Legislature(2013 - 2014)BARNES 124

03/24/2014 01:00 PM RESOURCES

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01:14:21 PM Start
01:14:43 PM SB138
09:46:24 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Continued at 6:30 p.m. Today --
Heard & Held
-- Testimony <Invitation Only> --
+ LB&A Consultants: Enalytica - Janak Mayer & Nikos TELECONFERENCED
+ Bills Previously Heard/Scheduled TELECONFERENCED
         SB 138-GAS PIPELINE; AGDC; OIL & GAS PROD. TAX                                                                     
1:14:43 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 noted  that  the  legislature's consultants  from                                                               
enalytica  are providing  a presentation  regarding the  proposed                                                               
Alaska Liquefied Natural Gas (LNG) Project.                                                                                     
1:15:03 PM                                                                                                                    
NIKOS  TSAFOS, Partner,  Energy  Consultant,  enalytica, said  he                                                               
will  be talking  today about  existing project  structure versus                                                               
alternative  project structures,  financing options  available to                                                               
the state,  cash in and  cash out as  regards how much  the state                                                               
will be  paying and what the  state can expect to  get in return,                                                               
and the midstream [portion of  the project].  Addressing slide 4,                                                               
"Executive Summary," Mr. Tsafos  said there is enormous variation                                                               
in  structure when  looking around  the  world at  how other  LNG                                                               
projects are  structured.  Regarding Alaska's  circumstances, the                                                               
current  [proposed]   structure  has  a  great   deal  of  merit.                                                               
Regarding  the financing  plan, Alaska  would be  responsible for                                                               
paying its share of the investment.   Where that money would come                                                               
from  is  currently  unknown,  but   there  are  various  options                                                               
available  to  the state.    Regarding  the modeling  of  various                                                               
structures, enalytica  ran an economic  case as well as  a stress                                                               
case to  quantify what  would happen  if things  went wrong.   He                                                               
cautioned that  the stress  case he will  present is  a negative,                                                               
but  not catastrophic,  scenario; he  therefore asked  members to                                                               
please  not take  this  model  as the  worst  that could  happen.                                                               
Useful  in this  stress  case  is that  it  reiterates a  message                                                               
enalytica has  presented, which is  that LNG projects  usually do                                                               
not lose money,  rather they may not make as  much money as would                                                               
be liked.                                                                                                                       
1:18:34 PM                                                                                                                    
MR. TSAFOS  continued addressing  slide 4, saying  the Memorandum                                                               
of Understanding  (MOU) between  the state and  TransCanada makes                                                               
sense  when  it is  assumed  the  state is  capital  constrained.                                                               
Given  this  assumption, it  makes  sense  to focus  the  state's                                                               
money, as is  done under [CSSB 138(FIN) am],  on the liquefaction                                                               
and foregoing some  of the participation in the  pipeline and gas                                                               
treatment  plant (GTP).   Regarding  the  tariff -  TransCanada's                                                               
charge to  the state for  the state's participation -  the tariff                                                               
is  expensive when  compared to  a loan  because the  state could                                                               
probably borrow money  for a lower rate.  However,  the tariff is                                                               
attractive  in  terms  of  what  tariffs  are  generally  in  the                                                               
marketplace.   There are two  ways to judge  this.  The  first is                                                               
how much it  would cost the state if it  undertook the project by                                                               
itself.   The second is the  tariff cost charged to  the state if                                                               
it were  to find a different  partner.  Regarding the  money that                                                               
will  be  generated by  this  project,  TransCanada will  receive                                                               
between 1 and  7 percent of the total return,  depending on price                                                               
and whether [the state exercises  its buyback option].  Regarding                                                               
the finer  points of  the MOU, the  risk allocation  is something                                                               
worth focusing on.                                                                                                              
1:21:31 PM                                                                                                                    
MR. TSAFOS  turned to  slide 5,  "Proposed Project  Structure Has                                                               
Lots of  Merit," and reminded  members of their  previous request                                                               
for a  review of other project  structuring possibilities besides                                                               
that proposed  under CSSB 138(FIN) am.   He noted there  are four                                                               
pieces  to the  project:    the upstream,  which  is  gas in  the                                                               
ground;  the  treatment  plant,   which  purifies  the  gas;  the                                                               
pipeline, which  is 800 miles long  and goes to Nikiski;  and the                                                               
liquefaction facility,  which liquefies the gas  for transport on                                                               
ships.  Of the options listed  under each of the four pieces, the                                                               
ones  highlighted in  grey represent  those  [proposed under  the                                                               
bill].   A project could  be created  by combining one  item from                                                               
each of the  four pieces/columns.  Any of the  options listed for                                                               
each piece  could be selected  and combined to create  a project.                                                               
Some of  those combinations  probably do not  exist in  the world                                                               
today, but  most of the combinations  would have an example  of a                                                               
project somewhere in the world that is structured in that way.                                                                  
1:23:39 PM                                                                                                                    
MR. TSAFOS reviewed the various  options for structure listed for                                                               
each of the  four components of the project.   Under the upstream                                                               
component,  one  option is  for  the  oil  companies to  own  and                                                               
produce  the gas  with the  State of  Alaska (SOA)  participating                                                               
through royalty  and taxes.   This option  is the status  quo, or                                                               
in-value, world.  Another option is  for the oil companies to own                                                               
a share of the fields, but the  state becomes a partner.  In this                                                               
option, the  state owns a  share of the  asset instead of,  or in                                                               
addition to, being  a royalty or taxing authority.   Usually this                                                               
would happen at the beginning of  the process, so this would have                                                               
been a  good discussion to have  in the mid-1960s.   When looking                                                               
at LNG projects  around the world, usually a  sovereign becomes a                                                               
partner from the  beginning of the lease or  the concession term.                                                               
In today's world,  the option would be for the  state to buy into                                                               
the field.   The last option is where there  are no oil companies                                                               
and the state  fully acquires the upstream.  There  are places in                                                               
the   world  where   this  happens,   usually   when  the   state                                                               
nationalizes  and  becomes a  100  percent  owner of  the  asset.                                                               
There are places where the state  is 100 percent owner for assets                                                               
that have yet to be leased committed to a lease.                                                                                
1:25:32 PM                                                                                                                    
MR. TSAFOS  noted that  all of the  structure options  listed for                                                               
the gas  treatment plant,  pipeline, and  liquefaction components                                                               
are the  same.  He  said the structure  chosen for each  of these                                                               
three components  may or may not  be the same as  that chosen for                                                               
the other  two components.  One  option is the oil  companies own                                                               
100  percent of  the assets.   A  second option  is that  the oil                                                               
companies  and  the  state  own  the  asset,  which  is  what  is                                                               
envisioned in  the Heads of Agreement  (HOA).  A third  option is                                                               
for  the oil  companies plus  the state  plus a  third party.   A                                                               
fourth option  is the oil  companies plus  a third party.   These                                                               
last two  options are the  worlds envisioned  by the MOU  and the                                                               
HOA together.   A  fifth option  is the  state being  100 percent                                                               
owner.  A sixth option is the state  and a third party.  The last                                                               
option is  for a third party  being 100 percent owner,  which was                                                               
the beginning structure for the  project under the Alaska Gasline                                                               
Inducement Act (AGIA) until one  of the oil companies joined into                                                               
that process.  The options  highlighted in grey are the structure                                                               
options chosen  under the  HOA and  the MOU [as  well as  in CSSB
138(FIN) am].                                                                                                                   
1:27:22 PM                                                                                                                    
MR. TSAFOS  described each of  the structure options on  slide 5.                                                               
Regarding  the options  listed under  the upstream  component, he                                                               
said the proposal [under CSSB 138(FIN)  am] for the state to move                                                               
from  in-value  to in-kind,  or  the  idea  of the  state  taking                                                               
physical ownership of the gas,  is between the first option where                                                               
the  oil companies  own and  produce the  gas with  the State  of                                                               
Alaska  (SOA) participating  through  royalty and  taxes and  the                                                               
second  option  where the  oil  companies  and the  state  become                                                               
partners.   This is because the  state is in some  ways a partner                                                               
since it  is responsible  for some  of the  cost through  the tax                                                               
system and  because the  state is  entitled to  some of  the gas.                                                               
Thus, in some ways, the state  is becoming a partner by virtue of                                                               
its gas entitlement.  Regarding  the third option under upstream,                                                               
he said expropriation,  while a path open to the  state, might be                                                               
too harsh.  The drawbacks to  this option are the amount of money                                                               
the  state would  have to  pay upfront  and the  state having  to                                                               
learn how to run this massive asset on its own.                                                                                 
1:28:55 PM                                                                                                                    
MR.  TSAFOS addressed  the options  for structure  under the  gas                                                               
treatment,  pipeline, and  liquefaction components,  conjecturing                                                               
that he does not  need to say much about why  the state would not                                                               
want the oil companies  to own 100 percent.  If  the state had an                                                               
asset where this was  the only gas around, it might  not be a bad                                                               
structure;  but,   if  the  state   is  looking  to   develop  an                                                               
infrastructure that should  be open to others  and to incentivize                                                               
the  development of  additional  gas, this  structure poses  some                                                               
challenges.  Regarding a structure  of 100 percent state, he said                                                               
there is merit to this in  terms of the state's ability to create                                                               
an  open  access  pipeline  network.     The  challenge  to  that                                                               
structure would  be chiefly financial given  the [estimated total                                                               
project cost of  $45-$65 billion].  Regarding a  structure of the                                                               
state with  a third party,  he said  there are places  where that                                                               
happens  but it  generally does  not  happen because  it is  very                                                               
difficult for  someone to  come in and  make that  big investment                                                               
without  also having  that visibility  on the  upstream as  it is                                                               
difficult  to   coordinate  and  integrate  with   the  upstream.                                                               
Regarding a structure of 100  percent ownership by a third party,                                                               
he said  it would have  the same problems  as with the  option of                                                               
the state and a third party.                                                                                                    
1:31:11 PM                                                                                                                    
MR. TSAFOS said what comes  across when looking at this structure                                                               
is the  integration benefits  of having  one company  see through                                                               
the entire  chain, with  the benefit  of that  infrastructure not                                                               
being exclusive.  One example  was brought up during the [2/4/14]                                                               
presentation by Steve Butt, Senior  Project Manager of the Alaska                                                               
LNG  Project for  ExxonMobil Development.   In  his presentation,                                                               
Mr.  Butt stated  that during  the AGIA  process the  thought was                                                               
that  there would  be four  trains  at the  gas treatment  plant.                                                               
However, once  [all of the  producers] were brought  together and                                                               
there was  access to all  the data information across  the entire                                                               
chain,  it was  found  that  three trains  would  be the  optimum                                                               
number.    When looking  at  the  structure highlighted  in  grey                                                               
representing the MOU and  HOA, it is seen that there  is a lot of                                                               
merit in avoiding the pitfalls  of an oil company-only asset, but                                                               
gaining the benefit of having  the oil companies involved to gain                                                               
efficiencies across the entire value chain.                                                                                     
1:33:18 PM                                                                                                                    
MR.  TSAFOS  brought attention  to  the  difference in  structure                                                               
between  the  liquefaction component  and  the  pipeline and  gas                                                               
treatment plant  components as proposed by  the MOU and HOA.   He                                                               
said  this difference  makes sense  in that  the state's  primary                                                               
interest is  to ensure  that if someone  develops more  gas, this                                                               
gas can  be delivered by putting  it through the pipeline.   That                                                               
structure really needs a third  party for the gas treatment plant                                                               
and the  pipeline.   However, for  the liquefaction  facility, an                                                               
entity  finding enough  gas to  expand the  liquefaction facility                                                               
could take on  the task of building that additional  capacity.  A                                                               
third party  owner in the  liquefaction would not be  as critical                                                               
as for the pipeline.   Similar ownership between the pipeline and                                                               
liquefaction is unnecessary because  liquefaction is the building                                                               
of  a  parallel  facility  at  the same  location,  so  the  same                                                               
ownership that  allows open access  to the infrastructure  is not                                                               
1:34:43 PM                                                                                                                    
REPRESENTATIVE  KAWASAKI related  it has  been argued  that under                                                               
state ownership  there is  better transparency  when it  comes to                                                               
negotiating.   He read a  statement by a  legislative consultant,                                                               
Roger Marks:   "It is possible that any  partnership with private                                                               
parties who  generally operate with greater  confidentiality than                                                               
public  entities could  limit transparency."   He  requested that                                                               
enalytica  address this  statement,  adding that  Mr. Marks  made                                                               
this statement under the "ownership  section dealing with whether                                                               
state ownership is a good thing or not."                                                                                        
JANEK  MAYER,  Partner,  Energy  Consultant,  enalytica,  replied                                                               
there are  two different considerations.   There is  the question                                                               
of   transparency   toward   the  state's   administration,   and                                                               
transparency beyond the administration  to the legislature and to                                                               
the general public.  It is  difficult not to think that the state                                                               
as   an   active   participant  does   not   radically   increase                                                               
transparency  toward  the  executive  branch  because  it  is  an                                                               
investor in this  project and is making key  decisions along with                                                               
the  other  members   and  therefore  has  access   to  all  that                                                               
information.   His  impression from  the aforementioned  quote is                                                               
that the argument  being made is that the state  is being brought                                                               
in to private  participation in a private project, and  it may no                                                               
longer  have  the same  impetus  to  disclose everything  to  the                                                               
legislature or  the public, which, he  allowed, may be true.   He                                                               
said he thinks CSSB 138(FIN) am goes  a long way in terms of this                                                               
initial  contract  negotiation  process  and  how  that  will  be                                                               
