SENATE BILL NO. 308 "An Act authorizing the Alaska Railroad Corporation to issue revenue bonds to finance rail transportation projects that qualify for federal financial participation; and providing for an effective date." This was the first hearing for this bill in the Senate Finance Committee. PAT GAMBLE, President and Chief Executive Officer, Alaska Railroad Corporation (ARRC), Department of Commerce, Community and Economic Development noted that a handout titled "Alaska Railroad Corporation Legislative Request for Bonding Approval" and "a series of maps" depicting the ARRC's "work plan" for proposed tract improvements during the years 2006 through 2015 [copies on file] have been provided. Mr. Gamble reviewed the handout as follows. Page 2 Request Legislative Approval ARRC desires to issue one or more series of capital grant receipts revenue bonds or notes, in aggregate not to exceed $165 million. Mr. Gamble remarked that this bill would seek Legislative approval allowing AARC to issue a series of capital grant receipt (CGR) revenue bonds not to exceed $165 million. The "sourcing [of] these bonds" would be as prescribed by Alaska State Railroad Transfer Statutes. Page 3 What? Rehabilitate Mainline Substandard or Potentially Unsafe Track · Single most important purpose for the use of federal funds · Top capital investment effort and #1 priority since 1996 … $220 million already invested. Mr. Gamble informed that in 1996, ARRC began an effort to "rehabilitate" or rebuild its main rail tracks. This continuing effort has been primarily funded by annual federal appropriations, provided through efforts by Alaska Congressman Ted Stevens who recognized that no regular deferred maintenance had been conducted on the Alaska Railroad's (Railroad) main line since it was rebuilt in the 1950s following World War 11. Mr. Gamble stated that the deferred maintenance effort was further compounded by the fact that train mainline derailment occurrences were increasing and incurring additional expenses. That risk of derailments exacerbated the need for deferred maintenance since the Railroad's passenger count and hazardous cargo loads were increasing. Actual track improvements began in 1998. Mr. Gamble noted that the revenues generated from this bonding would be used to rapidly accelerate and complete the deferred maintenance plan on upgrading the mainline track. ARRC has continued to request Federal funding through Congressman Stevens since it ranked the mainline track upgrade a priority in 1996. That federal money has been and would continue to be limited to funding work on the mainline rather than being utilized to support facilities and equipment. The money generated by the revenue bonds requested in this bill would also be limited, with a few "minor exceptions", to the mainline rehabilitation work. 9:59:09 AM Mr. Gamble conveyed that the "Derailments, 1996-2005" graph depicted on page 4 was included to provide an example of what has happened on the mainline since the improvements began. The blue line on the graph indicates a downward trend in the number of derailments with reportable damage. The "Train Accident Rate" graph depicted on page 5 compares the Alaska Railroad accident trend to national railroad statistics. These graphs "provide strong evidence" that the deferred maintenance efforts are "having the desired payoff". This fact is what prompted the notion amongst Railroad staff that "accelerating" the work on the main line would provide "a safer railroad faster … The State and our customers would expect that from us." This prompted this initiative. Page 6 Project Information · 100% CWR from Anchorage to Fairbanks (355 miles) · 85,000 concrete ties on curves less than 6 degrees (32 miles) · Wooden ties all upgraded to 35-year cycle · All ballast reset · Complimented by ARRC Bridge Program … $30 million · Complimented by ARRC Collision Avoidance Program … $13 million Mr. Gamble reviewed the benefits the Railroad would receive from this endeavor. While it was once thought that Continuous Welded Rail (CWR) would not work in the cold climates and extreme temperatures changes experienced in the State, such as the high ninety-degree summer time temperatures and the sixty-below-zero ambient temperatures experienced in Fairbanks. Railroad experts from other parts of the country "proved" that to be wrong. Thus ARRC is "vigorously" conducting a CWR program. CWR is important because it welds segments of track together thereby eliminating joints, which are often the cause of derailments. "The exchange of energy" between the rail joints and the train wheels "is hard on the metals of both and quite often is the single most prominent source of failures on track and damage to wheels. In addition to improved safety, CWR tracks are quieter as the noise generated by the wheels hitting joints is eliminated. Mr. Gamble noted that while concrete ties provide no substantial benefit over wooden ties on straight stretches of rail, utilizing them on curves increases the stability of the rail and better absorbs the energy transfer between the track and train wheels. In addition, concrete ties are easier to place at "the right degree" to meet the angle calculated for a specific curve. 85,000 concrete ties would be utilized between Anchorage and Fairbanks on curves exceeding six degrees. This would further improve rail safety, as curves are susceptible to track failure. Mr. Gamble also noted that the project would specify a 35-year tie upgrade cycle. Depending on how much water is absorbed by the tie and other circumstances, a tie typically does not undergo "serious breakdowns" until about 40 years of use. A 35- year cycle would provide a "safety margin" and would align with what "good railroads" in the contiguous United States are doing. Mr. Gamble noted that in conjunction with tie and rail replacement, rock ballast under the railways, including river rock, would be replaced "with solid granite which interlocks very tightly and provides a solid bed". 