SENATE BILL NO. 13 "An Act relating to bonds of the Knik Arm Bridge and Toll Authority; relating to reserve funds of the authority; relating to taxes and assessments on a person that is a party to an agreement with the authority; and establishing the Knik Arm Crossing fund." SENATOR CHARLIE HUGGINS, introduced Mr. David Livingstone from Citigroup. He stated that the Knik Arm Crossing was the only strategic pieces of infrastructure for transportation currently being discussed in the state. He said that the estimates for widening and improving the Glenn Highway were approximately $3 billion. He opined that approximately 20,000 people were traveling from the Mat-Su to Anchorage daily between the hours of 4am and 9am. He added that there were three highway safety corridors on the way from Anchorage to Mat-Su, which was symptomatic of the population growth. He relayed that records indicated that in 2012 Knick-Goose Bay Road (KGB) was more dangerous than driving south out of Anchorage, and that the road from Wasilla to Palmer was equally dangerous. He said that users of KGB Road heading toward the Port of Anchorage had grown by 50 percent in the last 10 years. He pointed out that there were a significant number of people that would use the access immediately in order to get into Anchorage. 10:36:23 AM Senator Huggins related the sponsor statement: Senate Bill 13 amends the Knik Arm Bridge and Toll Authority's enabling statute to provide for a successful procurement for the Knik Ann Crossing project and to generate the best value for the state. The Knik Arm Crossing will significantly enhance Alaska's public infrastructure and further the movement of goods and people throughout our state. Passing this legislation this session is important for moving the Knik Arm Crossing toward a bridge opening in 2015. This bill, written in consultation with the Knik Arm Bridge and Toll Authority (KABATA), which was established in 2003 by the Alaska Legislature, accomplishes many items deemed necessary for securing a successful public-private partnership, including: > Increases KABATA's bonding authority from $500 million to $600 million: • The $600 million number represents the same amount authorized under Private Activity Bonds (PABs) allocation from FHWA. • Lowers the cost of capital for the project and ultimately lowers the cost to end users. • Private partner is the borrower of any PABs issued. > Clarifies that the bridge and associated facilities are exempt from state and local taxes; • Like any other transportation project in Alaska, the roads and bridges are not subject to property taxation. • Any private facilities developed outside the crossing will be taxable. • Property tax exemption reduces the availability payment and reduces the toll. > Establishes a project reserve fund: • Provides backstop for toll revenue fluctuations. • Enhances the credit worthiness of the project and reduces project costs • Will be repaid over the life of the project. • Keeps the tolls affordable to the traveling public All of the above language clarifications and additions lower the capital costs of this much-needed infrastructure project and deliver benefits in a timely efficient manner. SB 13 is a companion bill to House Bill 23, which is sponsored by Representative Mark Neuman. Senator Huggins urged the committee to link the bill to its House counterpart quickly. He stated that there was $500 million available to the project through the Transportation Finance and Innovation Act (TIFIA), but that time was limited. 10:37:58 AM Co-Chair Meyer noted that public testimony would be taken on the House companion bill, HB 23, once it was received by the committee. 10:39:59 AM MICHAEL FOSTER, CHAIRMAN, KABATA, began a presentation on SB 13 titled "Knik Arm Crossing." He discussed Slide 2, "Historic and Projected Population Trend 1985 to 2035." He stated that, according census numbers, between 1985 and 2010 the population of Anchorage grew by 28 percent; Mat- Su by 140 percent, and the South Central area by 44.5 percent. He relayed that there were several different models under discussion using numbers from the Department of Labor (DOL), ISER and KABATA; if all the models were examined and corrected to the 2010 actual census data, there was only a 1 percent difference between the ISER and KABATA models. He said that most of the growth was occurring in Eagle River and North of Mat-Su. He noted that 44 percent of the total growth in Anchorage was in the Eagle River area because the bowl area was running out of land causing the population to move northward. 