handled in  terms of both  things that  need to be  maintained as                                                               
confidential  through that  process and  then an  eventual public                                                               
process for  approval or  disapproval of  the contracts  that are                                                               
negotiated.    But,   if  core  interest  of  the   state  is  in                                                               
understanding the  details of the  project so that  its financial                                                               
interest is  protected, it seems to  him it is hard  not to think                                                               
that  that is  addressed by  participation, whether  or not  that                                                               
means that all the details are suddenly open to the public.                                                                     
1:38:22 PM                                                                                                                    
REPRESENTATIVE HAWKER pointed out that  missing from the chart on                                                               
slide 5  are the  transmission lines from  the Point  Thomson and                                                               
Prudhoe Bay fields  to the treatment plant, which in  the HOA are                                                               
carved  out  for  special  treatment.     He  asked  whether  the                                                               
transmission lines  are a relevant  consideration in  this chart,                                                               
recognizing that upstream is defined  differently in this project                                                               
than in the past.                                                                                                               
MR. TSAFOS  responded enalytica did not  include the transmission                                                               
lines  in this  chart  because they  were  not thought  relevant.                                                               
Whether  the transmission  lines are  considered upstream  or gas                                                               
treatment  matters  for taxation,  but  does  not matter  in  the                                                               
broader structure of the project.                                                                                               
1:39:39 PM                                                                                                                    
REPRESENTATIVE  HAWKER took  issue  with the  statement that  the                                                               
transmission  lines  are relevant  to  taxation  but not  in  the                                                               
broader perspective,  saying it is  not a congruent  statement as                                                               
taxation is a big issue for the state.                                                                                          
MR.  TSAFOS answered  that it  classifies  the lease  expenditure                                                               
that  is deductible  for the  upstream  and it  also defines  the                                                               
point  of production.   Agreeing  it is  important, he  qualified                                                               
that  it is  not  important in  terms of  how  that structure  is                                                               
thought  about.    Where  exactly   the  split  is  between  each                                                               
column/component is quite important in  how the pass is made from                                                               
one  column  to  the  other.     Enalytica  did  not  include  an                                                               
additional piece as it is either  part of the upstream or part of                                                               
the  treatment  plant  in  terms of  an  LNG  project  structure.                                                               
Rarely  is there  another  party that  comes in  to  just do  the                                                               
pipeline from  the upstream to  the treatment plant, and  that is                                                               
the  context in  which he  meant the  transmission lines  are not                                                               
important to  the structure.   He agreed  it is important  to the                                                               
economics in  how the state's  share is calculated and  how lease                                                               
expenditures are calculated.  Because  enalytica thought that the                                                               
transmission lines  will be  part of either  the first  or second                                                               
column, it was  thought unnecessary to have  an additional column                                                               
for them.                                                                                                                       
1:41:22 PM                                                                                                                    
REPRESENTATIVE HAWKER  appreciated the difficulty  of simplifying                                                               
a very  complex project into  a chart, saying an  inherent danger                                                               
of simplification  is that  it provides  the appearance  that the                                                               
chart is an exclusive list of  options.  Drawing attention to the                                                               
statement  on  slide 5,  "Possible  Project  Structures based  on                                                               
Ownership," he  expressed concern that ownership  and control are                                                               
not equal.   Both  have merits  and when the  gives and  the gets                                                               
come to the  contract that is established,  ownership and control                                                               
can  be managed  through the  relationship.   Saying  slide 5  is                                                               
purely  an  ownership  analysis,  he queried  whether  the  state                                                               
should be  concerned about  control in  addition to  ownership or                                                               
whether control is not an issue for enalytica.                                                                                  
MR. TSAFOS,  in regard to the  dangers of trying to  simplify the                                                               
complex,  replied that  enalytica  could show  this ownership  in                                                               
terms  of what  it entitles  the state  to in  terms of  capacity                                                               
rights and  control.  Speaking  to the question of  control, with                                                               
the state  as a minority  partner, he  noted the question  of how                                                               
much control  20 or 25  percent [ownership] gives the  state, and                                                               
against what.   When  compared against  zero, the  state probably                                                               
has quite a  bit more control, but  at the same time  it does not                                                               
have a  majority share.   It is  important to understand  that if                                                               
this proposed  legislation passes the  state will spend  the next                                                               
year  developing  joint venture  agreements  and  setting up  the                                                               
corporate  structure  for  this   project.    In  that  corporate                                                               
structure, one of the things that  will be defined is the kind of                                                               
agreement the different decisions require.   As with any company,                                                               
some can  be passed with  a majority vote, some  need two-thirds,                                                               
and still others need unanimous consent.                                                                                        
MR. TSAFOS hypothesized that major  decisions [for the Alaska LNG                                                               
Project],  such as  whether to  go to  Front-End Engineering  and                                                               
Design (FEED)  and authorize the  next $1-$2 billion,  or whether                                                               
to  construct the  project, will  most  likely require  unanimous                                                               
consent.   Looking at projects  around the world,  when companies                                                               
are not  interested or unwilling  to move something  forward, the                                                               
project  either completely  slows  down or  the companies  leave.                                                               
Qualifying that this  does not mean it has not  happened, he said                                                               
he cannot think  of an example where 51 percent  of the ownership                                                               
of an LNG project decided to  go ahead with the project, while 49                                                               
percent  did not  want  to.   He allowed  this  does not  protect                                                               
against all sorts of decisions.   As a minority owner, there will                                                               
be decisions  in which  the state  is on the  losing side.   When                                                               
looking  at  the  joint  venture agreements,  it  is  crucial  to                                                               
understand exactly what those decisions  are.  The administration                                                               
will  negotiate those  agreements and  in some  things the  state                                                               
will  only have  25 percent  veto power  and in  some things  the                                                               
state will  have no  veto power.   There will  be many  times the                                                               
state will  not care to have  veto power, such as  more technical                                                               
or operational aspects, whereas the  operators might care a great                                                               
MR.  TSAFOS, continuing  his  response, said  that  the State  of                                                               
Alaska will  likely be the  second largest owner with  25 percent                                                               
and  ExxonMobil will  likely have  a  bit more  than 25  percent.                                                               
Based on  his experience, he  cautioned committee members  not to                                                               
assume that the oil companies  will always agree with one another                                                               
or will always sit on the same side on any given issue.                                                                         
1:47:49 PM                                                                                                                    
REPRESENTATIVE HAWKER agreed with  the aforementioned analysis by                                                               
Mr.  Tsafos.   He said  the state  should try  to anticipate  and                                                               
identify every  one of  its conceivable  concerns and  write them                                                               
into  the  joint  venture  and  limited  partnership  agreements,                                                               
saying that  regardless of ownership  the state has the  right of                                                               
refusal.  He added he is trying  to keep in mind the concept that                                                               
this project is  a pipe within a pipe.   Although Mr. Tsafos said                                                               
that the state  owns 25 percent of this project,  he argued, that                                                               
it is  not really ownership as  it is within a  limited liability                                                               
partnership that  the state  does not  control, and  therein lays                                                               
his concern  because those different  issues must  be anticipated                                                               
and  dealt with.   He  noted the  legislature has  no say  in how                                                               
those issues get resolved.                                                                                                      
MR. TSAFOS answered that the state  has a 25 percent share in the                                                               
liquefaction,  whereas, in  the  pipeline and  the gas  treatment                                                               
plant, the state's share comes through TransCanada.                                                                             
REPRESENTATIVE HAWKER clarified he  is talking about the pipeline                                                               
and the gas treatment plant.                                                                                                    
MR. TSAFOS agreed  with Representative Hawker in that  it must be                                                               
seen  how that  agreement  is structured.    He said  enalytica's                                                               
understanding is  that the  intention of  this structuring  is to                                                               
ensure  that  TransCanada  and  the state  participate  as  a  25                                                               
percent owner  as opposed  to having one  company own  15 percent                                                               
and  another company  own 10  percent.   Whether that  is a  wise                                                               
decision depends on  the level of control and  influence that the                                                               
state will have in that joint  venture and he does not think that                                                               
is known yet.   Thus, it will be well worth  looking out for this                                                               
when these agreements come back [to the legislature].                                                                           
1:51:00 PM                                                                                                                    
REPRESENTATIVE TARR  asked whether  it would have  been premature                                                               
to expect some of those major  decisions to have been outlined in                                                               
the Heads  of Agreement (HOA),  thereby providing comfort  to the                                                               
MR.  TSAFOS  offered his  understanding  that  the MOU  had  some                                                               
language to that effect.                                                                                                        
REPRESENTATIVE HAWKER confirmed that it does.                                                                                   
REPRESENTATIVE TARR pointed out the  MOU is the state's alignment                                                               
with TransCanada,  while the  HOA is the  alignment with  all the                                                               
MR. MAYER responded that it was  probably premature.  He said the                                                               
HOA does not commit  the state to take gas in-kind  or to have an                                                               
equity  share;   rather,  the  HOA   sets  a  vision   where,  if                                                               
satisfactory agreements  can be reached,  this will happen.   The                                                               
question  of satisfactory  agreements is  integral as  it answers                                                               
the question of  what the state has control of  and veto over, as                                                               
well as an endless array of other issues.                                                                                       
1:52:43 PM                                                                                                                    
REPRESENTATIVE  TARR said  it would  be  instructive to  consider                                                               
whether  language should  be included  in  the bill  to have  the                                                               
force  of law  for expectations  that would  be used  to work  on                                                               
those joint venture  agreements.  She remarked  that the timeline                                                               
is an  issue given  "how little  control we  might have  once the                                                               
enabling  legislation goes  forward"  because "at  that point  we                                                               
would no  longer be the  negotiator ...  we would be  hoping that                                                               
the deal  was negotiated in the  best possible way on  our behalf                                                               
... and then  eventually come back, but we would  not actually be                                                               
able to participate in that way."                                                                                               
MR. MAYER concurred, saying the  aforementioned points out why it                                                               
is  so  important  the  legislature  be  clear  about,  and  have                                                               
confidence in,  this process of executive  session briefings with                                                               
the  administration  as  these contracts  are  being  negotiated.                                                               
Additionally,  the legislature  must have  confidence that  these                                                               
are going  to happen on  a regular basis  and will have  the full                                                               
degree  of  transparency  needed  to  understand  what  is  being                                                               
contemplated  and  what  might  be traded  off,  and  provide  an                                                               
adequate opportunity  to say  "do not go  here because  ... going                                                               
there  would  fundamentally  jeopardize  the ability  for  us  to                                                               
approve this when  it actually comes back to us."   Without that,                                                               
he continued,  it seems the legislature  does face an up  or down                                                               
vote,  and cannot  have  confidence.   The  process of  executive                                                               
session briefings  is so  critical and  one that  the legislature                                                               
needs to have full confidence in.                                                                                               
1:54:54 PM                                                                                                                    
REPRESENTATIVE HAWKER drew attention to  the MOU, Exhibit B, page                                                               
1, Alaska LNG Project Equity Option  Term Sheet, item 3, which is                                                               
the  area of  the document  being  talked about  and which  reads                                                               
[original punctuation provided]:                                                                                                
     The  Limited Partnership  Agreement would  provide that                                                                    
     TADI  [TransCanada  Alaska  Development, Inc.]  or  its                                                                    
     Affiliate would own 100% of  the general partner of the                                                                    
     Limited  Partnership, and  such  general partner  would                                                                    
     hold a minimal  (less than 1%) interest  in the Limited                                                                    
     Partnership.    The  General  Partner  would  make  all                                                                    
     decisions  on   behalf  of  the   Limited  Partnership,                                                                    
     provided that the Equity  Option Agreement will provide                                                                    
     that  certain  fundamental  decisions (e.g.  change  to                                                                    
     distribution    policy,     winding-up    of    Limited                                                                    
     Partnership,  sale of  significant interest  of Limited                                                                    
     Partnership in  AK LNG) could  not be made  without the                                                                    
     approval  of   the  Optionee  (before  the   option  is                                                                    
     exercised) or the Limited Partner  (after the option is                                                                    
     exercised).   The General Partner would  be entitled to                                                                    
     recover  all  of  its reasonable  direct  and  indirect                                                                    
     costs  that  are  associated  with  it  acting  as  the                                                                    
     general partner.                                                                                                           
REPRESENTATIVE HAWKER  noted that, basically, there  are words in                                                               
the aforementioned  that say the  State of Alaska.   He expressed                                                               
his concern  that those are  very vague descriptions of  the kind                                                               
of control  that would  be put in  place through  the contractual                                                               
relationship.   Regarding  an  up or  down vote,  he  said it  is                                                               
important  to  remember  that  the  legislature  passes  enabling                                                               
legislation that  empowers the administration  to go  forward and                                                               
ink the document that inherently  involves the Equity Option Term                                                               
Sheet, which does not come  back to the legislature for approval.                                                               
The   legislature  is   proceeding   in  good   faith  that   the                                                               
administration get it  right for the next 50 years,  a concern he                                                               
struggles with in this whole process.                                                                                           
1:57:20 PM                                                                                                                    
REPRESENTATIVE KAWASAKI recalled  discussion about the difference                                                               
between  ownership and  control.   He said  his concern  with the                                                               
state becoming  a part owner or  junior partner in a  pipeline is                                                               
