Legislature(2003 - 2004)

04/24/2003 03:16 PM House O&G

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
HB 267-AK RAILROAD BONDS FOR NAT.GAS TRANSPORT                                                                                
Number 2339                                                                                                                     
CHAIR KOHRING  announced that the  final order of  business would                                                               
be 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."                                                                 
CHAIR KOHRING, sponsor of HB 267,  pointed out the work of others                                                               
on  this  legislation and  described  himself  as a  facilitator.                                                               
Explaining  that   the  bill  provides   a  tool   for  potential                                                               
constructors of  the gas  pipeline and is  intended to  provide a                                                               
financing  option, he  thanked Representative  Fate  for work  on                                                               
other legislation pertaining to stranded  gas.  He noted that the                                                               
Alaska Railroad  Corporation (ARRC) has bonding  capability and a                                                               
very  good bond  rating, and  thus  can access  capital at  cheap                                                               
rates.   This  bill asks  ARRC to  issue bonds  in order  to make                                                               
money  available  for potential  constructors  of  a natural  gas                                                               
pipeline,  who would  work out  a contractual  arrangement.   The                                                               
bill  provides for  up to  $17  billion in  bonds, whereas  Chair                                                               
Kohring said  he's been told  constructing a pipeline  would take                                                               
as much  as $20 billion.   He characterized this as  an important                                                               
piece of the package to make the gas pipeline a reality.                                                                        
Number 2506                                                                                                                     
PAUL FUHS,  Lobbyist for Yukon  Pacific Corporation  (YPC), began                                                               
by listing his  experience with bonding issues and  entities.  He                                                               
told  members  this  important  tool  has  always  been  seen  as                                                               
"nonrecourse bonding":   if ARRC issues these bonds,  it would be                                                               
conduit financing, with  no recourse of any lender  "to the state                                                               
general obligation  bonding - the  permanent fund,  the railroad,                                                               
or any  of the other  assets."  He  said this "peculiar  piece of                                                               
tax  law" came  across as  the  railroad was  transferred to  the                                                               
state, and is included in the federal railroad transfer Act.                                                                    
MR. FUHS emphasized  YPC's desire that the committee  be aware of                                                               
the  potential for  a  pipeline to  Valdez.   He  noted that  the                                                               
Canadian pipeline project is dependent  on federal subsidies that                                                               
may or may not be received, for instance.                                                                                       
Number 2583                                                                                                                     
MR.  FUHS drew  attention to  documents he'd  provided [a  letter                                                               
from  Representative  Harris  to   Ward  Whitmore  of  YPC  dated                                                               
December 24, 2002; a letter  in response; and a six-page document                                                               
entitled "Yukon Pacific Corporation:   Trans-Alaska Gas System"].                                                               
He  suggested   these  contain  the  most   detailed  information                                                               
provided by  any project sponsor  in terms of  numbers, including                                                               
capital  costs  of about  $12  million  and delivered  prices  of                                                               
liquefied natural  gas (LNG) at  $3.50 in  Asia and $3.25  on the                                                               
U.S. West Coast, and gas delivered  in Alaska at $2.50, leaving a                                                               
wellhead  value  to  the  producers  of  about  $1.00,  which  he                                                               
suggested is in  the range talked about.  As  to whether there is                                                               
a market, he said California  has expressed interest and that LNG                                                               
will be a critical part of that state's energy mix.                                                                             
MR. FUHS  also alluded  to an  e-mail in  packets with  regard to                                                               
discussions   with  Mr.   Kim,  vice   president  of   Korea  Gas                                                               
Corporation  (KOGAS), to  whom  this  information was  presented.                                                               
Mr. Fuhs  noted that Representative  Fate was at that  meeting as                                                               
well  and  also had  heard  that  when  the  price of  $3.50  was                                                               
mentioned  to [Mr.  Kim], he  pulled a  piece of  paper from  his                                                               
pocket and said  the lowest price they'd been  offered was $4.00,                                                               
with the highest  being $5.17 for the gas that  they were looking                                                               
for.   Regardless  of generic  comments that  this project  isn't                                                               
economical, Mr.  Fuhs said, these  numbers show a  viable project                                                               
that doesn't even need subsidies.                                                                                               
MR. FUHS also  drew attention to [letters between  John Urbina of                                                               
George K.  Baum & Company  ("George K. Baum")  and Representative                                                               
Harris].   He  noted that  Representative Harris  had asked  that                                                               
company  - which  has sold  about $2  billion worth  of bonds  in                                                               
