Legislature(2013 - 2014)BARNES 124
03/26/2014 01:00 PM House RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| SB138 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 138 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| + | TELECONFERENCED |
SB 138-GAS PIPELINE; AGDC; OIL & GAS PROD. TAX
1:06:07 PM
CO-CHAIR FEIGE announced that the only order of business is CS
FOR SENATE BILL NO. 138(FIN) am, "An Act relating to the
purposes, powers, and duties of the Alaska Gasline Development
Corporation; relating to an in-state natural gas pipeline, an
Alaska liquefied natural gas project, and associated funds;
requiring state agencies and other entities to expedite reviews
and actions related to natural gas pipelines and projects;
relating to the authorities and duties of the commissioner of
natural resources relating to a North Slope natural gas project,
oil and gas and gas only leases, and royalty gas and other gas
received by the state including gas received as payment for the
production tax on gas; relating to the tax on oil and gas
production, on oil production, and on gas production; relating
to the duties of the commissioner of revenue relating to a North
Slope natural gas project and gas received as payment for tax;
relating to confidential information and public record status of
information provided to or in the custody of the Department of
Natural Resources and the Department of Revenue; relating to
apportionment factors of the Alaska Net Income Tax Act; amending
the definition of gross value at the 'point of production' for
gas for purposes of the oil and gas production tax; clarifying
that the exploration incentive credit, the oil or gas producer
education credit, and the film production tax credit may not be
taken against the gas production tax paid in gas; relating to
the oil or gas producer education credit; requesting the
governor to establish an interim advisory board to advise the
governor on municipal involvement in a North Slope natural gas
project; relating to the development of a plan by the Alaska
Energy Authority for developing infrastructure to deliver
affordable energy to areas of the state that will not have
direct access to a North Slope natural gas pipeline and a
recommendation of a funding source for energy infrastructure
development; establishing the Alaska affordable energy fund;
requiring the commissioner of revenue to develop a plan and
suggest legislation for municipalities, regional corporations,
and residents of the state to acquire ownership interests in a
North Slope natural gas pipeline project; making conforming
amendments; and providing for an effective date."
CO-CHAIR FEIGE, in relation to CSSB 138(FIN) am, invited the
administration's consultants from Black & Veatch Corporation to
provide their presentation [entitled, "TransCanada Participation
in AKLNG Project"].
1:06:58 PM
DEEPA PODUVAL, Principal, Management Consulting Division, Black
& Veatch Corporation;, Consultant, Department of Natural
Resources (DNR), noted that yesterday's presentation was about
the Heads of Agreement (HOA), the first of the two major
agreements that the state has entered into [in regard to the
proposed Alaska Liquefied Natural Gas (LNG) Project]. She said
today's presentation is about TransCanada's participation in the
Alaska LNG Project and the Memorandum of Understanding (MOU)
that has been entered into between the state and TransCanada.
Turning to slide 3, entitled "Memorandum of Understanding -
Highlights of the Deal on the Table," she said it is anticipated
in the MOU that TransCanada would hold the state's equity share
in the gas treatment plant and pipeline components of the Alaska
LNG Project. The state would have an option to buy back up to
40 percent of TransCanada's share at around initiation of the
Front-End Engineering and Design (FEED) stage. The state would
commit to a 25-year transportation services agreement with
TransCanada. The agreement commits TransCanada, in turn, to a
weighted average cost of capital (WACC) of 6.75 percent and that
is driven by the capital structure as well as the return on
equity and cost of debt that TransCanada has committed to as
part of the commercial terms laid out in the MOU. Various
milestones and off-ramps for the state and TransCanada are laid
out in the MOU.
1:08:54 PM
MS. PODUVAL moved to slide 4, entitled "Options Identified by
State for Equity Participation," to discuss the three
alternatives available to the state. In the first option, the
State of Alaska (SOA) would go it alone, taking 25 percent
equity participation in the project. The state would hold 25
percent in the gas treatment plant (GTP), 25 percent in the
pipeline, and 25 percent in the LNG plant. In the second
option, the state would participate with TransCanada without
exercising the state's buyback option. TransCanada would hold
the state's equity portion of the GTP as well as the pipeline,
so TransCanada would have the 25 percent in the GTP and
pipeline, and the state would continue to hold 25 percent in the
LNG plant. In the third option, the state would partner with
TransCanada and would exercise the state's buyback option. As
part of the buyback, the state can essentially buy back from
TransCanada up to 40 percent of TransCanada's interest in the
GTP and pipeline. She explained that 40 percent of 25 percent
would give the state a 10 percent holding in the GTP and
pipeline and TransCanada would hold 15 percent of the GTP and
pipeline, and the state would have 25 percent of the LNG plant.
Common through all alternatives is that the state will hold its
25 percent in the LNG plant, and TransCanada's participation
essentially impacts the state's ownership or what portion it
will hold in the GTP and pipeline components of the project.
1:11:12 PM
REPRESENTATIVE TARR surmised from slide 4 that everything [Black
& Veatch] has worked on presupposes the tax and gas and the
royalty-in-kind that keeps the State of Alaska at 25 percent.
MS. PODUVAL responded yes, everything in this presentation
assumes that the state will take an equity participation in the
project and that that equity would be between 20 and 25 percent,
and there will be a corresponding gross tax percent associated
with that.
1:11:45 PM
MS. PODUVAL explained slide 5, entitled "Implications of Options
and Potential Off Ramps," shows what the investment implications
are as well as what the potential off-ramps are associated with
these three different investment alternatives that the state
has. She reminded members that yesterday she talked about the
different project of allotment stages and the timeline
associated with that, while today is just before what is hoped
will be the Pre-Front-End Engineering and Development (Pre-FEED)
stage that will get initiated in the second half of 2014. If
the state chooses to go it alone, the investment that will be
required of the state is expected to be about $100 million
through Pre-FEED, going up to about $450 million getting through
FEED, and a little over $13 billion once the final investment
decision (FID) has been made and construction gets kicked off on
the project. The second alternative available to the state,
where TransCanada participates in the project but the state does
not exercise its buyback option, is the path where the state has
the least investment of the three alternatives available to it.
That is because in this option TransCanada will hold the 25
percent in the GTP and pipeline and the state will hold 25
percent in the LNG plant alone. The state's investment under
this alternative would be about $40 million or so through Pre-
FEED, $180 million going through FEED, and $6.7 billion through
the construction phase. All of these costs would be related to
the state's investment in the LNG plant alone. In the third
alternative where the state exercises its 40 percent buyback
option from TransCanada and takes on 10 percent of the GTP and
pipeline, the state's investment through Pre-FEED would be $43
million. That is because the state would not exercise its
buyback until the Pre-FEED is done. Going through FEED the
state's investment is expected to be $360 million, and through
construction the state's investment would be a little over $9
billion. So, from an investment perspective, the most expensive
alternative for the state is the going-it-alone option. The
least expensive would be for TransCanada to hold the 25 percent
through the GTP and pipeline and the state not buying it back.
The option in which the state buys back a portion of the GTP and
pipeline falls in between the other two levels of investment.
1:14:54 PM
MS. PODUVAL noted the red boxes depicted on slide 5 indicate the
points in time along the project's development where the state
can exercise an off-ramp and end its relationship with
TransCanada. The first point where this happens is at the end
of the Pre-FEED stage. If the state exercises an off-ramp
option at the end of Pre-FEED, the state would pay back to
TransCanada the cost it has spent on the project, which is
expected to be about $70 million. That would be with and
without the buyback because TransCanada would have spent the
equivalent of 25 percent of the costs related to the GTP and the
pipeline through the end of Pre-FEED. At the end of the FEED
stage, the state would pay back development costs to TransCanada
in the range of between $230 million and about $400 million.
