HB 229am-KENAI GASIFICATION PROJECT; RAILROAD BOND    3:53:36 PM CHAIR HUGGINS announced HB 229 am to be up for consideration. LALANYA SNYDER, staff to Representative Chenault, sponsor of HB 229, explained that Agrium owns and operates an ammonia and urea complex in the Kenai area that has been at risk for a number of years of being shut down permanently because of the lack of feed stock. So, the Agrium Kenai gasification project has been in development. This project would bring coal from Healy to Kenai where low-emission coal gasification and electricity generation plants would be built. HB 229 authorizes the Alaska Railroad Corporation (ARRC) to issue up to $2.9 billion in tax exempt bonds to finance a portion of the project. The project will also help generate electricity for Southcentral Alaska and generate excess carbon dioxide that could be used to improve oil recovery from the wells in Cook Inlet and as well as continue to supply fertilizer to Alaska. 3:54:44 PM MS. SNYDER explained that payment of the debt service for facilities and equipment that would not be owned by ARRC would be provided through a long-term contract or other agreement between ARRC and the project's owner or operator. There would be no fiscal impact to the state. CHAIR HUGGINS asked if they had heard of any resistance to the project or the bonding implications thus far. MS. SNYDER replied that she hadn't heard of any. CHAIR HUGGINS asked Ms. Parker of Agrium to further explain the concept. 3:55:42 PM LISA PARKER, Manager, Government Relations, Agrium U.S., said she supported HB 229 am. The concept that is imbedded from Agrium's standpoint with coal gasification is that coal would be transported from Healy to a port facility and barged to Agrium's facility where the coal would be gasified. Part of the 3 million tons of coal per year would be used for creating the hydrogen Agrium needs to make anhydrous ammonia and the rest would be used for generating power. The complex they are envisioning would generate 190 megawatts of power - 120 megawatts would be used at their facility for the gasifier air separation unit (ASU) and 70 megawatts would be put into the grid without having to upgrade the existing transmission lines. Homer Electric Association is taking the lead on the power generation-side. 3:56:17 PM SENATORS GREEN AND MCGUIRE joined the committee. MS. PARKER explained that Agrium's plant has been operating at 50 percent capacity for half of the year and they want to bring it back to full operation. 3:58:30 PM SENATOR WAGONER asked if Agrium could get its funding somewhere else if this bill doesn't pass. MS. PARKER replied they would be able to look for other avenues. SENATOR WAGONER said that this wasn't a bail out, but rather one method of financing. MS. PARKER replied that this mechanism was established 20 years ago as a funding mechanism by the federal government to allow the ARRC to issue tax free bonds for economic development projects in Alaska. From the state's standpoint, there is no state involvement. It is not a bail out. 3:59:59 PM SENATOR WIELECHOWSKI asked who pays if there is a default. MS. PARKER replied if the legislature gives the ARRC authority to seek tax-free bonds, it then has to get permission from its board of directors to seek those bonds. In seeking those bonds, they go to the bond market which will thoroughly investigate the Railroad, Agrium and its equity partners in this process. If the market does not feel that they have the resources to pay for those bonds, they would not issue them. 4:00:47 PM SENATOR WIELECHOWSKI asked if the ARRC could lose many of its assets if there was a default. 4:01:01 PM PAT GAMBELL, President and CEO, Alaska Railroad Corporation (ARRC), said the Railroad would be responsible for any portion of the bonding that would be used to purchase assets on its own - in terms of locomotives and coal cars. But for the vast majority of the dollars they are talking about in this particular project, there is no recourse to the state or to the ARRC. MR. GAMBELL said the ARRC's participation is in two parts. One is the operational part, which would be the movement of the coal to an offload point. Two points are being looked at right now and they are looking at moving in the neighborhood of 3 million tons a year, which is significantly more than it has moved in the past. So, therefore, part of the tax-free issuance would go to purchase around 200 railcars and probably 9 or 10 locomotives that would go into service full-time to move the product to the chosen port. He said the second interest in this project is to use this tool for the economic development that Ms. Parker described. He also wanted to reinforce the idea that this is absolutely not a bailout and it is simply a tool and one that simply has not been used up to this point in time. 4:04:12 PM SENATOR WIELECHOWSKI wanted to clarify that there is absolutely no state liability if there is a default. MR. GAMBELL replied that that was true as well as unique in terms of the U.S. tax code. The Alaska Railroad properties were left untouched in the tax rewrite of 1986. 