Legislature(2003 - 2004)

05/14/2003 01:41 PM FIN

Audio Topic
* first hearing in first committee of referral
+ 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                                                                   
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                                                                   
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                                                                   
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                                                                   
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                                                                   
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                                                                   
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                                                                   
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                                                                   
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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