like to take long-term tax risk. The $1
billion dollars value is the present value and in actuality,
it would be more like $5 billion dollars real terms.
Mr. Brown noted that the raw numbers amounted to nearly $100
million dollars per year.
Representative Whitaker thought that the $100 million
present dollar per year value added to an expected return,
by the State's assumption would not get the project "over
the hurdle". He claimed that the producers were seeking
another number.
Mr. Slotnick advised that the economists had plugged in
various assumptions over the years. He did not know what
was a reasonable projection.
Representative Whitaker referenced the $163 million dollar
FY05 fiscal note projection, a contractual expense to be
paid by bond proceeds. He questioned what the $163 million
dollars would be used for.
Mr. Slotnick advised that would be used for the expense of
issuing bonds. It would be paid to bond counsel,
underwriters and financial advisors. The decision would be
left up to the Railroad, as they would be the contracting
entity. Mr. Slotnick suggested that future questioning be
directed to the Railroad. He advised that he had spoken
with the Railroad to help develop the procedures for going
to market. The agencies involved are Alaska Housing Finance
Corporation (AHFC), Alaska Industrial Export & Development
Authority (AIDEA), and the Department of Revenue.
Vice-Chair Bunde asked who would pay the cost.
Mr. Slotnick explained that the cost would be paid by the
Railroad and would be reimbursed through the proceeds of the
bond sale. The eventual payer would be the owner of the
pipeline.
Representative Whitaker commented that the cost would be
reflected in the tariff. He assumed that the State of
Alaska would essentially be paying the $160 million dollar
cost.
Mr. Slotnick acknowledged that the cost of issuance of the
bonds would be reflected in the tariff, even if it were
taxable through taxable bonds or through tax-exempt bonds.
DAN FAUSKE, (TESTIFIED VIA TELECONFERENCE), EXECUTIVE
DIRECTOR, ALASKA HOUSING FINANCE CORPORATION, DEPARTMENT OF
REVENUE, WASHINGTON D.C., stated that there are a lot of
questions that need to be answered in reference to the IRS.
He noted that those concerns are beyond the control of AHFC
and the legislators. He commented that the proposed
legislation was a very "do-able" deal. However, the IRS
agents or U.S. Congress could question the deal. He stated
that it is important that the State put itself in a position
to act on the proposed deal. He believed that would send a
strong message to Congress about Alaska's preparedness to
undertake the deal. Additionally, it would send a message
to the oil and gas industry that the project is do-able and
in the case of dollars, tax exempt financing would be a step
in the right direction to make the project viable.
Mr. Fauske referenced the fiscal note and the underwriting
costs. The costs are built in on how to price that bond.
Mr. Fauske did not know how those costs would be paid.
JOHN BITNEY, LEGISLATIVE LIAISON, ALASKA HOUSING FINANCE
CORPORATION, DEPARTMENT OF REVENUE, referenced the handout
distributed, "Presentation to the House Finance Committee by
Alaska Housing Finance Corporation, April 9, 2002". (Copy
on File). He noted that the information in the handout is a
replica of what AHFC provided to the Alaska Railroad for
preparing the tax-exempt finance bond.
JOE DUBLER, CHIEF FINANCAL OFFICIER, ALASKA HOUSING FINANCE
CORPORATION, DEPARTMENT OF REVENUE, introduced the team of
participants with AHFC and financial advisors that were on
line.
Mr. Dubler spoke to the assumed a 30-year term. He claimed
that AHFC's proposed numbers were more aggressive. He
referenced the booklet and the tax-exempt bond issuance:
· Selecting appropriate professionals such as
the financial, tax, legal, and financing
specific experts;
· Performing feasibility analysis such as tax,
financial, and project analysis;
· Developing optimal finance structure such as
coordination with users of project;
· Generating local support;
· Providing information to the public; and
· Responding to rating agency concerns and
obtaining a rating.
TAPE HFC 02 - 78, Side B
· Marketing the bonds with the institutional
and the retail investors; and
· Providing continuing disclosure.
Representative Whitaker thought that there should be more
than one approach to the bond issue.
Mr. Bitney explained that AHFC was hoping that based upon
their experience in providing the "lion's share" of tax
financing to the State, they would show the types of things
that are necessary to undertake that type of financing. HB
423 would authorize the Alaska Railroad for the federal tax
exemption. The passage of the bill would be financing under
the auspicious of the Alaska Railroad. At that point, it
would be the obligation of that agency to conduct the
financing.
Representative Whitaker asked if there would be an
opportunity for the State to gain some of that portion back.