Ms. Poduval put into context the off-ramps and the payment of
development costs to TransCanada by pointing out that the amount
is essentially what the state would have been investing in the
go-it-alone option. It is almost like TransCanada is carrying
that cost up to the point where the state exercises its off-
ramp, ending that relationship, and then the state goes back and
pays the development cost that it would have paid anyway. A
nuance around that is the $5 million in allowance for funds used
during construction (AFUDC). That can be thought of as interest
cost or carrying cost of money for TransCanada. That interest
rate is about 7 percent, so the approximately $5-$50 million of
AFUDC is the incremental cost that the state is bearing relative
to an alternative without TransCanada. Not all of that will be
a completely incremental cost because the state will have its
own carrying cost of money. To the extent it is not investing
that money in this project, the state could be investing that
money elsewhere and earning interest on it, so there is a lost
opportunity cost associated with that. Another aspect covered
by that cost is that the state is paying for the technical and
commercial expertise that a partner brings to the table that the
state would otherwise have to contract for, assuming the state
can find somebody qualified to watch over this project on the
state's behalf in a going-it-alone option. The decision in
front of the committee today with these off-ramps available, the
dollar amount being contemplated, is the $5-$50 million in
carrying cost as well as what it would cost the state to
replicate the expertise that TransCanada brings to watch over
the project on the state's behalf.
1:19:06 PM
CO-CHAIR SADDLER inquired whether there is a direct nexus
between the AFUDC and construction or whether it is simply a
carrying cost for financing and expertise costs.
MS. PODUVAL replied it is carrying cost. Responding further,
she explained it is a weighted, averaged cost of capital for
TransCanada. It assumes a debt/equity structure of 70/30, a 12
percent return on equity, and a 5 percent cost of debt, which is
what boils it down to a 7 percent weighted cost of capital or
carrying cost for TransCanada.
CO-CHAIR SADDLER asked what amount that is calculated on since
it is not a construction cost.
MS. PODUVAL answered it is calculated on the amount that
TransCanada is investing in the project. Responding further,
she confirmed it is a development cost, not a construction cost,
and that AFUDC is simply a regulatory term.
CO-CHAIR SADDLER related that when he takes his car to the
mechanic he is charged for the repair services, the parts, and
for shop towels. Having an extra cost for expertise seems like
paying for shop towels, he said. He asked whether the expertise
is a standard over cost rather than a part of the package.
MS. PODUVAL responded that in thinking about the package, of the
$70 million in the first off ramp, $65 million is what the state
would have paid anyway to contractors for doing the Pre-FEED
study for the state. The remaining $5 million, which includes a
12 percent return on equity for the $65 million that TransCanada
has spent, is what the state is paying for TransCanada's
expertise and efforts in the process.
1:21:39 PM
REPRESENTATIVE TARR noted that in this scenario the state is
responsible for paying TransCanada if the state chooses not to
move forward with the project, but there is no reciprocal
relationship should TransCanada decide not to go forward. She
inquired how members can assess whether that is a good deal for
the state, given it seems there should be some equality in that
relationship. She further asked why it would be more
advantageous to pay a 7 percent [weighted cost] to TransCanada
when the state could borrow that money at a lower interest rate,
excluding that the state has other capital considerations.
MS. PODUVAL, regarding the first question, replied TransCanada
is investing in the project by taking on a portion of the
state's equity share. The state is not investing on behalf of
TransCanada; in other words, the state is not spending any money
for TransCanada for them to pay the state back. Regarding the
second question, she said it goes back to the role of
TransCanada in this arrangement. One aspect of that role is the
financial side, which is that TransCanada shares the upfront
cost associated with this project. The other aspect of that
role is the expertise and the experience that TransCanada brings
into this project. Part of what the state is paying for is what
the state would pay if it was trying to get a technical and a
commercial expert to watch over the state's interest in a go-it-
alone option. Strictly speaking, the state can probably finance
it for less, but the state is also paying for having an
experienced partner at the table that shares the state's
interests and will watch out for those.
1:24:14 PM
REPRESENTATIVE TARR, regarding the answer that the state is not
really spending on TransCanada's behalf, remarked that the state
is moving forward as if that partnership will exist; for
example, in this first year there is a commitment of $80-$100
million to move forward, so the state is spending something to
get to the next step in the process. In that sense, it seems to
be somewhat unbalanced in that the state must hope that
TransCanada wants to move forward; for example, other
opportunities could come up elsewhere in the world that seem
better to TransCanada and the State of Alaska would have no way
to push TransCanada in its favor.
MS. PODUVAL allowed that is probably right, as there is nothing
that would necessarily hold TransCanada to this deal; it is
something TransCanada has to want to do. She said she thinks
TransCanada has demonstrated it wants to be here with everything
it has done in getting to this stage. This is a fairly risky
project for TransCanada as well as it is a project that is 10
years out in the future. Through the Alaska Gasline Inducement
Act (AGIA), TransCanada has already spent about $100 million in
a project that is now recognized as likely uneconomic.
TransCanada is going to participate in this project if it
continues to make sense to the company and has agreed on terms
with the state that will get codified in the transportation
service agreement (TSA) coming forward. As with the producers,
as with the state, so it is with TransCanada. All of the
parties have to continue to believe that this is an economic
project that will make them money. As each development stage is
gone through, every party will have the option to stop and think
about whether it wants to continue.
1:26:45 PM
MS. PODUVAL, returning to her presentation, said four questions
surfaced when the value of TransCanada's participation was
looked at (slide 6, entitled "Key Questions in Looking at Value
of TransCanada's Participation"). The first question looks at
the financial bottom line and whether there is an economic
impact to the state from having TransCanada participate in the
project. The second question is whether the state can go it
alone and what the associated implications are with this. The
third question, assuming the state wants to take a partner, is
whether TransCanada is a good partner and what attributes
TransCanada brings to the table and how TransCanada compares
with the alternatives available to the state. The fourth
question looks at things from TransCanada's point of view by
asking what financial risks TransCanada would be exposed to, if
any, in this agreement.
1:27:58 PM
MS. PODUVAL moved to slide 7, entitled "What is the Economic
Impact to State From TransCanada's Participation?" She examined
the first question of what the financial bottom line is for the
state or what the economic impact is to the state from entering
into this agreement with TransCanada and having TransCanada
participate in the project. She explained that everything to
the left of the vertical orange line on slide 7 is the project's
development and construction and to the right of the orange line
is when the project is in operation. The basic deal on the
table says that during project development and construction,
TransCanada, instead of the state, will invest 60-100 percent of
the upfront capital cost that is associated with the GTP and the
pipeline. Once the project is in operation, in return the state
will pay TransCanada a negotiated tariff for that same 60-100
percent of the GTP and pipeline capacity that will be used to
move the state's gas. The economic analysis will examine the
net impact of putting those together -- the advantage of having
TransCanada bear the upfront cost and the cost of a tariff to
the state over the 25 years of this transportation service
agreement with TransCanada. It will examine whether this is
better or worse for the state than going it alone.
1:29:45 PM
MS. PODUVAL said slide 8, entitled "TransCanada's Participation
Impacts SOA Up Front Cash Calls and Revenues From Project," puts
numbers to the state's three different alternatives. The
project is anticipated to be in service in 2024, so all of the
cash flows shown on the graph for before 2024 are the investment
that the state is making in the project. The positive cash
flows seen on the graph after 2024 are the state's revenues
associated with the Alaska LNG Project. The blue line depicts
the state's cash flows under the go-it-alone alternative. The
blue line is the lowest line on the investment side of the
timeline, reflecting that it is the alternative in which the
state would be investing the most money. Once the revenues
start to flow, the blue line is the highest, reflecting that the
state is not paying TransCanada a tariff or a return. The green
line is the alternative where the state involves TransCanada and
does not buy back a portion of the GTP or the pipeline. It is
the alternative where the state has the least investment up
front and is also the alternative where the state has the lowest
cash flows or revenues once the project is operational because
the state is paying a tariff to TransCanada on all 25 percent of
the GTP and the pipeline. The grey line is the alternative with
TransCanada where the state exercises its buyback clause and
this line falls between the other two. TransCanada's
participation reduces the state's upfront cash calls by between
$1.5 and a little over $2 billion, assuming that the state is
able to finance its investment using up to 70 percent of debt.
