Legislature(2003 - 2004)
04/24/2003 03:16 PM O&G
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
HB 267-AK RAILROAD BONDS FOR NAT.GAS TRANSPORT Number 2339 CHAIR KOHRING announced that the final order of business would be HOUSE BILL NO. 267, "An Act relating to the Alaska Railroad; authorizing the Alaska Railroad Corporation to provide financing for the acquisition, construction, improvement, maintenance, equipping, or operation of facilities for the transportation of natural gas resources within and outside the state by others; authorizing the Alaska Railroad Corporation to issue bonds to finance those facilities; and providing for an effective date." CHAIR KOHRING, sponsor of HB 267, pointed out the work of others on this legislation and described himself as a facilitator. Explaining that the bill provides a tool for potential constructors of the gas pipeline and is intended to provide a financing option, he thanked Representative Fate for work on other legislation pertaining to stranded gas. He noted that the Alaska Railroad Corporation (ARRC) has bonding capability and a very good bond rating, and thus can access capital at cheap rates. This bill asks ARRC to issue bonds in order to make money available for potential constructors of a natural gas pipeline, who would work out a contractual arrangement. The bill provides for up to $17 billion in bonds, whereas Chair Kohring said he's been told constructing a pipeline would take as much as $20 billion. He characterized this as an important piece of the package to make the gas pipeline a reality. Number 2506 PAUL FUHS, Lobbyist for Yukon Pacific Corporation (YPC), began by listing his experience with bonding issues and entities. He told members this important tool has always been seen as "nonrecourse bonding": if ARRC issues these bonds, it would be conduit financing, with no recourse of any lender "to the state general obligation bonding - the permanent fund, the railroad, or any of the other assets." He said this "peculiar piece of tax law" came across as the railroad was transferred to the state, and is included in the federal railroad transfer Act. MR. FUHS emphasized YPC's desire that the committee be aware of the potential for a pipeline to Valdez. He noted that the Canadian pipeline project is dependent on federal subsidies that may or may not be received, for instance. Number 2583 MR. FUHS drew attention to documents he'd provided [a letter from Representative Harris to Ward Whitmore of YPC dated December 24, 2002; a letter in response; and a six-page document entitled "Yukon Pacific Corporation: Trans-Alaska Gas System"]. He suggested these contain the most detailed information provided by any project sponsor in terms of numbers, including capital costs of about $12 million and delivered prices of liquefied natural gas (LNG) at $3.50 in Asia and $3.25 on the U.S. West Coast, and gas delivered in Alaska at $2.50, leaving a wellhead value to the producers of about $1.00, which he suggested is in the range talked about. As to whether there is a market, he said California has expressed interest and that LNG will be a critical part of that state's energy mix. MR. FUHS also alluded to an e-mail in packets with regard to discussions with Mr. Kim, vice president of Korea Gas Corporation (KOGAS), to whom this information was presented. Mr. Fuhs noted that Representative Fate was at that meeting as well and also had heard that when the price of $3.50 was mentioned to [Mr. Kim], he pulled a piece of paper from his pocket and said the lowest price they'd been offered was $4.00, with the highest being $5.17 for the gas that they were looking for. Regardless of generic comments that this project isn't economical, Mr. Fuhs said, these numbers show a viable project that doesn't even need subsidies. MR. FUHS also drew attention to [letters between John Urbina of George K. Baum & Company ("George K. Baum") and Representative Harris]. He noted that Representative Harris had asked that company - which has sold about $2 billion worth of bonds in Alaska in the last 10 years - to look at the numbers provided by YPC to see whether George K. Baum believes the bonds could be sold and what impact the ARRC bonds would have. Number 2704 MR. FUHS pointed out that [page 2 of Mr. Urbina's letter] says, based on the information supplied by YPC, that the project can be financed in the bond market if the ARRC vehicle is available. Mr. Fuhs called this a pretty strong statement from a bonding company on the importance of the railroad bonds. Highlighting "Chart A," an attachment to Mr. Urbina's letter, Mr. Fuhs noted that it shows almost a 2 percent difference in the rate of return if ARRC bonds are used, with a projected return to the State of Alaska of $500 million to $1 billion a year. He characterized this as the only project seen so far that comes close to meeting the governor's goal of addressing the state's budget deficit through resource development. Number 2758 REPRESENTATIVE HOLM asked whether there are any U.S.