Legislature(2003 - 2004)
05/14/2003 01:41 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. 267
"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 those
facilities; and providing for an effective date."
REPRESENTATIVE VIC KOHRING, SPONSOR, provided information
about the bill. He observed that the legislation would allow
revenues to be raised in order to build a natural gas
pipeline. He explained that the bill authorizes the Alaska
Railroad Board to generate tax-exempt bonds to raise low
interest rate funds. Bonds would be issued and proceeds
would be lent to potential constructors of the gas line.
There would be no net effect to the State. Bonding
authorization would be available to assist the building of
the pipeline. The debt is non-recourse, which means that the
debt would be the responsibility of the project sponsor. The
builders would be responsible for their debt. The debtor
could not lien any assets of the Railroad, state of Alaska,
or the Permanent Fund. Financing would be issued for
acquisition, construction, improvement, maintenance,
equipping, and operation of facilities associated with
transportation of natural gas. Up to $17 billion would be
authorized, which would provide the majority of proceeds
needed for building a $20 - $25 billion pipeline. The Alaska
Railroad would issue the bonds, but neither the Railroad nor
the state of Alaska would be liable for the debt. The bill
requires that prior to issuing bonds, proof of ability to
repay must be demonstrated. Representative Kohring noted
that there was a history in other states of railroads
helping to finance pipeline projects. He also pointed out
the mission of the Railroad to facilitate economic
development.
Representative Kohring referred to a letter by George K Baum
& Company, which indicated the feasibility of issuing bonds.
He stressed that the current low interest rates would allow
the capital to be raised. He noted that the bonds were tax
exempt. The Railroad's ability to issue tax-exempt bonds was
initiated when purchased by the federal government. He
concluded that the bill presented an important facet toward
completion of the pipeline.
Co-Chair Harris asked for an update of discussions with
North Slope producers.
PAUL FUHS, YUKON PACIFIC, stated that the Administration
might have more information on specific negotiations. In
response to a question by Co-Chair Harris, Mr. Fuhs stated
that the intent is to get tax-exempt bonding through the
Railroad. He observed that the Alaska Railroad Corporation
does not have the authority in its organic act. The state of
Alaska must give it the authority.
TAPE HFC 03 - 93, Side B
In response to a question by Representative Hawker, Mr. Fuhs
noted that a similar bill was in the last legislative
session: HB 423, which was rolled into HB 519.
Representative Whitaker referred to the difference between
tax exempt and taxable bonds. Mr. Fuhs encouraged the
Committee to read the letter from George K. Baum and
Company, which has sold $2 billion in bonds in the state.
Representative Whitaker asked who was the holder of the
bonds in Valdez. Mr. Fuhs observed that they are municipal
bonds.
Mr. Fuhs pointed out that George K Baum and Company was
asked to verify Yukon Pacific's numbers look at the
difference in tax-exempt bonds and estimate if the bonds
could be sold. The letter concludes that the project could
be financed in the bond market if the railroad vehicle is
available. He pointed out that this pertains to either
project: Trans Canada or all Alaskan. He referred to the
spreadsheet attached to the letter, indicating that the rate
difference between non-taxable and taxable was two full
points (copy on file.) He added that they indicated that
there were sufficient revenues under the Alaska Natural Gas
Development Act. He observed that estimated revenues for a
private project would be $350 - $400 million to the state of
Alaska and $50 - $100 for municipalities. A public model
shows up to a billion dollar return to the state of Alaska.
Mr. Fuhs observed that the George K Baum and Company has as
much experience in selling bonds as anyone in Alaska.
Representative Kohring referred to his experience with the
company while on the Alaska Railroad Board. Representative
Whitaker expressed hid support of the bill.
Mr. Fuhs discussed changes proposed in an amendment by Co-
Chair Harris (Amendment 1), which would confirm the
authority of the Railroad to what is actually stated in the
authorization.
Representative Hawker observed that there was no information
in the packet from the Department of Revenue, and pointed
out that the Department had bond experience. Mr. Fuhs stated
that the Department of Revenue had responded in other
committee meetings.
Representative Whitaker pointed out that he had testimony by
former Department of Revenue Commission Wilson Condon.
BILL O'LEARY, VICE PRESIDENT, FINANCE, ALASKA RAILROAD
CORPORATION testified via teleconference in support of the
bill. Representative Hawker observed that the investment
community's view of Alaskan bonds might not be the same as
it was a year ago. He asked if Committee should obtain a
more current view of the bond rating before proceeding.
Mr. O'Leary stated that he had viewed the information from
the state financial advisor, and pointed out that the model
being used would not affect the State's bond ratings; only
the project would be affected.
Representative Whitaker stressed that there is no inherent
liability for the state of Alaska or the Alaska Railroad
Corporation. The liability lies with the feasibility of the
project.
Representative Hawker expressed concern about the extent of
the bonds ($17 billion), and asked if the Department of
Revenue had reviewed the project.
