JOINT HOUSE & SENATE TRANSPORTATION AND SENATE FINANCE March 26, 1996 1:33 p.m. SENATE COMMITTEE MEMBERS PRESENT Senator Steve Rieger, Chairman of Senate Transportation Senator Robin Taylor, Vice Chair of Senate Transportation Senator Lyda Green Senator Al Adams Senator Georgianna Lincoln Senator Steve Frank, Co-Chair of Senate Finance Senator Rick Halford, Co-Chair of Senate Finance Senator Randy Phillips Senator Dave Donley SENATE COMMITTEE MEMBERS ABSENT Senator Bert Sharp Senator Fred Zharoff HOUSE COMMITTEE MEMBERS PRESENT Representative Gary Davis, Chair of House Transportation Representative Beverly Masek, Vice-Chair of House Transportation Representative William Williams Representative Jeannette James Representative Tom Brice Representative Don Long HOUSE COMMITTEE MEMBERS ABSENT Representative Jerry Sanders ALSO IN ATTENDANCE Senator Drue Pearce, President of the Senate Senator Loren Leman Senator Judy Salo Representative Gail Phillips, Speaker of the House Representative Ramona Barnes Representative John Davies Representative Joe Green COMMITTEE CALENDAR Presentation by the Montana Rail Link, Inc. WITNESS REGISTER Bill Brodsky, President Montana Rail Link, Inc. PO Box 8779 Missoula, Montana 59807 Mort Lowenthal, Director Montana Rail Link, Inc. PO Box 8779 Missoula, Montana 59807 Governor Bill Sheffield, Chairman Alaska Railroad Corporation Board of Directors PO Box 107500 Anchorage, Alaska Bob Hatfield, President & CEO Alaska Railroad Corporation PO Box 107500 Anchorage, Alaska ACTION NARRATIVE TAPE 96-7, SIDE A Presentation by the Montana Rail Link, Inc.  CHAIRMAN RIEGER called the joint meeting to order at 1:33 p.m. and invited the representatives of Montana Rail Link, Inc. to the table to begin their presentation. Number 025 BILL BRODSKY, President of the Montana Rail Link, Inc., said that he and Mr. Lowenthal were present in order to introduce themselves and to express a strong interest, on behalf of the owner Dennis Washington, in acquiring the Alaska Railroad. Mr. Brodsky began with the topic of privatization of railroads globally. New Zealand and Great Britain have recently decided to eliminate the government from rail transportation and turn it over to private enterprise. He informed the committee that the Montana Rail Link, Inc. has been involved in the privatization of the railroads in Argentina and Chile. Brazil, Mexico, and Canada are also beginning efforts towards privatization of the railroad. Mr. Brodsky discussed the reasons for the move towards privatization: the flexibility that entrepreneurship brings to capital, the incentive for profit, to grow the business, to expand the markets, to create jobs, and to create opportunity which can surpass the capabilities of government. He pointed out many similarities between Montana and Alaska - a large land mass with few people and dependency on natural resources. Montana's economy is very dependent on natural resources which has created a conflict with the commitment to protect the environment. The railroad is an ally to both sides because it is environmentally friendly. Mr. Brodsky noted that like Alaska, Montana's natural resource economy has focused increasingly on tourism. This past year, Montana Rail Link provided rail access to two of Montana's national parks. Number 136 Mr. Brodsky said that the Montana Rail Link is a unique regional railroad of approximately 1,000 miles. Montana Rail Link has doubled employment and rail traffic since its beginnings in the late fall of 1987. Mr. Brodsky informed everyone that Montana Rail Link operates one of the highest traffic levels of any regional railroad in the world, as it handles more than 40 million gross tons per mile. Mr. Brodsky also discussed the terrain and climatic challenges that the railroad faces. Montana Rail Link is a fully unionized railroad with eight operating unions on the property and two general contracts. There is one contract for the operating crafts and one contract in which seven non operating crafts are signatory to. He said that this arrangement has worked well. The operating contract has been renegotiated twice without the Union serving a Section 6 notice. All of the companies in the Washington organization are based on a profit sharing concept which utilizes the same formula for everyone. Number 201 Mr. Brodsky recognized that customers are the key to prosperity and growth of a business, which is the underlying philosophy of the Montana Rail Link. In order to work and be successful at Montana Rail Link, one must realize that the rail link is a service industry which involves people at every level. Montana Rail Link is the largest privately owned railroad in the U.S. The railroad operates in Montana, Idaho, and Washington. Mr. Brodsky stated that Montana Rail Link is a long-term player that has a major impact on the economies which are served. Thus far, Mr. Washington's businesses have been winners for himself, his employees, and the communities and regions served. Mr. Brodsky informed everyone that Mr. Washington's holdings are in transportation, construction, and mining. Recently, the transportation and construction holdings have become the major focus. There has also been expansion in the marine industry. He discussed some of the ventures in Canada. The construction holding is still the core business. Mr. Washington began as a heavy