Alaska in the last 10 years -  to look at the numbers provided by                                                               
YPC to  see whether George  K. Baum  believes the bonds  could be                                                               
sold and what impact the ARRC bonds would have.                                                                                 
Number 2704                                                                                                                     
MR. FUHS pointed  out that [page 2 of Mr.  Urbina's letter] says,                                                               
based on  the information supplied  by YPC, that the  project can                                                               
be financed in the bond market  if the ARRC vehicle is available.                                                               
Mr. Fuhs  called this  a pretty strong  statement from  a bonding                                                               
company on  the importance of  the railroad bonds.   Highlighting                                                               
"Chart A," an  attachment to Mr. Urbina's letter,  Mr. Fuhs noted                                                               
that  it shows  almost  a 2  percent difference  in  the rate  of                                                               
return if  ARRC bonds are  used, with  a projected return  to the                                                               
State  of Alaska  of  $500 million  to  $1 billion  a  year.   He                                                               
characterized this  as the  only project seen  so far  that comes                                                               
close to  meeting the governor's  goal of addressing  the state's                                                               
budget deficit through resource development.                                                                                    
Number 2758                                                                                                                     
REPRESENTATIVE  HOLM  asked  whether  there  are  any  U.S.-built                                                               
tanker hulls  available today  that could  haul LNG  between U.S.                                                               
MR. FUHS said no.  He added  that the world's LNG tankers are 100                                                               
percent utilized at this time and  are on contract.  Thus tankers                                                               
will have to be  built.  If they go into  the U.S. [from Alaska],                                                               
they'll have  to comply  with the  federal Jones  Act.   For Baja                                                               
California, additionally, he said it  would be U.S. tankers.  The                                                               
most interesting  development in  LNG is offshore  platforms; the                                                               
first is  being applied  for 130  miles offshore  in the  Gulf of                                                               
Mexico,  with  the gasification  facilities  being  on the  ship.                                                               
That helps  to solve  some of  the siting problems.   He  said he                                                               
wasn't  sure whether  something 20  miles offshore  would require                                                               
compliance with the  Jones Act, but specified  that vessels going                                                               
into a U.S. port would have to comply with the Jones Act.                                                                       
Number 2843                                                                                                                     
WENDY  KING,  Director  of External  Strategies,  ConocoPhillips,                                                               
informed members that she works  in the "ANS [Alaska North Slope]                                                               
gas commercialization group."  She told the committee:                                                                          
     ConocoPhillips  supports House  Bill  267, which  could                                                                    
     provide, but  would not require, an  Alaska natural gas                                                                    
     pipeline  to  potentially  utilize an  Alaska  Railroad                                                                    
     Corporation bond financing mechanism.                                                                                      
     As    mentioned   before    in   previous    testimony,                                                                    
     ConocoPhillips has  a three-pronged strategy to  make a                                                                    
     gas pipeline through Alaska and  Canada a reality.  The                                                                    
     first  is two  distinctly different  pieces of  federal                                                                    
     legislation.    The  first  one   is  focusing  on  ...                                                                    
     streamlining the  permitting process.   And  the second                                                                    
     is  fiscal legislation  which  would provide  insurance                                                                    
     against  the risk  of extreme  price  volatility.   The                                                                    
     third  item  is  state fiscal  certainty  and  clarity,                                                                    
     which  will be  progressing  with  the recently  passed                                                                    
     House   Bill  16,   which  reauthorized   the  [Alaska]                                                                    
     Stranded Gas Development Act.                                                                                              
     If  ConocoPhillips is  successful  with securing  these                                                                    
     three  items, we  plan to  continue  moving forward  on                                                                    
     this project.   Financing this  potentially $20-billion                                                                    
     project will be a  significant activity for any company                                                                    
     that  pursues  the Alaska  pipeline  project.   And  we                                                                    
     support  having as  many tools  as  possible to  choose                                                                    
     from, when  that time comes.   While it's too  early to                                                                    
     select specific  financing [vehicles], if  this vehicle                                                                    
     proves  workable it  might add  a potentially  valuable                                                                    
     In  conclusion, we  support the  passage  of ...  House                                                                    
     Bill 267 and appreciate  the legislature for addressing                                                                    
     the financing options for the gas pipeline project.                                                                        
