Legislature(1995 - 1996)
03/26/1996 01:33 PM Senate TRA
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
JOINT HOUSE & SENATE TRANSPORTATION AND SENATE FINANCE
March 26, 1996
1:33 p.m.
SENATE COMMITTEE MEMBERS PRESENT
Senator Steve Rieger, Chairman of Senate Transportation
Senator Robin Taylor, Vice Chair of Senate Transportation
Senator Lyda Green
Senator Al Adams
Senator Georgianna Lincoln
Senator Steve Frank, Co-Chair of Senate Finance
Senator Rick Halford, Co-Chair of Senate Finance
Senator Randy Phillips
Senator Dave Donley
SENATE COMMITTEE MEMBERS ABSENT
Senator Bert Sharp
Senator Fred Zharoff
HOUSE COMMITTEE MEMBERS PRESENT
Representative Gary Davis, Chair of House Transportation
Representative Beverly Masek, Vice-Chair of House Transportation
Representative William Williams
Representative Jeannette James
Representative Tom Brice
Representative Don Long
HOUSE COMMITTEE MEMBERS ABSENT
Representative Jerry Sanders
ALSO IN ATTENDANCE
Senator Drue Pearce, President of the Senate
Senator Loren Leman
Senator Judy Salo
Representative Gail Phillips, Speaker of the House
Representative Ramona Barnes
Representative John Davies
Representative Joe Green
COMMITTEE CALENDAR
Presentation by the Montana Rail Link, Inc.
WITNESS REGISTER
Bill Brodsky, President
Montana Rail Link, Inc.
PO Box 8779
Missoula, Montana 59807
Mort Lowenthal, Director
Montana Rail Link, Inc.
PO Box 8779
Missoula, Montana 59807
Governor Bill Sheffield, Chairman
Alaska Railroad Corporation
Board of Directors
PO Box 107500
Anchorage, Alaska
Bob Hatfield, President & CEO
Alaska Railroad Corporation
PO Box 107500
Anchorage, Alaska
ACTION NARRATIVE
TAPE 96-7, SIDE A
Presentation by the Montana Rail Link, Inc.
CHAIRMAN RIEGER called the joint meeting to order at 1:33 p.m. and
invited the representatives of Montana Rail Link, Inc. to the table
to begin their presentation.
Number 025
BILL BRODSKY, President of the Montana Rail Link, Inc., said that
he and Mr. Lowenthal were present in order to introduce themselves
and to express a strong interest, on behalf of the owner Dennis
Washington, in acquiring the Alaska Railroad. Mr. Brodsky began
with the topic of privatization of railroads globally. New Zealand
and Great Britain have recently decided to eliminate the government
from rail transportation and turn it over to private enterprise.
He informed the committee that the Montana Rail Link, Inc. has been
involved in the privatization of the railroads in Argentina and
Chile. Brazil, Mexico, and Canada are also beginning efforts
towards privatization of the railroad.
Mr. Brodsky discussed the reasons for the move towards
privatization: the flexibility that entrepreneurship brings to
capital, the incentive for profit, to grow the business, to expand
the markets, to create jobs, and to create opportunity which can
surpass the capabilities of government. He pointed out many
similarities between Montana and Alaska - a large land mass with
few people and dependency on natural resources. Montana's economy
is very dependent on natural resources which has created a conflict
with the commitment to protect the environment. The railroad is an
ally to both sides because it is environmentally friendly. Mr.
Brodsky noted that like Alaska, Montana's natural resource economy
has focused increasingly on tourism. This past year, Montana Rail
Link provided rail access to two of Montana's national parks.
Number 136
Mr. Brodsky said that the Montana Rail Link is a unique regional
railroad of approximately 1,000 miles. Montana Rail Link has
doubled employment and rail traffic since its beginnings in the
late fall of 1987. Mr. Brodsky informed everyone that Montana Rail
Link operates one of the highest traffic levels of any regional
railroad in the world, as it handles more than 40 million gross
tons per mile. Mr. Brodsky also discussed the terrain and climatic
challenges that the railroad faces. Montana Rail Link is a fully
unionized railroad with eight operating unions on the property and
two general contracts. There is one contract for the operating
crafts and one contract in which seven non operating crafts are
signatory to. He said that this arrangement has worked well. The
operating contract has been renegotiated twice without the Union
serving a Section 6 notice. All of the companies in the Washington
organization are based on a profit sharing concept which utilizes
the same formula for everyone.
Number 201
Mr. Brodsky recognized that customers are the key to prosperity and
growth of a business, which is the underlying philosophy of the
Montana Rail Link. In order to work and be successful at Montana
Rail Link, one must realize that the rail link is a service
industry which involves people at every level. Montana Rail Link
is the largest privately owned railroad in the U.S. The railroad
operates in Montana, Idaho, and Washington. Mr. Brodsky stated
that Montana Rail Link is a long-term player that has a major
impact on the economies which are served. Thus far, Mr.