equipment operator in Alaska, after which he created his own business in construction. Eventually, Mr. Washington expanded into contract mining. Number 290 Mr. Brodsky was excited about the prospects of the railroad business in Alaska. With the entrepeneural approach of a private operator, there would be opportunities to look at economic development to a greater degree. Mr. Brodsky reiterated that the Montana Rail Link had doubled its employment in Montana which has services not so unlike those in Alaska. Montana Rail Link has also been active in promoting tourism and expanding services in that area which would also be an opportunity in Alaska. Mr. Brodsky noted that the Montana Rail Link has pondered the possibility of an all rail tie between Alaska, Canada, the U.S., and Mexico. The size and scope of the transaction required with the Alaska Railroad is one which Mr. Brodsky felt comfortable. Normally, acquisitions of this size would not be contingent upon financing. Mr. Brodsky said that Montana Rail Link is committed to investing in the railroad. The necessary equity capital for such a transaction is within Rail Link's reach. Mr. Brodsky reiterated the seriousness of Montana Rail Link's commitment. He believed a process needed to be established to define how the Alaska Railroad would be acquired. With whom would one negotiate on this matter? What is being sold? Mr. Brodsky acknowledged that there are real estate issues associated with the Alaska Railroad. He informed everyone that they had not made any attempts to gain access or review data on the railroad property. Mr. Washington is very interested in the Northwest area which is indicated in his holdings. Montana Rail Link would like to have the opportunity to expand in Alaska. Number 348 SENATOR RANDY PHILLIPS asked if Montana Rail Link had contacted the Alaska Railroad prior to this presentation. BILL BRODSKY explained that a letter expressing interest had been sent to the Governor, the President of the Senate, the Speaker of the House, and the Chairman of the Alaska Railroad Board some time ago, about six months ago. Mr. Brodsky believed that Mr. Washington had an informal meeting with Governor Sheffield. SENATOR LINCOLN asked if Mr. Brodsky had considered where expansion would take place in Alaska. How would Alaskan Railroad employees be handled since Montana Rail Link is fully unionized? What structure would the purchase of the railroad have? Would Mr. Washington review mining and construction possibilities in Alaska? BILL BRODSKY could not say where opportunities for economic expansion would exist because he had not yet been on the property. In Montana, the railroad has been a catalyst for businesses to expand and create more jobs. Mr. Brodsky noted that in Montana there is a problem with creating jobs, especially for young people. The railroad has been successful with helping companies grow. Mr. Brodsky believed that the same approach would be used in Alaska which means a partnership between businesses and the railroad. Montana Rail Link comes in as a willing player with capital resources and a strong commitment to this endeavor in an environmentally friendly manner in order to benefit everyone. With regard to the union contracts, Mr. Brodsky was not aware of which organizations were represented on the property. He understood that the railroad employees in Alaska are also state employees and would therefore, not fall under the Railway Labor Act. That needs to be reviewed. Mr. Brodsky reiterated that all their railroads in Canada and the U.S. are fully unionized. He expected that the Alaska Railroad would be represented by union organizations. Mr. Brodsky believed that if the railroad is privatized, then the railroad would be required to fall under the guidelines of the Railway Labor Act. Mr. Brodsky informed everyone that all of Mr. Washington's businesses stand alone, one operation does not subsidize another. If the Montana Rail Link acquires the properties of the Alaska Railroad then it will be operated as a railroad and managed in order for the railroad to grow. For example, in Montana there is a coal mine under development located 40 miles from the railroad. The railroad has had nothing to do with the development of that coal mine. However, an agreement between the mine and the railroad has been made. If the mine meets certain productivity and development criteria, then the railroad would construct the 40 miles of road to the coal mine. This is the type of capability that Mr. Washington brings to the table. Number 440 SENATOR LEMAN asked Mr. Brodsky if he was interested in the other properties held by the Alaska Railroad or would the interest merely lay in the track, rolling stock, and running it as a railroad. BILL BRODSKY did not know. Fundamentally, this would be a railroad business. To the extent that the properties could benefit the railroad, those would be critical. Those properties that do not benefit or impact the railroad would be of interest for the value of the property which would influence the purchase price of the asset. Mr. Brodsky indicated that the Montana Rail Link is flexible with regards to how the real estate is dealt with so long as the railroad can be operated in an economically viable way. SENATOR TAYLOR pointed out that he had been trying to sell the Alaska Railroad ever since the state