10:43:04 AM Mr. Foster spoke to slide 3, "Glenn Highway AADT Counts (no bridges)." He shared that in 1985 traffic at the Eklutna Bridge was approximately 16,000, and increased to 30,000 in 2010. He contended that by 2035 the traffic number would increase to 65,000 at that point on the Glenn Highway. He pointed out that in 1985, at the point south of Eagle River that was the combination of all the northbound traffic into Anchorage, traffic measured approximately 33,000; 53,000 in 2010, and was projected to increase to 110,000 by 2035. He pointed out that the highlighted two lane road and the slide carried 62 percent of the traffic on the four lane highway. Mr. Foster continued to Slide 4, "Knik-Fairview Fastest Growing Area": •Knik-Fairview 2012 population estimate 16,126 -Larger than the incorporated areas of Palmer and Wasilla combined -If incorporated, would be fourth largest city in the state •Knik-Goose Bay Road traffic statistics: 2000 AADT - 12,590 2010 AADT - 18,308 Increase 5,718 percent 45.4 percent 10:47:23 AM Mr. Foster stressed the importance of TIFIA for the project. He explained that the developer would be able to access federal dollars, at low interest, and would not have to make a payment on the loan until five years after the bridge opened. He quoted at letter from Bryan Butcher, Commissioner, Department Of Revenue: "Finally, you asked about my confidence in the revenue projections and financial analysis provided by KABATA in its March 1 TIFIA letter of interest. KABATA has retained CITI, one of the largest and most successful financial services firm in the world, especially as it relates to government financing of infrastructure projects, to develop its financial models. KABATA retained Wilbur Smith, a firm that has advised on many successful projects to do its traffic and toll models. I am confident that the revenue projections and financial analysis are objective and done to the highest of professional standards. This is the type of work that will be accepted and relied upon by the institutional investors that may be interested in financing this project." 10:49:19 AM Mr. Foster addressed Slide 5, "What Happens Without the Bridge?": •State has to accommodate transportation needs to maintain existing level of service: -6 lane improvements on Glenn Highway from Eagle River to Wasilla -8 lane improvements on Glenn Highway from South Eagle River to 5th Avenue -Parks Wasilla Bypass -Network improvements in Palmer/Wasilla corridor •§billion total cost with no toll revenue * * Estimate per 2008 Statewide LRTP prepared by ADOT&PF 10:49:58 AM Co-Chair Kelly required a brief explanation of the TIFIA program. Mr. Foster replied that TIFIA was a federal loan program that provided Federal credit assistance in the form of direct loans, loan guarantees, and standby lines of credit to finance surface transportation projects of national and regional significance. TIFIA credit assistance provides improved access to capital markets, flexible repayment terms, and potentially more favorable interest rates than can be found in private capital markets for similar instruments. TIFIA can help advance qualified, large-scale projects that otherwise might be delayed or deferred because of size, complexity, or uncertainty over the timing of revenues. Many surface transportation projects - highway, transit, railroad, intermodal freight, and port access - are eligible for assistance. Each dollar of Federal funds can provide up to $10 in TIFIA credit assistance - and leverage $30 in transportation infrastructure investment. He noted that there were currently letters of interest from 18 different states and that the Alaska project was in the "hold mode." He shared that the program was still being developed and the application process had yet to be completed. He stated that the program was waiting for the legislation to move forward, which would signify the state's commitment in the project, before inviting Alaska into the pre-application process. He noted that the state had applied to the program before and had been turned down. He believed that if the legislation passed the state would be invited into the program. 10:53:58 AM Senator Olson wondered why letters of interest had been sent out before the financial modeling had been completed. Ms. Foster replied that that had had several financial models and that at the time TIFIA had a small financial capacity. 10:55:24 AM Senator Olson asked about other TIFIA loans that had been granted in the United States. Mr. Foster referred the question to Mr. Livingston. 10:56:09 AM DAVID LIVINGSTONE, MANAGING DIRECTOR, CITI CORP, introduced the presentation, "Knik Arm Crossing: Finance Briefing." He spoke to Slide 1, "Public-Private Partnership Approach": to build and operate the Crossing - Alaska legislature authorized and encouraged use of P3 for project delivery under AS 19.75.111 have been used successfully in the US for: - East End Bridge (over Ohio River near Louisville, KY) - Presidio Parkway (San Francisco) - I-595 (Fort Lauderdale) - Denver Eagle "Fastracks" - Port of Miami Tunnel deliver and operate major projects worldwide, including in the UK, US, Germany, France, Italy, Spain, Portugal, Australia, Canada, Chile and Brazil - Concept is so well proven that in Canada any project over $100M using federal funds must analyze use of P3 and justify why P3 should NOT be used - US road P3's have come in 23 percent to 42 percent lower than the owner's capital cost estimate1 KABATA's