for how  that balances out  with the  state being a  sovereign, a                                                               
taxing authority, and a regulator,  the state's current role.  He                                                               
asked whether there are examples of similar situations.                                                                         
MR. TSAFOS replied  that the typical case in the  world of LNG is                                                               
for the  state to  be an  owner in the  project rather  than not.                                                               
Most LNG projects  "out there" have a sovereign as  a full equity                                                               
partner all  the way from  the investment to marketing  that gas.                                                               
However, when  a state wears  multiple hats things  can sometimes                                                               
get  confusing and  difficult.   In his  experience working  with                                                               
national  oil   companies,  he  related,  it   sometimes  becomes                                                               
difficult to  separate the company  functions from  the sovereign                                                               
functions and sometimes national  oil companies act as regulators                                                               
or as the authority that grants the  leases.  So, in some ways, a                                                               
national company can  be thought of as encompassing  four or five                                                               
of the  State of Alaska's  departments or functions  within those                                                               
departments.   The lesson is that  things can be structured  in a                                                               
good way that delineates the  responsibilities of the state-owned                                                               
enterprises,  the responsibilities  of  the  regulators, and  the                                                               
relationship between  them.  It  is important to sketch  that out                                                               
in the proper  way, but this is  by no means a conundrum.   It is                                                               
typical for states  to be both regulators and part  owners in the                                                               
1:59:53 PM                                                                                                                    
REPRESENTATIVE KAWASAKI requested specific examples.                                                                            
MR. TSAFOS  answered oil examples  include Brazil  and Venezuela,                                                               
and LNG  examples include Qatar,  Algeria, United  Arab Emirates,                                                               
Indonesia, Russia, and Yemen.                                                                                                   
REPRESENTATIVE  KAWASAKI maintained  the aforementioned  examples                                                               
are  different because  they are  state-owned oil  companies that                                                               
are partners.   He queried  whether there are examples  where the                                                               
state does not  own its own oil company and  oil company interest                                                               
so that  it is more  similar to what  is proposed for  the Alaska                                                               
LNG Project.                                                                                                                    
MR. MAYER responded  there are plenty of examples  of states that                                                               
either did  not have a large  or any national oil  company at the                                                               
outset.   They typical  situation is  still one  of participation                                                               
through  a  national  oil  company  even if  it  is  a  fledgling                                                               
national oil  company that  is sometimes referred  to as  a purse                                                               
box national  oil company, which  is a  place to mail  checks to.                                                               
The bill before  the committee is also a corporate  entity of the                                                               
State of  Alaska which would  participate and, in that  sense, is                                                               
no different in some ways to  a fledgling national oil company in                                                               
another jurisdiction.   There is one part of this  that is unique                                                               
to Alaska,  as far as  he is aware, and  that is the  question of                                                               
creating the equivalent  of an equity share of the  gas itself by                                                               
taking the  royalty and the tax  in-kind and turning that  into a                                                               
state profit  share.  In  that sense,  Alaska is already  used to                                                               
relatively  unique, hybrid  models.   For  instance, the  profit-                                                               
based production  tax laid on top  of royalty is a  hybrid in its                                                               
own way.  This  comes from the state wanting to  be a more active                                                               
participant  in its  resource,  but coming  from  a general  U.S.                                                               
framework  that is  one  of  private ownership  and  a much  less                                                               
involved role of the state.   The basic foundation here of leases                                                               
and all the  rest, and the way this foundation  is written is not                                                               
one  in which  the state  naturally has  an equity  stake in  the                                                               
upstream and  other things.   The unique component of  the Alaska                                                               
LNG Project  is its  construction of  royalty and  production tax                                                               
in-kind to  create an equity  share for  the state.   The broader                                                               
point of  equity participation  in a project  is the  norm rather                                                               
than the exception.                                                                                                             
2:03:44 PM                                                                                                                    
MR.  TSAFOS returned  to his  presentation,  addressing slide  6,                                                               
"Various  Financing Options  Open to  LNG Projects."   Qualifying                                                               
that this is  again a simplification, he said there  are two ways                                                               
to finance a  project of this type:  balance  sheet financing and                                                               
project financing.   Under balance  sheet financing,  the project                                                               
sponsors provide  funds. For example,  each part-owner  could put                                                               
down the  same percentage  as its ownership,  creating a  pool of                                                               
money for building the project.   These funds can combine debt as                                                               
well  as  cash flow,  so  when  one  party  puts down,  say,  $10                                                               
billion, that money  could be both revenues as well  as debt that                                                               
was  raised.   The  ultimate  guarantee  comes from  the  project                                                               
sponsor and the sponsor's balance sheet.   It comes down to faith                                                               
in  the project  sponsor,  the  company that  is  putting in  the                                                               
money, and the faith that that  company will pay its debts.  This                                                               
type  of  financing is  easier  if  all  the parties  have  great                                                               
balance  sheets.   Under project  financing,  third parties  lend                                                               
money to  the project  directly, not  to the  sponsors.   In this                                                               
case, money  would be loaned  to the  Alaska LNG Project,  not to                                                               
ExxonMobil, BP,  Conoco, and  the State of  Alaska.   The project                                                               
would  get  some  equity;  for  example,  the  project  could  be                                                               
capitalized  with  30 percent  equity  from  the pockets  of  the                                                               
sponsors,  with the  rest  borrowed by  the  Alaska LNG  Project.                                                               
Crucial  is  that the  guarantee  for  the  debt is  the  project                                                               
revenues, not  the project sponsor.   The difference  between the                                                               
two  options is  that  with balance  sheet  finance the  ultimate                                                               
guarantor is the  project sponsor and with project  finance it is                                                               
the  revenues of  the project.   Because  of that,  the rate  for                                                               
project  finance  depends   on  risk  of  the   project  and,  in                                                               
particular, the risk of the people  who are promising to pay back                                                               
the money.   This  form of  finance is  attractive because  it is                                                               
easier to  accommodate riskier  sponsors.   For example,  when an                                                               
LNG project  was being  done in  Qatar in  the mid-1990s  and the                                                               
State of  Qatar was  bankrupt, a  lender may  not have  wanted to                                                               
loan money to the State of  Qatar, but the lender may have wanted                                                               
to loan money  to a project being led by  ExxonMobil in which the                                                               
State of  Qatar was a partner  and the revenue was  guaranteed by                                                               
the  Japanese utility  that had  promised  to buy  gas from  that                                                               
project.   In the case of  the Alaska LNG Project,  the financial                                                               
strength of  the state's partners is  probably not at the  top of                                                               
the list.                                                                                                                       
2:09:42 PM                                                                                                                    
MR. TSAFOS, continuing his discussion  of financing options, said                                                               
it was important to keep the  distinction between the two in mind                                                               
because project  finance is  non-recourse debt,  so the  bank can                                                               
only  take  the asset,  which,  from  an accounting  perspective,                                                               
allows a  project sponsor to not  have that asset on  its balance                                                               
sheet.   In thinking about  debt specifically for the  Alaska LNG                                                               
Project,  project  financing  would  make a  difference  for  the                                                               
state's credit  ratings, its debt  numbers.  Under  balance sheet                                                               
finance for  the Alaska  LNG Project, the  State of  Alaska would                                                               
borrow money  or take money from  taxes to put into  the project,                                                               
while under  project finance it  would be the Alaska  LNG Project                                                               
that is  borrowing the money.   This is an  important distinction                                                               
when  looking at  the  key  questions for  the  State of  Alaska.                                                               
These  have not  yet been  answered  and should  not be  answered                                                               
until the details  are clear.  The first key  question is the mix                                                               
of  debt  and equity.    In  the  case  of Alaska,  equity  means                                                               
carrying revenue that the state has.   The second key question is                                                               
whether the debt  will be specific to the LNG  project or part of                                                               
the  broader  state  balance  sheet liability.    The  third  key                                                               
question, if the state puts in  equity, is where that equity will                                                               
come  from.   This  is linked  to the  fourth  question which  is                                                               
whether the  permanent fund could put  in money and, if  it does,                                                               
where does  the money go when  it comes out.   Whichever path the                                                               
state chooses,  there is a  precedent as there are  projects that                                                               
do balance sheet  finance and there are projects  that do project                                                               
2:12:05 PM                                                                                                                    
MR. TSAFOS  moved to slide  7, "Project Finance  Well Established                                                               
in LNG,"  emphasizing that project  finance is an  extremely well                                                               
established  principle and  practice in  the  world of  LNG.   He                                                               
noted slide 7 provides a list  of recent examples of LNG projects                                                               
that  have secured  third party  financing.   Alaskans may  think                                                               
that  no matter  what other  projects exist  Alaska's project  is                                                               
going to be  bigger than anyone has ever seen  and therefore this                                                               
type of  financing does  not apply to  Alaska, although  it does.                                                               
For example,  Ichthys [in Northern Australia]  raised $20 billion                                                               
in  third party  financing  which  came from  the  Japan Bank  of                                                               
International  Cooperation  (JBIC),  the  Korean  and  Australian                                                               
export  and  import  banks, commercial  banks,  and  the  project                                                               
sponsors.  Papua  New Guinea, a project in which  ExxonMobil is a                                                               
partner, took  $14 billion in  third party financing.   Australia                                                               
Pacific  LNG, a  ConocoPhillips  project, [took  $5.8 billion  in                                                               
third party financing].   The Tangguh project in  Indonesia, a BP                                                               
project,  [took $3.5  billion in  third party  financing].   This                                                               
list of projects  shows that all three of the  Alaska LNG Project                                                               
partners  have  quite  a  bit  of  experience  with  third  party                                                               
financing.   A  benefit of  project financing  is that  financing                                                               
from sovereigns,  credit agencies,  and multilateral  banks tends                                                               
to be quite competitive relative to commercial bank rates.                                                                      
2:14:11 PM                                                                                                                    
REPRESENTATIVE HAWKER,  regarding the absoluteness  of statements                                                               
being  made in  the presentation,  asserted that  while the  debt                                                               
itself is  technically non-recourse  under project  financing, an                                                               
organization must  still put  the debt  on its  books due  to the                                                               
underlying  level of  risk assumption.    An organization  cannot                                                               
insulate  itself automatically  from recognizing  the liabilities                                                               
associated with  the project  on its  balance sheet  just because                                                               
the financing arrangement is, arguably, non-recourse.                                                                           
MR. TSAFOS  agreed that Representative  Hawker is correct  in his                                                               
observation that  enalytica's statements are absolute  when there                                                               
is finer detail.  Mr. Tsafos  said it has not yet been determined                                                               
what kind  of separation there  will ultimately be if  the Alaska                                                               
LNG Project is done using  project finance and whether this asset                                                               
will be completely off the State of Alaska's balance sheet.                                                                     
2:16:09 PM                                                                                                                    
REPRESENTATIVE  HAWKER  said  a  classic example  is  that  until                                                               
recently the  State of Alaska  was not required to  recognize its                                                               
post-retirement  benefits  in  its balance  sheet,  although  the                                                               
state chose  to do  so.   Accounting promulgations  were recently                                                               
changed   to  mandate   that  this   be   done,  affecting   many                                                               
municipalities.   It  is  not only  something  empirical.   Those                                                               
issues  are subject  to future  regulatory  authority that  could                                                               
change the character  of the project.  The  classic definition of                                                               
mega-project  is   a  project  that  changes   the  economic  and                                                               
regulatory weather around it.   When this project gets going, the                                                               
accounting world could very well  say that this project cannot be                                                               
hidden from the world.                                                                                                          
MR.  MAYER added  that  this  was not  included  here  to set  up                                                               
something firm  and absolute, but  rather the opposite --  to set                                                               
out the extent  of the unknowns in  all of this.   At this moment                                                               
there is  only a vision for  a project; the vast  majority of the                                                               
details are yet to be hammered out.   One big unknown is how this                                                               
might  be  financed in  terms  of  the  overall project  and  the                                                               
individual partners.  Later in  today's presentation the question                                                               
of the midstream  and TransCanada will be addressed.   A question                                                               
raised  numerous  times  by the  administration  is  the  state's                                                               
overall balance sheet and ability  to carry debt for this process                                                               
and therefore  ability to fund its  share, which is a  reason why                                                               
having a partner  like TransCanada is attractive.   A vast amount                                                               
remains unknown  about how  this will  be financed  and therefore                                                               
what the implications  are for the state and  the state's balance                                                               
sheet.   It  may  well be  that the  state  is seriously  capital                                                               
constrained  and  that  for purely  financial  reasons  having  a                                                               
partner could  be very  attractive.   It could  also be  that the                                                               
inverse is  true and large  amounts can be financed  through non-                                                               
recourse debt which  would not have to go on  the state's balance                                                               
sheet.   The state might  turn to other assets  or to a  range of                                                               
other  things  by maintaining  flexibility  in  how it  seeks  to                                                               
structure  this or  to  exercise  an off-ramp  [in  the MOU  with                                                               
TransCanada] if it finds it  does have the financing capacity and                                                               
wants to pursue that.                                                                                                           
2:19:19 PM                                                                                                                    
MR. TSAFOS,  in response  to Co-Chair  Feige, confirmed  that IHS                                                               
[slide 6] is  a consulting company that he and  Mr. Mayer used to                                                               
work for.                                                                                                                       
MR. MAYER added that the report published by IHS is available.                                                                  
2:19:42 PM                                                                                                                    
REPRESENTATIVE  KAWASAKI, in  regard to  easier accommodation  of                                                               
riskier sponsors under project finance,  asked if this is Alaska.                                                               
