Legislature(1995 - 1996)
02/09/1995 01:34 PM Senate TRA
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* first hearing in first committee of referral
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+ teleconferenced
= bill was previously heard/scheduled
SENATE TRANSPORTATION
February 9, 1995
1:34 p.m.
MEMBERS PRESENT
Senator Steve Rieger, Chairman
Senator Robin Taylor, Vice Chair
Senator Lyda Green
Senator Al Adams
MEMBERS ABSENT
Senator Georgianna Lincoln
COMMITTEE CALENDAR
SENATE BILL NO. 64
"An Act relating to the dissolution of the Alaska Railroad
Corporation and providing for a successor corporation; and
providing for an effective date."
PREVIOUS SENATE ACTION
No previous action to record.
WITNESS REGISTER
Bob Hatfield, Chief Executive Officer
Alaska Railroad Corporation
Member, Alaska Railroad Corporation Board
POSITION STATEMENT: Expressed concerns with SB 64 and offered
suggestions.
Loren Lounsbury, Chair
Alaska Railroad Corporation Board
POSITION STATEMENT: Offered suggestions on SB 64.
ACTION NARRATIVE
TAPE 95-2, SIDE A
STRA - 2/9/95
SB 64 CONVERT AK RY TO PRIVATE CORPORATION
CHAIRMAN RIEGER called the Senate Transportation meeting to order
at 1:34 p.m. He introduced SB 64 as the only order of business
before the committee.
CHAIRMAN RIEGER reviewed the sponsor statement for SB 64. In
summary, SB 64 sets up shares of stock as parcels of ownership in
order to facilitate the transfer of ownership of the Alaska
Railroad Corporation (ARRC) to private entities through sale. SB
64 would end problems created by state ownership of ARRC.
Number 049
BOB HATFIELD, Chief Executive Officer of ARRC and an ARRC Board
member, felt that the end results sought in SB 64 were sound,
however, there are some areas that could be improved. He expressed
concern with the requirement that ARRC pay for a property appraisal
prior to the creation and transfer of the stock. Previous
appraisals of the railroad by the state and federal government cost
approximately $2 million. Such appraisals usually expire after 90
days. He said that ARRC does not have the finances for an
appraisal and traditionally, a buyer pays for due diligence prior
to the purchase. He suggested that the state pay for an appraisal
if it is required.
Mr. Hatfield called the committee's attention to the fact that
qualifications for the Board of Directors for ARRC are not
specified in SB 64. The board members need to have defined
business skills. He noted that the current board has a labor
organization representative codified as being a member of the
board. This should be continued.
Number 149
Mr. Hatfield felt that even with SB 64, ARRC would still be
perceived as owned by the state and continue to carry the baggage
of that perception. He suggested that the stock transfer be done
as specified in Section 1 and Section 2 (a) of SB 64, but change
Section 2 (b) and Sections 4, 5, and 6 to place the stock into a
trust to be managed by a qualified financial institution.
Mr. Hatfield indicated that there are no guarantees for a potential
buyer. When the deal is completed the deal could not be incumbered
with restrictions making it financially infeasible to the buyer.
A voting trust would alleviate this problem. A potential buyer
would know all the mandates up front. He concluded that his
suggestions may be one manner in which to insulate the state from
competing in the private sector and sell the railroad.
CHAIRMAN RIEGER noted for the record that Representatives James and
Davis joined the audience.
Number 236
SENATOR ADAMS asked what contracts the railroad currently has with
key private industries. BOB HATFIELD informed the committee that
the railroad has long-term contracts with MAPCO and Cruise Line.
The MAPCO contract to haul their refined oil products has 18 more
years and would transfer with the corporation. The Cruise Line
contract to transport their rail cars on the passenger train
between Anchorage and Fairbanks extends 15 more years. There are
also contracts with coal companies, the military, and oil
companies. Mr. Hatfield emphasized that the railroad has hundreds
of contracts which usually have a duration of 3 years or less.
In response to Senator Adams, Mr. Hatfield explained that ARRC has
a 40 percent interest in the Comfort Inn which is a partnership not
a contract. ARRC owns this and it would be transferred with the
corporation.
SENATOR ADAMS stated that the request of ARRC for the state to pay
for the appraisal seems to insinuate that ARRC is in financial
difficulty; will ARRC ask the legislature for capital or operating
funds and in what amount. BOB HATFIELD said yes. ARRC will ask
for the reallocation of a $9 million equipment grant which was to
support equipment purchases for a coal mining operation in 1990.
That money is available for reallocation because the coal mining
operation fell through, however, ARRC was already subsidizing the
export coal operation between Healy and Seward in 1990. ARRC has
lost money over the fully allocated costs of the transport of that
coal which has not allowed ARRC to do enough maintenance on the
track. Mr. Hatfield specified that the money would be reallocated
for ties and the ballast.