proposed P3 approach has been tested in numerous projects in the US and around the world. (1) For East End Bridge, Presidio Parkway and I-595, the most recent three availability fee P3's. 10:58:17 AM Vice-Chair Fairclough requested and all-in cost on the previous P3 projects and projected traffic counts for the bridges. Mr. Livingstone replied that he would try to find the information. Vice-Chair Fairclough asked if the projects were of a similar magnitude as KABATA. Mr. Livingstone replied that the East End Bridge was almost identical in size to KABATA in terms of cost. 10:59:44 AM Mr. Livingstone addressed Slide 2, "Procurement Status": Procurement is in process with firm bids expected in 2013. partner with the following international consortia competing for the Crossing: - Alaska Infrastructure Access Partners - Infrared Capital Partners; Bouygues; Colaska; URS Alaska; Moffatt & Nichol; USKH; R&M Consultants; Macquarie Capital - Cook Inlet Passage Partners - Meridiam Infrastructure; Kiewit; Manson Construction; Transfield Services; Parsons Transportation Group; Golder Associates; Dowl HKM; Dan Brown and Associates; BMT Fleet Technologies; KPMG Corporate Finance - North Star Mobility Group - Hochtief; ACS Infrastructure Development; Iridium; Flatiron Constructors; Dragados; Traylor Bros.; HNTB; CH2M Hill Engineers; Alaska Interstate Construction; Arcadis; Kodiak Map; Hart Crowser; Earth Mechanics; Bittner-Shen; Denali Drilling; Gregg Drilling and the three firms shown were short listed by KABATA firms and industry leaders in US and worldwide P3s Mr. Livingstone stated that the firm selection would be based on which firm would offer the lowest availability payments. 11:01:42 AM Mr. Livingstone spoke to Slide 3, "Structure for Availability Fee P3 Deal", which was a flow chart that illustrated that private partner provided single point responsibility for design, construction, financing and long-term operation and maintenance, all for a pre- determined annual availability fee. 11:02:50 AM Mr. Livingstone spoke to Slide 4, "Risk Sharing": The following summarizes the key risk sharing, where the private partner takes risks under its control and KABATA assuming risks of uncontrollable events. Risk Party Taking Risk Design deficiencies Private Partner Construction cost Private Partner Design/construction integration Private Partner Construction schedule Private Partner KABATA discretionary change orders/KABATA acts KABATA All other design/construction change orders Private Partner Specific conditions/events outside private partner control (see page 6) KABATA Debt service Private Partner O&M cost (for 35 years) Private Partner Needed renewal capital expenditures (for 35 years) Private Partner Future expansions KABATA / Private Partner Toll collection cost (for 35 years) Private Partner Toll revenue KABATA Availability payment KABATA/Project Reserve/State Moral Obligation 11:04:04 AM Mr. Livingstone spoke to Slide 5, "Availability Payment": Private partner bears risk that its costs exceed the availability fee. private partner to the extent the Crossing is "available" to traffic - No availability payments owed until project is opened for service - To the extent the private partner does not keep lanes open, or does not operate and maintain the Crossing to detailed operating standards, the availability payment is reduced the concession is signed and includes components for: - Recovery of capital (debt and equity), which are fixed and not subject to escalation - Operation, maintenance and repair, which are fixed, but subject to inflation escalation - Tolling services, which are fixed fees per collected toll, but subject to inflation escalation 11:04:59 AM Mr. Livingstone addressed slide 6 titled "Events Outside Private Partner Control": While KABATA has assumed designated uncontrollable circumstances risks, steps have been taken to mitigate those risks to KABATA. • KABATA retains certain other risks related to KABATA changes or acts in its control and, listed below, items out of the control of the private partner · KABATA Retained Risks Outside of Private Partner Control · Mitigation  Discovery of unforeseen subsurface conditions,  hazardous waste, archeological resources, endangered species Extensive subsurface investigation completed,  including borings in the Knik Arm and  historical/archeological surveys along the bridge and  roadway alignment  Delays in receipt of certain major permits or right of way acquisition; costs of changes in state law or permit conditions Major permits and right of way should be completed  prior to private partner selection  Delays by utilities There are not many utilities along right of way and  they are known and mapped  Utility memoranda of understanding, should be executed  prior to private partner selection  Force majeure events, including earthquakes, war, terrorism, fires, floods The Crossing is required to be designed to withstand  earthquakes, fires and floods  The private partner is required to carry casualty  insurance  If an event is catastrophic, it is likely to be  covered in part by FHWA, FEMA and/or other federal  disaster aid  11:05:55 AM Senator Bishop inquired if bedrock had been found as a result of the soil testing. Mr. Foster responded that consolidated glacial till had been found. 