Mr. Wohlforth explained that in 1974, the City of Valdez was
part of the first financing. The City charged 1% and has
continued to charge that fee for recent refinancing,
extending the term to 2031. With the 1% increased aid fee
the City has charged, they now have a permanent fund in the
order of approximately $55 million dollars. That could be a
consideration for the Railroad.
Representative Whitaker questioned if the AHFC approach was
different from the approach put forward by the Department of
Revenue.
Mr. Bitney responded that there have been no decisions
regarding the specific approach of how to address the
concern. AHFC is providing a series of necessary steps in
order that it can happen. The key rests with the selection
of the people involved in structuring the financing.
Representative Whitaker asked if the State was on the
correct financing course.
Mr. Bitney did not know of any problems at this point. It
is a process that needs to be driven by the Railroad.
Representative Whitaker commented on the nature of the
transaction and the value it could have for serving the
State of Alaska. He suggested that if AHFC should become
aware of something in the process that was "non-
competitive", they would come forward and warn the
Administration.
Mr. Dubler explained that to the extend that AHFC was
involved in any transaction, they will take steps to insure
the process.
Representative Whitaker asked who would insure that the
process was procedurally competitive and in compliance with
how the public process is conducted.
Mr. Bitney advised that at this point in the process, AHFC
is not in charge of the financing, pointing out that right
now, AHFC is only addressing the process needed to get the
procedure started.
Mr. Dubler explained that the meeting presentation had been
encouraged by Alaska Railroad and was not intended to be a
secondary or alternate approach.
Representative Whitaker asked who is in charge.
Mr. Dubler explained that the Railroad is in charge.
Mr. Fauske noted that AHFC was asked to prepare advice based
on their experience. There are a couple of agencies
involved that have extensive experience in financing. These
agencies stand on the position that offering assistance
would help show the way for the transaction to happen.
Alaska Railroad will be issuing the bonds and they have no
experience in doing that. With a model in place, AFHC,
AIDEA and the State would be the best and most effective tax
models.
Mr. Fauske mentioned that with a "deal" this large, it is
important to get as many outside firms as possible involved
to help market it. It is imperative that the Alaska
Railroad authority will reside with that entity and that the
Railroad has absolute control over the financing. He
advised that there have been no discussions other than how
to approach the issue with the underwriters. Mr. Fauske
urged that the idea move forward as it would mean a great
deal for the State and to the Nation.
MICHAEL HURLEY, PHILLIPS ALASKA, ANCHORAGE, spoke in support
of HB 423. He noted that Phillips Alaska has reviewed the
concept embodied in the bill. Conduit financing does have
the potential to benefit the gas pipeline project.
Additional clarity in several areas will be needed. He
added that Phillips Alaska is continuing to evaluate the
impacts more fully. At this time, Phillips Alaska supports
passage of the legislation, which would provide the
authorization necessary if the project were to become a
viable alternative.
Representative Whitaker asked who Mr. Hurley previously
represented.
Mr. Hurley noted that in the past, he had represented three
companies, Exxon Mobil, British Petroleum and Phillips
Alaska.
JERRY MCCUTHEON, (TESTIFIED VIA TELECONFERENCE), ANCHORAGE,
claimed that there will not be a gas pipeline out of Alaska
in our lifetime. He spoke to concerns regarding the C2's
and C3's. The project would need about five trains a day.
He commented that it could be done, if the State was willing
to pay for the track. Amtrak is requesting billions of
dollars. Amtrak and the Alaska Railroad are the two
eligible entities for those billions for which Amtrak
desperately needs. He said that the current system of
putting the gas liquids in a hot oil line is wasteful.
Vice-Chair Bunde suggested that there should be
opportunities for future legislators to "weigh-in" or review
the procedures. He warned about the size of the project and
the amount of oversight that it will need.
PAUL FUHS, YUKON PACIFIC CORPORATION, spoke in support of
the proposed legislation. He noted that when it was first
proposed, it could only be used for a pipeline through
Canada. The Oil and Gas Committee did amend the bill to
allow other options including the pipelines to tide water in
Alaska.
Mr. Fuhs pointed out that the State is attempting to make an
economic model of a project available to the Oil and Gas
Committee in contrast to other projects. Mr. Fuhs noted
that there have been rates of returns indicated in the range
proposed by Vice-Chair Bunde. If the railroad model could
improve the financing, those rates would improve more.
He claimed that there is a huge fight regarding who will get
the value added for the project. At this time, there are 18
alternative proposals. He stated that he would make the
handout about the alternative mean proposals available to
the Committee. (Copy on File). Two tests need to be used to
determine whether the project is feasible:
· The first is the economic amount being put
forward and whether the market would be
buying that gas; and
· Whether the bonds can be sold. People will
need to believe in the economics of the
project.
Co-Chair Williams noted that HB 423 would be HELD in
Committee for further consideration.
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