Legislature(2003 - 2004)

05/19/2003 08:46 AM Senate FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
     CS FOR HOUSE BILL NO. 267(FIN)                                                                                             
     "An Act authorizing  the Alaska Railroad Corporation to provide                                                            
     financing  for  the  acquisition,  construction,  improvement,                                                             
     maintenance,   equipping,  and  operation   of  a  natural  gas                                                            
     pipeline  and  related  facilities  for the  transportation  of                                                            
     natural  gas recovered  from  the North  Slope  of this  state;                                                            
     authorizing  the Alaska Railroad Corporation  to issue bonds to                                                            
     finance  those  facilities;  and  providing  for  an  effective                                                            
This  was the first  hearing  for this  bill in  the Senate  Finance                                                            
Co-Chair  Wilken stated that  this legislation  would authorize  the                                                            
Alaska  Railroad  Corporation  to  issue  bonds not  to  exceed  $17                                                            
billion for the construction of an Alaska natural gas pipeline.                                                                 
REPRESENTATIVE  VIC KOHRING, the bill's sponsor, informed  that this                                                            
bill  would  authorize  the  Railroad  to  issue  bonds  to  provide                                                            
financing for the construction  of a natural gas pipeline. He stated                                                            
that in  addition  to this bill,  additional  pieces of legislation                                                             
such as  the Stranded Gas  Act bill and  bills to streamline  State-                                                            
permitting  regulations are  being addressed  by the Legislature  to                                                            
enable this project to proceed.                                                                                                 
Representative  Kohring stated  that this bill  would allow  for the                                                            
issuance  of up to  $17 billion  in tax-exempt  bonds, and he  noted                                                            
that  the low  interest rates  that  are currently  available  would                                                            
benefit  the State.  He communicated  that the sale  of these  bonds                                                            
would generate capital  that the State would then use to provide low                                                            
interest rate  loans to private developers.  He informed  that these                                                            
private  developers,  rather  than the  State  of Alaska,  would  be                                                            
responsible  for building  the pipeline.  Furthermore, he  specified                                                            
that  these  bonds  would  be classified   as "non-recourse   debt,"                                                            
meaning  that the developers  rather  than the State  or the  Alaska                                                            
Railroad would  be responsible for  the bond debt. Additionally,  he                                                            
clarified  that this type  of bond program  specifies that  no liens                                                            
could be placed  upon State or Railroad  assets. He shared  that the                                                            
cost of  building the  pipeline is  estimated to  range between  $12                                                            
billion and $30 billion.                                                                                                        
Representative Kohring  furthered that the bonds would not be issued                                                            
without guarantees  that the  contractor could  pay back the  money,                                                            
and he  specified that  the legislation  would additionally  require                                                            
that reserves  must be maintained  for the payments on those  bonds.                                                            
Representative  Kohring  referenced a  letter from  a Seattle-based                                                             
bonding   company,   George  K   Baum   &  Company,   addressed   to                                                            
Representative  John  Harris,  the  Co-Chair  of the  House  Finance                                                            
Committee,  dated January 30, 2003  (copy on file) that determined,                                                             
upon  evaluation,  that  the  viability  of  these  bonds  could  be                                                            
maintained.  Furthermore, he  stated that a  letter he had  received                                                            
from Conoco  Phillips Alaska,  dated May 6,  2003 (copy on  file) is                                                            
indicative of  industry support for this mode of funding  option for                                                            
the pipeline project.                                                                                                           
Representative Kohring  reminded the Committee that the authority to                                                            
issue  tax-exempt bonds  was granted  by the  federal government  in                                                            
1983 when  it transferred  the ownership of  the Alaska Railroad  to                                                            
the State. He declared  that this legislation would incur no cost to                                                            
the State,  although he  noted that the  accompanying Department  of                                                            
Community and Economic  Development fiscal note specifies that in FY                                                            
06  there  would  be an  expense  of  $163  million.  He  specified,                                                            
however, that  this would not be an  expense to the State  as, "this                                                            
amount  would  be rolled  into  the entire  financing  package."  He                                                            
reiterated  that   this  non-recourse  debt  would   not  incur  any                                                            
liability on the State.                                                                                                         
Representative  Kohring  informed  the  Committee  that  the  Alaska                                                            
Railroad Corporation supports this bill.                                                                                        
Senator  Bunde asked for  further information  regarding the  bill's                                                            
fiscal note,  as he stated that it  is unusual that no liability  or                                                            
financial  obligation would  be incurred  by the  State or, in  this                                                            
situation, the Railroad.                                                                                                        
BILL O'LEARY, Chief Financial  Officer, Alaska Railroad Corporation,                                                            
Department  of Community  and Economic  Development,  testified  via                                                            
teleconference  from an offnet site in Anchorage and  explained that                                                            
although  the  Railroad would  be  the issuer  of  the non-recourse                                                             
revenue  bond  financing,   or  what  he  referred   to  as  conduit                                                            
financing, the  underlying credit for the transaction  would be that                                                            
of  the producers  or  pipeline  investors.  He specified  that  the                                                            
investors would  purchase the bonds after reviewing  the project and                                                            
determining that it would support the repayment of the debt.                                                                    