4:05:00 PM SENATOR WIELECHOWSKI said he wanted to hear more about how it's possible for the state or the Railroad to have zero liability if there's a default. And he wanted to hear it from a tax expert. MS. PARKER explained that the $2.9 billion bond has three components or partners. Agrium's portion would be $2 billion; $600 million is designated for the Railroad; and $300 million is designated for a spur line through the Mat-Su Borough. She deferred the tax question to ARRC tax expert, Bill Leary. 4:05:51 PM BILL LEARY, Chief Financial Officer, ARRC, explained this is a very big deal to the ARRC - in that it is moving 3 million incremental tons of coal. With regard to the specific question about recourse to the state or to the Railroad, he said this bill is only an authorization to issue up to $2.9 billion worth of bonds. The actual mechanics of who would be responsible for repayment of the debt would be: first it would need to be approved by Railroad management, then by the Railroad Board of Directors, but the ultimate control would come from the marketplace. He assured them that the ARRC's balance sheet would not support the issuance of anything with even a $1 billion sign on it. As a result, the market would dictate how much could be issued and what the repayment source would be. So, in this case, a small amount in the grand scheme of things would have the Railroad as its backstop - for things like the railcars, locomotives and infrastructure improvements that would be needed to support this project, but the vast majority would be supported by Agrium or a combination of Agrium and its partners. That's who would be responsible for repaying that debt and those terms would be drawn up in the bond documents themselves. SENATOR WIELECHOWSKI asked if the bond could be used to build a spur line from the North Slope down to Southcentral. 4:08:30 PM MR. LEARY replied that this unique authority that the Railroad has, based on language in the Transfer Act, needs to be tied directly to the Railroad and to rail service. That is why this is such a good project as it's proposed with the Agrium initiative. 4:09:24 PM SENATOR WIELECHOWSKI asked if the bond could be used to bring a line to Southcentral. MR. LEARY recalled how in 2004 the Legislature approved $17 billion worth of railroad bond authorizations related to financing the natural gas pipeline. CHAIR HUGGINS said that Senator Wielechowski was referring to the authorization in the event that the spur line existed that pipe and other logistical support requirements for a pipeline construction could be reverse-hauled north on it. MR. GAMBELL responded absolutely - the reverse haul potential would be excellent from Port MacKenzie into the Interior. He hoped the state would consider that in the engineering of the pipeline. CHAIR HUGGINS said that is one of the underpinnings that makes this attractive to him. 4:11:03 PM DAVE HANSEN, Director, Economic Development, Mat-Su Borough, strongly supported HB 229 am. They feel that an extension from the main line down to Port Mackenzie would not only greatly enhance the Agrium gasification project for a coal transportation port, but also would provide extensive statewide benefits - such as making the development of numerous strategic mineral deposits in the Interior more cost effective and feasible. One study says Port Mackenzie would be the best port for this purpose. It would also reduce the need to invest up to $150 million in rail crossing improvements in the Wasilla to Anchorage rail corridor and should save Agrium rail transport money in its rail freight costs. 4:13:30 PM SENATOR STEVENS asked if this project would have the ability to provide electricity beyond the needs of the Agrium plant. MR. HANSEN replied that answer would have two parts. Lisa Parker would have to answer the one about the actual electric generation at the Agrium plant that is part of the gasification. But he could answer that by putting a rail line to Port Mackenzie you make the possibility of electric generation through the use of coal as a fuel very feasible and that could be put on the main line system, the grid. 4:14:41 PM MS. PARKER added that Agrium's current design for the power plant is for 190 megawatts of power. Agrium would purchase 120 percent of that and the remaining 70 megawatts would be available for distribution on the grid. 4:15:14 PM SCOTT HAMANN, Kenai resident, said this is a great bill and it is good for the whole state. This is just a win/win situation. CHAIR HUGGINS asked Ms. Snyder to give them an overview of the issues that were raised in the other body on the bonding concept and Agrium's viability. 