Washington's businesses have been winners for himself, his
employees, and the communities and regions served.
Mr. Brodsky informed everyone that Mr. Washington's holdings are in
transportation, construction, and mining. Recently, the
transportation and construction holdings have become the major
focus. There has also been expansion in the marine industry. He
discussed some of the ventures in Canada. The construction holding
is still the core business. Mr. Washington began as a heavy
equipment operator in Alaska, after which he created his own
business in construction. Eventually, Mr. Washington expanded into
contract mining.
Number 290
Mr. Brodsky was excited about the prospects of the railroad
business in Alaska. With the entrepeneural approach of a private
operator, there would be opportunities to look at economic
development to a greater degree. Mr. Brodsky reiterated that the
Montana Rail Link had doubled its employment in Montana which has
services not so unlike those in Alaska. Montana Rail Link has also
been active in promoting tourism and expanding services in that
area which would also be an opportunity in Alaska. Mr. Brodsky
noted that the Montana Rail Link has pondered the possibility of an
all rail tie between Alaska, Canada, the U.S., and Mexico. The
size and scope of the transaction required with the Alaska Railroad
is one which Mr. Brodsky felt comfortable. Normally, acquisitions
of this size would not be contingent upon financing. Mr. Brodsky
said that Montana Rail Link is committed to investing in the
railroad. The necessary equity capital for such a transaction is
within Rail Link's reach.
Mr. Brodsky reiterated the seriousness of Montana Rail Link's
commitment. He believed a process needed to be established to
define how the Alaska Railroad would be acquired. With whom would
one negotiate on this matter? What is being sold? Mr. Brodsky
acknowledged that there are real estate issues associated with the
Alaska Railroad. He informed everyone that they had not made any
attempts to gain access or review data on the railroad property.
Mr. Washington is very interested in the Northwest area which is
indicated in his holdings. Montana Rail Link would like to have
the opportunity to expand in Alaska.
Number 348
SENATOR RANDY PHILLIPS asked if Montana Rail Link had contacted the
Alaska Railroad prior to this presentation. BILL BRODSKY explained
that a letter expressing interest had been sent to the Governor,
the President of the Senate, the Speaker of the House, and the
Chairman of the Alaska Railroad Board some time ago, about six
months ago. Mr. Brodsky believed that Mr. Washington had an
informal meeting with Governor Sheffield.
SENATOR LINCOLN asked if Mr. Brodsky had considered where expansion
would take place in Alaska. How would Alaskan Railroad employees
be handled since Montana Rail Link is fully unionized? What
structure would the purchase of the railroad have? Would Mr.
Washington review mining and construction possibilities in Alaska?
BILL BRODSKY could not say where opportunities for economic
expansion would exist because he had not yet been on the property.
In Montana, the railroad has been a catalyst for businesses to
expand and create more jobs. Mr. Brodsky noted that in Montana
there is a problem with creating jobs, especially for young people.
The railroad has been successful with helping companies grow. Mr.
Brodsky believed that the same approach would be used in Alaska
which means a partnership between businesses and the railroad.
Montana Rail Link comes in as a willing player with capital
resources and a strong commitment to this endeavor in an
environmentally friendly manner in order to benefit everyone.
With regard to the union contracts, Mr. Brodsky was not aware of
which organizations were represented on the property. He
understood that the railroad employees in Alaska are also state
employees and would therefore, not fall under the Railway Labor
Act. That needs to be reviewed. Mr. Brodsky reiterated that all
their railroads in Canada and the U.S. are fully unionized. He
expected that the Alaska Railroad would be represented by union
organizations. Mr. Brodsky believed that if the railroad is
privatized, then the railroad would be required to fall under the
guidelines of the Railway Labor Act.
Mr. Brodsky informed everyone that all of Mr. Washington's
businesses stand alone, one operation does not subsidize another.
If the Montana Rail Link acquires the properties of the Alaska
Railroad then it will be operated as a railroad and managed in
order for the railroad to grow. For example, in Montana there is
a coal mine under development located 40 miles from the railroad.
The railroad has had nothing to do with the development of that
coal mine. However, an agreement between the mine and the railroad
has been made. If the mine meets certain productivity and
development criteria, then the railroad would construct the 40
miles of road to the coal mine. This is the type of capability
that Mr. Washington brings to the table.
Number 440
SENATOR LEMAN asked Mr. Brodsky if he was interested in the other
properties held by the Alaska Railroad or would the interest merely
lay in the track, rolling stock, and running it as a railroad.