In regard  to the rate  depending on  project risk, he  asked who                                                               
decides that and how would the  risk be formulated for the Alaska                                                               
LNG Project.   He further asked how enalytica thinks  the risk of                                                               
this project will be perceived.                                                                                                 
MR. TSAFOS responded that easier  to accommodate riskier sponsors                                                               
is a general  statement and has nothing to do  with Alaska as far                                                               
as the state's current financial  solvency given Alaska's balance                                                               
sheet  is  definitely strong.    Regarding  how project  risk  is                                                               
assessed, he  recalled that  at the  LNG 17  industry conference,                                                               
ExxonMobil gave  a presentation about  project finance  for Papua                                                               
New Guinea.   ExxonMobil put up  a picture of the  closing day on                                                               
the $14  billion loan and it  showed stacks of papers  across the                                                               
full length  of a 40-foot  room, all of  which had to  be signed,                                                               
noting that who  determines and how it gets determined  is a very                                                               
long  process.    The  difference  between  project  finance  and                                                               
balance sheet  finance is that  when loaning money  to ExxonMobil                                                               
the question being asked by  the lender is whether ExxonMobil can                                                               
pay  back the  loan  and when  loaning money  to  the Alaska  LNG                                                               
Project the  question being  asked by the  lender is  whether the                                                               
Alaska LNG Project can pay back  the loan.  The lender ultimately                                                               
cares about how  much the project is going to  cost, what kind of                                                               
contracts  are   available  for   selling  the  gas,   and  being                                                               
comfortable  that these  contracts will  be honored  by both  the                                                               
buyer  and  the seller.    Sovereign  risk  in  the case  of  LNG                                                               
projects usually takes two forms.   One is security risk, such as                                                               
building something in the Niger  Delta or something adjacent to a                                                               
war zone.  The  other type of risk is if  the country is bankrupt                                                               
it can be  expected that that country will take  radical steps to                                                               
redeem itself  and a  big asset  like an LNG  project would  be a                                                               
prime candidate for a state or  sovereign to go after in order to                                                               
generate money  to get itself out  of a tough position.   So, the                                                               
answer is  whoever is  willing to  loan the  money --  the lender                                                               
determines  the  project risk.    The  lender assesses  security,                                                               
technical risk, and operational risk,  and puts these together to                                                               
determine a cost of debt.                                                                                                       
2:24:02 PM                                                                                                                    
MR.  MAYER  concurred, adding  that  a  lender loaning  money  to                                                               
ExxonMobil for  a project cares about  ExxonMobil's balance sheet                                                               
and  credit rating.    A  lender to  the  Alaska  LNG Project  is                                                               
thinking  about companies,  balance sheets,  and credit  ratings,                                                               
but more  than anything  a lender  cares about  the "take-or-pay"                                                               
contracts that have been signed,  who the contracts are with, and                                                               
the credit  ratings of those  buyers.   The future cash  flows of                                                               
the project  open the financing  and the lender is  assessing the                                                               
creditworthiness  of  that  contract,   how  much  it  absolutely                                                               
requires these  entities to pay or  be in default, and  how "good                                                               
for it" those entities are.                                                                                                     
2:25:33 PM                                                                                                                    
MR. TSAFOS turned  to slide 8 to address the  methodology of cash                                                               
in and  cash out.   For the Alaska  LNG Project, the  state earns                                                               
money in two ways:  by virtue  of being a project owner and being                                                               
a sovereign.   Project revenue  is calculated by  multiplying the                                                               
volume  times  the  price,   minus  capital  expenditures,  minus                                                               
operations  and maintenance,  minus debt  service, and  minus the                                                               
tariff paid to  TransCanada.  Cash flow  from sovereign functions                                                               
comes  from state  income  tax  and property  tax.    Thus, as  a                                                               
sovereign, the  money the state  makes from the  project includes                                                               
project cash flows and sovereign cash flows.                                                                                    
2:27:05 PM                                                                                                                    
MR. TSAFOS  looked at four  cash flow scenarios, each  assuming a                                                               
25 percent  equity ownership for  the state:   1) no debt  and no                                                               
TransCanada partnership;  2) no  TransCanada partnership  but the                                                               
state finances 70 percent of  its share with debt; 3) TransCanada                                                               
is a  partner and the state  exercises its buyback option  so the                                                               
state has a  10 percent share in the gas  treatment plant and the                                                               
pipeline  and  TransCanada  has  a  15  percent  share  in  those                                                               
components; and  4) TransCanada is  a partner but the  state does                                                               
not exercise its  buyback option, so the gas  treatment plant and                                                               
pipeline are 75 percent oil  companies and 25 percent TransCanada                                                               
and the  liquefaction plant  is 75 percent  oil companies  and 25                                                               
percent State of Alaska.   All the revenue from project ownership                                                               
and  from sovereign  functions is  not necessarily  available for                                                               
the state  to spend  in any  given year,  as both  restricted and                                                               
unrestricted cash flows must be  reviewed.  Restricted cash flow,                                                               
income that  must go to the  permanent fund and income  that will                                                               
pay   property  tax,   must  be   subtracted  to   determine  the                                                               
unrestricted funds available to the state.                                                                                      
2:29:27 PM                                                                                                                    
MR. TSAFOS,  in response  to Co-Chair  Feige, confirmed  that the                                                               
property tax is  the share of the overall property  tax that goes                                                               
to municipalities.   He said enalytica has made  an assumption of                                                               
putting 80 percent into restricted  funds for property tax; thus,                                                               
if property tax is $100 then $80 will go to the municipalities.                                                                 
REPRESENTATIVE SEATON,  noting that the State  of Alaska's system                                                               
has tax  credits, inquired  whether those  would be  considered a                                                               
capital expense.                                                                                                                
MR. MAYER  replied the  bigger question is  not tax  credits, but                                                               
tax deductions  of capital spending,  which is  upstream spending                                                               
on gas and  deduction against the oil.  That  is accounted for in                                                               
the  model as  a cash  outlay; it  is reduction  in revenue  that                                                               
shows up  in the  cash flow.   The final results  are net  of all                                                               
these, including net of losses in taxes due to expenditure.                                                                     
2:30:54 PM                                                                                                                    
MR. TSAFOS  moved to slide  9, "SOA'S Cash Calls  and Off-Ramps,"                                                               
explaining  that  the y-axis  of  the  graph  is in  millions  of                                                               
dollars.   The  x-axis  depicts four  sets  of different  colored                                                               
bars,  each  set representing  one  of  the  four phases  of  the                                                               
project -- Pre-FEED, FEED, Construction,  and Online.  Each green                                                               
bar represents the scenario of  no TransCanada and no debt, which                                                               
is the HOA, the  maximum that the state could be  on the hook for                                                               
paying out and the maximum the  state could expect to get back in                                                               
return.    Each   yellow  bar  represents  the   scenario  of  no                                                               
TransCanada  and the  state borrowing  70 percent  of its  share.                                                               
Each red bar represents the  scenario of TransCanada as a partner                                                               
and the state  buy back of its share so  that TransCanada ends up                                                               
with a 15 percent  share and the state a 10  percent share.  Each                                                               
blue  bar  represents  the scenario  of  TransCanada  owning  100                                                               
percent  of the  gas treatment  plant  and the  pipeline and  the                                                               
state does not exercise its  buyback option and remains purely an                                                               
owner in the  liquefaction.  The text at the  bottom of the chart                                                               
explains how  to get from  the first  phase to the  second phase,                                                               
from the  second phase  to the  third phase,  and from  the third                                                               
phase to the fourth phase.                                                                                                      
2:33:25 PM                                                                                                                    
MR.  TSAFOS, responding  to Representative  P.  Wilson, said  the                                                               
"70/30 D/E split" for the  red bar means 70/30 debt/equity, which                                                               
is 15  percent for TransCanada  and 10 percent for  Alaska, which                                                               
comes from  the state buy  back of 40  percent of the  25 percent                                                               
that it has given TransCanada.                                                                                                  
2:34:17 PM                                                                                                                    
MR. TSAFOS  addressed the set  of negative bars  representing the                                                               
[Pre-FEED]  phase, specifying  that  the negative  for the  state                                                               
could be anywhere from $55  million to $104 million, depending on                                                               
which structure the  state chooses.  In an option  where there is                                                               
no TransCanada  (green and yellow  bars), the number  is negative                                                               
$104 million; if  TransCanada is brought in (red  and blue bars),                                                               
the  number  is  negative  $55  million  because  TransCanada  is                                                               
covering the state's share for a  portion of the studies.  At the                                                               
end of  the Pre-FEED  process, the state  has three  options, one                                                               
option  being to  abandon the  project and,  if TransCanada  is a                                                               
partner, reimburse  TransCanada $50-$60 million per  the terms of                                                               
the MOU.                                                                                                                        
CO-CHAIR  SADDLER announced  that Co-Chair  Feige has  passed the                                                               
gavel to him.                                                                                                                   
MR. TSAFOS continued his explanation  of slide 9, explaining that                                                               
if TransCanada becomes  a partner it pays for  the state's share.                                                               
So, if the  state drops TransCanada or abandons  the project, the                                                               
state must  reimburse TransCanada for carrying  the state's share                                                               
into the project,  as per the MOU.  Another  option for the state                                                               
is to  adjust its equity, which  it can do throughout  the phases                                                               
of the project.  The state  could, for example, reduce its equity                                                               
from 25  percent to 20 percent  by selling 5 percent.   The third                                                               
option is  for the state to  keep things as they  are and proceed                                                               
to the FEED stage.                                                                                                              
2:37:06 PM                                                                                                                    
MR. TSAFOS said if the project  goes to the FEED stage, the state                                                               
will be  required to pay its  share of the FEED  study, from $500                                                               
million  to $270  million.    He reiterated  that  the green  and                                                               
yellow bars  represent not  having TransCanada  as a  partner and                                                               
the red and blue bars  represent having TransCanada as a partner.                                                               
At the  end of the FEED  stage, if TransCanada owns  100 percent,                                                               
the  state will  have  spent  [$266] million  (blue  bar in  FEED                                                               
stage) plus $55 million (blue bar  in Pre-FEED stage) for a total                                                               
expenditure  of  between  $310  million and  $320  million.    If                                                               
TransCanada  is not  a partner,  the state  will have  spent $486                                                               
million plus $104 million.  After  the FEED study is completed in                                                               
2017 or  2018, the state [again  has three options].   One option                                                               
is to abandon  the project in which case the  state would need to                                                               
reimburse  TransCanada for  paying  the state's  share.   Another                                                               
option is  to adjust the  state's equity  by selling some  of its                                                               
share.   The third option  is that the  state can keep  things as                                                               
they are and proceed to the construction phase.                                                                                 
MR. TSAFOS  pointed out that  the construction phase is  when the                                                               
large  amounts of  money  are invested.   The  green  bar in  the                                                               
construction phase represents  the state taking no  debt [and not                                                               
having TransCanada as  a partner], in which case  the state would                                                               
be on the hook for about $11.7 billion.                                                                                         
2:40:12 PM                                                                                                                    
REPRESENTATIVE HAWKER  expressed his  concern and asked  what the                                                               
probability  is that  these are  in  fact the  numbers, slide  9,                                                               
given that  Pre-FEED and FEED  are about identifying the  cost of                                                               
this project.   He queried  whether the consultants are  privy to                                                               
information that legislators are not.                                                                                           
MR.  MAYER answered  that  the numbers  on the  slide  are not  a                                                               
precise measurement; the aim is to  be illustrative and to give a                                                               
very rough idea.   For example, enalytica's  numbers are similar,                                                               
but  by no  means  identical,  to the  numbers  presented by  the                                                               
administration's  consultant, Black  & Veatch,  as each  has done                                                               
its own modeling with its own  assumptions.  These numbers are an                                                               
order-of-magnitude indication,  and are not precise  forecasts of                                                               
what  will happen  as  the project  has not  been  scoped in  any                                                               
detail.  These  numbers are very, very rough  indications of what                                                               
could happen.                                                                                                                   
2:42:40 PM                                                                                                                    
REPRESENTATIVE HAWKER  expressed his concern that  enalytica sees                                                               
the world  differently than  Black & Veatch.   He  said enalytica                                                               
works for and  is providing counsel to the  legislature while the                                                               
administration is  providing its  perspective to  the legislature                                                               
based on  the work of its  consultants, Black & Veatch.   Hearing                                                               
that  there  is such  a  material  differential between  the  two                                                               
consulting firms  is a bit  of concern.   He said he  hopes there                                                               
will be  clarification of  the differences  and recognition  of a                                                               
common answer.                                                                                                                  
MR.  MAYER   responded  that  when   the  numbers   are  compared                                                               
directionally,  the two  consulting  firms come  to very  similar                                                               
conclusions on  many of the core  issues.  But, he  allowed, when                                                               
it comes  to specific revenue  amounts there  is a wide  range of                                                               
difference,  including that  enalytica presents  its analysis  in                                                               
real, constant dollar  terms as opposed to looking  at the impact                                                               
of inflation over time.                                                                                                         
2:43:40 PM                                                                                                                    
REPRESENTATIVE HAWKER  inquired whether  Black & Veatch  is using                                                               
discounted dollars while enalytica is using whole dollars.                                                                      
MR. MAYER  replied that,  in regard  to recent  presentations, he                                                               
does not  know.   However, he continued,  in the  timeframe being                                                               
talked about, the differences are  not enormously material and he                                                               
takes a  lot of confidence  that [the two consulting  firms] have                                                               
approached  this  entirely  separately,  come  up  with  entirely                                                               