4:17:15 PM MS. SNYDER responded that Representative Hawker had some concerns with the size of the bonding, but those were cleared up by the Department of Revenue. Representative Gara brought up the issue of emissions and he offered an amendment on the floor that did not pass. CHAIR HUGGINS asked Ms. Parker to review the decision points Agrium has. MS. PARKER replied on July 1 Agrium will have to decide whether to go forward on this project or not. It was started in October 2004. That decision will be based on the financials from an engineering standpoint, for one thing, and the engineering has been done. They are continuing to work on the engineering, but it has been found to be feasible. The initial work on permitting did not identify any show-stoppers and they will be announcing the selection of the environmental firm later this week. After July, if the decision is made by management and equity partners to continue the project, the next gate would be in the fall of 2008. That would be as to whether or not Agrium goes into detailed engineering and start procurement on things that would need a long lead-time. She said if all gates open, this project would be on line by 2011/2012. SENATOR WAGONER reminded them that some people have said using CO2 in a field such as Swanson River and Cook Inlet that an additional 300 million barrels of oil could be recovered. When you start calculating what the state gets out of that at the current price of oil per barrel, that's a big prize. 4:20:06 PM SENATOR WIELECHOWSKI asked if Agrium preferred to fuel its plant with natural gas. MS. PARKER replied yes, but the supply of natural gas is declining. The plant was closed for six months because it was unable to get feed stock and is operating at 25 percent capacity on average. MS. PARKER said that two other facilities were impacted by the same lack in Southcentral as was a company that delivers natural gas to Fairbanks - but the company Fairbanks was able to work out an arrangement to get the natural gas from Enstar. She said they are looking at a five-year time frame of trying to keep their plant operating while this gasification project comes online. Senior management doesn't see North Slope natural gas coming on line in the next 10 years and doesn't foresee being able to keep the facility operating for that time at 50 percent capacity. SENATOR WIELECHOWSKI asked how soon they expected to be gasifying coal under this proposal. MS. PARKER replied by 2011/12. And management hopes to be able to get gas to operate at least half of their plant for half of the year during the construction time. 4:22:17 PM SENATOR WIELECHOWSKI again voiced his concern that he raised when the legislature received this presentation earlier along with one by Enstar that proposed a bullet gasline from the North Slope down to Southcentral, which would cost almost the same as this project. His concern was if you want $2.9 billion worth of to get a bullet gasline to Southcentral, you would need a big anchor tenant to pay for it and Agrium is the ideal anchor tenant. So, if they go ahead with this project, it hurts the state's ability to bring a natural gas pipeline from the North Slope, because they loose Agrium as an anchor tenant - and if the state has this opportunity to bond, he would like to see it go towards building a bullet gasline from the North Slope and incorporating the Railroad into the building of a spur line. "That way we get you your gas, but we also get gas for the hundreds of thousands, the 71 percent of Southcentral in Fairbanks and Kenai residents who use natural gas, whose rates have doubled in the last five years...." SENATOR WAGONER responded that he didn't think that concept would fit the Railroad bonding capabilities. 4:23:55 PM MR. GAMBELL said that was an interesting concept, but the issue is timing and Agrium's timing is urgent. The Railroad's bonding capacity is not capped and it could look at another project like a bullet line in the future. In fact, it has discussed projects with numerous other companies and he said: It's certainly feasible. The devil is in the details in terms of making arrangements much as we have with Agrium to satisfy the requirement that the project is for railroad purposes. So therefore, property or right-of-way, or some sort of support, or a combination of all the above may very well prove to be the right formula at some point in the future. That point, however, is certainly farther down the road than the current concern that Agrium has for its inability to put capacity out of its plant. We'd be very happy to talk with the state or look at that initiative as well, and we can, because as a conduit financer and with this capability we have we would not be capped and in fact could look at something like that. 4:25:27 PM PAUL KENDALL, Anchorage resident, said he was not endorsing this project, but he wanted to suggest that the future lies in hydrogen. SENATOR STEVENS moved to pass HB 229 am from committee with individual recommendations and attached fiscal note. SENATOR WIELECHOWSKI objected saying he wanted HB 229 to get a Finance Committee referral for his previously mentioned reasons. It is not a bad project, but it is only one project and he preferred to see the bonding go towards a gas pipeline from the North Slope to Southcentral that would provide natural gas energy for Agrium along with energy for the many residents all up and down the Railbelt. CHAIR HUGGINS said they could not discount the value of being able to reverse hauling to the North in logistical support of any pipeline and secondly that the LNG plant can be viewed as a potential anchor for a large natural gas supply. And he didn't think they were mutually exclusive. A roll call vote was taken: Senators Stevens, Wagoner, Green and Huggins voted yea; Senator Wielechowski voted nay; and HB 229 am moved from committee. 4:29:03 PM at ease 4:31:07 PM