STRA - 2/9/95 SB 64 CONVERT AK RY TO PRIVATE CORPORATION  CHAIRMAN RIEGER called the Senate Transportation meeting to order at 1:34 p.m. He introduced SB 64 as the only order of business before the committee. CHAIRMAN RIEGER reviewed the sponsor statement for SB 64. In summary, SB 64 sets up shares of stock as parcels of ownership in order to facilitate the transfer of ownership of the Alaska Railroad Corporation (ARRC) to private entities through sale. SB 64 would end problems created by state ownership of ARRC. Number 049 BOB HATFIELD, Chief Executive Officer of ARRC and an ARRC Board member, felt that the end results sought in SB 64 were sound, however, there are some areas that could be improved. He expressed concern with the requirement that ARRC pay for a property appraisal prior to the creation and transfer of the stock. Previous appraisals of the railroad by the state and federal government cost approximately $2 million. Such appraisals usually expire after 90 days. He said that ARRC does not have the finances for an appraisal and traditionally, a buyer pays for due diligence prior to the purchase. He suggested that the state pay for an appraisal if it is required. Mr. Hatfield called the committee's attention to the fact that qualifications for the Board of Directors for ARRC are not specified in SB 64. The board members need to have defined business skills. He noted that the current board has a labor organization representative codified as being a member of the board. This should be continued. Number 149 Mr. Hatfield felt that even with SB 64, ARRC would still be perceived as owned by the state and continue to carry the baggage of that perception. He suggested that the stock transfer be done as specified in Section 1 and Section 2 (a) of SB 64, but change Section 2 (b) and Sections 4, 5, and 6 to place the stock into a trust to be managed by a qualified financial institution. Mr. Hatfield indicated that there are no guarantees for a potential buyer. When the deal is completed the deal could not be incumbered with restrictions making it financially infeasible to the buyer. A voting trust would alleviate this problem. A potential buyer would know all the mandates up front. He concluded that his suggestions may be one manner in which to insulate the state from competing in the private sector and sell the railroad. CHAIRMAN RIEGER noted for the record that Representatives James and Davis joined the audience. Number 236 SENATOR ADAMS asked what contracts the railroad currently has with key private industries. BOB HATFIELD informed the committee that the railroad has long-term contracts with MAPCO and Cruise Line. The MAPCO contract to haul their refined oil products has 18 more years and would transfer with the corporation. The Cruise Line contract to transport their rail cars on the passenger train between Anchorage and Fairbanks extends 15 more years. There are also contracts with coal companies, the military, and oil companies. Mr. Hatfield emphasized that the railroad has hundreds of contracts which usually have a duration of 3 years or less. In response to Senator Adams, Mr. Hatfield explained that ARRC has a 40 percent interest in the Comfort Inn which is a partnership not a contract. ARRC owns this and it would be transferred with the corporation. SENATOR ADAMS stated that the request of ARRC for the state to pay for the appraisal seems to insinuate that ARRC is in financial difficulty; will ARRC ask the legislature for capital or operating funds and in what amount. BOB HATFIELD said yes. ARRC will ask for the reallocation of a $9 million equipment grant which was to support equipment purchases for a coal mining operation in 1990. That money is available for reallocation because the coal mining operation fell through, however, ARRC was already subsidizing the export coal operation between Healy and Seward in 1990. ARRC has lost money over the fully allocated costs of the transport of that coal which has not allowed ARRC to do enough maintenance on the track. Mr. Hatfield specified that the money would be reallocated for ties and the ballast. LOREN LOUNSBURY, Chair of ARRC, declared that ARRC had never asked nor anticipated the need to request operating capital from the legislature. BOB HATFIELD stressed that railroads are very capital intensive, they are not generating enough revenue to have the capital program desired. Number 320 LOREN LOUNSBURY reiterated that for the state or the railroad to finance a $1.7 million appraisal, which would only last 90 days, seems inappropriate. Normal business practice is for the buyer to pay for due diligence. If ARRC had to pay for the appraisal, their