purchased it from the federal government. He explained that part of the Alaska Railroad Board's financial report is supposed to include information about the attempts made to sell the properties. Not too many years ago, the board provided a report which indicated that there was not a railroad in the North American continent that could purchase the Alaska Railroad due to the sustained annual loss. At that time, the Alaska Railroad was losing $3-5 million per year after liquidating surplus inventories, equipment, and properties all of which were used as a profit base to offset the loses. This year the Alaska Railroad shows an $8 million profit. Have you had a chance to review the books of this operation? BILL BRODSKY had not. Mr. Brodsky said that the frame of reference the Montana Rail Link has is the level of activity and the size of the railroad. With the resources available to Montana Rail Link, some things could be done to the property that a typical investor could not do. MORT LOWENTHAL, Director of the Montana Rail Link, explained that the reason the books have not been reviewed is because the company would like to receive an indication that selling the Alaska Railroad is a possibility. To study the property is a big, expensive project. Number 500 SENATOR ADAMS asked if Montana Rail Link was willing to purchase the Alaska Railroad for the amount exceeding either the fair market value of the Alaska Railroad and the excess of the Alaska Railroad Corporation or the amount that Alaska has expended to obtain, maintain, and subsidize the Alaska Railroad and its corporation. Secondly, if Montana Rail Link purchases the Alaska Railroad would it be willing to operate it for 20 years. Thirdly, would the Montana Rail Link be willing to honor the current contracts of the Alaska Railroad which includes various agreements. MORT LOWENTHAL explained that Montana Rail Link will pay what it determines the Alaska Railroad will generate in terms of cash flow income. Currently, Mr. Lowenthal did not know what that amount would be. If encouragement is given, the Montana Rail Link will do an independent analysis in order to obtain an amount. With regards to running the railroad for an extended period of time, Mr. Lowenthal emphasized that would be the case. The Montana Rail Link has been in railroads for nine years and more than $150 million has been reinvested in that property in that nine years. BILL BRODSKY said that he had not seen the contracts and could not provide an answer to Senator Adam's third question. Mr. Brodsky reiterated that the Montana Rail Link is a fully unionized operation that understands unions and contracts. He expected that the Alaska Railroad would also operate as a fully unionized business. REPRESENTATIVE JAMES said that she was probably one of the more enthusiastic persons about the railroad. Representative James inquired as to the experience Montana Rail Link has had in acquiring right of way over private, state, or federal lands. BILL BRODSKY stated that the right of way has typically been in tact. The Montana Rail Link has not had to acquire a lot of right of way. If the line is built to the aforementioned coal mine, that would be the first right of way. Currently, a third party holds the right of way. Montana Rail Link has committed to build the 40 miles of railroad if the coal mine meets certain production goals. REPRESENTATIVE LONG asked if Montana Rail Link purchased the Alaska Railroad would the railroad spin off to areas such as the Red Dog, the Western Arctic, and other areas that have minerals and resources without transportation. BILL BRODSKY indicated that reviewing those opportunities would be possible, but he could not specify which areas would be viable. There is much exploration yet to be done. Mr. Brodsky emphasized that Montana Rail Link has the capability to build and expand the railroad. Number 561 SENATOR FRANK believed there to be general interest in selling the railroad, although there have been obstacles to overcome. For example, the land holdings of the railroad seem to obscure the operation of the railroad. Senator Frank inquired as to how the railroad customers, such as the Usebeli Coal Mine and Mapco Petroleum and other big customers, would view the sale of the railroad. Would rates be regulated in a different manner if the railroad is privatized? Senator Frank asked Mr. Brodsky what he felt were some of the problems surrounding the sale of the railroad. BILL BRODSKY said that Montana Rail Link had not talked to any of the Alaska Railroad's customers. Fundamentally, if Montana Rail Link purchases the railroad then the contracts with those customers would also be acquired. He offered to provide a list of Montana Rail Link's customers who he was sure would overwhelming endorse Montana Rail Link's business. TAPE 96-7, SIDE B With regards to the rate regulation question, Mr. Brodsky did not know how Alaska was set up. Primarily, contract rates tend to be deregulated today. There are certain rates in Montana that are covered by the Public Utilities Commission, is there a comparable body in Alaska? SENATOR FRANK informed Mr. Brodsky that Alaska does have a Public Utility Commission. BILL BRODSKY explained that Montana Rail Link could not have achieved what it did without focusing on the customers. SENATOR FRANK clarified that he was attempting to