Once the project becomes operational, TransCanada's
participation reduces the state's revenues by between $200 and a
little over $350 million per year.
1:32:03 PM
REPRESENTATIVE HAWKER, regarding slide 8 and the alternative of
TransCanada with no buyback, inquired whether the cash flow
prior to 2024 is almost exclusively the LNG facility given the
state would not be investing in the pipe system.
MS. PODUVAL confirmed that in the green line [the state's]
investment is associated only with the LNG plant. TransCanada
would be making all of the investment associated with the GTP as
well as the pipeline.
1:33:02 PM
MS. PODUVAL explained that slide 9, entitled "What is the
Economic Impact to State From TransCanada's Participation?",
boils down the cash flows from slide 8 into one number, the net
impact. Slide 9 looks at it in two different ways. The green
bar graph on the left totals up all of the state's cash flows
[for each of the three alternatives] with the investment up
front, which would be negative, and then the revenues that come
subsequently over the first 25 years of the project's operation.
This graph shows that TransCanada's participation, on a cash
flow basis, comes at a cost to the state, although in context it
is not a very large cost: the state's total cash flow in the 40
percent buyback option is $110 billion as compared to $114 in
the go-it-alone option, a reduction of $4 billion. The blue bar
graph on the right takes the time value of money and shows the
net present value (NPV) to the state for each of the three
alternatives. This graph shows there is really not much
difference between the three alternatives from a net present
value perspective for the state. That is because the upfront
money that TransCanada would be investing, rather than the
state, carries a lot of weight -- much more than cash flows that
the state would have over 25 years of the project's operation
into 2040.
1:34:45 PM
CO-CHAIR SADDLER inquired whether the state's total cash flows
depicted by the green bars are net cash flows.
MS. PODUVAL nodded yes.
CO-CHAIR SADDLER concluded it all mixes down to the net present
value anyway.
MS. PODUVAL replied correct.
CO-CHAIR SADDLER asked whether total cash flow is total profit.
MS. PODUVAL answered it is the net total cash flow.
1:35:12 PM
REPRESENTATIVE HAWKER observed that the graph for total cash
flows is in nominal dollars. He recalled it being said that
this modeling is based on a 25-year timeframe, and calculated
that when the difference of $4 billion between the go-it-alone
option and the 40-percent-buyback option is taken over 25 years,
the result is a reduction of $160 million a year. However, he
observed, slide 8 states that TransCanada's participation
reduces the state's revenues by $200-$360 million per year. He
requested a reconciliation of the numbers from these two slides.
MS. PODUVAL responded that the $114 billion and $110 billion on
slide 9 are the total net. They take the negative cash flows up
front, so it is not just starting at project operation, it is
looking at the whole deal. Everything on slide 8 is totaled
together to get to the numbers on slide 9.
1:37:12 PM
MS. PODUVAL returned to discussion of slide 9, pointing out that
TransCanada's NPV is expected to be $150-200 million [over the
initial 25 year period], while the state will make $13 billion
out of the project.
1:37:54 PM
MS. PODUVAL moved to slide 10, entitled "Can the State Go It
Alone?". She noted there are two different aspects of this to
explore, the first being the capital cost and investment
implications of going it alone. TransCanada reduces the state's
upfront capital costs. The second aspect is the debt
implications of going it alone. This helps with the questions
that have been asked about whether the state can finance this
cheaper and has a stronger balance sheet. Turning to slide 11,
entitled "SOA Upfront Capital Cost Exposure is Reduced Through
TransCanada Participation," she explained that the capital cost
risk is highest to the state before the project is operational
because there are no revenues to support any cash calls or
expenses that the state would be obligated for in the project.
There is potentially some value in TransCanada's participation
because it reduces exposure for the state. TransCanada's
participation allows the state to retain 20-25 percent of the
gas while only being responsible for 13-18 percent of the
upfront costs. That is important even assuming a baseline cost
project, but if cost overruns start to creep in and there are
unanticipated cash calls on the state, then having somebody to
share this with can be important and valuable.
1:40:07 PM
CO-CHAIR FEIGE understood exposure to cost overruns is shared by
all the owners proportionately. TransCanada having a minimum of
14 percent of the overall project will share the exposure even
more from the state and hence will be motivated to keep cost
overruns from occurring.
MS. PODUVAL concurred, saying all of the parties are going to be
extremely motivated to manage the costs of this project very
aggressively. The cost is high enough to start with and it is
not wanted to have the cost get much higher.
1:40:53 PM
MS. PODUVAL drew attention to slide 12, entitled "SOA Upfront
Capital Cost Exposure is Reduced Through TC Participation,"
which depicts two project scenarios in which the state has
exercised its buyback option [at 30-40 percent]. One scenario
assumes a project completed at $45 billion and the other
scenario assumes a 20 percent cost overrun for a project
completed at $54 billion. In a project completed at $45
billion, TransCanada's participation reduces the state's
investment by about $3 billion. For a project with a cost
overrun, TransCanada's participation reduces the state's upfront
investment by about $4 billion. If the state does not exercise
its buyback option, its investment will fall even further with
TransCanada's participation.
MS. PODUVAL turned to the graph on slide 13, entitled "SOA
Investment for a 25% Ownership with TC is Expected to be $1.3-$B
Lower Than for a 20% Ownership Going Alone." She compared the
upfront investment that would be required from the state by
going it alone and affording a 20 percent stake in the project
with the upfront investment of going with a partner and
affording a 25 percent stake in the project. The total
investment for the state going it alone and affording a 20
percent stake in the project (blue dotted line) would be about
$11 billion. By partnering with someone, in this case
TransCanada, the state is able to take a 25 percent stake in the
project and the state's upfront investment would be reduced by
between $1.3 billion and $4 billion, depending on whether the
state exercises the buyback.
MS. PODUVAL brought attention to the graph on slide 14, entitled
"SOA Revenues for a 25% Ownership with TC are Expected to be
$0.4-$0.5B Per Year Higher than for a 20% Ownership Going
Alone." She compared the revenues the state would receive from
the aforementioned alternatives. Revenues from going it alone
with a 20 percent equity share in the project would be lower
than they would be from going with a partner and 25 percent
equity share. Putting the facts together from slides 13 and 14
tell a story that the state can invest less and earn more by
taking a greater share in the project with a partner than by
affording a lower share in the project and trying to go alone.
Boiling that down to a net present value in today's dollars, she
related that going it alone with a lower share in the project
has a value of $2 billion less than the alternatives where the
state has a partner and a higher stake in the project (slide 15,
entitled "25% Ownership with TC Increases State of Alaska NPV by
$2B Compared to a 20% Ownership Going Alone").
1:44:39 PM
MS. PODUVAL moved to slide 16, entitled "Can the State Go It
Alone? - State's Debt Capacity." To address the concept of what
the state's debt capacity is and how the state's obligations to
the Alaska LNG Project would relate to that, she looked at three
borrowing scenarios. She noted that two related factors become
important when borrowing to pay for this project. First, at
what cost of debt can the state borrow this money? Second, what
portion of the state's revenues, or general fund unrestricted
revenues (GFUR), would be needed to service the debt that is
associated with only this project? Scenario 1 is the highest
quality debt, meaning it will be the cheapest debt, or lowest
interest rate, that the state can get. The cost of debt in
Scenario 1 is approximated to be 4.6 percent and the debt
service is limited to 3 percent of the GFUR. Scenario 3 is the
lowest quality debt, meaning the state would be paying the
highest interest rate. In Scenario 3, the interest is 5.6
percent and the debt service is limited to 6 percent of GFUR.