capital budget would suffer. SENATOR TAYLOR inquired as to whom ARRC would be sold. LOREN LOUNSBURY said to a qualified buyer with an amount determined by an offer according to due diligence. The legislature or the Governor, if SB 64 remains the same, would determine if the amount was appropriate. SENATOR TAYLOR expressed concern with the manner in which ARRC is sold. LOREN LOUNSBURY maintained that a trust would alleviate such concerns. SENATOR TAYLOR emphasized the need to have efficient safeguards against scams. LOREN LOUNSBURY concurred with Senator Taylor. Mr. Lounsbury noted that they had a short time to analyze the bill and offered their expertise in crafting a bill. In response to Senator Green, LOREN LOUNSBURY clarified that normally after 90 days an appraisal is null. He also stated that ARRC does have a ballpark price for the railroad, but it would be subject to due diligence, a third party audit. Money for an appraisal should not be spent until there is a legitimate offer before them, then the buyer should pay for the appraisal. BOB HATFIELD mentioned that ARRC does simple appraisals throughout the year which cost approximately $2,000 a year. Number 401 SENATOR GREEN inquired as to how much the subsidy of the coal operation from Healy to Seward cost the ARRC. BOB HATFIELD stated that they lost approximately $20 million over the past 10 years. That $20 million includes the wages of crew members, the wear and tear on the track and the equipment, the wages of mechanics, fuel, and the administrators. CHAIRMAN RIEGER expressed interest in how that $20 million compared to the tariff. BOB HATFIELD said that 15 percent was a rough estimate. CHAIRMAN RIEGER asked if there was a contract with a barge service that would be ending. BOB HATFIELD recognized that contract and said that it had three more years. In response to Chairman Rieger, BOB HATFIELD explained that the MAPCO contract has a fixed duration of 18 years. Mr. Hatfield clarified that this contract would remain in effect regardless of ownership changes of ARRC. Mr. Hatfield and Mr. Lounsbury agreed with Chairman Rieger that an appraisal is not necessary to convert the ARRC to a stock ownership. CHAIRMAN RIEGER suggested that ARRC should propose qualifications for the board. There was a discussion regarding the possible provisions of a trust. Mr. Hatfield paralleled the trustee to an executor of an estate. Mr. Lounsbury pointed out that a trust could be irrevocable or have a specific time limit, but whatever the case the trust should clarify such things in the beginning because once the trust is set up it cannot be changed. SENATOR TAYLOR predicted that a 50 year contract with the federal government was not worth the paper on which it is written. BOB HATFIELD pointed out that most contracts have force majeure clauses for unexpected events. Number 470 CHAIRMAN RIEGER asked if Mr. Hatfield or Mr. Lounsbury felt that ARRC has potential when it is going to report a loss to last year's operating budget. BOB HATFIELD asserted that ARRC has great potential although it is undercapitalized. CHAIRMAN RIEGER urged ARRC to create some written recommendations regarding qualifications for the board and the trust concept. SENATOR ADAMS communicated to the committee that he was working on a proposed amendment to SB 64. This amendment would go beyond a successor corporation. SB 64 should actively sell ARRC. He felt that the legislature should eliminate assets not related to government. CHAIRMAN RIEGER said that SB 64 would probably be before the committee in two weeks. He indicated that there may be a committee substitute drafted for the committee to review at that time. SENATOR TAYLOR suggested that legislative oversight should be part of the trust if a relationship between ARRC and the government continues. On the other hand, if there is a clean break of the relationship then ARRC should become a publicly held corporation. He felt that there should be an opportunity for future legislators to step in if needed. CHAIRMAN RIEGER expressed concern that the legislature currently spends time as a second board of directors because disgruntled businesses may not agree with decisions made by ARRC. The legislature is presented with proposals to experiment with the management of ARRC. This poses problems for the legislature who is attempting to keep control of ARRC while the state owns it. He recognized that trust proposal may enable the ARRC to be ran in a business like fashion with appropriate state control until it is privatized. He assessed that if the railroad were sold today that the sale may be forced and the true value of ARRC may be lost. CHAIRMAN RIEGER held SB 64.