determine how people would view this. How would the rate be priced for opportunities such as the railroad to the coal mine? Senator Frank did not want opportunities to be presented only to later find out that the Public Utilities Commission would not allow it. BILL BRODSKY said that the rates for projects such as building the railroad to the coal mine in Montana are established by the marketplace. Mr. Brodsky pointed out in the case of the railroad to the coal mine, the rate would be established after determining if the mine could deliver coal competitively after everyone receives their share. At that rate, could the investment into the facility be justified. In the Montana coal mine that analysis is already known. REPRESENTATIVE GARY DAVIS asked how keen the competition is in Montana related to the other modes of transportation or are most of the goods primarily moved by train. BILL BRODSKY stressed that transportation in Montana is tough. A freeway runs parallel to the railroad across the state. When the Montana Rail Link began, all of the logs, a primary forest product in Montana, were handled by trucks. Railroads had decided to get out of that business. This year, the Montana Rail Link will handle over 5,000 car loads of logs. As mills downsize and begin to specialize in the handling of the raw material, the small logs go in the opposite direction of the big logs. Montana Rail Link has determined that more money can be made when the logs go in both directions. Currently, almost all of the railroads in the Northwestern U.S. have returned to logs. Mr. Brodsky noted that Montana has a limited budget that must maintain a huge highway network in a state with few people and revenue. The railroad has solved many problems in Montana. The traffic on the highway eliminated by the railroad allows the roads to last longer. Number 522 REPRESENTATIVE GARY DAVIS mentioned that permits to receive right of way in Alaska could be costly and time consuming. It seems that the Montana Rail Link has not encountered problems in obtaining right of ways, but if that is not the case could that issue be elaborated upon. BILL BRODSKY said that the extreme delays to which Representative Davis was referring have not been encountered by the Montana Rail Link. The primary focus would be to operate the railroad that is currently in place and the remaining focus would be placed on the an opportunity if it presents itself. SENATOR RANDY PHILLIPS inquired as to the structure of the Montana Rail Link. BILL BRODSKY explained that Mr. Washington has a group of companies that grew from his original construction company. Those companies are owned completely by Dennis Washington and are operated independently. The companies report through the President of Washington Corporations to Dennis Washington. Mr. Brodsky mentioned that an environmental mediation company had been added to the construction company. The Butte Copper Mine is held separately. When the railroad was established, Mr. Washington is the principle owner with some minority shareholders. SENATOR RANDY PHILLIPS noted that the Montana Rail Link initially made contact six months ago. What was the response regarding how to proceed with the purchase? BILL BRODSKY said that he was unsure as to how Montana Rail Link should proceed. In response to Senator Randy Phillips, Mr. Brodsky stated that Montana Rail Link had not been told much. Mr. Brodsky and Mr. Lowenthal both said they needed advice in this matter. CHAIRMAN RIEGER reminded Senator Randy Phillips that the Chairman of the Board of the Alaska Railroad would be before the committee after the Montana Rail Link. Number 471 REPRESENTATIVE DAVIES asked Mr. Brodsky to discuss the mix of businesses in the Montana Rail Link, specifically how passenger travel fits in relative to freight. Representative Davies was interested to know if the Montana Rail Link would consider maintaining a basic level of passenger service throughout the year. He asked Mr. Brodsky to characterize the response to the letters of interest. BILL BRODSKY said that typically, the Montana Rail Link operates 20-30 trains across the line a day. Everything from 15,000 ton coal trains to light fast intermodal operations is operated on the Montana Rail Link. Mr. Brodsky noted that this past year, the Montana Rail Link has become involved in passenger service and has worked well. There is nothing that would be eliminated from review to be part of the package. With regard to the responses received, prior to the invitation to visit with the committee Mr. Washington did not feel that there was a strong commitment to move forward. SENATOR PEARCE provided copies to the committee of the letter she had received from Mr. Washington in October which was the same letter the Representative Gail Phillips received. Together Senator Pearce and Representative Gail Phillips sent a letter to Mr. Washington saying that the legislature would enjoy discussions regarding selling the railroad. The railroad did have a response. REPRESENTATIVE GAIL PHILLIPS inquired as to what expansion projects the Montana Rail Link are involved in and where those major expansion projects are located. What time frame would be involved with an acquisition project in Alaska? BILL BRODSKY said that Montana Rail Link is looking into some other railroads, but confidentiality agreements have