-built tanker hulls available today that could haul LNG between U.S. ports. MR. FUHS said no. He added that the world's LNG tankers are 100 percent utilized at this time and are on contract. Thus tankers will have to be built. If they go into the U.S. [from Alaska], they'll have to comply with the federal Jones Act. For Baja California, additionally, he said it would be U.S. tankers. The most interesting development in LNG is offshore platforms; the first is being applied for 130 miles offshore in the Gulf of Mexico, with the gasification facilities being on the ship. That helps to solve some of the siting problems. He said he wasn't sure whether something 20 miles offshore would require compliance with the Jones Act, but specified that vessels going into a U.S. port would have to comply with the Jones Act. Number 2843 WENDY KING, Director of External Strategies, ConocoPhillips, informed members that she works in the "ANS [Alaska North Slope] gas commercialization group." She told the committee: ConocoPhillips supports House Bill 267, which could provide, but would not require, an Alaska natural gas pipeline to potentially utilize an Alaska Railroad Corporation bond financing mechanism. As mentioned before in previous testimony, ConocoPhillips has a three-pronged strategy to make a gas pipeline through Alaska and Canada a reality. The first is two distinctly different pieces of federal legislation. The first one is focusing on ... streamlining the permitting process. And the second is fiscal legislation which would provide insurance against the risk of extreme price volatility. The third item is state fiscal certainty and clarity, which will be progressing with the recently passed House Bill 16, which reauthorized the [Alaska] Stranded Gas Development Act. If ConocoPhillips is successful with securing these three items, we plan to continue moving forward on this project. Financing this potentially $20-billion project will be a significant activity for any company that pursues the Alaska pipeline project. And we support having as many tools as possible to choose from, when that time comes. While it's too early to select specific financing [vehicles], if this vehicle proves workable it might add a potentially valuable option. In conclusion, we support the passage of ... House Bill 267 and appreciate the legislature for addressing the financing options for the gas pipeline project. Number 2922 CHAIR KOHRING emphasized the goal of providing a tool that potentially can be used to finance construction of that gas pipeline, and acknowledged that it won't automatically be used by any company. He then asked Mr. Marks of the Department of Revenue to address feasibility during his testimony. Number 2951 ROGER MARKS, Petroleum Economist, Economic Research Section, Tax Division, Department of Revenue, said [the department] has done quite a bit of detailed modeling of this financing mechanism just to see what kind of potential effect it could have on project viability. TAPE 03-18, SIDE B Number 2973 MR. MARKS pointed out that the first step is making sure there is a good project [economically], regardless of financing. However, if this mechanism were available and project sponsors decided to use it, he estimated the range of savings would be from zero up to $4 billion in financing charges, depending on the degree it was used because of the tax-free treatment. He said the Department of Revenue would support HB 267 as a way of moving this project forward. Number 2915 REPRESENTATIVE KERTTULA referred to the analysis section of ARRC's fiscal note and asked who bears the liability for the bonds and who will hold them. MR. MARKS answered that these "nonrecourse bonds" would be paid directly from project revenues. The corporations financing the project would be liable. He suggested that Mr. Boutin or someone from ARRC could discuss this in detail. Number 2842 TOMAS H. BOUTIN, Deputy Commissioner, Office of the Commissioner, Department of Revenue, responded that as the structure has been explained to him, ARRC would be the "nominal issuer," a role state agencies or municipalities often have; there wouldn't be implications for the state, including ARRC. He said it isn't an uncommon structure in public financing. REPRESENTATIVE KERTTULA related her understanding that although ARRC would basically be passing it through, the corporations themselves ultimately would be liable. She surmised that people who'd be buying these bonds would know that. MR. BOUTIN said typically there would be a feasibility consultant with specific expertise in gas pipeline projects; this would be an important component, and the credit-rating agencies and so forth would use the consultant in addition to doing their own "due diligence" to determine that the revenues would be adequate to repay the bond debt. REPRESENTATIVE KERTTULA asked whether bonds using ARRC as a conduit could be sold for any purpose or just for a gas pipeline. MR. BOUTIN suggested Ms. Lindskoog of ARRC could answer better, but said because of tax-code changes, primarily in the 1980s, ARRC has a singular ability with regard to tax-exempt debt. Number 2671 MR. MARKS pointed out that the federal legislation that transferred the Alaska Railroad to the state says the intent was to confer upon the railroad all the business opportunities available to comparable railroads. There is a long record of gas pipelines tied to railroads in the Lower 48, he noted, with examples of railroads that have owned, operated, and financed gas pipelines. He suggested this might apply some boundaries with regard to what this mechanism could be used for. Number 2646 REPRESENTATIVE KERTTULA asked about risk to the state. MR. MARKS replied that he believes there is no risk or a very, very low risk. CHAIR KOHRING asked whether ARRC supports the bill. Number 2596 WENDY LINDSKOOG, Director of External Affairs, Alaska Railroad Corporation, Department of Community & Economic Development, informed members that ARRC supports the use of its tax-exempt bonding authority for a gas pipeline and believes it fits within ARRC's mission to support economic development for the state. She said this obviously is an important tool that could be used to help lower the cost of the project. She deferred to Bill O'Leary or Phyllis Johnson to answer further