BILL BRODSKY did not know. Fundamentally, this would be a railroad
business. To the extent that the properties could benefit the
railroad, those would be critical. Those properties that do not
benefit or impact the railroad would be of interest for the value
of the property which would influence the purchase price of the
asset. Mr. Brodsky indicated that the Montana Rail Link is
flexible with regards to how the real estate is dealt with so long
as the railroad can be operated in an economically viable way.
SENATOR TAYLOR pointed out that he had been trying to sell the
Alaska Railroad ever since the state purchased it from the federal
government. He explained that part of the Alaska Railroad Board's
financial report is supposed to include information about the
attempts made to sell the properties. Not too many years ago, the
board provided a report which indicated that there was not a
railroad in the North American continent that could purchase the
Alaska Railroad due to the sustained annual loss. At that time,
the Alaska Railroad was losing $3-5 million per year after
liquidating surplus inventories, equipment, and properties all of
which were used as a profit base to offset the loses. This year
the Alaska Railroad shows an $8 million profit. Have you had a
chance to review the books of this operation? BILL BRODSKY had
not. Mr. Brodsky said that the frame of reference the Montana Rail
Link has is the level of activity and the size of the railroad.
With the resources available to Montana Rail Link, some things
could be done to the property that a typical investor could not do.
MORT LOWENTHAL, Director of the Montana Rail Link, explained that
the reason the books have not been reviewed is because the company
would like to receive an indication that selling the Alaska
Railroad is a possibility. To study the property is a big,
expensive project.
Number 500
SENATOR ADAMS asked if Montana Rail Link was willing to purchase
the Alaska Railroad for the amount exceeding either the fair market
value of the Alaska Railroad and the excess of the Alaska Railroad
Corporation or the amount that Alaska has expended to obtain,
maintain, and subsidize the Alaska Railroad and its corporation.
Secondly, if Montana Rail Link purchases the Alaska Railroad would
it be willing to operate it for 20 years. Thirdly, would the
Montana Rail Link be willing to honor the current contracts of the
Alaska Railroad which includes various agreements.
MORT LOWENTHAL explained that Montana Rail Link will pay what it
determines the Alaska Railroad will generate in terms of cash flow
income. Currently, Mr. Lowenthal did not know what that amount
would be. If encouragement is given, the Montana Rail Link will do
an independent analysis in order to obtain an amount. With regards
to running the railroad for an extended period of time, Mr.
Lowenthal emphasized that would be the case. The Montana Rail Link
has been in railroads for nine years and more than $150 million has
been reinvested in that property in that nine years.
BILL BRODSKY said that he had not seen the contracts and could not
provide an answer to Senator Adam's third question. Mr. Brodsky
reiterated that the Montana Rail Link is a fully unionized
operation that understands unions and contracts. He expected that
the Alaska Railroad would also operate as a fully unionized
business.
REPRESENTATIVE JAMES said that she was probably one of the more
enthusiastic persons about the railroad. Representative James
inquired as to the experience Montana Rail Link has had in
acquiring right of way over private, state, or federal lands.
BILL BRODSKY stated that the right of way has typically been in
tact. The Montana Rail Link has not had to acquire a lot of right
of way. If the line is built to the aforementioned coal mine, that
would be the first right of way. Currently, a third party holds
the right of way. Montana Rail Link has committed to build the 40
miles of railroad if the coal mine meets certain production goals.
REPRESENTATIVE LONG asked if Montana Rail Link purchased the Alaska
Railroad would the railroad spin off to areas such as the Red Dog,
the Western Arctic, and other areas that have minerals and
resources without transportation. BILL BRODSKY indicated that
reviewing those opportunities would be possible, but he could not
specify which areas would be viable. There is much exploration yet
to be done. Mr. Brodsky emphasized that Montana Rail Link has the
capability to build and expand the railroad.
Number 561
SENATOR FRANK believed there to be general interest in selling the
railroad, although there have been obstacles to overcome. For
example, the land holdings of the railroad seem to obscure the
operation of the railroad. Senator Frank inquired as to how the
railroad customers, such as the Usebeli Coal Mine and Mapco
Petroleum and other big customers, would view the sale of the
railroad. Would rates be regulated in a different manner if the
railroad is privatized? Senator Frank asked Mr. Brodsky what he
felt were some of the problems surrounding the sale of the
railroad.
BILL BRODSKY said that Montana Rail Link had not talked to any of
the Alaska Railroad's customers. Fundamentally, if Montana Rail
Link purchases the railroad then the contracts with those customers
would also be acquired. He offered to provide a list of Montana
Rail Link's customers who he was sure would overwhelming endorse
Montana Rail Link's business.