been signed. However, those interests would not negatively impact moving forward on the Alaska Railroad. Mr. Brodsky said that he would like to move as quickly as possible. Number 388 REPRESENTATIVE BARNES discussed the history of the Alaska Railroad. She believed that if the Alaska Railroad were privately owned, it would offer much potential to Alaska. Representative Barnes hoped that the Montana Rail Link would pursue the property. SENATOR FRANK had the sense that the land issue would be one that would be an obstacle in selling the railroad. Would Montana Rail Link focus on the rail operations? Senator Frank advised that Montana Rail Link focus on the rail operations and the operating earnings. MORT LOWENTHAL reiterated that the land Montana Rail Link would be interested in would be that which could be used to expand or enhance the railroad directly. BILL BRODSKY reiterated that Montana Rail Link is not nor intends to be a real estate company. It would help if Montana Rail Link was given some sense of how Alaska would like this transaction to proceed. SENATOR PEARCE asked if Mr. Brodsky and Mr. Lowenthal or their attorneys had reviewed the federal and the state Railroad Transfer Act in which Alaska took ownership of the railroad from the federal government. BILL BRODSKY replied no, that is on their list. SENATOR PEARCE asked if any of Montana Rail Link's railroad operations were directly subsidized by any public entities. BILL BRODSKY and MORT LOWENTHAL replied no. SENATOR PEARCE referred to the letter she received from Mr. Washington, when asking if Mr. Washington's letter to Governor Sheffield requested that the communication and its response be kept confidential. MORT LOWENTHAL believed that Governor Sheffield received the same letter as Senator Pearce. SENATOR PEARCE acknowledged that Montana Rail Link has received only one letter of response from the Alaska Railroad. The letter inquired as to the possibility of a confidential dialogue. Nothing further happened after the Alaska Railroad's response because Governor Sheffield stated, "At this point, the strong inclination of the Board is that privatization is premature." Senator Pearce informed the committee that before session began she had inquired as to Governor Knowles' response to Mr. Washington. Governor Knowles said that he had given it to Governor Sheffield to respond. Senator Pearce did not believe that it was fair that the legislature or any other group of the state was not informed of the interest in purchasing the railroad. Therefore, what can the legislature do to indicate its interest in a dialogue regarding the sale of the railroad? Number 272 MORT LOWENTHAL said that some correspondence or a motion indicating a sincere interest would be appropriate. Furthermore, determining who the Montana Rail Link would deal with on this matter would help. Someone has to be assigned to work on this. REPRESENTATIVE BARNES asked if a resolution stating that the legislature supported selling the Alaska Railroad would suffice. MORT LOWENTHAL agreed that would provide a positive indication, but the question of how to proceed would remain. REPRESENTATIVE BARNES believed that the Alaska Railroad is owned by the State of Alaska, not by the Board of the Alaska Railroad. From time to time, even the legislature has had difficulty in obtaining information from the board. There has to be a way to acquire the necessary information for the Montana Rail Link to make a decision. Representative Barnes hoped that Montana Rail Link would not preclude reviewing the value of the land which could become an asset on the tax roles of the state. BILL BRODSKY reiterated that Montana Rail Link needs to understand how Alaska wants to sell the railroad. The Montana Rail Link would like to proceed in a manner that is compatible with Alaska's interests. Number 240 CHAIRMAN RIEGER asked if during the acquisition of other properties has the seller performed a complete appraisal, was a bid packet produced or was it left to the Montana Rail Link to do. BILL BRODSKY said that Montana Rail Link had experienced all of the above. MORT LOWENTHAL believed that there are companies that specialize in valuing railroad properties. Upon hearing no further questions, the representatives of the Alaska Railroad were invited to the table. BILL SHEFFIELD, Chairman of the Alaska Railroad Board, thanked everyone for the opportunity to provide an update on the Alaska Railroad. Mr. Sheffield informed everyone that he was very involved in the acquisition of the railroad and has been chairman of the board for less than a year. Mr. Sheffield said that he and the board were not opposed to the selling of the Alaska Railroad. The railroad was originally purchased because the federal government was discussing closing it down all together. The State of Alaska discussed purchasing the railroad for years. The railroad was an important corridor between the ocean and the interior of Alaska. The notion had been to expand the railroad and move resources to the market; those corridors or right of ways have not been expanded. Mr. Sheffield believed that the state could expand the corridors much easier than the private sector because of the access to the necessary tools and the experience in this area. The sale of the Alaska Railroad evokes the question of a process as well as public policy