169 bridges would be upgraded in conjunction with track improvements. Mr. Gamble pointed out that while the majority of his remarks have addressed "mitigating the physical risks of track failure, collision avoidance is a technology" that is also being addressed by ARRC. This effort would address "human mistakes and errors in judgment". Thus, the Railroad is "simultaneously reducing physical risk as well as human error risks to the degree affordable and possible with the current technology." The effort would be to provide "one of the safest railroads in the United States within the next seven or eight years". Page 7 Why? · Consistent with #1 priority · Faster "take" of safety benefits and risk reduction of non-human factors · Continued mitigation effort - More than 600 passenger trains per year - 800 million gal. Refined product/hazardous materials (30,000 carloads) - 60% = hazardous cargo proportion · Builds clarity and budget discipline into capital program - Debt service schedule drives yearly capital apportionment Mr. Gamble reiterated that this endeavor would fulfill the number one priority of ARRC. The fact that this effort could reduce "by as much as ten years" the work that the current program would otherwise allow would be "worth the premium that we would pay through the bonding". The Railroad moves approximately 600 passenger trains a year and 800,000,000 gallons of hazardous material on its mainline. The amount of hazardous material moved by the Railroad is one of the "highest proportions of hazardous material cargo" run on any railroad in the country. Any effort to increase the Railroad safety is "an obligation" owed to the State. 10:05:31 AM Mr. Gamble communicated that one of the "advantages" this legislation would provide "internally" would be that "locking these dollars in on an annual basis through bonding" would assist ARRC in determining the level of capital funding that would be available for other programs. Page 8 Why Now · SAFETEA-LU makes it possible · Formula Funds increased 6-fold · No undue risk to railroad or state · Consistent with corporate priority · Materials costs escalating annually · Growing passenger train demand required nothing less · Desire to get pre-pipeline work done ASAP · No impact to previous capital plan Mr. Gamble stated that after a five-year effort to secure Federal Transit Administration (FTA) Formula Funds on an annual basis, ARRC is now entitled to receive a predictable level of funds from year to year. The level is based on a formula relying on such things as "passenger miles and the number of total miles on the railroad". The formula is also subject to an approximate two percent growth rate each year. The FTA funding has provided ARRC a "new tool in the tool kit"; this funding source could be used "to pay off the debt service". Mr. Gamble stated that two other positive events occurred three years prior: the ARRC match required for federal funds was reduced from 20 percent to nine percent and the federal Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users (SAFETEA-LU) "formula for attributable miles to the Alaska Railroad has increased from ten percent attributable miles to 60 percent attributable miles". This meant that the FTA formula dollars increased from approximately five million dollars a year to approximately $30,000,000 a year. Therefore, were the ARRC able to provide its "low" nine percent match, ARRC could depend on receiving total funds ranging between $30,000,000 to $36,000,000 into the future. These events provided ARRC the opportunity to consider a bonding proposal similar to the one presented in this bill. Mr. Gamble declared that this proposal is consistent with ARRC's priorities. It would also provide ARRC the ability to improve materials management; particularly as ARRC could make bulk steel purchases and store the steel in order to avoid continuing price increases. Furthermore, the increasing passenger train traffic would benefit from safer tracks. Mr. Gamble also noted that this proposal would allow pre- pipeline work to be conducted in anticipation of the construction of the State gas pipeline. Railroad tracks and bridges must be ready to handle the load capacities that would be required. 10:08:20 AM Mr. Gamble stated that these improvements would provide the Railroad the "ability to flow" the demands of the pipeline into "our current customer load without cutting other customers off." Mr. Gamble reiterated that the bond proposal would not impact the Railroad's capital program. Page 9 Proposed Financing · $165 million authorization requested · Currently planning three bond sales over next six years - Maximum annual debt service: $19.1 million or 49% of available FTA/match for year · ARRC Board approval required for each project and bond sale Mr. Gamble reviewed the proposed financing plans. Mr. Gamble noted that the "Debt Service as a Percent of Formula Funds/Match" graph on page 10 depicts the program's debt service percentages from the year 2007 through 2024. The maximum level of 49 percent would be anticipated in the year 2014, with the debt dramatically decreasing toward zero from the year 2017 to 2024. Mr. Gamble reminded the Committee that this debt service is "just one element" of the Railroad's debt. Some other smaller Railroad "borrowings" would also be retiring at that time. The Railroad's "debt position" would remain "very healthy during this whole process". Mr. Gamble concluded his presentation. He could provide additional financial details or review the remaining information in the handout if so desired by the Committee. The remaining information in the handout would provide "additional detail about some of the methodology and considerations that have gone into this proposal". 