TAPE 96-7, SIDE B
With regards to the rate regulation question, Mr. Brodsky did not
know how Alaska was set up. Primarily, contract rates tend to be
deregulated today. There are certain rates in Montana that are
covered by the Public Utilities Commission, is there a comparable
body in Alaska?
SENATOR FRANK informed Mr. Brodsky that Alaska does have a Public
Utility Commission.
BILL BRODSKY explained that Montana Rail Link could not have
achieved what it did without focusing on the customers.
SENATOR FRANK clarified that he was attempting to determine how
people would view this. How would the rate be priced for
opportunities such as the railroad to the coal mine? Senator Frank
did not want opportunities to be presented only to later find out
that the Public Utilities Commission would not allow it.
BILL BRODSKY said that the rates for projects such as building the
railroad to the coal mine in Montana are established by the
marketplace. Mr. Brodsky pointed out in the case of the railroad
to the coal mine, the rate would be established after determining
if the mine could deliver coal competitively after everyone
receives their share. At that rate, could the investment into the
facility be justified. In the Montana coal mine that analysis is
already known.
REPRESENTATIVE GARY DAVIS asked how keen the competition is in
Montana related to the other modes of transportation or are most of
the goods primarily moved by train.
BILL BRODSKY stressed that transportation in Montana is tough. A
freeway runs parallel to the railroad across the state. When the
Montana Rail Link began, all of the logs, a primary forest product
in Montana, were handled by trucks. Railroads had decided to get
out of that business. This year, the Montana Rail Link will handle
over 5,000 car loads of logs. As mills downsize and begin to
specialize in the handling of the raw material, the small logs go
in the opposite direction of the big logs. Montana Rail Link has
determined that more money can be made when the logs go in both
directions. Currently, almost all of the railroads in the
Northwestern U.S. have returned to logs. Mr. Brodsky noted that
Montana has a limited budget that must maintain a huge highway
network in a state with few people and revenue. The railroad has
solved many problems in Montana. The traffic on the highway
eliminated by the railroad allows the roads to last longer.
Number 522
REPRESENTATIVE GARY DAVIS mentioned that permits to receive right
of way in Alaska could be costly and time consuming. It seems that
the Montana Rail Link has not encountered problems in obtaining
right of ways, but if that is not the case could that issue be
elaborated upon. BILL BRODSKY said that the extreme delays to
which Representative Davis was referring have not been encountered
by the Montana Rail Link. The primary focus would be to operate
the railroad that is currently in place and the remaining focus
would be placed on the an opportunity if it presents itself.
SENATOR RANDY PHILLIPS inquired as to the structure of the Montana
Rail Link. BILL BRODSKY explained that Mr. Washington has a group
of companies that grew from his original construction company.
Those companies are owned completely by Dennis Washington and are
operated independently. The companies report through the President
of Washington Corporations to Dennis Washington. Mr. Brodsky
mentioned that an environmental mediation company had been added to
the construction company. The Butte Copper Mine is held
separately. When the railroad was established, Mr. Washington is
the principle owner with some minority shareholders.
SENATOR RANDY PHILLIPS noted that the Montana Rail Link initially
made contact six months ago. What was the response regarding how
to proceed with the purchase?
BILL BRODSKY said that he was unsure as to how Montana Rail Link
should proceed. In response to Senator Randy Phillips, Mr. Brodsky
stated that Montana Rail Link had not been told much. Mr. Brodsky
and Mr. Lowenthal both said they needed advice in this matter.
CHAIRMAN RIEGER reminded Senator Randy Phillips that the Chairman
of the Board of the Alaska Railroad would be before the committee
after the Montana Rail Link.
Number 471
REPRESENTATIVE DAVIES asked Mr. Brodsky to discuss the mix of
businesses in the Montana Rail Link, specifically how passenger
travel fits in relative to freight. Representative Davies was
interested to know if the Montana Rail Link would consider
maintaining a basic level of passenger service throughout the year.
He asked Mr. Brodsky to characterize the response to the letters of
interest. BILL BRODSKY said that typically, the Montana Rail Link
operates 20-30 trains across the line a day. Everything from
15,000 ton coal trains to light fast intermodal operations is
operated on the Montana Rail Link. Mr. Brodsky noted that this
past year, the Montana Rail Link has become involved in passenger
service and has worked well. There is nothing that would be
eliminated from review to be part of the package. With regard to
the responses received, prior to the invitation to visit with the
committee Mr. Washington did not feel that there was a strong
commitment to move forward.
SENATOR PEARCE provided copies to the committee of the letter she
had received from Mr. Washington in October which was the same
letter the Representative Gail Phillips received. Together Senator
Pearce and Representative Gail Phillips sent a letter to Mr.
Washington saying that the legislature would enjoy discussions
regarding selling the railroad. The railroad did have a response.