She explained the relationship between these two scenarios as
follows: A lender loaning money to Alaska would have the most
comfort that its loan is going to get paid back if it only takes
a small portion of Alaska's revenues to pay back the loan. The
lower the portion of state revenues that is required to pay back
the debt, the greater comfort the lender has in lending to
Alaska and the lower the interest rate will be that is offered
for that loan. On the flip side, if a greater portion of
Alaska's revenues are needed to pay back the lender, then that
becomes a more risky loan for the lender and the lender will
charge a higher interest rate to make that loan. So, the
highest quality is the one that only obligates the lowest
portion of the state's GFUR to pay it back and the most
expensive debt is the one where a larger portion of the state's
revenues will be required to pay it back.
1:48:26 PM
REPRESENTATIVE HAWKER understood Ms. Poduval's point, but noted
that in a project like this the state might be bonding for its
participatory interest in the pipe project. He inquired whether
that would be more project-specific revenue bonding, rather than
bonding that is dependent upon the general fund for repayment.
MS. PODUVAL agreed it is quite possible that the debt would be
in the form of a revenue bond, but said it is almost too early
in the project's development to know what kind of financing
arrangements would be available for this project.
REPRESENTATIVE HAWKER asked whether the interest spreads shown
on slide 16 are presuming that these are full general obligation
bonds of the State of Alaska. He further asked whether Ms.
Poduval has a sense of what the cost of capital would be should
the financing be through a project-specific revenue bond.
MS. PODUVAL confirmed slide 16 assumes general obligation funds
rather than revenue bonds. She said she does not have a good
sense for what the cost of capital would be for revenue bonds.
1:50:22 PM
CO-CHAIR SADDLER inquired whether the interest rate and debt
service limit in a scenario are independent variables or whether
the interest rate is conditioned on the proportion of state GFUR
to the amount financed.
MS. PODUVAL replied those two are related. The lower the amount
of the state's revenues that will be needed to pay back that
loan, the lower the interest rate will be, and that relationship
will be seen when the three scenarios are looked at.
1:51:04 PM
REPRESENTATIVE TARR inquired about the extent to which the
state's substantial savings would influence its borrowing
ability, rather than the state's unrestricted revenue which has
a more limited opportunity.
MS. PODUVAL responded that the way she looks at it, the state's
substantial permanent fund savings, as well as its other
resources, support its credit rating and influence what the
state can borrow for. She imagined there are other alternatives
to leverage those resources for financing this project and she
imagined that the various departments will be looking at those
alternatives as they proceed in this process and more concrete
information on what this project is becomes available to share
with the financial market.
1:52:39 PM
MS. PODUVAL returned to her presentation, explaining slide 17,
entitled "The Amount of Cheap Debt Available to the State Could
be Limited," shows how much debt the state can borrow in each of
the three aforementioned alternatives. In general, the state
can borrow more at the higher cost of debt than it can at the
lower cost of debt. This is because more lenders are going to
step up if the state is willing to pay a higher interest rate.
Each set of three bars on the chart represents one level of
investment that is required from the state. The height of the
bars in the go-it-alone option is the highest because that is
where the state has the highest level of investment obligation.
The bar height in the TransCanada-without-buyback option are the
lowest overall because that is where the state would have the
lowest level of investment required.
1:54:04 PM
CO-CHAIR FEIGE observed on slide 17 that the label for the three
middle bars states 30 percent buyback. He asked whether that
should be 40 percent.
MS. PODUVAL replied 25 percent state equity participation has
notionally been picked throughout in the presentation, unless it
is called out otherwise. That is because greater equity
participation brings greater value to the state and that is what
the state should be hoping to get from this project. For this
analysis specifically, a 20 percent equity stake in the project
was used. The reason for doing this is to first answer the
question of whether the state can afford to borrow to take 20
percent equity in the project. If the answer is no, then it
stops the analysis there and automatically gives an answer to
whether the state can borrow to take a 25 percent stake in the
project. If this analysis shows that, yes, the state can take a
20 percent stake in the project, then the analysis moves on to
look at a 25 percent stake. The 30 percent buyback comes from
TransCanada's need for a minimum 14 percent stake in the
project. So, when looking at a 20 percent total stake in the
project, assuming TransCanada keeps 14 percent, that leaves the
remaining 6 percent for the state, which is equivalent to 30
percent of the total 20 percent.
1:55:55 PM
REPRESENTATIVE HAWKER offered his appreciation for the analyses
being illustrative to show the issue rather than specifics as to
the project itself. He recalled the dialogue on a previous
slide about the illustrative debt being general obligation debt
rather than project-specific revenue bond financing. He
inquired whether this chart is relevant in this conversation
because it is talking about the treasury carrying the weight of
the project rather than the project carrying its own weight.
MS. PODUVAL thanked Representative Hawker for understanding the
perspective that is being offered in highlighting an issue
rather than the specifics. From that same specific, she related
that most helpful to her during the analysis was being able to
put the obligations that would be associated with the Alaska LNG
Project in the context of the state's financial resources and
the state's debt servicing capacity. She acknowledged there are
revenue bonds, the permanent fund savings, and other tools that
will be examined and agreed that this is by no means the only
way to be looking at the debt associated with this project.
REPRESENTATIVE HAWKER, given that Black & Veatch is working for
the administration, asked whether Black & Veatch is preparing
legislators for a serious consideration of general obligation
debt to fund this project.
MS. PODUVAL answered no, she would not say that.
1:58:27 PM
REPRESENTATIVE P. WILSON requested further elaboration regarding
TransCanada's 14 percent, the state's 6 percent, and 40 percent
[as related to slide 17].
MS. PODUVAL responded the 30 and 40 percent she was referring to
goes to the buyback option that the state would have where it
purchases back from TransCanada a portion of the ownership in
the GTP and pipeline. When the state holds a 25 percent equity
stake in the entire project, then the state has the right to buy
back 40 percent of that 25 percent share from TransCanada. That
would leave TransCanada with 15 percent and the state with 10
percent. When the state takes a 20 percent equity share in the
project, assuming TransCanada keeps 14 percent, then the state
buys back 30 percent or 6 percent of the 20 percent.
1:59:46 PM
MS. PODUVAL resumed her review of slide 17, explaining it shows
that, assuming the state is trying to finance this with general
obligation debt, only in the TransCanada alternative, even
without the buyback, can sufficient debt be borrowed by the
state for this project to get to a 70 or 75 percent debt level.
In general, large LNG projects aim for a capital structure of
about 70 percent debt/30 percent equity. They want to borrow as
much as they can because debt is generally cheaper than is their
own equity, but the financial market will also place some checks
and balances on that and insist the companies or the project
developers put in some of their own money, too, and where that
balance is generally struck is in that 70/30 mix. If the state
would like to achieve that level of debt in this project, at
least with general obligation debt, the total investment level
that can be supported is the one that corresponds to having a
partner in the project and not exercising buyback.
MS. PODUVAL pointed out that DOR uses a watermark to prudently
manage the state's debt capacity. The department tries to
manage the state's total debt service obligation to fall under 8
percent of the total general fund unrestricted revenue. The
three different scenarios presented here would require between 3
and 6 percent of general fund unrestricted revenue to support
just the Alaska LNG Project. If this is the path of debt that
is considered, that would leave as little as 2 percent of the
state's general fund unrestricted revenue as the remaining
borrowing capacity for the state to finance schools and
everything else that the state does as a sovereign.