Number 2922                                                                                                                     
CHAIR  KOHRING  emphasized the  goal  of  providing a  tool  that                                                               
potentially  can be  used  to finance  construction  of that  gas                                                               
pipeline, and  acknowledged that  it won't automatically  be used                                                               
by any  company.  He  then asked Mr.  Marks of the  Department of                                                               
Revenue to address feasibility during his testimony.                                                                            
Number 2951                                                                                                                     
ROGER MARKS, Petroleum Economist,  Economic Research Section, Tax                                                               
Division, Department  of Revenue, said [the  department] has done                                                               
quite  a bit  of detailed  modeling of  this financing  mechanism                                                               
just  to see  what  kind of  potential effect  it  could have  on                                                               
project viability.                                                                                                              
TAPE 03-18, SIDE B                                                                                                            
Number 2973                                                                                                                     
MR. MARKS  pointed out that the  first step is making  sure there                                                               
is  a  good  project  [economically],  regardless  of  financing.                                                               
However, if  this mechanism were  available and  project sponsors                                                               
decided to  use it, he  estimated the  range of savings  would be                                                               
from zero  up to  $4 billion in  financing charges,  depending on                                                               
the degree  it was used  because of  the tax-free treatment.   He                                                               
said the Department  of Revenue would support HB 267  as a way of                                                               
moving this project forward.                                                                                                    
Number 2915                                                                                                                     
REPRESENTATIVE  KERTTULA  referred  to the  analysis  section  of                                                               
ARRC's  fiscal note  and asked  who bears  the liability  for the                                                               
bonds and who will hold them.                                                                                                   
MR. MARKS answered  that these "nonrecourse bonds"  would be paid                                                               
directly from  project revenues.  The  corporations financing the                                                               
project  would  be liable.    He  suggested  that Mr.  Boutin  or                                                               
someone from ARRC could discuss this in detail.                                                                                 
Number 2842                                                                                                                     
TOMAS   H.   BOUTIN,   Deputy   Commissioner,   Office   of   the                                                               
Commissioner,  Department  of  Revenue,  responded  that  as  the                                                               
structure has been  explained to him, ARRC would  be the "nominal                                                               
issuer,"  a role  state agencies  or  municipalities often  have;                                                               
there  wouldn't be  implications for  the state,  including ARRC.                                                               
He said it isn't an uncommon structure in public financing.                                                                     
REPRESENTATIVE KERTTULA  related her understanding  that although                                                               
ARRC  would basically  be passing  it  through, the  corporations                                                               
themselves ultimately would be liable.   She surmised that people                                                               
who'd be buying these bonds would know that.                                                                                    
MR.  BOUTIN   said  typically  there   would  be   a  feasibility                                                               
consultant  with specific  expertise  in  gas pipeline  projects;                                                               
this  would  be an  important  component,  and the  credit-rating                                                               
agencies and  so forth  would use the  consultant in  addition to                                                               
doing their  own "due diligence"  to determine that  the revenues                                                               
would be adequate to repay the bond debt.                                                                                       
REPRESENTATIVE  KERTTULA  asked whether  bonds  using  ARRC as  a                                                               
conduit  could  be  sold  for  any purpose  or  just  for  a  gas                                                               
MR. BOUTIN suggested  Ms. Lindskoog of ARRC  could answer better,                                                               
but said  because of  tax-code changes,  primarily in  the 1980s,                                                               
ARRC has a singular ability with regard to tax-exempt debt.                                                                     
Number 2671                                                                                                                     
MR.  MARKS   pointed  out  that  the   federal  legislation  that                                                               
transferred the Alaska Railroad to  the state says the intent was                                                               
to  confer  upon  the railroad  all  the  business  opportunities                                                               
available to  comparable railroads.   There is  a long  record of                                                               
gas pipelines tied  to railroads in the Lower 48,  he noted, with                                                               
examples  of railroads  that have  owned, operated,  and financed                                                               
gas pipelines.   He  suggested this  might apply  some boundaries                                                               
with regard to what this mechanism could be used for.                                                                           
Number 2646                                                                                                                     
REPRESENTATIVE KERTTULA asked about risk to the state.                                                                          