LARRY PERSILY, DEPUTY COMMISSIONER, DEPARTMENT OF REVENUE
noted that the idea had been discussed the previous year, in
regards to how the state could help bring about a natural
gas project to commercialize stranded gas in the North
Slope. He noted that it was discovered that under federal
legislation the Alaska Railroad Corporation has the ability
to issue tax-exempt bonds. There is no explicit provision
requiring the bonds to be used to support railroad function.
Discussions with bond counselors indicated that if there is
enabling legislation the Alaska Railroad Corporation would
be in a position to issue financing bonds. The payment of
the bonds would not be the responsibility of the state of
Alaska or the Corporation. Investors would have to
demonstrate sufficient revenue from the project to repay the
bonds. A determination was made that [the investors] could
realize a savings of $1 billion by issuing tax-exempt bonds.
He noted the argument that the federal regulations were
unclear, and might dissuade investors. This would be
resolved by an IRS opinion or further legal research prior
to the bond purchases.
Representative Hawker concurred that the funding seemed
viable, but observed that the bill had not been a high
priority previously. Mr. Persily clarified that a change in
[state] statute is needed to give the Railroad the authority
to issue the bonds. He concluded that tax-exempt bonding
could be a viable funding source.
Mr. Fuhs stressed that this bonding authority was
specifically intended for the gas pipeline, and speculated
that this was the reason for the delay.
Representative Hawker noted the correlation with Proposition
3 in the last election. Mr. Fuhs speculated that the
legislation does not discriminate against potential
sponsors.
Representative Berkowitz pointed out that this authority
could be used for other purposes such as a portion of the
capital budget.
Co-Chair Harris noted that the bill is project and site
neutral. He referred to Amendment 1, which conforms the
powers granted to ARRC in Sec. 2 of the bill with the
specific provisions in the legislative authorization and
approval section. It clarifies that the act is intended to
facilitate a natural gas pipeline form the North Slope of
Alaska.
Mr. Persily agreed that the amendment made it explicit that
[the bonds are intended] for a natural gas pipeline in the
North Slope, replacing a more broad authority, which could
have been used for other projects. He noted that this
applied to commercializing and transporting gas from the
North Slope.
In response to a question by Co-Chair Harris, Mr. Persily
acknowledged that if amendment would assist North Slope gas
development. He observed that using the authority for other
purposes might risk its ability to be used for [the natural
gas pipeline] if problems were encountered before it was
needed for the project. He pointed out that a potential
sponsor could be anyone who can show sufficient revenue to
cover the bonds.
Representative Whitaker expressed his support of the bill.
Vice-Chair Meyer also expressed his support of the bill, and
asked if the State was ultimately responsible. Mr. Persily
noted that the bonds were revenue bonds, based on the belief
in sufficient repayment revenue. The state of Alaska would
not be responsible.
Mr. Fuhs referred to the letter by George K. Baum and
observed that the bonds would be non-recourse conduit bonds.
The minimum debt service ratios are calculated at fifty
percent higher revenues than needed to make the payments, in
order for the market to have confidence in purchasing the
bonds.
Representative Hawker referred to a letter from Conoco
Phillips, stating: "while it is too early to select
financing vehicles, HB 267 will add a potentially valuable
option". He asked why the bill was proposed in the current
year. He suggested that there were still hurdles to overcome
to truly view the viability of the funding. He asked why a
specific amount ($17 billion) was selected and why the
legislation should be passed now.
Mr. Persily noted the specific financing vehicle depends on
who builds the project. The specific amount was necessary to
attract pipeline sponsors, and if the statute was not on the
books, it might delay negotiations. He maintained that there
was no harm in having the statute. Mr. Fuhs maintained that
federal factors in the negotiations would become clear this
year.
Representative Hawker asked the Department of Revenue's
position. Mr. Persily stated that he believed the Department
of Revenue was supportive of the bill, since they had worked
on various aspects of the legislation over the years.
Representative Kerttula referred to the importance of the
legislation to potential buyers. Mr. Persily confirmed that
it was also important to show good faith to the federal
government and demonstrate that [the state of Alaska] is
moving forward.
In response to a question by Representative Whitaker, Mr.
Persily responded that the most current estimates of funding
needs were reflected in the $17 billion figure.
Co-Chair Harris MOVED Amendment #1. There being NO
OBJECTION, it was so ordered.
Representative Berkowitz MOVED to ADOPT Amendment #2 a title
amendment: delete "relating to the Alaska Railroad". There
being NO OBJECTION, it was so ordered.
Representative Foster MOVED to report CSHB 267 (FIN) out of
Committee with individual recommendation and the
accompanying fiscal note. There being NO OBJECTIONS, it was
so ordered.
CS HB 267 was REPORTED out of Committee with a "do pass"
recommendation and one fiscal impact note: #1 from
Department of Community and Economic Development.
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