2:02:35 PM
MS. PODUVAL turned to slide 18, entitled "Is TransCanada a Good
Partner for the State of Alaska in the AKLNG Project?" Should
the state decide that having a partner is a good idea to help it
afford a higher stake in the project, the first attribute of
TransCanada is that it brings extensive experience in building,
owning, and operating northern pipelines. TransCanada is
extremely well skilled, is a good project manager, and has more
activity with northern pipelines than any of the other major
pipeline companies. Second, TransCanada has shown a long
history of interest in the Alaska pipeline, most recently
through its participation in the AGIA process. TransCanada's
participation helps to retain momentum in the project and that
is driven by several factors. Most obvious is all of
TransCanada's work under AGIA in studying this pipeline and its
route and being able to transfer that work product to give this
project a kick start. The second aspect is that relations are
involved here. People from TransCanada, the state, and the
producers have sat around tables and negotiated various aspects
of this to get to this point. Those things take time and if a
new party is introduced there will be inefficiencies until
everyone falls in sync again. A third aspect is that
TransCanada, or any third party, comes into this with the
perspective of not being a producer. TransCanada is an
infrastructure company and, as such, its earnings are linked to
having more throughput - more customers - that it can provide
these services to. From that perspective, TransCanada is
aligned to the state's interest of facilitating access and
expansion on the project, which is different from the producers'
perspective whose primary interest is always going to be to
maximize their own revenues by moving their gas to market. The
producers, arguably, have a disincentive, not with any nefarious
intent, but just out of fiduciary duty to their own
stockholders, not to make it very easy for other oil and gas
producers to explore on the North Slope and compete with them
and use this project to monetize that gas. Having a third party
that is aligned with the state's interest as a partner is
definitely valuable.
2:06:35 PM
PETER ABT, Management Director, Management Consulting Division,
Black & Veatch Corporation;, Consultant, Department of Natural
Resources (DNR), expanded upon why TransCanada [would be a good
partner] as opposed to soliciting other prospective pipeline
companies for whether they have interest in filling that role.
TransCanada has a long history in Alaska and has developed a
great deal of institutional knowledge of the unique challenges
that are faced in developing, constructing, and operating
pipelines in arctic environments. TransCanada arguably has the
most experience with this of any company in the world, perhaps
shared only by a Russian pipeline company. While there are
several other very good pipeline companies that operate in the
Lower 48, none of them have a portfolio as extensive as that of
TransCanada in operating in the climate that is had in Alaska.
Additionally, the process of soliciting interest from other
pipeline companies would only delay the whole development of
this project because it would probably take a significant amount
of time to solicit these proposals, review them, evaluate them,
select a winner, and then begin the negotiations of an agreement
such as the one being contemplated here that has already been
arrived at with TransCanada. Another factor is how the
producers would feel about that. Would they be as welcoming of
a new party that would have a steep learning curve that would
only add additional time and money to the development of the
project? Those are extremely important considerations to take
into account when trying to decide whether TransCanada is an
appropriate partner in this context.
2:08:54 PM
MS. PODUVAL moved to slide 19, entitled "Retaining Momentum on
Project Could be More Valuable than Securing Better Commercial
Terms." She addressed the question of what the state would hope
to achieve by bringing in another partner, saying this is a
reasonable question to ask since this has not been bid out to
know whether the state has the best commercial terms. Black &
Veatch ran analysis to understand what the impact to the state
would be of improved commercial terms. The two key commercial
terms to focus on are the capital structure that has been
offered in the project and the return on equity that TransCanada
is earning in this project from the state. TransCanada has
offered a capital structure of 75 percent debt and 25 percent
equity, and a 12 percent return on equity. In general, the cost
of debt is 5 percent and given the way transportation service
contracts are generally structured, that is a pass through. So,
what really is being negotiated is the capital structure and the
return on equity. In regard to trying to improve the capital
structure, she said 75 percent debt is an excellent commercial
term for capital structure. In looking at pipeline companies in
the Lower 48 and a number of recent projects, the capital
structure is much more equity heavy than the 25 percent in the
negotiated deal with TransCanada. But, assuming that the 75/25
can be improved upon, the direction the state would want to go
is more debt and less equity. The left-most panel of slide 19
shows that every 5 percent increase in equity, and increase in
the debt of that capital structure, creates a value to the state
of about $200 million. Holding that number and moving to the
middle panel, and assuming the state can find a different
partner that will accept a lower return on equity, slide 19
shows that for every 1 percent decrease in the return on equity
that the state is paying creates an additional $100 million in
value to the state. So, between those two commercial terms, the
debt/equity mix is more impactful and improves the state's net
present value by about $200 million. The return on equity is
less impactful but every percentage improvement can create
another $100 million in value to the state. The far right panel
of slide 19 looks at the cost to the state if finding a
different partner results in delay of the project. This panel
shows that for each year's delay in the project, the state loses
the equivalent of $800 million in value. Thus, assuming an
equally qualified and interested partner could be found, and
assuming that partner will offer more competitive terms than
those given by TransCanada, it can be seen that any improvement
in commercial terms would be dwarfed by the value that the state
would lose by losing time on the project.
2:13:35 PM
REPRESENTATIVE TARR related that in a report prepared by Roger
Marks, consultant to the Legislative Budget and Audit Committee,
it is suggested that the state will not miss a window of
opportunity for the Asian markets and that a better project that
begins in 2026 may be preferable to a sub-optimal one that
starts in 2024. Saying she is trying to reconcile these
comments by Mr. Marks with today's presentation, she asked
whether Ms. Poduval agrees that a two-year window would not be
very meaningful in terms of progress on the project.
MS. PODUVAL responded she thinks Mr. Marks is accurate in saying
there is not necessarily a window in global energy that the
state is trying to squeeze through. Regarding the premise that
a 2024 project would be sub-optimal somehow, she said she does
not understand the rationale behind that. It is very early in
this project's development stage, she continued, the state is
not committing to spend $13 billion today. The state is not
representing, nor should it represent, that this has been
studied and everything negotiated that needs to be negotiated.
All of that will happen next. All that is trying to be done
here is kick start the project, get it out of the gate, get it
through its first phase of Pre-FEED, and then FEED, where a lot
more information is gathered. All of the negotiations with
TransCanada, the producers, and AGDC will take a lot of
deliberation and a lot of study and will happen over the next
four to six years before construction starts. She offered her
belief that the project is not being rushed by any means; work
is starting on the project as it should be. Trying to time the
market would be foolhardy and is impossible to do, especially in
a large LNG project that has such a long lead time. There is
simply not the luxury of being able to respond instantly to a
market need. The process must be kicked off years in advance so
the project will be ready for the market 10 years from now.
Delaying the project through any factors that the state controls
does not sound prudent. Money today is definitely, and will
always be, worth more than that same amount of money tomorrow.
In yesterday's presentation the state's revenue profile without
this project was looked at and that in itself gives her a sense
of urgency to do this while the state has more resources
available.
2:16:54 PM
CO-CHAIR SADDLER noted attention is being paid to the State of
Alaska's debt capacity as far as rules of thumb and ratios. He
inquired about TransCanada's ability to finance this project and
further asked whether there are other pipeline companies in the
world that could meet the capital financing requirements that
this project envisions.
MR. ABT replied there are probably six companies in North
America that are equivalent or larger in size to TransCanada.
Broadening that to other companies in the world, there is
probably one, the Russian pipeline company Gazprom. In that
peer group, he would say there are maybe eight companies that
would have the financial capacity similar to TransCanada's. In
further response, Mr. Abt confirmed it is not necessarily a
company's size, but its financial strength. Of that group, only
three immediately come to mind that operate in arctic
conditions: TransCanada, Gazprom, and Enbridge. Enbridge's
experience is primarily in liquids and oil pipelines, not
necessarily gas pipelines.
MS. PODUVAL added that when making these commercial terms with
the state, TransCanada is taking on the risk that its financial
strength may not be the same in the future when it has to
finance this project as it is today. She said she will later be
addressing how TransCanada takes on this risk.
2:19:11 PM
REPRESENTATIVE SEATON, regarding that each year of delay is
about $800 million as shown on slide 19, inquired whether the
delay is from extending construction a year so it is six years
instead of five years, or is from moving the project out one
year further.