REPRESENTATIVE GAIL PHILLIPS inquired as to what expansion projects
the Montana Rail Link are involved in and where those major
expansion projects are located. What time frame would be involved
with an acquisition project in Alaska? BILL BRODSKY said that
Montana Rail Link is looking into some other railroads, but
confidentiality agreements have been signed. However, those
interests would not negatively impact moving forward on the Alaska
Railroad. Mr. Brodsky said that he would like to move as quickly
as possible.
Number 388
REPRESENTATIVE BARNES discussed the history of the Alaska Railroad.
She believed that if the Alaska Railroad were privately owned, it
would offer much potential to Alaska. Representative Barnes hoped
that the Montana Rail Link would pursue the property.
SENATOR FRANK had the sense that the land issue would be one that
would be an obstacle in selling the railroad. Would Montana Rail
Link focus on the rail operations? Senator Frank advised that
Montana Rail Link focus on the rail operations and the operating
earnings. MORT LOWENTHAL reiterated that the land Montana Rail
Link would be interested in would be that which could be used to
expand or enhance the railroad directly. BILL BRODSKY reiterated
that Montana Rail Link is not nor intends to be a real estate
company. It would help if Montana Rail Link was given some sense
of how Alaska would like this transaction to proceed.
SENATOR PEARCE asked if Mr. Brodsky and Mr. Lowenthal or their
attorneys had reviewed the federal and the state Railroad Transfer
Act in which Alaska took ownership of the railroad from the federal
government. BILL BRODSKY replied no, that is on their list.
SENATOR PEARCE asked if any of Montana Rail Link's railroad
operations were directly subsidized by any public entities. BILL
BRODSKY and MORT LOWENTHAL replied no.
SENATOR PEARCE referred to the letter she received from Mr.
Washington, when asking if Mr. Washington's letter to Governor
Sheffield requested that the communication and its response be kept
confidential. MORT LOWENTHAL believed that Governor Sheffield
received the same letter as Senator Pearce.
SENATOR PEARCE acknowledged that Montana Rail Link has received
only one letter of response from the Alaska Railroad. The letter
inquired as to the possibility of a confidential dialogue. Nothing
further happened after the Alaska Railroad's response because
Governor Sheffield stated, "At this point, the strong inclination
of the Board is that privatization is premature." Senator Pearce
informed the committee that before session began she had inquired
as to Governor Knowles' response to Mr. Washington. Governor
Knowles said that he had given it to Governor Sheffield to respond.
Senator Pearce did not believe that it was fair that the
legislature or any other group of the state was not informed of the
interest in purchasing the railroad. Therefore, what can the
legislature do to indicate its interest in a dialogue regarding the
sale of the railroad?
Number 272
MORT LOWENTHAL said that some correspondence or a motion indicating
a sincere interest would be appropriate. Furthermore, determining
who the Montana Rail Link would deal with on this matter would
help. Someone has to be assigned to work on this.
REPRESENTATIVE BARNES asked if a resolution stating that the
legislature supported selling the Alaska Railroad would suffice.
MORT LOWENTHAL agreed that would provide a positive indication, but
the question of how to proceed would remain.
REPRESENTATIVE BARNES believed that the Alaska Railroad is owned by
the State of Alaska, not by the Board of the Alaska Railroad. From
time to time, even the legislature has had difficulty in obtaining
information from the board. There has to be a way to acquire the
necessary information for the Montana Rail Link to make a decision.
Representative Barnes hoped that Montana Rail Link would not
preclude reviewing the value of the land which could become an
asset on the tax roles of the state.
BILL BRODSKY reiterated that Montana Rail Link needs to understand
how Alaska wants to sell the railroad. The Montana Rail Link would
like to proceed in a manner that is compatible with Alaska's
interests.
Number 240
CHAIRMAN RIEGER asked if during the acquisition of other properties
has the seller performed a complete appraisal, was a bid packet
produced or was it left to the Montana Rail Link to do. BILL
BRODSKY said that Montana Rail Link had experienced all of the
above. MORT LOWENTHAL believed that there are companies that
specialize in valuing railroad properties.
Upon hearing no further questions, the representatives of the
Alaska Railroad were invited to the table.
BILL SHEFFIELD, Chairman of the Alaska Railroad Board, thanked
everyone for the opportunity to provide an update on the Alaska
Railroad. Mr. Sheffield informed everyone that he was very
involved in the acquisition of the railroad and has been chairman
of the board for less than a year. Mr. Sheffield said that he and
the board were not opposed to the selling of the Alaska Railroad.
The railroad was originally purchased because the federal
government was discussing closing it down all together. The State
of Alaska discussed purchasing the railroad for years. The
railroad was an important corridor between the ocean and the
interior of Alaska. The notion had been to expand the railroad and
move resources to the market; those corridors or right of ways have
not been expanded. Mr. Sheffield believed that the state could
expand the corridors much easier than the private sector because of
the access to the necessary tools and the experience in this area.