LOREN LOUNSBURY, Chair of ARRC, declared that ARRC had never asked
nor anticipated the need to request operating capital from the
legislature. BOB HATFIELD stressed that railroads are very capital
intensive, they are not generating enough revenue to have the
capital program desired.
Number 320
LOREN LOUNSBURY reiterated that for the state or the railroad to
finance a $1.7 million appraisal, which would only last 90 days,
seems inappropriate. Normal business practice is for the buyer to
pay for due diligence. If ARRC had to pay for the appraisal, their
capital budget would suffer.
SENATOR TAYLOR inquired as to whom ARRC would be sold. LOREN
LOUNSBURY said to a qualified buyer with an amount determined by an
offer according to due diligence. The legislature or the Governor,
if SB 64 remains the same, would determine if the amount was
appropriate.
SENATOR TAYLOR expressed concern with the manner in which ARRC is
sold. LOREN LOUNSBURY maintained that a trust would alleviate such
concerns. SENATOR TAYLOR emphasized the need to have efficient
safeguards against scams. LOREN LOUNSBURY concurred with Senator
Taylor. Mr. Lounsbury noted that they had a short time to analyze
the bill and offered their expertise in crafting a bill.
In response to Senator Green, LOREN LOUNSBURY clarified that
normally after 90 days an appraisal is null. He also stated that
ARRC does have a ballpark price for the railroad, but it would be
subject to due diligence, a third party audit. Money for an
appraisal should not be spent until there is a legitimate offer
before them, then the buyer should pay for the appraisal. BOB
HATFIELD mentioned that ARRC does simple appraisals throughout the
year which cost approximately $2,000 a year.
Number 401
SENATOR GREEN inquired as to how much the subsidy of the coal
operation from Healy to Seward cost the ARRC. BOB HATFIELD stated
that they lost approximately $20 million over the past 10 years.
That $20 million includes the wages of crew members, the wear and
tear on the track and the equipment, the wages of mechanics, fuel,
and the administrators.
CHAIRMAN RIEGER expressed interest in how that $20 million compared
to the tariff. BOB HATFIELD said that 15 percent was a rough
estimate.
CHAIRMAN RIEGER asked if there was a contract with a barge service
that would be ending. BOB HATFIELD recognized that contract and
said that it had three more years.
In response to Chairman Rieger, BOB HATFIELD explained that the
MAPCO contract has a fixed duration of 18 years. Mr. Hatfield
clarified that this contract would remain in effect regardless of
ownership changes of ARRC. Mr. Hatfield and Mr. Lounsbury agreed
with Chairman Rieger that an appraisal is not necessary to convert
the ARRC to a stock ownership.
CHAIRMAN RIEGER suggested that ARRC should propose qualifications
for the board. There was a discussion regarding the possible
provisions of a trust. Mr. Hatfield paralleled the trustee to an
executor of an estate. Mr. Lounsbury pointed out that a trust
could be irrevocable or have a specific time limit, but whatever
the case the trust should clarify such things in the beginning
because once the trust is set up it cannot be changed.
SENATOR TAYLOR predicted that a 50 year contract with the federal
government was not worth the paper on which it is written. BOB
HATFIELD pointed out that most contracts have force majeure clauses
for unexpected events.
Number 470
CHAIRMAN RIEGER asked if Mr. Hatfield or Mr. Lounsbury felt that
ARRC has potential when it is going to report a loss to last year's
operating budget. BOB HATFIELD asserted that ARRC has great
potential although it is undercapitalized.
CHAIRMAN RIEGER urged ARRC to create some written recommendations
regarding qualifications for the board and the trust concept.
SENATOR ADAMS communicated to the committee that he was working on
a proposed amendment to SB 64. This amendment would go beyond a
successor corporation. SB 64 should actively sell ARRC. He felt
that the legislature should eliminate assets not related to
government.
CHAIRMAN RIEGER said that SB 64 would probably be before the
committee in two weeks. He indicated that there may be a committee
substitute drafted for the committee to review at that time.
SENATOR TAYLOR suggested that legislative oversight should be part
of the trust if a relationship between ARRC and the government
continues. On the other hand, if there is a clean break of the
relationship then ARRC should become a publicly held corporation.
He felt that there should be an opportunity for future legislators
to step in if needed.
CHAIRMAN RIEGER expressed concern that the legislature currently
spends time as a second board of directors because disgruntled
businesses may not agree with decisions made by ARRC. The
legislature is presented with proposals to experiment with the
management of ARRC. This poses problems for the legislature who is
attempting to keep control of ARRC while the state owns it. He
recognized that trust proposal may enable the ARRC to be ran in a
business like fashion with appropriate state control until it is
privatized. He assessed that if the railroad were sold today that
the sale may be forced and the true value of ARRC may be lost.
CHAIRMAN RIEGER held SB 64.
There being no further business before the committee, the meeting
adjourned at 2:15 p.m.
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