MS. PODUVAL answered it was looked at both ways and the numbers
do not change very much because it is really during construction
where all of the dollars are being spent. This particular one,
she said, may be looking at where the construction is spread out
an extra year.
CO-CHAIR SADDLER understood Ms. Poduval to be saying there is
not much difference between stretching out construction versus
shifting it.
MS. PODUVAL responded correct and added that it is driven by two
factors. First, to the extent that the construction is getting
pushed back or stretched, the capital associated with the
project is going to increase because escalation starts building
into that cost. Second, the revenue is delayed by a year, so
all of the cash flows that would have been received are now
going to be received a year later.
2:20:46 PM
MS. PODUVAL resumed her presentation, turning to slide 20,
entitled "Does TransCanada Bear Any Financial Risk?", to look at
the project from TransCanada's point of view. Given the MOU
that TransCanada has committed to with the state and the
anticipated transportation service agreement (TSA), the question
is whether TransCanada is taking on risk by participating in
this project with the State of Alaska. TransCanada has
committed to commercial terms with a capital structure that
reflects it can borrow up to 75 percent of what it is going to
invest in this project in the financial market as debt. That is
a fairly aggressive assumption, especially because today it is
too early to know what financing arrangements will be available
for this project at the time that TransCanada will actually try
to procure this debt. She reminded members that 70/30 is the
mix that seems to shake out in the financial market for large
LNG projects where the companies feel like they have enough debt
to keep their costs low but the lenders feel like the companies
have enough of their own equity in the project to have skin in
the game. Thus, 75/25 would be more aggressive than 70/30 and
is a big assumption that TransCanada has made.
2:22:12 PM
MS. PODUVAL continued, saying a second assumption made by
TransCanada is its cost of debt; that it will be able to borrow
at 5 percent. Given the scale of this project and all the
uncertainties associated with it, financing is a significant
risk. So, these two commitments represent some risk to
TransCanada. One caveat related to the cost of debt and the
return on equity committed to by TransCanada is that TransCanada
has offset part of that risk to the state. The part offset to
the state works through what is captured as a rate tracker,
which shifts to the state any risk associated with the general
financial market changing between the point in time that the
transportation service agreement is entered into and the point
in time when the final investment decision (FID) is taken and
TransCanada locks in its financing. That is a recognition that
money is cheap today relative to what it has been historically.
There is a general expectation that as the economy recovers
these rates will start increasing. Through the rate tracker
mechanism, TransCanada has protected itself against that general
market movement. The 12 percent and the 5 percent that
TransCanada has committed to here will be added on to by the
movement in interest rate between the point when the
transportation service agreement is entered into and the point
where the final investment decision is taken. The part of the
risk that TransCanada has not offset to the state, and that
TransCanada bears, is if its own borrowing capacity or financial
strength changes from the assumption being made today. In
today's market, TransCanada believes it can borrow 75 percent of
what the project is going to need and that it can be borrowed at
a 5 percent cost of interest. When looking at the state's
general fund obligation to borrow for this project, it was seen
that as the amount needing to be borrowed increased, the cost of
that debt started going up to 5 and 6 percent. Without being in
the financial market and knowing what it can borrow for this
project, TransCanada's assumption that it can borrow up to 75
percent at 5 percent based on its financial strength is a fairly
big leap for the company. If TransCanada is unable to match
that, then it starts bearing that risk alone because the state
will be paying TransCanada based on a formula that assumes that
75 percent of what TransCanada has invested is in the form of
debt, and the state will be paying TransCanada based on a
formula that assumes the cost of that debt is 5 percent in
today's money.
2:25:36 PM
REPRESENTATIVE HAWKER said he is unsure he agrees with how Ms.
Poduval has characterized things. He maintained that the
debt/equity split of 75/25, which was stated as TransCanada's
ability to go to the market and achieve that, is really just a
stipulated number for rate making purposes and is not indicative
of what TransCanada can get in the marketplace, unless somewhere
inside the company that is a metric. He asked whether his
understanding is correct.
MS. PODUVAL confirmed Representative Hawker is correct and added
that this is what TransCanada has committed to recovering from
the state in the formula that will determine what the state pays
TransCanada. It may have nothing to do with how much
TransCanada borrows in the real market, but to the extent that
TransCanada borrows less than 75 percent and puts more equity in
the project, then TransCanada is going to earn less than the 12
percent return on equity that the formula would give.
REPRESENTATIVE HAWKER said TransCanada's relationship with the
state is not a market-driven factor, it is stipulated here.
MS. PODUVAL replied correct.
REPRESENTATIVE HAWKER added it is also stipulated that during
development and construction, as he reads the MOU, "we are
stipulated to a 70/30 debt/equity structure." If the state buys
in and shares the debt/equity structure, the state is tying
itself into a debt/equity level and that TransCanada can achieve
that 70/30 debt/equity or TransCanada does take the financial
risk of its inefficiency and ability to secure the debt.
MS. PODUVAL answered the 70/30 that is the capital structure
during the development and construction part of the project is
essentially what interest or carrying cost TransCanada will have
for that period of time until the project is in operation.
TransCanada is going to earn a return on its equity during the
entire 25 years to come off of that. It is correct that during
that period of time, before the project is operational,
TransCanada is earning on 30 percent equity rather than 25
percent equity.
REPRESENTATIVE HAWKER reiterated that that is a stipulated
number to the state for that calculation of what TransCanada is
allowed to return and it is a different number during the
construction period and that it actually commences on the second
anniversary of the in-service date.
MS. PODUVAL concurred.
2:29:14 PM
REPRESENTATIVE HAWKER noted the rate tracker differential allows
an adjustment for market within certain periods. But, also,
that cost of debt for the whole initial financial system is a
stipulated number of 5 percent and that is fixed at the date of
final investment decision. If there is a huge market move
between now and the final investment decision, there is still a
commitment of 5 percent for debt to be used in the initial
system, plus or minus that rate tracker differential that might
occur in the marketplace.
MS. PODUVAL agreed.
REPRESENTATIVE HAWKER acknowledged that a skyrocketing of market
rates would likely upset the whole project. The only thing that
would roll through in the calculations relevant to the State of
Alaska would be the spread differential on the 30-year U.S.
Treasury.
MS. PODUVAL agreed.
REPRESENTATIVE HAWKER understood the return on equity number of
12 percent is a fixed after-tax number.
MS. PODUVAL concurred.
REPRESENTATIVE HAWKER noted that because taxes are a substantial
item, the pre-tax return must be relatively higher than the 12
percent after-tax return. He inquired whether that is a normal
number in this sort of situation -- that it is an after-tax
number rather than a 12 percent return on TransCanada's
investment in this pre-tax.
MS. PODUVAL confirmed this is a fairly standard way of setting
that return to be an after-tax number; that is how the Lower 48
pipelines will set their returns on equity as well. The 12
percent after-tax number as it is set here is similar to formula
that would be used elsewhere.
2:31:57 PM
REPRESENTATIVE HAWKER asked whether the MOU would be interpreted
to be the after-tax return on all of TransCanada's worldwide
investments or the 12 percent after-tax strictly on this
operation, which is set up as a limited liability partner that
does not have taxes that go through a parent organization.
MS. PODUVAL answered it is for this specific project and
TransCanada's investment in this specific project.
REPRESENTATIVE HAWKER inquired whether that would be the tax
provision or the tax as paid -- the tax that shows up on
TransCanada's financial statements or the tax as actually paid.
He asked how the temporal differences are being dealt with
between taxes paid and taxes accrued and recognized.
MS. PODUVAL responded she will get back with an answer.
2:33:31 PM
CO-CHAIR SADDLER recalled Ms. Poduval stating that a risk to
TransCanada is that its borrowing capacity might not be as
robust at the final investment decision as it is right now when
it is offering the state these terms. He inquired what
mechanism is used by TransCanada to manage that risk aside from
walking away from the deal.