11:06:22 AM Mr. Livingstone addressed Slide 7, "Proposed Legislation": Passage of SB13 (or HB23) is condition to the project proceeding under the "availability fee" P3 approach and obtaining a low cost TIFIA loan from the US Department of Transportation. - Ability to establish a Project Reserve and subject it to a trust arrangement - Toll revenues collected by KABATA are deposited into the Project Reserve - KABATA's availability payment obligation and KABATA expenses are paid from the Project Reserve - The KABATA chair must annually certify to the Governor and Legislature the status of the Project Reserve and amounts needed, if any, to restore it to its minimum requirement - By the time the Crossing opens for traffic, the project reserve is expected to be funded by State appropriations totaling $150 million, with a "down payment" this year percent of the estimated average availability payment over next three years plus (2) 120 percent of prior year KABATA expenses minus (3) prior year toll revenues - Provides liquidity to KABATA to make the availability payments and fund KABATA administrative costs given the annual legislative schedule (appropriations can normally only be made during the 90 day session) 11:07:25 AM Mr. Livingstone discussed Slide 8, "Purpose of State Financial Backstop": The private partner is investing nearly $800 million of its funds to build the Crossing and needs assurance that KABATA and the State can pay if the private partner meets its obligations. · Request · Key Purpose  Funding shortfalls if availability payments and other expenses exceed toll revenues • Provides funding for early year projected revenue  shortfalls during traffic ramp up on bridge  • Under base case projections there are minimal future  need for State support  Funding "pinhole" risks • Provides funding for "pinhole" risks assumed by  KABATA  • Pinhole risks proposed to be backstopped by the  State include: (1) termination costs, should the  concession be terminated prior to its maturity for  KABATA fault or convenience ; and (2) compensation for  specific conditions/events outside private partner  control  11:08:44 AM Mr. Livingstone spoke to slide 9 titled: Assumptions Provided by Team of Experts": The financial projections are based on a set of assumptions carefully prepared by a team of experts in their respective fields. • As KABATA's financial advisor, Citigroup has prepared financial projections to show how the project will perform under a set of assumptions developed by national experts in their respective fields: (The following information is ordered: the assumption, the firm, and the credentials.) Construction Cost HDR1 Fifth-ranked engineering firm for highway design in the US Traffic and Revenue CDM Smith Foremost Traffic and Revenue consultant with more studies supporting financings than any other firm Operations and Maintenance HDR/PND Fifth-ranked engineering firm for highway design in the US and one of the top Alaskan road and bridge engineers Toll Collection CDM Smith Leading toll system advisor to toll and transportation agencies Renewal Capital Expenditures CDM Smith2 Substantial experience in inspecting bridges and developing capital maintenance programs for transportation agencies in the US. Debt and Equity Citigroup One of the world's largest banks and the #1 underwriter of US toll road bonds (1) HDR was assisted by PND, Armeni, William Ott and DCS for bridge design and Hydro-Ram and IHC Merwede for piling (2) CDM Smith was assisted by PND 11:09:46 AM Mr. Livingstone addressed Slide 10, "KABATA Projected Obligations and Toll Revenues." He stated that in the early years, revenue would be insufficient to cover costs, but in the later part the project would generate significant revenue for the state. 11:10:59 AM Mr. Livingstone discussed Slide 11, "Sensitivities" Sensitivities prepared to determine upside and downside impact of the project on KABATA and the State. - Base case - Most likely traffic and revenue projection - Upside and downside sensitivities at 5 percent (aggressive upside), 25 percent (upside), 75 percent (downside) and 95 percent (severe downside) probabilities that traffic will exceed - Initial Crossing: four lane foundation to avoid future neighborhood disruption - Future Expansions: initial configuration (estimated 20301 for base case) Point MacKenzie Road upgrade to four lanes (estimated 20251 for base case) controlled by KABATA and the State based on traffic, congestion and funding availability (1) Based on traffic capacity analysis by CDM Smith and HDR. 11:12:30 AM Mr. Livingstone discussed Slide 12, "Revenue Sensitivity Results from Monte Carlo Simulations," which charted that Citi analyzed the Crossing's revenues under five cases, the base case previously described and four alternative probability cases at higher and lower traffic and revenue volumes. The severe downside, downside, upside and aggressive upside cases represent 95 percent, 75 percent, 25 percent and 5 percent probabilities that traffic and toll revenues will be greater, respectively. For instance, under the severe downside, 95 percent probability case, there is only a 5 percent probability that toll revenues will be below the projection. 