separate sets  of assumptions  and models, and  yet come  up with                                                               
analysis that, on core issues, is directionally very similar.                                                                   
CO-CHAIR SADDLER  commented that  the committee  has the  time to                                                               
hear the two and compare the conflicting models and conclusions.                                                                
2:44:40 PM                                                                                                                    
REPRESENTATIVE HAWKER,  regarding slide  9 and the  assumption of                                                               
25 percent equity for the  state, inquired whether that equity is                                                               
referring to  the state's  "pipe within a  pipe".   Regarding the                                                               
cash splits depicted on slide  9, he inquired what the assumption                                                               
is for the equity split between TransCanada and the state.                                                                      
MR. MAYER answered  that it assumes a 25 percent  gas share.  The                                                               
green  and yellow  bars depicted  in each  scenario represent  25                                                               
percent equity across  the entire value chain.  The  red and blue                                                               
bars [depicted in  each scenario] represent the world  of the MOU                                                               
and TransCanada.   In the buyback option [red bar],  the State of                                                               
Alaska has 10  percent and TransCanada has 15 percent  in the gas                                                               
treatment plant and  the pipeline [for a total of]  25 percent in                                                               
the midstream.   The blue bars  represent the full 25  percent to                                                               
TransCanada in the  gas treatment plant and the  pipeline, and 25                                                               
percent to the state in the liquefaction.                                                                                       
2:46:01 PM                                                                                                                    
MR.  MAYER, responding  to Co-Chair  Saddler, confirmed  that the                                                               
cash  outlay depicted  for each  phase is  the dollar  amount for                                                               
that phase only and not a cumulative number.                                                                                    
2:46:28 PM                                                                                                                    
REPRESENTATIVE  SEATON,  regarding  the state  selling  down  its                                                               
equity, asked  whether that means  the state would  be partnering                                                               
with the  entity that purchases  the equity.  For  example, could                                                               
the  state split  its  equity,  or sell  the  entire portion  and                                                               
become a revenue  receipt partner so that the state  is back into                                                               
its normal receipt of tax and revenue share.                                                                                    
MR. TSAFOS  responded the answer is  half yes.  The  half that is                                                               
yes  is that  the state  could  sell, say,  5 percent  of its  25                                                               
percent share  in the liquefaction  to, for  example, Mitsubishi.                                                               
Depending on  what the state  sells determines what the  state is                                                               
left with.  The state could sell  all of its gas at the wellhead,                                                               
but that would  not necessarily push the state back  into the old                                                               
world of traditional tax royalty  because the state is already in                                                               
the new world.  It is just a  matter of where the state sells its                                                               
25 percent of gas.  For example,  the state could sell its gas up                                                               
on the North Slope,  or in Nikiski, or in Japan.   So, the answer                                                               
is the  state can bring  a partner  but there are  many different                                                               
ways in  which the  state can bring  that partner  that determine                                                               
what the  state ends  up receiving  over a  long period  of time.                                                               
Normally, a lump  sum is received up front, but  what is received                                                               
afterward depends on what exactly was sold.                                                                                     
2:48:44 PM                                                                                                                    
REPRESENTATIVE  SEATON recounted  that  the  committee has  often                                                               
heard  that when  a  percentage of  gas is  sold,  the gas  buyer                                                               
generally wants to  have that same percentage all the  way up the                                                               
chain.  He posed a scenario in  which the state has 25 percent in                                                               
gas  and 25  percent in  liquefaction, and  inquired whether  the                                                               
state  could return  itself to  a  more traditional  governmental                                                               
position of revenue receiving by  selling both of those ownership                                                               
MR.  MAYER replied  that, in  principle,  the idea  of the  state                                                               
selling its share of the  gas is exactly as Representative Seaton                                                               
said, in that  the state would be trying to  monetize the present                                                               
value of  the future  revenue stream  and claim that  now.   In a                                                               
traditional  project   where  the   state  has   full  ownership,                                                               
including    the    upstream,    that   would    be    relatively                                                               
straightforward.   In  this case,  where the  state has  that gas                                                               
share by  virtue of  royalty and  tax, some  specific contractual                                                               
structures might  need to  be put  in place to  enable a  sale of                                                               
that  future  gas  stream along  with  the  corresponding  equity                                                               
stake.  Mr.  Mayer imagined there are a number  of ways the state                                                               
could do that, but said many  details would need to be worked out                                                               
to  determine  how  to  implement that  and  whether  there  are,                                                               
indeed, any limitations.                                                                                                        
2:51:28 PM                                                                                                                    
REPRESENTATIVE SEATON requested enalytica  to run those scenarios                                                               
to  see whether  any provisions  in  the bill  would prevent  the                                                               
state from exercising its more  traditional governmental role and                                                               
receiving a  revenue stream,  not necessarily all  up front  as a                                                               
net  present value  but  a  sale with  revenue  stream over  time                                                               
instead of the participation.                                                                                                   
2:52:01 PM                                                                                                                    
CO-CHAIR SADDLER  noted there are  limitations in this  deal that                                                               
Alaska cannot  sell its  share to a  TransCanada competitor.   He                                                               
asked whether  that could limit  the state's ability to  meet its                                                               
obligations should it find itself short of cash.                                                                                
MR. MAYER agreed this is a good  point and said it is certainly a                                                               
limiting factor under the MOU.   Unlike selling an overall equity                                                               
share in the  project along with the share of  gas that goes with                                                               
it,  if one  sought  to allocate  that  participation to  another                                                               
partner,  the basis  on which  that  participation was  allocated                                                               
would usually be one of trying  to get the lowest possible bidder                                                               
on tariff  because ultimately what  is being  sold is a  share of                                                               
something  that is  just the  right  to recover  the future  cost                                                               
through a  tariff, not the  right to  gas and revenue  that comes                                                               
from the gas.  So, in that  sense, it is not something that would                                                               
be looked  at to sell  as a  revenue-generating item as  would be                                                               
the   case  for   the   overall  gas   share   and  sharing   the                                                               
2:53:39 PM                                                                                                                    
MR.  TSAFOS addressed  Representative  Hawker's comments,  saying                                                               
enalytica's  awareness of  the uncertainty  is why  a stress-case                                                               
scenario  was  modeled  in  which  capital  expenditures  are  25                                                               
percent higher  to provide a  sense of the range  of uncertainty.                                                               
He noted this will be discussed later in the presentation.                                                                      
2:54:27 PM                                                                                                                    
MR. TSAFOS resumed  his discussion of slide  9, drawing attention                                                               
to  the portion  of the  graph for  the construction  phase.   He                                                               
reminded members that the idea of  the graph is to understand the                                                               
total  numbers if:   1)  the  state pays  for everything  out-of-                                                               
pocket and  has no debt  (green bars); or  2) the state  takes on                                                               
debt (yellow  bars); or 3)  the state  takes on TransCanada  as a                                                               
partner (red and blue bars).   He noted that the depicted numbers                                                               
come  with  the  caveats  relating  to  precision  as  previously                                                               
mentioned by  Mr. Mayer.   In the  construction phase,  the state                                                               
could be  on the  hook for about  $12 billion if  it takes  on no                                                               
debt.   If the state finances  with 70 percent debt,  it would be                                                               
on the  hook for about $5  billion.  The addition  of TransCanada                                                               
as  a partner  could  bring the  state's cost  down  to about  $4                                                               
billion  or $3.5  billion.   He  said he  is trying  to give  the                                                               
committee a  sense about capital  constraints and  TransCanada at                                                               
this stage of  the project, and the flexibility the  state has in                                                               
its equity share and its upfront spending.                                                                                      
2:55:56 PM                                                                                                                    
REPRESENTATIVE  TARR  remarked  that while  several  options  are                                                               
being evaluated,  the options  that really are  on the  table are                                                               
the two TransCanada  options due to the documents.   She sked how                                                               
committee  members can  appropriately evaluate  the risk  between                                                               
the  blue   bars  versus  the   yellow  bars  [the   scenario  of                                                               
TransCanada  100 percent  gas treatment  plant  and pipeline  and                                                               
70/30  debt/equity split  versus scenario  of no  TransCanada and                                                               
70/30 debt/equity split].  She  observed that these two scenarios                                                               
are  closer   financially  in  terms   of  the   state's  overall                                                               
commitment ($3.5 billion versus $5 billion, respectively).                                                                      
MR. MAYER responded future slides  will look at this question and                                                               
will help with that answer.                                                                                                     
MR. TSAFOS added it also  becomes quite different when the stress                                                               
case  scenario  is  looked  at, which  is  where  the  difference                                                               
between  having TransCanada  and not  having TransCanada  becomes                                                               
quite interesting.                                                                                                              
2:57:41 PM                                                                                                                    
MR.  TSAFOS wrapped  up his  discussion  of slide  9 by  bringing                                                               
attention to  the online phase  of the  project.  He  pointed out                                                               
that once  construction starts it  is now  too late to  stop [and                                                               
not  proceed to  online].   The only  question at  this point  is                                                               
whether the  state is  still comfortable  with its  equity share.                                                               
Once  online,  the revenues  to  the  state  will range  from  $4                                                               
billion to  $2.9 billion annually.   He reiterated that  the idea                                                               
of  the  chart  on  this  slide   is  to  see  what  the  state's                                                               
commitments  are  at each  stage  of  the  project, what  is  the                                                               
directional  change  between  one  option  versus  the  other  so                                                               
members can start  asking questions, such as  what the difference                                                               
is between having  TransCanada or not having  TransCanada and how                                                               
much  that partnership  helps  upfront but  how  much revenue  is                                                               
foregone later on.                                                                                                              
2:58:58 PM                                                                                                                    
CO-CHAIR  SADDLER inquired  what  the  state's total  expenditure                                                               
will be over the initial project term of 25 years.                                                                              
MR. TSAFOS  replied that  the cumulative cash  flows, as  well as                                                               
the split between the different  partners, will be provided later                                                               
in the presentation.                                                                                                            
CO-CHAIR  SADDLER  asked whether  that  will  be in  net  present                                                               
MR.  TSAFOS answered  it will  be net  present value  as well  as                                                               
undiscounted when addressed later in the presentation.                                                                          
2:59:43 PM                                                                                                                    
MR. TSAFOS turned to the graph  on slide 10, "LNG Income Includes                                                               
Restricted  Revenue," explaining  that  not all  of the  revenues                                                               
will be  available for spending  because some of it  is permanent                                                               
fund and some  is property tax.   He pointed out that  the set of                                                               
four bars  on the far  left of  this chart represent  the state's                                                               
total annual income  and is the same set of  bars depicted on the                                                               
far right of the  graph on slide 9.  The middle  set of four bars                                                               
represent  the state's  total income  minus  the permanent  fund.                                                               
The set of four bars on the  far right of the graph represent the                                                               
state's  total income  minus  the permanent  fund  and minus  the                                                               
property  tax due  the municipalities.    Responding to  Co-Chair                                                               
Saddler, he said enalytica made  the assumption for allocating 80                                                               
percent  of the  total  of property  tax  to municipalities,  but                                                               
qualified that  this assumption  is not  a forecast  or statement                                                               
that this is going  to happen.  He said [the graph]  is to give a                                                               
sense  of the  orders of  magnitude of  how these  numbers differ                                                               
when going  from total revenue  versus revenue that  is available                                                               
to spend unrestricted.                                                                                                          
[Co-Chair Saddler returned the gavel to Co-Chair Feige.]                                                                        
3:02:14 PM                                                                                                                    
REPRESENTATIVE   HAWKER  inquired   whether  the   aforementioned                                                               
numbers in the overall model include the state's royalty share.                                                                 
MR. MAYER responded  yes, the entire model is built  on the basis                                                               
of a  25 percent share of  the gas, which comes  from the royalty                                                               
and the production tax.                                                                                                         
3:02:50 PM                                                                                                                    
CO-CHAIR FEIGE  recessed the  House Resources  Standing Committee                                                               
until 6:30 p.m.                                                                                                                 
6:35:19 PM                                                                                                                    
CO-CHAIR  FEIGE called  the  House  Resources Standing  Committee                                                               
meeting  back to  order  at 6:35  p.m.   Representatives  Hawker,                                                               
Johnson, Seaton,  P. Wilson, Saddler,  and Feige were  present at                                                               
the  call back  to order.   Representatives  Tarr, Kawasaki,  and                                                               
Olson arrived  as the  meeting was  in progress.   Representative                                                               
Isaacson was also present.                                                                                                      
6:35:33 PM                                                                                                                    
REPRESENTATIVE HAWKER  addressed slide 11, "Stress  Testing SOA's                                                               
Cash Calls and Revenues."  He  drew attention to the far left set                                                               
of four bars  depicting the base case construction  for the years                                                               
2019-2023 and compared them to  a handout in the committee packet                                                               
which  he believed  came from  the administration.   He  observed                                                               
that for  the scenario in which  the state goes it  alone with no                                                               
debt (green bar),  enalytica's graph has an  expenditure of $11.7                                                               
billion while the administration's  expenditure is $13.2 billion.                                                               
For  the  scenario  of  40  percent  state  buyback,  enalytica's                                                               
expenditure is [$4.05] billion  while the administration's figure                                                               
is $9.3 billion.  He asked what accounts for these differences.                                                                 
MR.  MAYER replied  he would  expect to  see differences  because                                                               
enalytica arrived at its numbers  through its own assumptions and                                                               
exercise.    These  numbers  are actually  very  close  from  the                                                               
perspective of  just how little  is known about this  project and                                                               