MR. MARKS  replied that he believes  there is no risk  or a very,                                                               
very low risk.                                                                                                                  
CHAIR KOHRING asked whether ARRC supports the bill.                                                                             
Number 2596                                                                                                                     
WENDY LINDSKOOG,  Director of  External Affairs,  Alaska Railroad                                                               
Corporation,  Department  of  Community &  Economic  Development,                                                               
informed members  that ARRC  supports the  use of  its tax-exempt                                                               
bonding authority for a gas  pipeline and believes it fits within                                                               
ARRC's  mission to  support economic  development for  the state.                                                               
She said this  obviously is an important tool that  could be used                                                               
to help  lower the  cost of  the project.   She deferred  to Bill                                                               
O'Leary or Phyllis Johnson to answer further questions.                                                                         
Number 2547                                                                                                                     
REPRESENTATIVE  FATE asked  what  the process  will  be and  when                                                               
bonds will be issued.  He pointed  out that even though this is a                                                               
pass-through, there is a lot of money involved.                                                                                 
Number 2441                                                                                                                     
BILL   O'LEARY,   Vice   President,  Finance;   Alaska   Railroad                                                               
Corporation,  noted that  he is  ARRC's chief  financial officer.                                                               
In answer to Representative Fate's  question, he said it would be                                                               
solely dependent  upon having someone  such as the  [current oil]                                                               
producers first agree that the project  is viable, with a wish to                                                               
proceed.    If   the  other  steps  including   passage  of  this                                                               
legislation were in place, ARRC would  lay out a timeline for the                                                               
particular bond issuance or issuances  that would take place.  He                                                               
said it  is driven by  the producers' coming forward  and saying,                                                               
"Yes, we want to do this."                                                                                                      
REPRESENTATIVE  FATE  asked  whether [the  producers'  statement]                                                               
would  be  "Yes,  we  want  to  do this"  or  "Yes,  we  want  to                                                               
participate  in the  financing of  this," or  both.   He said  it                                                               
seems a lot  of groundwork must be laid before  issuance of those                                                               
bonds.     Although   he   said  he   didn't   have  a   concern,                                                               
Representative  Fate specified  that  he wanted  to know  whether                                                               
there is a timeline "that you are concerned about here."                                                                        
MR. O'LEARY  reiterated that the  timeline is dependent  upon the                                                               
producers'  coming  forward  and  saying they  wish  to  use  the                                                               
financing  mechanism through  ARRC.   From that  point, the  game                                                               
plan  would  be figured  out  with  respect  to when  the  [bond]                                                               
issuances  would  take  place.    He said  until  that  point  is                                                               
reached, it is tough to lay out anything more than that.                                                                        
Number 2342                                                                                                                     
MR. FUHS added:                                                                                                                 
     It may be  the producers.  It may be  a pipeline group.                                                                    
     It may be  the state development authority.   It may be                                                                    
     a  combination of  -- I  think Korea  Gas [Corporation]                                                                    
     said  they  would  look  at  5  to  10  percent  equity                                                                    
     investment.   So it  could be  any one  of a  number of                                                                    
     potential sponsors.                                                                                                        
     But the best  information on this is  contained in this                                                                    
     report by George  K. Baum.  And what they  did is, they                                                                    
     modeled also the  bonding for this.  It's  about an 80-                                                                    
     page report, and  I can make it available to  you.  And                                                                    
     what they  do is,  they start  from a  possible project                                                                    
     sanction  -  when you  have  the  go-ahead.   And  then                                                                    
     you've got  a certain amount of  final engineering that                                                                    
     has  to be  done, and  other things,  before you  start                                                                    
     issuing those bonds.                                                                                                       
     Now, George K. Baum  recommended three trains of bonds,                                                                    
     because you're not going to  go borrow all the money at                                                                    
     once.   You don't  need it  all at once.   So  you only                                                                    
     borrow  as  much  as  you  need,  because  during  your                                                                    
     construction  period is  your highest  interest rate  -                                                                    
     the interim financing during  construction, just like a                                                                    