issues. Mr. Sheffield passed out copies of his response to Mr. Washington. Mr. Sheffield explained that the secrecy issue grew from a reporter wanting to do an article on the sale of the Alaska Railroad. There are 550 railroad employees who constantly worry about their jobs. Mr. Sheffield had asked the reporter to notify him before printing the article so that he could inform the employees. Mr. Sheffield said that the corridor is worth a lot of money. Also much real estate is owned by the railroad. Mr. Sheffield felt that a state owned railroad should be benevolent, for lack of a better term, to the people in the communities where the railroad owns property. There is concern about the problems the real estate could cause with the sale of the railroad. Mr. Sheffield clarified that this did not indicate that he was opposed to the sale of the railroad, but merely that the issues should be well thought. Mr. Sheffield discussed that the rail transportation provided communities like Whittier the only way in which to travel in and out of the community. Such passenger service does not make money, although it is necessary to do. Number 092 Mr. Sheffield discussed the passenger service that the railroad provides. Passenger service has increased over the past years and profit was seen for the first time in 1995. He informed everyone that six trains a week are operated for Mapco passenger service between Fairbanks and Anchorage. Six trains a week also run between Healy and Seward for coal; this will be the first year that 800,000 metric tons of coal will be delivered to Seward per the deal of 1984. The railroad is doing a little more than breaking even on the coal shipment. Previously, the coal shipment had been subsidized. Mr. Sheffield noted that the railroad employed more people now than when the state purchased it. Mr. Sheffield said that the Alaska Railroad lost money three years in a row due to some bad decisions and a reduction in management, almost in half, with some buy out packages. Currently, business is average and costs are down so the railroad made $8 million in 1995. With depreciation, that $8 million equals $14 million in cash flow for 1995. He noted that early on it was recognized that the railroad might not generate enough to do the capital improvements necessary. The entire Alaska Railroad was built in 1917 and overhauled all at once in the 1950s. Mr. Sheffield said that the railroad might wear out all at once in the coming years. Therefore, a $10 million federal appropriation was received for upgrades to the railroad. The law was changed so that the Alaska Railroad could qualify for federal funds. Alaska would receive approximately $5 million a year per the formula program for the Alaska Railroad. That appropriation is currently in the Conference Committee. TAPE 96-8, SIDE A Number 013 Mr. Sheffield projected that it would cost between $10 and $14 million per year in order to upgrade the Alaska Railroad. The Alaska Railroad just invested in 68 new hopper cars to haul coal. The cars are aluminum and therefore, weigh less. More coal can be hauled with less weight on the tracks and more money can be made, more efficiently. Mr. Sheffield said that if the railroad had more money, more cars would be purchased. He noted that the railroad's long-term debt ends in 1999. He discussed the work being done in Whittier. The board and the management of the Alaska Railroad consider themselves to be stewards of one of Alaska's assets. That sentiment would be different if one were a private sector operator. Mr. Sheffield informed everyone that the Alaska Railroad was appraised at $244 million when the federal government was considering purchasing the railroad; that was with contamination across the railroad system. Almost all of those problems have been fixed and a profit is being made. Mr. Sheffield said that the railroad receives a letter or phone call every three or four months from a railway regarding the purchase of the Alaska railroad. The same information that was told to Mr. Washington is told to those people interested in the railroad. Mr. Sheffield noted that he had passed out the letter to Mr. Washington from the railroad. He mentioned that this is a procurement or negotiated sale. Mr. Sheffield said that the railroad received a letter from Mr. Washington around October 1st and the railroad responded on October 19. Gill Carmichael was the person who acted on behalf of Mr. Washington. Eventually a meeting between Mr. Sheffield and Mr. Washington took place in Palm Springs. Mr. Sheffield said that the meeting concluded with Mr. Washington saying that if Mr. Sheffield was interested the two could meet again. Number 112 Mr. Sheffield did not think a resolution was necessary to sell the railroad. Much appraisal work is necessary in selling a railroad. He said that a path for the purchase of the railroad had been set. He also emphasized that the first time the railroad has to ask the legislature for money, the legislature will take over and the same scenario as the federal government will result. The desire is to run the railroad profitably, competitively, and like a business in order to help Alaska. The Alaska Railroad wants to do the same things that the Montana Rail Link is doing in Montana. Mr. Sheffield was pleased with his year as chairman, and he believes the railroad is a good