MS. PODUVAL replied that, as the MOU is written now, there is
not any mechanism beyond the rate tracker that offers
TransCanada any protection from that perspective.
CO-CHAIR SADDLER understood it is a risk TransCanada accepts.
2:34:25 PM
REPRESENTATIVE KAWASAKI understood that if TransCanada does not
get the expected commercial terms it has an off-ramp. He asked
whether that off-ramp is a liability borne by the state.
MS. PODUVAL confirmed TransCanada has the option to walk away at
any point in time that it does not make commercial sense for the
company. If the actual terms that TransCanada is able to get in
the financial market are vastly different from what it has
agreed to use in this stipulated formula, TransCanada definitely
can exercise this option.
REPRESENTATIVE KAWASAKI inquired what the potential exposure and
risk are to the State of Alaska in terms of dollars.
MS. PODUVAL responded that from a dollar perspective the state
would essentially be paying TransCanada the cost of funds used
during construction, which would be somewhere between $5 and $50
million depending on when it is exercised and whether the state
has exercised its buyback. It is the incremental cost and the
ceiling of the incremental cost for the state; it could be a lot
lower if one thinks about what the state might have spent anyway
and the carrying cost associated with the state's own money.
2:36:21 PM
REPRESENTATIVE TARR, regarding the rate tracker, asked how much
of a concern it is that responsibility will shift to the state
for any market change between signing of the TSA and the FID.
She surmised the two signings would be happening fairly close
together and therefore substantial changes in the market would
not be expected.
MS. PODUVAL replied TransCanada is trying to manage that risk
with the rate tracker. The development and construction time
period is 10 years, which is atypical for pipeline projects that
TransCanada would otherwise undertake. TransCanada is entering
into a transportation service agreement with the state years in
advance of when the final investment decision and the financing
arrangements would be finalized, so TransCanada is trying to
offset that risk. More commonly, she pointed out, the cost of
debt is a pass through to the shipper rather than it being
nailed down to a particular number like here. When the cost of
debt is a pass through to the customer, it is really the return
on equity that gets negotiated because that is what the company
gets to keep, but there is still motivation to find the best
cost of debt. Because a specific 5 percent cost of debt is a
little unusual, she surmised TransCanada has the tracker to at
least help it adjust for the market if not for its own financial
strength.
REPRESENTATIVE TARR understood the transportation service
agreements must be signed before TransCanada can get financing
and that the FID is estimated to be in 2018-2019. She asked
whether she is correct in thinking that the transportation
service agreements are signed fairly closely before the FID.
MS. PODUVAL believed the TSA will be signed either during Pre-
FEED or early in FEED and not as close to FID as thought by
Representative Tarr.
2:39:38 PM
REPRESENTATIVE SEATON understood the transportation service
tariffs for the different parties may all be stipulated
differently. He further understood that this is a stipulation
only for transportation of the state's gas and that it may or
may not be offered to the other parties.
MS. PODUVAL answered correct, adding that what is being talked
about here relates only specifically to the state transporting
its share of the gas through the portion of the project that
TransCanada will hold through the GTP and pipeline.
REPRESENTATIVE P. WILSON requested further elaboration regarding
how [the cost of debt] is usually or not usually done.
MS. PODUVAL responded that the tariffs are set when the
transportation service agreements are entered into. Generally,
the cost of debt is a pass through that is borne by the shipper.
It is a little unusual to commit to a certain cost of debt
without knowing whether that will be the actual cost at the time
of going to the market.
REPRESENTATIVE HAWKER commented that that puts TransCanada in
the position of not only having a financial risk but also of
having a potential financial benefit if it can execute a more
efficient transaction in the marketplace.
MS. PODUVAL agreed.
CO-CHAIR SADDLER inquired what the drive is behind having this
provision in the [MOU].
MS. PODUVAL deferred to TransCanada for an answer.
2:42:24 PM
MS. PODUVAL returned to her presentation, addressing slide 21,
entitled "Does TransCanada Bear Any Financial Risk?" She said
this slide puts numbers to TransCanada's potential risks
associated with the stipulated formula. She cautioned that
there needs to be a separation of the general movement of the
market versus a weakening of TransCanada's financial strength or
miscalculation of what TransCanada can get this debt for and it
ends up costing TransCanada more. An increase in the cost of
debt from 5 percent to 6 or 7 percent erodes TransCanada's
effective return on equity, given that the tariff and the
earnings that TransCanada is going to get from the state are
stipulated by a formula that uses 5 percent. The actual
financial arrangements could also result in TransCanada not
being able to borrow as much as anticipated, such that instead
of 75 percent debt it is 70 or 65 percent. The blue line at the
top of the graph represents the formula TransCanada is hoping to
get: 75 percent debt, 25 percent equity, 5 percent cost of
debt, and in which TransCanada would earn a 12 percent return on
its equity. However, if TransCanada's cost of debt climbs to 6
percent, its effective return on equity would be reduced to 10
percent [green line], and a 7 percent cost of debt would reduce
its effective return on equity to 8.5 percent [grey line]. The
three lines on the graph also show that TransCanada's effective
return on equity gets diluted if its capital structure changes
as well, since the state would be paying TransCanada a 12
percent return on 25 percent of its investment. If TransCanada
is actually contributing 30 or 35 percent equity, it is not
earning that 12 percent return on equity on that additional
contribution, which brings down the effective return on equity.
Addressing slide 22, entitled "Does TC Bear Any Financial
Risk?", Ms. Poduval said the graph shows how TransCanada's
anticipated net present value of about $200 million under the
formula is eroded by either a slippage in the anticipated cost
of debt or a change in the anticipated capital structure
2:46:10 PM
REPRESENTATIVE HAWKER said he is struggling with trying to
figure out how slide 22 was put together. He understood what is
trying to be shown -- that if TransCanada's cost of debt goes
up, its effective return on equity goes down. He offered his
understanding that in the MOU the State of Alaska has guaranteed
TransCanada a return on equity of 12 percent after tax, plus the
rate tracker differential, regardless of how TransCanada's
effective return on equity goes down.
MS. PODUVAL replied that, with the rate tracker issue set aside,
the state had guaranteed that it will pay TransCanada a 12
percent return on equity for 25 percent of its investment in the
project. A 5 percent cost of debt will be paid for 75 percent
of its project investment.
REPRESENTATIVE P. WILSON requested Ms. Poduval to repeat her
explanation.
MS. PODUVAL explained that the State of Alaska is committing to
pay TransCanada a return on equity of 12 percent on 25 percent
of the investment in the project, as well as a cost of debt of 5
percent on 75 percent of its investment in the project. That
would be paid regardless of any change to the variables for
TransCanada. Three of the four variables could change
independently: the cost of debt, the amount of investment as
debt, and the amount of investment as equity. Even should these
three change, the State of Alaska will still pay to its agreed
amount. The variable that would be impacted would be the return
on equity. As long as the state did not change its agreed
payment to TransCanada, a change to any of the other variables
would bring a change to the return on equity.
2:49:20 PM
REPRESENTATIVE SEATON directed attention to slide 22 and asked
for clarification that should the cost of debt increase to 6 or
7 percent, or the debt-equity structure actually change, the
result could be a negative $150 - $200 million. At the time of
investment, either change could affect the TransCanada decision
to proceed, as TransCanada would be losing money.
MS. PODUVAL confirmed this is definitely an option that
TransCanada would consider.
REPRESENTATIVE SEATON stated that this is even before
construction costs or delays are considered, as these could also
affect the long term net present value (NPV).
MS. PODUVAL concurred, stating that once the final investment
decision (FID) is taken the off-ramps go away and everyone is
committed. At that point "you're married and you're gonna live
together whether you like it or not." She pointed out that each
party would review its financing and its sales agreements, and
determine whether to commit to the billions of dollars
necessary.