The sale of the Alaska Railroad evokes the question of a process as
well as public policy issues. Mr. Sheffield passed out copies of
his response to Mr. Washington. Mr. Sheffield explained that the
secrecy issue grew from a reporter wanting to do an article on the
sale of the Alaska Railroad. There are 550 railroad employees who
constantly worry about their jobs. Mr. Sheffield had asked the
reporter to notify him before printing the article so that he could
inform the employees.
Mr. Sheffield said that the corridor is worth a lot of money. Also
much real estate is owned by the railroad. Mr. Sheffield felt that
a state owned railroad should be benevolent, for lack of a better
term, to the people in the communities where the railroad owns
property. There is concern about the problems the real estate
could cause with the sale of the railroad. Mr. Sheffield clarified
that this did not indicate that he was opposed to the sale of the
railroad, but merely that the issues should be well thought. Mr.
Sheffield discussed that the rail transportation provided
communities like Whittier the only way in which to travel in and
out of the community. Such passenger service does not make money,
although it is necessary to do.
Number 092
Mr. Sheffield discussed the passenger service that the railroad
provides. Passenger service has increased over the past years and
profit was seen for the first time in 1995. He informed everyone
that six trains a week are operated for Mapco passenger service
between Fairbanks and Anchorage. Six trains a week also run
between Healy and Seward for coal; this will be the first year that
800,000 metric tons of coal will be delivered to Seward per the
deal of 1984. The railroad is doing a little more than breaking
even on the coal shipment. Previously, the coal shipment had been
subsidized. Mr. Sheffield noted that the railroad employed more
people now than when the state purchased it.
Mr. Sheffield said that the Alaska Railroad lost money three years
in a row due to some bad decisions and a reduction in management,
almost in half, with some buy out packages. Currently, business is
average and costs are down so the railroad made $8 million in 1995.
With depreciation, that $8 million equals $14 million in cash flow
for 1995. He noted that early on it was recognized that the
railroad might not generate enough to do the capital improvements
necessary. The entire Alaska Railroad was built in 1917 and
overhauled all at once in the 1950s. Mr. Sheffield said that the
railroad might wear out all at once in the coming years.
Therefore, a $10 million federal appropriation was received for
upgrades to the railroad. The law was changed so that the Alaska
Railroad could qualify for federal funds. Alaska would receive
approximately $5 million a year per the formula program for the
Alaska Railroad. That appropriation is currently in the Conference
Committee.
TAPE 96-8, SIDE A
Number 013
Mr. Sheffield projected that it would cost between $10 and $14
million per year in order to upgrade the Alaska Railroad. The
Alaska Railroad just invested in 68 new hopper cars to haul coal.
The cars are aluminum and therefore, weigh less. More coal can be
hauled with less weight on the tracks and more money can be made,
more efficiently. Mr. Sheffield said that if the railroad had more
money, more cars would be purchased. He noted that the railroad's
long-term debt ends in 1999. He discussed the work being done in
Whittier. The board and the management of the Alaska Railroad
consider themselves to be stewards of one of Alaska's assets. That
sentiment would be different if one were a private sector operator.
Mr. Sheffield informed everyone that the Alaska Railroad was
appraised at $244 million when the federal government was
considering purchasing the railroad; that was with contamination
across the railroad system. Almost all of those problems have been
fixed and a profit is being made. Mr. Sheffield said that the
railroad receives a letter or phone call every three or four months
from a railway regarding the purchase of the Alaska railroad.
The same information that was told to Mr. Washington is told to
those people interested in the railroad. Mr. Sheffield noted that
he had passed out the letter to Mr. Washington from the railroad.
He mentioned that this is a procurement or negotiated sale. Mr.
Sheffield said that the railroad received a letter from Mr.
Washington around October 1st and the railroad responded on October
19. Gill Carmichael was the person who acted on behalf of Mr.
Washington. Eventually a meeting between Mr. Sheffield and Mr.
Washington took place in Palm Springs. Mr. Sheffield said that the
meeting concluded with Mr. Washington saying that if Mr. Sheffield
was interested the two could meet again.
Number 112
Mr. Sheffield did not think a resolution was necessary to sell the
railroad. Much appraisal work is necessary in selling a railroad.
He said that a path for the purchase of the railroad had been set.
He also emphasized that the first time the railroad has to ask the
legislature for money, the legislature will take over and the same
scenario as the federal government will result. The desire is to
run the railroad profitably, competitively, and like a business in
order to help Alaska. The Alaska Railroad wants to do the same
things that the Montana Rail Link is doing in Montana. Mr.