11:12:59 AM Mr. Livingstone addressed Slide 13, "Project Cost/Benefit to State." He explained that the slide illustrated the expected appropriations that would be expected under the various scenarios. Slide 13 charted cumulative costs and financial return to the state and the funding of, and release from, project reserve over 45 years. He noted that the grey line on the slide represented the $150 million initial funding of the reserve. He said that there would be no request for future appropriations until 2025. The slide listed dates that expansions could occur under the base case; under the sensitivities, the expansions occurred earlier (upside cases) or later (downside cases) based on when traffic levels warranted expansion. Additionally, the severe downside, downside, base, upside and aggressive upside represented 95 percent, 75 percent, 50 percent, 25 percent and 5 percent probabilities that traffic and toll revenues would be greater, respectively. For instance, under the severe downside, 95 percent probability case, there was only a 5 percent probability that toll revenues would be below the projection. 11:14:32 AM Senator Olson inquired the date of the projects final year. Mr. Livingstone replied 2060. 11:14:49 AM Mr. Livingstone spoke to Slide 14, "Sensitivity Results," which was the numeric information charted on the previous slide. Essentially, under the base case, over 45 years, ongoing appropriations of $37 million were required, while the Knik Arm Crossing would generate $2.3 billion of revenues to fund transportation in the state. 11:16:09 AM Mr. Livingstone discussed Slide 15 "Conservative Assumptions Used in the Financial Analysis": Citigroup's analysis uses conservative, reasonable assumptions. current market - 1.5 percent higher for tax-exempt PABs - 1.1 percent higher for TIFIA loan - Using current market interest rates eliminates any State reserve replenishment in other than the 95 percent probability, severe downside scenario percent probability scenario from $627 million to $113 million if state is paying under "moral obligation" pledge - If KABATA did not move forward with the expansions, under the severe downside case, State reserve replenishment drops from $627 million to $113 million, but the Crossing would become congested modeled - Recent Federal Highways reauthorization allows up to 49 percent TIFIA and lower interest rate for rural projects considered rural the public or the resulting economic development asset unencumbered Mr. Livingstone believed that all of the assumptions used in the presentation were very conservative. 11:18:33 AM Mr. Livingstone spoke to Slides 16 and 17, " Analysis of Financial Impact of Legislation on State": State's appropriation pledge is a backup to toll revenues and would only be triggered if toll revenues are insufficient to pay costs. is a "double barreled" credit - Payable FIRST from toll revenues in the Project Reserve as the intended primary source of debt repayment - Payable SECOND from the appropriated funds in the Project Reserve, initially equal to $150 million, and a commitment to seek a state appropriation if the Project Reserve falls short of minimum requirement base case financial projections support feature used by the Alaska Bond Bank and AIDEA which have good records of debt repayment and have been credit neutral to the State's own bond rating has been carefully crafted as back-up credit protection that should be viewed as credit neutral to the State's own bond rating because of the strength of the overall project plan and strength of the primary security The proposed legislation should be credit neutral to the State, given the minimal projected need for appropriations and the importance of the project to the State. the credit, is likely to be used sparingly - No availability payments due until the Project is completed and available for service, which removes the construction risks (State is not taking on construction cost overrun or schedule risk) State are $36 million; other shortfalls are covered by the Project Reserve without the need for further appropriations probability of exceeding," first Project Reserve replenishment by State is in 2025 ($9 million) and maximum annual payment is $38 million in 2043 - Infrastructure projects, like the Knik Arm Crossing, fill an essential need and spur economic development 11:19:03 AM Co-Chair Meyer noted that the committee would adjourn for floor session and continue the discussion during the afternoon meeting. 11:19:45 AM SB 13 was HEARD and HELD in committee for further consideration. 11:19:48 AM