Senator Bunde  asked how allowing the Railroad to  issue these bonds                                                            
would  benefit the  bond purchasers;  specifically  whether a  lower                                                            
interest rate could be offered to the purchasers.                                                                               
Mr. O'Leary noted that  the Railroad's issuance of these bonds would                                                            
provide  tax-exempt financing  for  the project.  He continued  that                                                            
this type of  funding "has historically  been significantly  cheaper                                                            
financing than  going out in the taxable debt market."  Furthermore,                                                            
he stated that furthering  the gas pipeline endeavor meshes with the                                                            
Railroad's mission of furthering  economic development in the State.                                                            
Senator Bunde asked whether  this conduit financing would impact the                                                            
Railroad's ability to fund future projects.                                                                                     
Mr.  O'Leary  specified  that  this process  would  not  impact  the                                                            
railroad's  ability to borrow money  as it is considered  a project-                                                            
based, stand-alone  situation, and  as such, he continued,  it would                                                            
not negatively  impact the Railroad's  funding of other projects  or                                                            
other stand-alone projects.                                                                                                     
Senator Bunde surmised  that this endeavor would generate additional                                                            
work for the Railroad.                                                                                                          
Mr. O'Leary  voiced that  the Railroad "hopes  to see a significant                                                             
portion  of  benefit"  from  the  project   in  terms  of  increased                                                            
workloads  such as freight  hauls. Furthermore,  he stated  that the                                                            
Railroad  would benefit  from being  required to  upgrade rails  and                                                            
existing  infrastructure  in  order  to  accommodate  the  project's                                                            
needs.  He stated that  transporting  the heavy  pipe that would  be                                                            
used for  the pipeline  would place  extra demands  on the  existing                                                            
Senator Bunde  puzzled as  to how the expense  of being required  to                                                            
upgrade  the railroad  would be  a benefit.  He stated  that he  has                                                            
never felt comfortable with "a free lunch."                                                                                     
Senator Taylor  interjected that he  does not belief this  is a free                                                            
lunch scenario.  He asked whether  the railroad would be  allowed to                                                            
charge  a fee  for the  service  of issuing  these  unique  tax-free                                                            
Mr. O'Leary responded that  the Railroad considers it appropriate to                                                            
charge an administrative  fee. He  furthered that the proceeds  from                                                            
this fee would  be used to help finance the upgrades  to the system.                                                            
Senator  Taylor acknowledged.  He declared  that this should  negate                                                            
the earlier concern  regarding the cost of upgrading  the system. He                                                            
suggested that  one-half or three-quarters  of one percent  on a $17                                                            
billion issue  would generate significant  income. He asserted  that                                                            
the railroad  should  be well paid  for financing  this project  and                                                            
that this would  be "a wonderful income stream for  the railroad" to                                                            
use to upgrade  and extend its system which would  provide the State                                                            
with further development opportunities.                                                                                         
Co-Chair Green  clarified that the  Railroad did not originate  this                                                            
legislation,  but "was  told to do  this." She  noted that a  recent                                                            
report in the Alaska Oil  and Gas Reporter (copy not provided) noted                                                            
that the  Railroad  has never used  its tax-exempt  bond  authority.                                                            
Furthermore,  she  shared  that  the  Reported  specified,  "that  a                                                            
favorable  ruling from the  US IRS (United  States Internal  Revenue                                                            
Service)  would be required"  in order for  the bonds to be  granted                                                            
the tax-exempt status.                                                                                                          
Representative Kohring  concurred and responded that the letter from                                                            
the IRS has not yet arrived.                                                                                                    
Co-Chair Green asked whether the letter has been requested.                                                                     
PAUL FUHS, Representative,  Yukon Pacific Corporation,  explained to                                                            
the Committee  that the tax-exempt  bond authority language  in this                                                            
legislation  is  purposefully  "very  specific  to the  natural  gas                                                            
pipeline project."  He explained that the letter to  the IRS has not                                                            
yet been submitted, because  he attested "that you really don't want                                                            
to trigger that discussion until you apply to do it."                                                                           
Co-Chair Green  understood, therefore  that were a favorable  ruling                                                            
not  forthcoming,  the tax-exempt  bond  authority  status would  be                                                            
limited to approximately a quarter of the full loan amount.                                                                     
Mr. Fuhs  confirmed. However,  he shared  that after discussing  the                                                            
issue with Alaska's  Congressional delegation and  other individuals                                                            
"who wrote the  law," this proposal would be viewed  as a legal tax-                                                            
exempt situation.  He shared  that the Bonneville  Dam Authority  is                                                            
the only  other entity in  the nation that  has "this very  rare tax                                                            
provision."  He stated therefore,  that when the provision  is used,                                                            
it is  imperative that  it be used  for a  substantial project  that                                                            
would  not garner  attention  and  prompt "someone  to  come in  and                                                            
change the law."                                                                                                                
Co-Chair  Green  asked  whether there  is  contingency  language  or                                                            
whether the  project would  be stopped were  a favorable IRS  ruling                                                            
not forthcoming.                                                                                                                