the Pre-FEED  process has not  even been commenced.   Any numbers                                                               
will be an  abstract effort what the possible  future looks like.                                                               
In a year and a half  there will be substantially tighter numbers                                                               
with  potentially  better  assumptions and  substantially  better                                                               
estimates.   By the time  it comes  to make the  final investment                                                               
decision there  should be some  very accurate numbers as  to what                                                               
those costs  actually are.   Any  number at  this point  is about                                                               
direction  of  analysis  in  coming  to  understand  whether  the                                                               
structure  makes sense  and  whether the  range  of things  makes                                                               
sense.  The only thing that  can be said about the actual precise                                                               
numbers is that they are all certainly wrong.                                                                                   
MR. TSAFOS added that part of  the question is how the capital is                                                               
spread across  that construction  period.   Crucially, it  is how                                                               
that capital  expenditure is spread  on the different  years, and                                                               
also whether it is assumed that  the day the project comes online                                                               
all the capital has been spent.   For example, enalytica has some                                                               
spending on  the first year  of operation, the reason  being that                                                               
this is a massive project with  three different trains.  So, even                                                               
when the project  comes online, there will still  be some capital                                                               
expenditure.  In  looking at the construction phase,  it does not                                                               
mean that  is all the money  the state spent for  the project; it                                                               
is the  money the state spent  before it has any  income, and the                                                               
entirety  of the  $1.5  billion could  be  attributable to  that.                                                               
Even  a  simple  difference  in  approach in  terms  of  what  is                                                               
calculated  [affects the  resulting numbers].   For  example, the                                                               
diagram referenced  by Representative  Hawker is  likely counting                                                               
just the  total capital expenditure, while  enalytica's number is                                                               
recognizing  that some  construction capital  may be  spent after                                                               
2023 during  the first  year of  operations, which  could account                                                               
for that difference.                                                                                                            
6:40:32 PM                                                                                                                    
REPRESENTATIVE HAWKER  qualified he is not  indicting enalytica's                                                               
work, but  questioned the  figure of $3.9  billion for  the green                                                               
bar depicted under the base case  online phase.  He asked whether                                                               
the $3.9 billion  in revenue is a net number  after capital costs                                                               
still being incurred in that period.                                                                                            
MR. MAYER  answered the number  is an average across  the project                                                               
life, with some  years the revenue being higher  than that number                                                               
and some  years lower.  The  way enalytica has modeled  it in the                                                               
first year  the number is lower  [than $3.9 billion] due  to that                                                               
additional spending.  However, on  average over the project life,                                                               
[$3.9 billion]  is the range  of net  annual cash flow  after all                                                               
expenses are taken out.                                                                                                         
MR. TSAFOS added  that [the $3.9 billion on slide  11] comes from                                                               
using the  formula on  slide 8.   It equals  all of  the revenue,                                                               
minus capital expenditures, minus  operation, minus debt service,                                                               
and minus tariff,  plus state income tax, and  plus property tax.                                                               
Thus, the first year would not  be as high.  He allowed enalytica                                                               
could have  also shown the  cash flow  for every single  year for                                                               
the next 20-25  years, but opted for this approach  rather than a                                                               
yearly  cash flow  because this  method was  more intuitive  even                                                               
though using averages  loses some precision over time.   The goal                                                               
was  to create  something that  is more  intuitive for  people to                                                               
understand  the trade-offs,  recognizing that  some precision  is                                                               
lost through that approach.                                                                                                     
6:43:32 PM                                                                                                                    
REPRESENTATIVE  HAWKER said  that is  $1.5 billion  of precision.                                                               
He  related  that  when  reading  these  numbers  in  enalytica's                                                               
previous testimony,  his take  away was that  this was  the first                                                               
year of operations.   Thereafter, it was not at  all clear to him                                                               
that this  was an averaged  annualized return for about  20 years                                                               
of  project life.   He  inquired  whether that  return is  skewed                                                               
heavily to either end or whether it is just the front-end year.                                                                 
MR.  MAYER responded  it  is overall  very even  over  time.   He                                                               
allowed there  is certainly variation  for a range of  reasons in                                                               
given years and said he would have  to go back to see if there is                                                               
more than a  billion dollars in variation in any  given year, but                                                               
reiterated that overall it is a very even cash flow.                                                                            
REPRESENTATIVE HAWKER  asked whether it is  enalytica's number or                                                               
the administration's number that is closest to right.                                                                           
MR. MAYER replied both of  these numbers are definitely wrong, as                                                               
he had said before.                                                                                                             
REPRESENTATIVE HAWKER said that answer just made his point.                                                                     
6:45:22 PM                                                                                                                    
MR. MAYER,  in response to Co-Chair  Feige, confirmed enalytica's                                                               
flow charts  are for the  entire project, the  liquefaction plant                                                               
as well as the midstream.                                                                                                       
MR.  TSAFOS  added  that  when  looking at  the  flow  chart,  he                                                               
believes all the  other numbers are fully 100  percent equity, so                                                               
none  of   the  other  options   are  directly   comparable  with                                                               
enalytica's numbers because these do  not include any debt, "like                                                               
the 6.9 and 9.6."                                                                                                               
6:46:18 PM                                                                                                                    
REPRESENTATIVE HAWKER  inquired why debt would  make a difference                                                               
given  it is  the  cost of  building the  project  that is  being                                                               
talked about, unless enalytica  is including capitalized interest                                                               
on the  project from an  accountancy basis.  He  further inquired                                                               
whether enalytica is talking about  the cash cost of constructing                                                               
the  project.   Noting  that  interest  is capitalized  into  the                                                               
project, he inquired  whether that is in  enalytica's numbers but                                                               
not in the administration's numbers.                                                                                            
MR. MAYER  answered the green  bar assumes no debt  whatsoever by                                                               
having the  entire cash  outlay be reflected  as such;  then, the                                                               
corresponding green bar shows all  the revenue that would come in                                                               
that scenario.   The  yellow bar  reflects the  70/30 debt/equity                                                               
ratio -- what  that would mean in actual cash  not including debt                                                               
that the  state would need  to provide; [then,  the corresponding                                                               
yellow bar]  is the  actual cash  net of  debt payments  that the                                                               
state would receive.                                                                                                            
6:47:39 PM                                                                                                                    
CO-CHAIR SADDLER understood the green  bar is all equity so there                                                               
is no  debt and  no financing.   He  further understood  that the                                                               
yellow bar labeled $3.445 billion is net of the debt expense.                                                                   
CO-CHAIR FEIGE noted it is 70 percent debt.                                                                                     
MR. MAYER responded yes.                                                                                                        
6:48:03 PM                                                                                                                    
REPRESENTATIVE HAWKER  asked whether the  administration's figure                                                               
of   $13.2  [billion]   for  construction   includes  capitalized                                                               
MR. MAYER replied  either he or the administration  would have to                                                               
get back to the committee with an answer.                                                                                       
REPRESENTATIVE HAWKER asked what basis  was used by enalytica for                                                               
the Pre-FEED, FEED,  and construction cost numbers,  given it did                                                               
its  own modeling.   He  recalled that  earlier testimony  by the                                                               
administration  that its  numbers were  based on  the old  Alaska                                                               
Gasline Inducement Act (AGIA) proposal  and not the new cost data                                                               
coming from the new project and the new players.                                                                                
MR.  MAYER answered  enalytica assumed  a total  project cost  of                                                               
about $49 billion for the base  case scenario:  about $45 billion                                                               
for liquefaction,  pipeline, and  gas treatment plant,  plus $3-4                                                               
billion  for upstream  costs  primarily at  Point  Thomson.   The                                                               
stress  case scenario  increased those  numbers 25  percent.   He                                                               
reiterated  that the  only purpose  of any  of this  quantitative                                                               
numeric  analysis,  at  this  point, is  to  have  a  directional                                                               
understanding.   For  example, how  does having  a gas  share and                                                               
equity compare with being a taxing  entity in-value?  What is the                                                               
role  of TransCanada  in all  of this  in terms  of its  relative                                                               
impact as  opposed to absolute numbers  where there is not  yet a                                                               
project  with any  concrete  details to  really  know what  these                                                               
numbers  actually  will  be?    The  purpose  is  to  understand,                                                               
relatively  speaking, whether  one structure  makes sense  versus                                                               
another and what  the impact is of a  particular intervention; it                                                               
is not to be  able to say that it is known  what income the state                                                               
will be receiving in any given year.                                                                                            
6:50:31 PM                                                                                                                    
REPRESENTATIVE  HAWKER  understood Mr.  Mayer  to  have said  the                                                               
numbers do not  make any difference because what  is being talked                                                               
about is structure.   However, there are numbers on  the page and                                                               
they are big  numbers, and they are numbers  that legislators are                                                               
being asked  to make judgments  on.  He inquired  what foundation                                                               
was used for the $49 billion in enalytica's model.                                                                              
MR. MAYER responded  it is a combination  of publically available                                                               
producer estimates  with enalytica's own understanding  of what a                                                               
well  at  Point Thomson  costs  to  what  might be  a  reasonable                                                               
assumption for a range of different components.                                                                                 
6:51:22 PM                                                                                                                    
REPRESENTATIVE SEATON  understood that on  [slide 11] as  well as                                                               
others, the Pre-FEED  is the years 2014-2015,  FEED is 2016-2018,                                                               
construction  is 2019-2023,  and revenue  begins in  2023, rather                                                               
than 2024.   He inquired  whether this is a  nomenclature problem                                                               
or  that revenue  will  be coming  in during  the  [last year  of                                                               
MR. MAYER  replied there  is an overlap  because the  new project                                                               
comes  online partway  through 2023.   He  allowed it  would have                                                               
been  clearer for  ease of  understanding had  enalytica drawn  a                                                               
firm line on January 1.                                                                                                         
REPRESENTATIVE  SEATON maintained  it does  make a  difference in                                                               
the  calculations as  to whether  or  not it  is a  full year  of                                                               
revenue in  the year the revenue  begins, and the chart  makes it                                                               
look like it is  a full year of revenue [in  2023].  He requested                                                               
the chart be rewritten.                                                                                                         
MR. TSAFOS agreed to rewrite the  chart [to show the online phase                                                               
beginning] in 2024.   He qualified, however,  that enalytica does                                                               
not want  that change to  imply a  precision or a  certainty that                                                               
the state should  be expecting money in 2024.   What is trying to                                                               
be shown  in this chart  is the average  cash that the  state can                                                               
expect to  get, based on  these assumptions, when the  project is                                                               
online.   Thus,  it  is  more the  year  after construction  ends                                                               
rather than to say to count on this amount of money in 2024.                                                                    
6:53:50 PM                                                                                                                    
MR. MAYER,  at Co-Chair  Saddler's request,  repeated enalytica's                                                               
assumption for  the total  project cost:   about $45  billion for                                                               
liquefaction,  pipeline,  and  gas  treatment  plant,  plus  $3-4                                                               
billion  for upstream  costs.   In  further  response, Mr.  Mayer                                                               
confirmed  that  enalytica's   information  source  was  publicly                                                               
available producer estimates plus  enalytica's own analysis based                                                               
on experience for  what would be reasonable costs for  a range of                                                               
components.   He added that  the entire  purpose of the  next one                                                               
and a  half years is to  start to get  a better handle on  all of                                                               
these things and  to start to be able to  make much more detailed                                                               
and informed  decisions.  Once  the entire FEED process  has been                                                               
gone through there  will be a final investment  decision that the                                                               
state needs to make  on the basis of some very  real numbers.  At                                                               
this point, these are  numbers to run for a model  to get a sense                                                               
of how value  in the project is shared between  the partners, the                                                               
role of  TransCanada and how  much value  that takes.   These are                                                               
the things  the legislature is  being asked  to decide on  at the                                                               
moment.  The  legislature is not being asked to  take sanction on                                                               
a $50 billion project; if it  were it would need much more detail                                                               
and much  more concrete, reliable,  accurate figures than  any of                                                               
these numbers.  Any numbers presented  by anyone at this time can                                                               
only be  a best guess that  will almost certainly change  as more                                                               
is discovered.                                                                                                                  
6:55:52 PM                                                                                                                    
MR. TSAFOS  added to  Mr. Mayer's comments  by pointing  out that                                                               
when the  LNG project in  Norway was undertaken, the  company did                                                               
not have a  full grasp of the  total cost until a  year after the                                                               
project  was running.   He  qualified he  is not  saying this  to                                                               
scare  committee members,  but to  say that  it is  an inevitable                                                               
"chicken and  an egg"  problem -- more  information is  needed to                                                               
make a decision,  but until some decisions are being  made no one                                                               
wants  to spend  the  money to  get  better data.    The hope  is                                                               
twofold:  1) as more study is  done the cost can be narrowed down                                                               
along with identifying places where  the cost can be lowered; and                                                               
2) to  look at whether this  project is viable at  all because if                                                               
it does end up  in the realm of $65 billion  it is quite possible                                                               
that the partners  and the State of Alaska will  say they need to                                                               
go back to the drawing board  and rethink this.  The challenge is                                                               
that  the decision  point cannot  be  arrived at  until money  is                                                               
spent based  on a  hunch that  this might work.   In  this sense,                                                               
there is  nothing different  about the State  of Alaska  than any                                                               