10:10:43 AM Senator Dyson, being "visually oriented", appreciated the charts and maps provided. Continuing, he asked the location of Wish Bone Hill, as that is the prospective site of a new coal plant. Mr. Gamble replied that Wish Bone Hill is located in the vicinity of Palmer, which is not on the Railroad's mainline. Senator Dyson observed that each of the maps from the year 2007 to 2015, depict two views of the Railroad's mainline. The view on the left of the page depicts the projects occurring that specific year and the view on the right depicts "the cumulative status of the track" to date. Mr. Gamble affirmed. He apologized for not fully explaining the maps earlier. Senator Dyson, referencing the map for the year 2015, asked for clarification as to whether the track at Hurricane, milepost 281.4, was CWT on wooden ties. Mr. Gamble stated that was correct. Senator Dyson understood that concrete ties usage would be limited to the areas highlighted in yellow with orange borders, as specified in the map's legend. Mr. Gamble acknowledged that due to the small map scale, it is difficult to show much detail about individual projects. Concrete ties would be utilized at any point of the track containing a curve over six degrees. For example, he pointed out that, as highlighted by the yellow and orange coloring on the map, concrete ties would be used on a curve near Broad Pass. Senator Dyson ascertained therefore, that concrete ties would also be used between Potter, milepost 100.6, and Bird, milepost 81.7. Mr. Gamble affirmed. There is a lot "of curvature" in that area. Senator Dyson ascertained that the narrow red line depicted on the map would indicate areas with regular un-welded line on wood ties. Mr. Gamble affirmed. For example, the line near Eielson Air Force Base near Fairbanks, milepost G24, is reflected as a narrow red line because that line "carries far far less tonnage than the main line". That segment was constructed after the main line and would not require upgrading. He reiterated that the view on the right side of the map reflects the cumulative project status and the view on the left side is that year's work plan. Senator Dyson deemed the maps "very helpful". Senator Olson, noting that 80,000 joints would be upgraded, questioned the total number of joints on the track. 10:14:57 AM Mr. Gamble stated that this information would be provided. A simple calculation involving the length of the track would be required. Senator Olson understood that rails were made with joints to accommodate expansion and contraction. Further information as to how CWR would accommodate these occurrences is desired. Mr. Gamble likened this to the question about "which came first … the chicken or the egg?" for there is disagreement as to whether train track joints were the result of rail length capabilities or temperature related characteristics. The rail length used today has been constant since the 1860s. Mr. Gamble explained that specifically trained personnel must conduct the CWR forced weld under exact circumstances. Expansion and contraction can be accommodated with a CWR; however extreme "vigilance" of the track for signs of wiggling or buckling must occur. The experience is that the CWR "could handle" the State's temperature conditions. A few instances have occurred during times of "extremely hot weather for several days" in which rails have experienced "heat soak" and have expanded and attempted to wiggle. However, the rail ties have securely held the rails in place. Such experiences are minor in comparison to the maintenance cost savings that the CWR provide. In summary, he concluded that "there is a science" to the CWRs and the process must be done correctly. Senator Dyson inquired to the number of track miles on the Railroad. Mr. Gamble advised that the Railroad's mainline is approximately 500 miles long. Senator Dyson asked the length of a traditional rail segment. Mr. Gamble noted that the CWR rail could be welded into a continuous segment of "up to half a mile". That piece could be loaded onto a work train and "fed" onto the track from the train. A regular piece of rail is 80-feet in length. 10:18:58 AM Senator Bunde asked for confirmation that these bonds would be used to maintain existing track rather than to expand the line. Mr. Gamble affirmed. Co-Chair Green noted that Members' packets contain a letter, dated March 14, 2006 from Tom Boutin, Deputy Commissioner, Department of Revenue to Bill O'Leary, Vice President Finance and Chief Financial Officer, Alaska Railroad Corporation [copy on file] that addresses the debt liability that would be assumed by the ARRC with the issuance of these bonds. Senator Bunde stated that his concern was in regards "to an on- going systemic problem", as, since "the Railroad is an instrument of the State when Railroad earnings are used to pay this, or if there should be a problem, it's really State money its just not general fund money." Based on two rails, a total mainline length of 500 miles, and rail lengths of 80 feet, Senator Dyson calculated there to be 66,000 joints on the mainline of the Railroad. Senator Stedman moved to report the bill from Committee with individual recommendations and accompanying fiscal notes. There being no objection, SB 308 was REPORTED from Committee with previous zero fiscal note #1 from the Department of Commerce, Community and Economic Development.