asset and much thought should be placed into the recommendations regarding the railroad. He mentioned that eight of the railroad's 550 employees were present and worrying about their jobs in the future. REPRESENTATIVE GAIL PHILLIPS asked Mr. Sheffield to restate how often the railroad receives inquiries about purchasing the railroad. BILL SHEFFIELD said that Mr. Hatfield may be able to better answer that question. Mr. Sheffield said that the railroad receives about three or four inquiries per year. BOB HATFIELD explained that recently there had been more inquiries because of the privatization move across the world. Generally, when the information regarding the ownership and structure of the railroad is given to the interested party, the interested party rarely initiates further contact. REPRESENTATIVE GAIL PHILLIPS asked if any people inquiring were aware of the legislation which created the railroad. BOB HATFIELD said that he mentioned that to those inquiring of the railroad at that time. Most of the time, those inquiring are people in the industry that Mr. Hatfield knew. Mr. Hatfield gathered that individuals have not wanted to pursue the legislative aspect of the railroad. Number 186 REPRESENTATIVE JAMES felt that the railroad has an important role in the future of Alaska. Representative James asked if the Alaska Railroad knew that she sponsored legislation in 1993 which allocated $10,000 to identify the cost of procuring the private property within the right of way that is already established from Elson Airforce Base to the Canadian border. Representative James also sponsored and passed legislation that authorized the identification of a corridor from Fairbanks to the Seward Peninsula without a fiscal note; this legislation allowed private industry to fund the money not necessarily the state. She asked if the Alaska Railroad was aware of that legislation. BILL SHEFFIELD said that he was aware of that legislation. Further steps are necessary to review if that works. There are many opportunities to expand the railroad. REPRESENTATIVE JAMES commented that the Alaska Railroad has done well considering the restrictions under which they operate. The railroad is a pseudo-private company owned by a public entity. The railroad is confined to a set of physical assets as well as a set amount of beginning operating funds along with a limit on financing without legislative approval. No other private industry faces those restrictions. Representative James was happy that the railroad made an $8 million profit. She then asked Mr. Sheffield if he were purchasing a company, would he determine if it was a good purchase or not on the experience of the operator or would he review how he would operate the company? BILL SHEFFIELD said that he would do the latter, but mix both determinants initially. Mr. Sheffield indicated that the proper value of the railroad should be determined and the purchaser should determine if what they are receiving is up to their expectations. Number 250 REPRESENTATIVE JAMES stated that she was concerned about the railroad employees as well as the unemployed across the state and all of the underemployed. She was excited about any increased economic activity possible. SENATOR RANDY PHILLIPS asked if Montana Rail Link was actually the first to show up on the door step. BILL SHEFFIELD replied yes. SENATOR RANDY PHILLIPS said that he detected a reluctance to talk to the Montana Rail Link about the details. Senator Randy Phillips asked Mr. Sheffield if the Alaska Railroad would be discussing the details with Montana Rail Link? BILL SHEFFIELD pointed out that Montana Rail Link was present because the compant was invited. If the Montana Rail Link is interested in following the path outlined in the letter, then discussions would follow. SENATOR RANDY PHILLIPS pointed out that Montana Rail Link does not seem to understand the process for purchase. BILL SHEFFIELD was not sure that is true. Mr. Sheffield said that he had only talked to Mr. Washington. SENATOR RANDY PHILLIPS asked if there were plans to have future meetings with the Montana Rail Link. BILL SHEFFIELD replied yes. SENATOR RANDY PHILLIPS asked if procedures for the purchase of the railroad have been established for such meetings. BILL SHEFFIELD explained that the next step would be to meet with the Alaska Railroad Council and Board of Directors in order to establish procedures and arrange for expenses. SENATOR RANDY PHILLIPS interpreted that to mean that the Alaska Railroad had an open mind. SENATOR PEARCE referred to Mr. Sheffield's earlier comments regarding the railroad being benevolent to the local communities. Senator Pearce believed that the local communities would trade the railroad's benevolence for taxes. She asked if the railroad board always indicated that "privatization is premature" to interested parties. BILL SHEFFIELD said that he had only two such occasions. BOB HATFIELD clarified that the bulk of interested is expressed through a telephone call or a representative from a firm. In Mr. Hatfield's six years, Mr. Washington's inquiry is the first that has stood the test of interest and resource together. Number 336 SENATOR PEARCE seemed to think that at one time the railroad was required to give an annual report to the legislature indicating any interest to purchase. Have all of those interested been