     house or  building or  anything else.   So you  want to                                                                    
     stretch that  out as far  as possible.   And ...  I can                                                                    
     share  that [report]  with you,  and you  can see  that                                                                    
     [it's]  about  over  a  five-year  period  that  you're                                                                    
        actually issuing those bonds, ... and they just                                                                         
      recommended that because it reduces the cost of the                                                                       
     project by doing it that way.                                                                                              
REPRESENTATIVE FATE  requested that  Mr. Fuhs supply  the 80-page                                                               
document he'd just referenced.                                                                                                  
MR. FUHS agreed, noting that this  could be used as a model, even                                                               
though it was based on the project to Valdez.                                                                                   
Number 2261                                                                                                                     
REPRESENTATIVE CRAWFORD  asked whether it  would be good  to take                                                               
advantage of the  current low interest rates all  at once, rather                                                               
than spacing this  out over five years and  having interest rates                                                               
perhaps climb.                                                                                                                  
MR.  FUHS said  no.   He pointed  out that  once those  loans are                                                               
taken  out, payments  must be  made, regardless  of whether  that                                                               
money is actually  being used, and that there will  be five years                                                               
of building the  project before any revenues come  in.  Referring                                                               
to last year's  HB 423 with regard to the  Alaska Housing Finance                                                               
Corporation,  Mr.  Fuhs  said  there  might  be  the  ability  to                                                               
arbitrage these  bonds and  even generate  some revenues  for the                                                               
State  of  Alaska.    Although  more  complicated,  he  said,  it                                                               
potentially exists once a project is actually going forward.                                                                    
Number 2194                                                                                                                     
REPRESENTATIVE CRAWFORD suggested those  bonds might be virtually                                                               
free if current  low interest rates were taken  advantage of [and                                                               
if it were leveraged well].                                                                                                     
MR.  FUHS replied,  "Yes, sir,  but there's  also some  potential                                                               
risk for  that."   He added  that for the  George K.  Baum model,                                                               
interest  rates  were  about  5.6   percent,  an  extremely  good                                                               
interest rate for a project of this type.                                                                                       
Number 2160                                                                                                                     
REPRESENTATIVE HOLM  referred to ARRC's fiscal  note and observed                                                               
that  it shows  a  cost  of $163  million  for  fiscal year  2006                                                               
(FY 06).  He requested an explanation from Mr. O'Leary.                                                                         
MR. O'LEARY responded:                                                                                                          
     The fiscal note  in front of you does show,  in 2006, a                                                                    
     $163-million expense funded  through the bond proceeds.                                                                    
     And this  is an estimate  of the bond issuance  costs -                                                                    
     what  it  would actually  cost  to  issue these  bonds.                                                                    
     And,  of  course,   this  is  based  on   a  number  of                                                                    
     assumptions.  ... It's  important to  realize that  the                                                                    
     model for this fiscal note  is based upon the work that                                                                    
     was done  last year  by the  Department of  Revenue and                                                                    
     Goldman Sachs  when this  issue sort  of came  to light                                                                    
     about a  year or 15 months  ago.  So this  fiscal note,                                                                    
     again, is  based on that  model and shows in  2006, ...                                                                    
     when the  initial [issuance]  would certainly  be, that                                                                    
     [this] would be our best  estimate of what the costs of                                                                    
     issuance would be.                                                                                                         
     Those costs  would be funded through  the bond proceeds                                                                    
     themselves.   So to your  question about impact  to the                                                                    
     state,  there would  be ...  certainly no  general fund                                                                    
Number 2061                                                                                                                     
CHAIR KOHRING asked whether there was further discussion and                                                                    
thanked participants.                                                                                                           
Number 2022                                                                                                                     
REPRESENTATIVE FATE moved to report  HB 267 out of committee with                                                               
individual  recommendations  and  the accompanying  fiscal  note.                                                               
There  being no  objection, HB  267 was  reported from  the House                                                               
Special Committee on Oil and Gas.                                                                                               

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