2:51:20 PM
REPRESENTATIVE TARR pointed out that the State of Alaska has no
control over other TransCanada investments and projects, which
will ultimately be reviewed by the banks when financing is
requested. She asked how the state should evaluate the project
for these parameters which were out of the state's control but
have the potential for an impact to the project and its
financial obligations.
MS. PODUVAL replied that each of the different parties,
including TransCanada, have to want to do this project. She
noted that TransCanada will also be reviewing other investment
alternatives and can exercise an off ramp if its financial
strength is stretched thin by other projects. She said that it
would be prudent for the state to be cognizant that these off-
ramps exist, and to plan accordingly. She pointed out that the
state can maintain its involvement, especially if it exercises
its buyback.
2:53:06 PM
REPRESENTATIVE SEATON surmised that, should Alaska get to the
stage where it exercises the buyback option from TransCanada,
there will no longer be a pipeline builder. He questioned
whether it is necessary that the full project state that
TransCanada is the builder.
MR. ABT explained that, although TransCanada will not actually
be the constructor of the project, it will be the project
manager. There will be an additional decision for who will
operate the pipeline once service commences. He offered his
understanding that the process will solicit bids from
engineering, procurement, and construction (EPC) firms to
construct the pipeline and the gas treatment plant (GTP). It is
unclear as to which partner is responsible for each segment of
the project, including the pipeline, the GTP, and the
liquefaction project. There is recognition that TransCanada
would be the best manager of the project segment, and this
expertise would be lost should TransCanada withdraw. He pointed
out that the constructor firm would still be in place, but a
project partner would need to become the project manager.
REPRESENTATIVE SEATON noted TransCanada is also the operator.
MS. PODUVAL replied that this will only impact the state portion
of the project for movement of its gas. The producers will have
their own commercial terms for gas shipment, as they each own a
percentage of the project equivalent to the amount of gas they
need to liquefy and ship. She suggested the producers could
create a midstream that would establish upstream commercial
terms, or they could treat this as a completely integrated
project with no commercial terms.
2:56:44 PM
REPRESENTATIVE HAWKER drew attention to the 12 percent after-tax
return on equity provision in the MOU, Exhibit C, page 2, Key
Item 6.6. He requested a definition of Initial System.
MS. PODUVAL deferred to the Department of Law, but offered her
opinion that this distinguishes between the initial project and
any subsequent expansions.
REPRESENTATIVE HAWKER requested the committee receive further
clarification in this regard.
2:58:14 PM
MS. PODUVAL moved on to slide 23, entitled "Summary on 4 Key
Questions," to summarize the discussion relating to
TransCanada's participation in the project. Regarding the first
question of whether there is an economic impact to the state
from participation by TransCanada, she said there will be a net
cost to the state, especially with regard to total cash flow and
whether the state exercises its buyback option. From a net
present value perspective, there is marginal impact from having
TransCanada participate in the project. Regarding the second
question of whether the state can go it alone, she said that
from an upfront capital investment perspective, TransCanada's
participation and partnership in the project will reduce the
state's investment between $4 and $7 billion, and would keep
state money available for other purposes. A review of the
state's ability to finance the project using general obligation
debt shows that, because the project is so large, it will
"really suck up a lot" of the state's borrowing capacity. By
having a partner the state will spend less and make more by
being able to afford a larger stake in the project than it would
by going alone and taking a smaller stake in the project. In
regard to whether TransCanada would be the right partner, there
is good reason why TransCanada would be a good partner.
TransCanada comes into this project as a third party that would
be aligned with the state to create access and enable expansion
on the project and allow other non-North Slope explorers and
developers to enter the project. This is important because it
is not a perspective that the producers will have.
MS. PODUVAL, continuing her summary of slide 23, addressed the
question of whether TransCanada is assuming financial risks by
being in partnership with the State of Alaska. TransCanada has
made commitments to the state on the commercial terms that will
be used to stipulate a formula to determine what the state will
pay TransCanada. A change in the financing arrangements that
TransCanada actually gets, relative to what it has assumed it
will be able to get, could erode TransCanada's return from this
project and create risk for the company.
3:02:01 PM
REPRESENTATIVE HAWKER offered his belief that, although these
are benchmarked and established for purposes of rate making with
the state, TransCanada could do anything it wants internally and
could achieve a material improvement in its financial situation.
Focusing on the negative for TransCanada is only half the story.
MS. PODUVAL agreed and said it only determines what the state is
going to pay TransCanada, and to the extent that TransCanada can
improve on that, it could earn more. She added that 75 percent
debt is a fairly aggressive assumption, saying it is fairly
unlikely TransCanada could improve on that term. Whether
TransCanada can improve on the 5 percent cost of debt it has
committed to is dependent on the market and TransCanada's
financial strength at the time.
3:03:05 PM
MS. PODUVAL, in response to Representative Tarr, disagreed the
state is taking on the most risk in the partnership with
TransCanada; TransCanada bears some risk. Under the HOA, the
producers are investing $3-$4 for every dollar that the state
invests. Everyone has skin in this game which was almost by
design with the creation of alignment.
3:04:00 PM
REPRESENTATIVE KAWASAKI, noting that Black & Veatch represents
the administration in support of TransCanada's participation in
the project, asked how legitimate the off-ramp is should the
state decide not to maintain the partnership. Responding to Ms.
Poduval's request for clarification, he agreed there is always
an element of assumable risk. He asked for assurance as to the
legitimacy of this off-ramp as presented, given the state is
already committed for an investment of at least $1 billion.
MS. PODUVAL responded there are two different perspectives --
legally and commercially. She said she hopes the agreements are
well enough written to assure that legally the state has the
availability of those off-ramps. Commercially, the question is
whether the state can exercise that off-ramp and still be okay.
This is something the state must be vigilant about, recognizing
that TransCanada can exercise these off-ramps as well and not
participate in the project. The state must be able to react and
respond to continue its own participation in the project.
REPRESENTATIVE KAWASAKI understood the MOU requires that if the
state goes with a new partner the terms must be substantially
similar to those with TransCanada.
MS. PODUVAL deferred to the Department of Law to provide the
nuance behind those terms.
3:07:03 PM
REPRESENTATIVE SEATON posed a scenario in which at the time of
final investment decision the state decides to have someone else
buy its 25 percent share of the gas, as well as the upstream and
the liquefaction portions. He understood this is where the off-
ramp option would be available to the state and the state would
owe TransCanada its cost plus the interest. He further
understood that TransCanada could also leave should it find it
will be underwater because the terms have changed.
MS. PODUVAL believed there is a fairly good likelihood that the
state will want to bring in more partners, and that there are
many prospective parties that would be interested in
participating in the project in addition to purchasing the
state's share of the LNG. Of late, it is a fairly common
structure for these LNG sales agreements to have the end user,
the buyer, purchase the gas as well as an equity share in the
project. She said she does not think there is anything in the
MOU that would preclude the state from entering into that type
of arrangement, and it is generally at the LNG plant.
3:08:58 PM
CO-CHAIR FEIGE noted the committee has not yet discussed how the
overall operational costs are addressed by the state as well as
by the other partners. He said he would like for the committee
to get an idea of the general types of agreements and the level
of complexity of the major agreements that the state will be
signing at the end of Pre-FEED. He further noted the committee
has not yet discussed the initial contract term of 25-years that
will happen once the pipeline is built and operated. The MOU
contains provisions pertaining specifically to what happens at
the end of that initial contract term and he would like an
update from the administration in this regard.
[CSSB 138(FIN) am was held over.]
| Document Name | Date/Time | Subjects |
|---|---|---|
| HRES 3.26.14 Black & Veatch Presentation - TC.pdf |
HRES 3/26/2014 1:00:00 PM |
SB 138 |