questions. Number 2547 REPRESENTATIVE FATE asked what the process will be and when bonds will be issued. He pointed out that even though this is a pass-through, there is a lot of money involved. Number 2441 BILL O'LEARY, Vice President, Finance; Alaska Railroad Corporation, noted that he is ARRC's chief financial officer. In answer to Representative Fate's question, he said it would be solely dependent upon having someone such as the [current oil] producers first agree that the project is viable, with a wish to proceed. If the other steps including passage of this legislation were in place, ARRC would lay out a timeline for the particular bond issuance or issuances that would take place. He said it is driven by the producers' coming forward and saying, "Yes, we want to do this." REPRESENTATIVE FATE asked whether [the producers' statement] would be "Yes, we want to do this" or "Yes, we want to participate in the financing of this," or both. He said it seems a lot of groundwork must be laid before issuance of those bonds. Although he said he didn't have a concern, Representative Fate specified that he wanted to know whether there is a timeline "that you are concerned about here." MR. O'LEARY reiterated that the timeline is dependent upon the producers' coming forward and saying they wish to use the financing mechanism through ARRC. From that point, the game plan would be figured out with respect to when the [bond] issuances would take place. He said until that point is reached, it is tough to lay out anything more than that. Number 2342 MR. FUHS added: It may be the producers. It may be a pipeline group. It may be the state development authority. It may be a combination of -- I think Korea Gas [Corporation] said they would look at 5 to 10 percent equity investment. So it could be any one of a number of potential sponsors. But the best information on this is contained in this report by George K. Baum. And what they did is, they modeled also the bonding for this. It's about an 80- page report, and I can make it available to you. And what they do is, they start from a possible project sanction - when you have the go-ahead. And then you've got a certain amount of final engineering that has to be done, and other things, before you start issuing those bonds. Now, George K. Baum recommended three trains of bonds, because you're not going to go borrow all the money at once. You don't need it all at once. So you only borrow as much as you need, because during your construction period is your highest interest rate - the interim financing during construction, just like a house or building or anything else. So you want to stretch that out as far as possible. And ... I can share that [report] with you, and you can see that [it's] about over a five-year period that you're actually issuing those bonds, ... and they just recommended that because it reduces the cost of the project by doing it that way. REPRESENTATIVE FATE requested that Mr. Fuhs supply the 80-page document he'd just referenced. MR. FUHS agreed, noting that this could be used as a model, even though it was based on the project to Valdez. Number 2261 REPRESENTATIVE CRAWFORD asked whether it would be good to take advantage of the current low interest rates all at once, rather than spacing this out over five years and having interest rates perhaps climb. MR. FUHS said no. He pointed out that once those loans are taken out, payments must be made, regardless of whether that money is actually being used, and that there will be five years of building the project before any revenues come in. Referring to last year's HB 423 with regard to the Alaska Housing Finance Corporation, Mr. Fuhs said there might be the ability to arbitrage these bonds and even generate some revenues for the State of Alaska. Although more complicated, he said, it potentially exists once a project is actually going forward. Number 2194 REPRESENTATIVE CRAWFORD suggested those bonds might be virtually free if current low interest rates were taken advantage of [and if it were leveraged well]. MR. FUHS replied, "Yes, sir, but there's also some potential risk for that." He added that for the George K. Baum model, interest rates were about 5.6 percent, an extremely good interest rate for a project of this type. Number 2160 REPRESENTATIVE HOLM referred to ARRC's fiscal note and observed that it shows a cost of $163 million for fiscal year 2006 (FY 06). He requested an explanation from Mr. O'Leary. MR. O'LEARY responded: The fiscal note in front of you does show, in 2006, a $163-million expense funded through the bond proceeds. And this is an estimate of the bond issuance costs - what it would actually cost to issue these bonds. And, of course, this is based on a number of assumptions. ... It's important to realize that the model for this fiscal note is based upon the work that was done last year by the Department of Revenue and Goldman Sachs when this issue sort of came to light about a year or 15 months ago. So this fiscal note, again, is based on that model and shows in 2006, ... when the initial [issuance] would certainly be, that [this] would be our best estimate of what the costs of issuance would be. Those costs would be funded through the bond proceeds themselves. So to your question about impact to the state, there would be ... certainly no general fund impact. Number 2061 CHAIR KOHRING asked whether there was further discussion and thanked participants. Number 2022 REPRESENTATIVE FATE moved to report HB 267 out of committee with individual recommendations and the accompanying fiscal note. There being no objection, HB 267 was reported from the House Special Committee on Oil and Gas.