Sheffield was pleased with his year as chairman, and he believes
the railroad is a good asset and much thought should be placed into
the recommendations regarding the railroad. He mentioned that
eight of the railroad's 550 employees were present and worrying
about their jobs in the future.
REPRESENTATIVE GAIL PHILLIPS asked Mr. Sheffield to restate how
often the railroad receives inquiries about purchasing the
railroad. BILL SHEFFIELD said that Mr. Hatfield may be able to
better answer that question. Mr. Sheffield said that the railroad
receives about three or four inquiries per year. BOB HATFIELD
explained that recently there had been more inquiries because of
the privatization move across the world. Generally, when the
information regarding the ownership and structure of the railroad
is given to the interested party, the interested party rarely
initiates further contact.
REPRESENTATIVE GAIL PHILLIPS asked if any people inquiring were
aware of the legislation which created the railroad. BOB HATFIELD
said that he mentioned that to those inquiring of the railroad at
that time. Most of the time, those inquiring are people in the
industry that Mr. Hatfield knew. Mr. Hatfield gathered that
individuals have not wanted to pursue the legislative aspect of the
railroad.
Number 186
REPRESENTATIVE JAMES felt that the railroad has an important role
in the future of Alaska. Representative James asked if the Alaska
Railroad knew that she sponsored legislation in 1993 which
allocated $10,000 to identify the cost of procuring the private
property within the right of way that is already established from
Elson Airforce Base to the Canadian border. Representative James
also sponsored and passed legislation that authorized the
identification of a corridor from Fairbanks to the Seward Peninsula
without a fiscal note; this legislation allowed private industry to
fund the money not necessarily the state. She asked if the Alaska
Railroad was aware of that legislation.
BILL SHEFFIELD said that he was aware of that legislation. Further
steps are necessary to review if that works. There are many
opportunities to expand the railroad.
REPRESENTATIVE JAMES commented that the Alaska Railroad has done
well considering the restrictions under which they operate. The
railroad is a pseudo-private company owned by a public entity. The
railroad is confined to a set of physical assets as well as a set
amount of beginning operating funds along with a limit on financing
without legislative approval. No other private industry faces
those restrictions. Representative James was happy that the
railroad made an $8 million profit. She then asked Mr. Sheffield
if he were purchasing a company, would he determine if it was a
good purchase or not on the experience of the operator or would he
review how he would operate the company? BILL SHEFFIELD said that
he would do the latter, but mix both determinants initially. Mr.
Sheffield indicated that the proper value of the railroad should be
determined and the purchaser should determine if what they are
receiving is up to their expectations.
Number 250
REPRESENTATIVE JAMES stated that she was concerned about the
railroad employees as well as the unemployed across the state and
all of the underemployed. She was excited about any increased
economic activity possible.
SENATOR RANDY PHILLIPS asked if Montana Rail Link was actually the
first to show up on the door step. BILL SHEFFIELD replied yes.
SENATOR RANDY PHILLIPS said that he detected a reluctance to talk
to the Montana Rail Link about the details. Senator Randy Phillips
asked Mr. Sheffield if the Alaska Railroad would be discussing the
details with Montana Rail Link? BILL SHEFFIELD pointed out that
Montana Rail Link was present because the compant was invited. If
the Montana Rail Link is interested in following the path outlined
in the letter, then discussions would follow.
SENATOR RANDY PHILLIPS pointed out that Montana Rail Link does not
seem to understand the process for purchase. BILL SHEFFIELD was
not sure that is true. Mr. Sheffield said that he had only talked
to Mr. Washington. SENATOR RANDY PHILLIPS asked if there were
plans to have future meetings with the Montana Rail Link. BILL
SHEFFIELD replied yes.
SENATOR RANDY PHILLIPS asked if procedures for the purchase of the
railroad have been established for such meetings. BILL SHEFFIELD
explained that the next step would be to meet with the Alaska
Railroad Council and Board of Directors in order to establish
procedures and arrange for expenses. SENATOR RANDY PHILLIPS
interpreted that to mean that the Alaska Railroad had an open mind.
SENATOR PEARCE referred to Mr. Sheffield's earlier comments
regarding the railroad being benevolent to the local communities.
Senator Pearce believed that the local communities would trade the
railroad's benevolence for taxes. She asked if the railroad board
always indicated that "privatization is premature" to interested
parties. BILL SHEFFIELD said that he had only two such occasions.
BOB HATFIELD clarified that the bulk of interested is expressed
through a telephone call or a representative from a firm. In Mr.
Hatfield's six years, Mr. Washington's inquiry is the first that
has stood the test of interest and resource together.
Number 336
SENATOR PEARCE seemed to think that at one time the railroad was
required to give an annual report to the legislature indicating any
interest to purchase. Have all of those interested been reported?