other company  and sovereign that  has ever undertaken  a project                                                               
of this magnitude.  A risk  faced in all projects is the spending                                                               
of  more  money  only  to  find  the project  is  a  no-go.    He                                                               
reiterated that enalytica  is trying to give  committee members a                                                               
sense  of how  these things  move  as the  assumptions are  moved                                                               
around  and, hopefully,  that, rather  than the  specific revenue                                                               
numbers, is the key takeaway.                                                                                                   
6:58:22 PM                                                                                                                    
CO-CHAIR  FEIGE offered  his understanding  that the  stage-gated                                                               
process has far  less risk than simply making the  decision to go                                                               
forward without  a process  of refining the  project design.   He                                                               
understood enalytica's intention  here is not to say  that if the                                                               
state goes  it alone it  will cost  $11.727 billion, but  to show                                                               
that the  relative cost of going  it alone is much  more than the                                                               
yellow bars which are more than  the red bars which are more than                                                               
the blue bars.   It is to give committee  members a relative idea                                                               
that one  particular option  is going to  cost more  than another                                                               
one,  not  what the  specific  costs  and  commitments are  at  a                                                               
particular time.                                                                                                                
6:59:26 PM                                                                                                                    
MR. TSAFOS, in  response to Co-Chair Saddler,  confirmed that the                                                               
cost  of $45  billion  [for gas  treatment  plant, pipeline,  and                                                               
liquefaction]   includes   the   marine  terminal   because   the                                                               
liquefaction plant is a marine terminal.                                                                                        
MR. MAYER,  in response to  Co-Chair Saddler, confirmed  that the                                                               
$45 billion  also includes  the transmission  lines from  the gas                                                               
7:00:02 PM                                                                                                                    
REPRESENTATIVE  HAWKER  recalled  that  earlier  today  enalytica                                                               
stated  that  the transmission  lines  were  not included  as  an                                                               
element in the  conceptual ownership graph.  However,  it was now                                                               
just stated  that the transmission  line cost is included  in the                                                               
$45 billion.   He  further recalled that  the additional  cost of                                                               
$3-4   billion  for   upstream   costs  does   not  include   the                                                               
transmission  lines.   He  asked  whether  that $3-4  billion  is                                                               
paying industry's development of Point Thomson or other fields.                                                                 
MR. MAYER replied  that is an assumption on what  is required for                                                               
additional  gas-related development,  primarily for  a number  of                                                               
additional  wells  at  Point  Thomson  as  well  as  initial  gas                                                               
processing  that occurs  on the  upstream before  gas enters  the                                                               
transmission line  to the gas treatment  plant.  That is  a total                                                               
amount  for  the   total  project.    The  state   would  make  a                                                               
contribution to that through the  tax system under which there is                                                               
a  35 percent  production  tax on  oil.   As  the legislation  is                                                               
currently  written, all  upstream  costs,  regardless of  whether                                                               
they  are for  oil or  for gas,  are deductible  against the  oil                                                               
production  tax.   In  other analyses,  enalytica  has shown  the                                                               
possible impact of that.   During construction, the state will be                                                               
receiving  lower oil  tax revenues,  35 percent  of the  upstream                                                               
cost that is being spent in those years.                                                                                        
7:02:15 PM                                                                                                                    
REPRESENTATIVE HAWKER  asked whether anyone has  done an analysis                                                               
on exactly  how much the state  is going to be  paying to develop                                                               
the infrastructure for the upstream  of Point Thomson that is not                                                               
a state asset,  and not part of  this project, as it  is an asset                                                               
of the producers.                                                                                                               
MR. MAYER  responded it  can be  thought of as  35 percent  of $4                                                               
billion, but there will be a better view of that down the road.                                                                 
CO-CHAIR FEIGE interjected "lease expenditures."                                                                                
7:03:01 PM                                                                                                                    
REPRESENTATIVE HAWKER  understood that  $4 billion is  what Point                                                               
Thomson  is going  to cost  as  it sits  at the  moment and  that                                                               
amount  does not  include any  of the  additional development  to                                                               
bring gas  online.   He said  he is not  trying to  pick problems                                                               
with enalytica's  methodology, but the discrepancies  between the                                                               
administration and enalytica are causing him much consternation.                                                                
MR.  MAYER answered  that enalytica  and the  administration have                                                               
approached these  things independently, yet have  come to similar                                                               
conclusions on the  core issues.  If there are  areas on which it                                                               
disagrees  with the  administration, enalytica  will let  members                                                               
know.  If he  were a legislator looking at this,  he would take a                                                               
great  deal of  comfort in  that two  different groups  of people                                                               
with two different approaches and  assumptions looked at this and                                                               
came  to very  similar conclusions  in the  directional analysis,                                                               
despite the independence of their approaches.                                                                                   
MR.  TSAFOS added  that  the number  enalytica  has for  upstream                                                               
developments and  the state contribution  through the  tax system                                                               
does show up  in Black & Veatch's analysis.   He recalled a Black                                                               
& Veatch  chart that  shows oil  only and then  oil and  gas, and                                                               
when looking at these two things it  can be seen that the oil and                                                               
gas turns below  the oil in the beginning years  because there is                                                               
a tax  deduction for  lease expenditures,  and that  is primarily                                                               
for Point Thomson.                                                                                                              
7:05:36 PM                                                                                                                    
REPRESENTATIVE HAWKER  said he thinks  the cost to  develop Point                                                               
Thomson is more  like $10 billion rather than $4  billion.  While                                                               
Mr. Mayer said the numbers do  not matter because the numbers are                                                               
close,  the issue  is that  they are  close enough  to illustrate                                                               
enalytica's concurrence with the  approach and the mechanism that                                                               
is brought forward  by the administration for how  this all works                                                               
together.   He asked  whether he  is supposed  to take  away that                                                               
enalytica  is endorsing  the administration  in the  MOU and  the                                                               
project proposal.                                                                                                               
MR. MAYER  responded enalytica has  areas of agreement  and areas                                                               
of  difference.   However,  when  it  comes to  the  quantitative                                                               
analysis, Black &  Veatch and enalytica get  very similar numbers                                                               
for such  things as how much  equity does the state  need to have                                                               
to be equivalent  to the status quo, or how  does in-kind compare                                                               
to in-value,  or how much  value does TransCanada consume  of the                                                               
project total  and that  compares to  other options  available to                                                               
the state.   He  would draw  comfort from  this given  that there                                                               
are, in fact, no accurate numbers  available anywhere.  It is not                                                               
a  question  of accurate  enough,  it  is  simply a  question  of                                                               
numbers  at this  point are  best  guesses based  on very  little                                                               
information.   In a  year and  a half there  will be  much better                                                               
information and  a few  years later  there will  be substantially                                                               
better   information.     In  the   meantime,   the  purpose   of                                                               
quantitative analysis is  not to forecast the future,  not to say                                                               
it is known  exactly what will be spent and  what revenue will be                                                               
received.  The purpose of  analysis is to declare the fundamental                                                               
things the  legislature needs to  understand and grapple  with as                                                               
those tend  to center  around a  few big  things like  whether to                                                               
take  value as  a  taxing entity  or gas  in-kind  and an  equity                                                               
stake, and how  those things compare across a  range of different                                                               
prices.    In  looking  at   the  MOU,  what  does  TransCanada's                                                               
participation actually mean?  How  much potential value could the                                                               
state  be foregoing  under that  option?   What might  some other                                                               
options  be?   How  do  these  things  compare?   Having  initial                                                               
approximate   numbers  to   view   as  a   model  provides   some                                                               
understanding  for how  these variables  move against  each other                                                               
and  where relative  value lies.    Understanding where  relative                                                               
value lies is  very different from being able to  say it is known                                                               
exactly in  this year what  the state should expect  because none                                                               
of us know that.                                                                                                                
7:08:50 PM                                                                                                                    
REPRESENTATIVE P.  WILSON understood what  is being looked  at is                                                               
the different options  that the state has and what  it would look                                                               
like in  one option  and what  it would look  like in  another so                                                               
members can make a general decision  about what is the best thing                                                               
for the state to do at this point in time.                                                                                      
MR. TSAFOS concurred, adding that a  lot of these paths are still                                                               
open  to  legislators even  if  enabling  legislation is  passed.                                                               
Legislators would  not be  100 percent  tied to  one of  the four                                                               
bars depicted  on the charts.   The legislature would  still have                                                               
the opportunity to go anywhere from  the green bar all the way to                                                               
the blue  bar.  Legislators are  not even being called  to make a                                                               
choice regarding which  of the four options.   Clearly, there are                                                               
things legislators can do that  push the state into one direction                                                               
or  the  other.    However,  even  if  the  legislature  approves                                                               
everything  before it,  it  could still  go to  a  world with  no                                                               
TransCanada  because  the MOU  provides  a  way for  doing  that.                                                               
Clearly, the enabling legislation sets  in motion a certain path,                                                               
but it  does not  close off all  the roads.   There is  a certain                                                               
amount of  technical analysis  that can  be done  and there  is a                                                               
certain amount  of philosophical gut-feeling.   What enalytica is                                                               
trying to do  is highlight the numbers and  articulate the trade-                                                               
offs.   In a project of  this magnitude there is  always going to                                                               
be an  element of gut feeling  because even when at  the point of                                                               
taking final  investment decision, it  is a decision in  which no                                                               
money will  be seen  for 5  years and  making a  bet of  what the                                                               
world looks  like for  another 25  years.  Even  when all  of the                                                               
available information  is had, legislators  will still  find they                                                               
do not have  quite as much information as they  would like.  That                                                               
is the nature of a  long-term, long-lead business.  An investment                                                               
is being  made today that  is going to pay  off over the  next 25                                                               
years.   There is  an inherent uncertainty  to this  project that                                                               
the  state will  have  to become  comfortable with  if  it is  to                                                               
choose this path.                                                                                                               
7:13:33 PM                                                                                                                    
REPRESENTATIVE TARR  calculated that  with an oil  production tax                                                               
rate of 35 percent, the  state could potentially lose almost $1.5                                                               
billion in revenue.  She  asked whether the revenues depicted [on                                                               
slide 11]  for when the  project goes online include  that annual                                                               
loss of $1.5 billion.                                                                                                           
MR. MAYER answered  any relevant ongoing spending  is captured in                                                               
these  numbers,  but the  majority  of  the development  spending                                                               
happens before the project comes  online.  Reminding members that                                                               
enalytica has  provided this  analysis in  other forums,  he said                                                               
between $200  million and $300  million in capital  spending will                                                               
happen  each year  over  a  number of  years,  totaling about  $1                                                               
billion  of  capital spending  over  that  time.   The  $200-$300                                                               
million  annually  will  be  foregone oil  taxes  to  the  state.                                                               
According to  the administration's modeling forecast,  revenue to                                                               
the state  from production tax  and royalty base will  be reduced                                                               
around [$4.5]  billion.  Costs  will be deducted and  written off                                                               
against oil taxes.                                                                                                              
MR. TSAFOS  pointed out that  "those numbers are included  in ...                                                               
the minus  in the construction phase."   So, it is  not just what                                                               
is spent,  it is also  what the state  does not receive  from the                                                               
oil taxes.  That is why  Mr. Mayer said that any ongoing spending                                                               
is in  the online world,  but during the construction  phase that                                                               
is embedded into these numbers.                                                                                                 
REPRESENTATIVE  TARR  regarding  the  average  [revenue]  numbers                                                               
depicted   on  [slide   11],  part   of  the   consideration  for                                                               
legislators is what  the state has in savings if  the state is in                                                               
a deficit-spending world and how many  years that will last.  She                                                               
requested from enalytica that these  numbers be broken out into a                                                               
10-year timeframe  so it can  be seen  whether the state  will be                                                               
running out of money before new  revenue comes in and where those                                                               
time  periods  overlap to  show  how  the state  will  transition                                                               
through these time periods.                                                                                                     
7:17:36 PM                                                                                                                    
REPRESENTATIVE HAWKER  commented that when  he is looking  at the                                                               
charts he  is looking for  the anomalies  and what sticks  out as                                                               
something  that creates  an obvious  relational  difference.   He                                                               
noted a "cash  call" is the cash  that is needed to  put into the                                                               
project and that  this does not mean it is  because of an overrun                                                               
or something bad.   A cash call is how the state  steps up to the                                                               
plate with  the checks it  must write.   [Regarding slide  9], he                                                               
observed that  for the Pre-FEED  and FEED phases there  is little                                                               
difference between  the height  of the option  bars, but  for the                                                               
construction phase  there is a mega-difference  between the green                                                               
and  [yellow]  bars,  which  represent  the  state  participating                                                               
without debt and with the  debt/equity split, respectively.  When                                                               
the state has no debt it does not  have to answer to a cash call.                                                               
The difference between  the $11.7 billion green bar  and the $4.9                                                               
billion  yellow bar  is the  debt  component.   He observed  that                                                               
under the no-debt option, the  construction cost is $11.7 billion                                                               
and, once  online, the  average annual  revenue is  $3.9 billion;                                                               
under the  [70/30] debt/equity option, the  construction cost put                                                               
