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 date." This was the first hearing for this bill in the Senate Finance Committee. 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 railroad. 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 bonds. 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 bonds. 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 required. 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 analysis. 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.