BOB HATFIELD did not know because most of the interest has not been
formalized.
SENATOR PEARCE asked if the indication that "privatization is
premature" expressed to Mr. Washington was something on which the
board took official action. BILL SHEFFIELD replied yes. The
board, in an executive meeting, took official action and approved
this letter.
SENATOR PEARCE asked if the official position of the Knowles'
Administration was that there was no interest on the part of the
state to sell the Alaska Railroad. BILL SHEFFIELD explained that
he had discussed this with Governor Knowles before writing the
letter. Mr. Sheffield clarified that Governor Knowles did not
express specifically that he had no interest in selling the
railroad, but the Governor was not looking for a sale. Governor
Knowles believed that the railroad was part of the overall plans
for the development of Alaska. Mr. Sheffield stated that the board
did not intend to indicate that the railroad was not for sale.
SENATOR PEARCE asked if the motion was made in executive session.
BILL SHEFFIELD replied yes. SENATOR PEARCE inquired as to the
motion to go into executive session. Why would the question of
whether to indicate if the railroad was for sale or not be made in
executive session. BILL SHEFFIELD specified that it was reviewed
in executive session and a motion was made. Mr. Sheffield said
there is an executive session every board meeting in order to
discuss those things that financially effect the railroad. Those
items are published.
SENATOR PEARCE requested the minutes in order to review the motion
made to go into executive session. Senator Pearce could not
believe that a publicly owned railroad board would go into
executive session to make the disinclination in selling the
railroad. BILL SHEFFIELD agreed to get those minutes.
REPRESENTATIVE GAIL PHILLIPS inquired as to how many miles of line
and employees the railroad has currently. BOB HATFIELD informed
the committee that the railroad has 550 miles of line. The
permanent employment base amounts to 465 people, but depending upon
the level of work the number of employees can rise to as high as
700 in the summers due to passenger service and construction work.
Number 389
CHAIRMAN RIEGER asked if there were any further questions. He
thanked the Alaska Railroad for the presentation and agreeing to
take questions. This issue will not be dropped here. If the
Transportation Committee, the Finance Committee, and the full
Legislature agrees, then the level of inclination or disinclination
towards the sale of the railroad will be clarified. Chairman
Rieger reiterated the issue of the process to be followed with the
purchase of the railroad.
BILL SHEFFIELD said that the railroad would be happy to talk with
Montana Rail Link in order to establish a path.
REPRESENTATIVE DAVIES in the Alaska Railroad's letter of response
to Mr. Washington there is an indication that independent
appraisals project that the railroad would be worth about $2
million. The corporation envisioned that they would want to be
reimbursed for an independent appraisal. Mr. Washington's letter
of October 4th says that he is willing to dedicate the analytical
and financial resources necessary to purchasing the railroad.
Would Mr. Washington be prepared to fund an independent appraisal
process?
BILL BRODSKY was not sure of the price of the Alaska Railroad. The
problem is not so much supporting an appraisal, but rather the
unclear indication that the railroad was for sale. Mr. Brodsky
interpreted the railroad's letter to indicate that the timing wa
bad to proceed. An evaluation would not be supported if there was
not a realistic opportunity to move towards the sale.
MORT LOWENTHAL pointed out that it would be unfair, under a bidding
process, for one party to support an appraisal from which the other
party would benefit. The process seems to be inconsistent.
REPRESENTATIVE DAVIES agree. Representative Davies noted that this
was in the negotiated process section of the letter. Under the
circumstances that serious interest was indicated and the process
would be negotiated, would that help. Both Mr. Brodsky and Mr.
Lowenthal agreed.
CHAIRMAN RIEGER clarified that competitive process does not
necessarily mean bidding, but does in general.
Number 435
SENATOR FRANK inquired as to how the Montana Rail Link would
characterize the letter from the Alaska Railroad Corporation.
MORT LOWENTHAL referred to the last sentence in the third paragraph
which seems to be a negative sentence.
SENATOR FRANK agreed and wondered why the Montana Rail Link was
present. He pointed out that Mr. Hatfield had indicated that when
prospective purchasers are told that the legislature would be
involved, the prospective purchasers hang up the phone. Is it a
problem that the legislature is part of the process?
BILL BRODSKY reiterated that a clearly defined process with someone
to deal with this sale would be necessary.
SENATOR FRANK believed that the Governor would have the power in
this situation. He wondered what the Administration's position is
on this issue. Senator Frank indicated that a serious debate with
the Administration over this is necessary.
CHAIRMAN RIEGER asked if there were further questions. Hearing
none, he thanked everyone for attending.
There being no further business before the committee, the meeting
was adjourned at 3:42 p.m.
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