reported? BOB HATFIELD did not know because most of the interest has not been formalized. SENATOR PEARCE asked if the indication that "privatization is premature" expressed to Mr. Washington was something on which the board took official action. BILL SHEFFIELD replied yes. The board, in an executive meeting, took official action and approved this letter. SENATOR PEARCE asked if the official position of the Knowles' Administration was that there was no interest on the part of the state to sell the Alaska Railroad. BILL SHEFFIELD explained that he had discussed this with Governor Knowles before writing the letter. Mr. Sheffield clarified that Governor Knowles did not express specifically that he had no interest in selling the railroad, but the Governor was not looking for a sale. Governor Knowles believed that the railroad was part of the overall plans for the development of Alaska. Mr. Sheffield stated that the board did not intend to indicate that the railroad was not for sale. SENATOR PEARCE asked if the motion was made in executive session. BILL SHEFFIELD replied yes. SENATOR PEARCE inquired as to the motion to go into executive session. Why would the question of whether to indicate if the railroad was for sale or not be made in executive session. BILL SHEFFIELD specified that it was reviewed in executive session and a motion was made. Mr. Sheffield said there is an executive session every board meeting in order to discuss those things that financially effect the railroad. Those items are published. SENATOR PEARCE requested the minutes in order to review the motion made to go into executive session. Senator Pearce could not believe that a publicly owned railroad board would go into executive session to make the disinclination in selling the railroad. BILL SHEFFIELD agreed to get those minutes. REPRESENTATIVE GAIL PHILLIPS inquired as to how many miles of line and employees the railroad has currently. BOB HATFIELD informed the committee that the railroad has 550 miles of line. The permanent employment base amounts to 465 people, but depending upon the level of work the number of employees can rise to as high as 700 in the summers due to passenger service and construction work. Number 389 CHAIRMAN RIEGER asked if there were any further questions. He thanked the Alaska Railroad for the presentation and agreeing to take questions. This issue will not be dropped here. If the Transportation Committee, the Finance Committee, and the full Legislature agrees, then the level of inclination or disinclination towards the sale of the railroad will be clarified. Chairman Rieger reiterated the issue of the process to be followed with the purchase of the railroad. BILL SHEFFIELD said that the railroad would be happy to talk with Montana Rail Link in order to establish a path. REPRESENTATIVE DAVIES in the Alaska Railroad's letter of response to Mr. Washington there is an indication that independent appraisals project that the railroad would be worth about $2 million. The corporation envisioned that they would want to be reimbursed for an independent appraisal. Mr. Washington's letter of October 4th says that he is willing to dedicate the analytical and financial resources necessary to purchasing the railroad. Would Mr. Washington be prepared to fund an independent appraisal process? BILL BRODSKY was not sure of the price of the Alaska Railroad. The problem is not so much supporting an appraisal, but rather the unclear indication that the railroad was for sale. Mr. Brodsky interpreted the railroad's letter to indicate that the timing wa bad to proceed. An evaluation would not be supported if there was not a realistic opportunity to move towards the sale. MORT LOWENTHAL pointed out that it would be unfair, under a bidding process, for one party to support an appraisal from which the other party would benefit. The process seems to be inconsistent. REPRESENTATIVE DAVIES agree. Representative Davies noted that this was in the negotiated process section of the letter. Under the circumstances that serious interest was indicated and the process would be negotiated, would that help. Both Mr. Brodsky and Mr. Lowenthal agreed. CHAIRMAN RIEGER clarified that competitive process does not necessarily mean bidding, but does in general. Number 435 SENATOR FRANK inquired as to how the Montana Rail Link would characterize the letter from the Alaska Railroad Corporation. MORT LOWENTHAL referred to the last sentence in the third paragraph which seems to be a negative sentence. SENATOR FRANK agreed and wondered why the Montana Rail Link was present. He pointed out that Mr. Hatfield had indicated that when prospective purchasers are told that the legislature would be involved, the prospective purchasers hang up the phone. Is it a problem that the legislature is part of the process? BILL BRODSKY reiterated that a clearly defined process with someone to deal with this sale would be necessary. SENATOR FRANK believed that the Governor would have the power in this situation. He wondered what the Administration's position is on this issue. Senator Frank indicated that a serious debate with the Administration over this is necessary. CHAIRMAN RIEGER asked if there were further questions. Hearing none, he thanked everyone for attending. There being no further business before the committee, the meeting was adjourned at 3:42 p.m.