Mr. Fuhs responded that, "it's all or nothing."                                                                                 
Co-Chair Green  asked whether, in  addition to the Alaska  Railroad,                                                            
the Alaska Pipeline Authority has the power to issue bonds.                                                                     
Mr.  Fuhs responded  that  the  Alaska Pipeline  Authority  has  the                                                            
ability  to issue  non-recourse bonds;  however,  he clarified  that                                                            
"they do not have  the federal tax loophole that the  Railroad has."                                                            
He stressed that the Railroad has "a very rare provision."                                                                      
Mr.  Fuhs  pointed  out that  the  Railroad  has  "the  federal  tax                                                            
loophole,  but it does not  have the authority  in statute  to issue                                                            
these  bonds."  Providing  that authority,  he  stated,  is  another                                                            
important provision in this bill.                                                                                               
Senator  Bunde stated  that testimony  specifying,  "that this  is a                                                            
one-shot  deal," appears  to contradict earlier  testimony  that the                                                            
Railroad  could issue these  types of bonds  for other projects.  He                                                            
asserted that  were this to be a one-time  opportunity, it  could be                                                            
argued that it  would negatively "impact the Railroad's  ability" to                                                            
fund other large projects in the future.                                                                                        
Co-Chair   Green  understood   that  were   another  large   project                                                            
identified,  the Railroad could  again seek  US IRS approval  to use                                                            
these types of bonds for that project.                                                                                          
Mr.  Fuhs  clarified  that rather  than  being  a  one-time  bonding                                                            
opportunity,  this  legislation  specifically  identifies  that  the                                                            
bonds being requested would  be used to fund a gas pipeline project.                                                            
He  continued  that  were the  Legislature  to  determine  that  the                                                            
Railroad's  unique bonding  ability  could be used  to fund  another                                                            
project,  that project  could be authorized,  and  the IRS could  be                                                            
petitioned to grant approval specific to that project.                                                                          
Senator  Bunde  surmised  that while  the  Legislature  could  grant                                                            
authority to  the Railroad for a future  project, the IRS  might not                                                            
approve it.                                                                                                                     
Senator  Taylor asked for  clarification that  the Legislature  must                                                            
grant  specific authority  before  the  Railroad could  issue  these                                                            
Mr.  Fuhs  clarified   that  "very  specific  authority"   from  the                                                            
Legislature  must be  granted  in order  for the  Railroad to  issue                                                            
these bonds.                                                                                                                    
Senator Taylor pointed  out that were this funding mechanism desired                                                            
to fund another  project, specific authority would  again have to be                                                            
granted by the Legislature for that unique project.                                                                             
Mr.  Fuhs  confirmed  that  Legislative  authority  would  again  be                                                            
Mr. O'Leary concurred.  He specified that the Railroad  must acquire                                                            
Legislative approval before it could issue any bonds.                                                                           
Senator Taylor stated that  in addition to Legislative approval, the                                                            
IRS  must agree  that this  bonding  authority is  the "appropriate                                                             
mechanism" with which to fund the project.                                                                                      
Representative  Kohring pointed out  that the availability  of these                                                            
tax-exempt  low interest bonds  would serve  as an incentive  to the                                                            
industry  to build  the pipeline,  as it  is projected  to save  the                                                            
industry one billion dollars.                                                                                                   
Senator  Taylor  asked whether  a  specific  gas pipeline  route  is                                                            
identified in the legislation.                                                                                                  
Representative Kohring communicated that the routing is open.                                                                   
Senator  Bunde  asked  whether  the one  billion  dollars  that  the                                                            
industry  is projected to  save from the  availability of these  low                                                            
interest,  tax-exempt   bonds  is  factored  into  the  fiscal  note                                                            
Mr. Fuhs  informed  that the administrative  fee  is not  specified;                                                            
however, he stated that  the savings to the project, as estimated in                                                            
the  aforementioned   George  K.   Baum  financial  analysis,   "are                                                            
projected to be approximately  two percent overall" on the return on                                                            
investment.  He continued  that,  whereas Senator  Taylor  suggested                                                            
that a one-half or three-quarters  percent interest be imposed as an                                                            
administrative  fee, the Railroad  estimates that an administrative                                                             
fee of one-tenth  of a percent would generate sufficient  funding to                                                            
conduct the "legitimate"  system upgrades the project would require.                                                            
Senator Bunde  opined that were the total cost to  upgrade the rails                                                            
a known  number, it  should be reflected  in the  bill. He  asserted                                                            
that  the  Railroad  should  be "upfront"   on the  amount,  and  he                                                            
suggested  that the  administrative  fee should  be  just below  the                                                            
maximum taxable bond level allowed.                                                                                             
Senator  Taylor  moved  to  report  the  bill  from  Committee  with                                                            
individual recommendations and accompanying fiscal note.                                                                        
There  being  no  objection,  CS HB  267  (FIN)  was  REPORTED  from                                                            
Committee with zero fiscal  note #1 from the Department of Community                                                            
and Economic Development.                                                                                                       

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