out by  the state is $4.9  billion and, once online,  the average                                                               
annual revenue  is $3.4  billion.  He  inquired whether  the $3.4                                                               
billion is net of the state's debt service costs.                                                                               
MR. TSAFOS responded it is net.                                                                                                 
MR. MAYER added the difference is the debt service cost.                                                                        
7:20:35 PM                                                                                                                    
REPRESENTATIVE HAWKER  observed from slide  11 that if  the state                                                               
were to  undertake this  project without  TransCanada and  with a                                                               
70/30  debt/equity split  ([yellow] bar),  the construction  cost                                                               
would be  $4.9 billion  and payback  would begin  one and  a half                                                               
years after that.                                                                                                               
MR. MAYER replied  yes, but advised members to bear  in mind that                                                               
the reason the  state's economics look quite good  is because the                                                               
state is  both a  project participant  and a  sovereign receiving                                                               
other forms  of cash,  such as property  and state  income taxes.                                                               
So, when  all of those are  included in the analysis  the state's                                                               
payback is relatively quick.                                                                                                    
REPRESENTATIVE  HAWKER remarked  "we  are the  sovereign" and  he                                                               
sees why the state would want  to use a debt/equity split for all                                                               
kinds of  reasons, including that  there is a  four-year payback.                                                               
He questioned  what it is  that TransCanada really brings  to the                                                               
table when the  state can get a  total cash payback in  one and a                                                               
half years and  after that be free and clear  and getting all the                                                               
cash to itself.                                                                                                                 
MR. TSAFOS answered that the  aforementioned is the base case and                                                               
advised members to look at the  stress case to see how easily the                                                               
numbers  and  payback  can  look   different  when  some  of  the                                                               
assumptions are  changed.  He  requested the committee  allow him                                                               
to answer  the question when he  gets to the last  section of his                                                               
presentation, which  is about the  midstream and  TransCanada and                                                               
includes what enalytica  has to say about the  financial and non-                                                               
financial benefits of TransCanada.                                                                                              
7:23:15 PM                                                                                                                    
REPRESENTATIVE TARR,  regarding the  scenario on  slide 11  of no                                                               
TransCanada and no debt (green  bar), expressed her surprise that                                                               
the reward  under that scenario  is not proportional  to spending                                                               
twice  as  much relative  to  the  other  scenarios.   She  asked                                                               
whether the amount of return reflects  how much the fixed costs -                                                               
in terms of capital expenditures  - influence this project versus                                                               
a change in the market price.                                                                                                   
MR.  MAYER  queried  whether Representative  Tarr's  question  is                                                               
about the difference  between the green and yellow  bars in terms                                                               
of the big difference in  the upfront cash but relatively smaller                                                               
difference in the [revenue] that follows.                                                                                       
REPRESENTATIVE TARR  said she is  referring to the green  bar and                                                               
why the reward is not proportionately equal.                                                                                    
MR. MAYER responded  that in both the green  and yellow scenarios                                                               
the  state is  taking the  full 25  percent throughout  the value                                                               
stream.   The  only  difference  between them  is  the choice  of                                                               
financing:  financing  entirely with the state's  own cash versus                                                               
financing  through some  form of  debt.   The difference  between                                                               
these two is the difference  in upfront capital cost being spread                                                               
over 20-25 years  of the project and the  corresponding 5 percent                                                               
rate of interest.   That difference of half a  billion dollars is                                                               
not just  for one year,  but for every  year of the  project life                                                               
and is paying back that initial upfront capital cost.                                                                           
MR.  TSAFOS added  that oil  companies really  like LNG  projects                                                               
because, once over the upfront  hump, LNG projects generate money                                                               
for a  very long time.   The challenge is getting  over that hump                                                               
in the beginning.   Key to remember is that  while the capital is                                                               
huge up front, the ongoing  operating capital is tiny relative to                                                               
that upfront investment.  This  goes back to a previous statement                                                               
he made before  the committee that LNG projects  generally do not                                                               
lose money;  they may not  make as  much as was  anticipated, but                                                               
once a  project is  running things  have to  turn really  sour to                                                               
actually lose  money.   The low annual  operational cost  is what                                                               
really  drives  the  economics.   That  is  why  the  overarching                                                               
question  is whether  the project  can actually  be built  at the                                                               
projected cost;  once built, this  project returns a  huge amount                                                               
of cash.  For example, the  pipeline in Kenai came online in 1969                                                               
and now  the economics  of exporting this  cargo from  Kenai look                                                               
great  -- all  the capital  has been  spent, the  asset has  been                                                               
amortized, and that is essentially the logic.                                                                                   
7:27:30 PM                                                                                                                    
MR. TSAFOS  returned attention to slide  11, explaining enalytica                                                               
approached  a stress  case in  three different  variables.   [The                                                               
first  variable],  capital  expenditure, was  raised  25  percent                                                               
higher than the projected $49 billion.   The figure of 25 percent                                                               
was  chosen as  reasonable based  on  the list  of worldwide  LNG                                                               
projects that  was provided in enalytica's  previous presentation                                                               
to the committee in which project  cost overruns varied from 0 to                                                               
125 percent,  and 25  percent is the  average of  those overruns,                                                               
including the  zeroes.   He qualified that  cost could  be higher                                                               
not because  of overruns but  because cost rises between  now and                                                               
construction.   [The second variable],  sales price,  was dropped                                                               
to  $7  per million  British  Thermal  Units (MMBTUs),  which  is                                                               
equivalent to about $50 per  barrel oil.  Currently, the cheapest                                                               
gas coming  into Japan  is at $11-$12.   If oil  were to  drop to                                                               
$50, this Alaska project would  have finance problems in addition                                                               
to LNG plant problems.   Therefore, enalytica believes this model                                                               
to be quite an aggressive stress  case.  He submitted that if the                                                               
price of gas  was to decline to $7, the  overwhelming majority of                                                               
proposed projects  throughout the world would  not be sanctioned.                                                               
He further  submitted the  price would  not stay  at $7  for very                                                               
long because no  one would build a project to  feed the market at                                                               
$7.   Another benchmark for  comparison, he specified, is  gas in                                                               
the Lower  48 at  $3 Henry Hub.   About $5-$7  is needed  to ship                                                               
that gas  to Asia.   So, even at $3  Henry Hub, gas  delivered to                                                               
Asia would be at a price higher  than $7, which is another way of                                                               
saying that  $7 is a  low price.   [The third  variable], average                                                               
utilization,  was put  at  80 percent  rather  than 100  percent.                                                               
Utilization reflects two things, he  explained.  First, in Alaska                                                               
the  amount  of   gas  that  can  be  produced   depends  on  the                                                               
temperature --  the colder it  is, the more  gas that can  be put                                                               
through the infrastructure; depending  on the temperature, Alaska                                                               
may be  unable to produce at  100 percent.  Second,  when looking                                                               
at new  LNG projects around the  world, it is seen  that projects                                                               
without problems  tend to operate  at 95-100 percent.   [Average]                                                               
global  utilization is  in  the high  80's  because new  projects                                                               
operating at 100  percent are added with  infrastructure that has                                                               
been  online for  40  years.   Older projects  operate  at a  low                                                               
utilization because  the gas  they were  developed to  export has                                                               
been  depleted.   Therefore,  80  percent  global utilization  is                                                               
really an average of two  extremes, rather than projects actually                                                               
operating at  that level.   Continuing, Mr.  Tsafos noted  that a                                                               
number of things  can lead to low utilization, some  of which are                                                               
not  relevant  for  Alaska.    Most  common  is  a  domestic  gas                                                               
diversion  in which  the  sovereign reduces  export  to meet  the                                                               
demand of its people.  He  submitted, however, that no matter how                                                               
much  Alaska might  try to  do that,  Alaska would  be unable  to                                                               
consume  enough gas  to  push  the utilization  that  low.   More                                                               
realistic for Alaska would be  outages or accidents; thus, Alaska                                                               
likely  would not  have  80 percent  utilization  over a  10-year                                                               
period but may have low utilization over a 1-year period.                                                                       
7:32:44 PM                                                                                                                    
MR.  TSAFOS said  enalytica added  together the  three events  of                                                               
higher capital  expenditure, lower price, and  low utilization to                                                               
create a perfect  storm.  He explained that the  two sets of four                                                               
bars on the left side of the graph  on slide 11 are the base case                                                               
construction  costs   discussed  earlier  and  the   stress  case                                                               
construction  costs, which  are a  25 percent  escalation of  the                                                               
base case.   The  only variable  changed during  the construction                                                               
period is  the construction  cost; price  and utilization  do not                                                               
matter because no gas is being  sold during this period.  The two                                                               
sets of  four bars on the  right side of the  graph represent the                                                               
base case  online revenue discussed  earlier and the  stress case                                                               
online revenue, in  which all three of the  variables are playing                                                               
a role.   Sales  price is  playing a role  because less  is being                                                               
earned  per  molecule  of  gas, utilization  is  playing  a  role                                                               
because  less  gas is  being  sold,  and capital  expenditure  is                                                               
playing a role  insofar as borrowed debt.  If  money was borrowed                                                               
and  the cost  went up  25 percent,  then 25  percent more  would                                                               
probably have been  borrowed and that money would have  to be re-                                                               
paid.    In the  stress  case  for  the  green bar  scenario  (no                                                               
TransCanada and no debt), construction  cost may be $14.7 billion                                                               
and revenue  may be  $1.6 billion  per year,  which is  a 10-year                                                               
payback period, ignoring  the time value of money  and that money                                                               
further out is  worth less than money today.   Mr. Tsafos pointed                                                               
out that  even if all  these stress case variables  happened, the                                                               
Alaska LNG Project would not  quite turn negative and the project                                                               
would not  come to the legislature  to ask for more  money.  But,                                                               
in  retrospect, the  project  would look  like  a bad  investment                                                               
because  the state  would  be earning  a low  return  for a  high                                                               
upfront  capital investment.    This stress  case  scenario is  a                                                               
caution to  the best-case scenario  (slide 10) which  looks quite                                                               
positive with a  quick payback period.  He noted  that the stress                                                               
case figures  on slide 12 are  an average because at  some points                                                               
the  price might  be lower  and  at some  points the  utilization                                                               
might be lower.                                                                                                                 
7:35:58 PM                                                                                                                    
CO-CHAIR SADDLER inquired whether the  model was created for each                                                               
variable  happening   by  itself  or  for   all  three  variables                                                               
happening together.                                                                                                             
MR. TSAFOS responded  that individual modeling was  not done, but                                                               
he offered to do so.                                                                                                            
CO-CHAIR  SADDLER understood  the initial  cost estimate  for the                                                               
Trans-Alaska Pipeline  System (TAPS)  was $800-$900  million, but                                                               
the final  cost was $8 billion.   He asked whether  enalytica can                                                               
give him, as well as the  public, any comfort that the final cost                                                               
for this LNG project will not be 10 times the current estimate.                                                                 
MR. TSAFOS replied he is not  in a position to give that comfort.                                                               
However, he would  say that if construction has  not started, and                                                               
the cost estimate is $450 billion,  that would be good reason not                                                               
to do this project.  The  most extreme case of cost escalation he                                                               
has  seen  is  Russia's  Sakhalin LNG  project  at  120  percent.                                                               
Qatar's Pearl  gas-to-liquids project  began at $4-5  billion but                                                               
ended up costing  over $20 billion.  No one  can give a guarantee                                                               
that  the cost  started  with will  be the  cost  ended up  with.                                                               
Comfort  can be  taken  somewhat in  that  Alaska's partners  are                                                               
probably as  good as one could  get in terms of  keeping the cost                                                               
down.  While good partners  do not insure against cost escalation                                                               
or against things going bad, the best  that can be done is to put                                                               
people in charge who know their jobs quite well.                                                                                
7:38:47 PM                                                                                                                    
CO-CHAIR  SADDLER   inquired  whether  the  Sakhalin   and  Pearl                                                               
projects had  single players or partners.   He said he  is asking                                                               
this question in an effort to  know whether it was the absence of                                                               
partners that led to the cost overruns.                                                                                         
MR. TSAFOS  explained that the Pearl  gas-to-liquids project went                                                               
from the  standard practice  project of 30,000  barrels a  day to                                                               
140,000 barrels a  day, so it was really  a technological overrun                                                               
rather than  a project overrun.   Sakhalin had some  very Russia-                                                               
specific challenges.   Sakhalin  had a 500-mile  pipeline through                                                               
territory  similar  to  Alaska's  and  had  many  challenges  for                                                               
environmental  permits.     The   biggest  challenge   was  stark                                                               
disagreements with  the sovereign.   Shell and its  partners sold                                                               
the  50-plus-one  share stake  in  the  Gazprom project,  Gazprom                                                               
being one  of the  state-owned companies in  Russia, and  at that                                                               
point some of the problems went  away and the project was able to                                                               
progress.  Speaking  generally about cost escalation,  he said it                                                               
can  be related  to global  commodity factors,  such as  steel or                                                               
cement  being  more  expensive.   Cost  escalation  can  also  be                                                               
related to  the specific country.   For example,  someone wanting                                                               
to build  an LNG project in  Papua New Guinea would  also have to                                                               
build roads  and infrastructure where  none exist.   Other times,                                                               
cost  escalation can  be a  factor of  competition for  laborers.                                                               
For  example, Australia  has a  large  number of  mining and  LNG                                                               
plants competing for the same labor.                                                                                            
7:43:29 PM                                                                                                                    
REPRESENTATIVE  JOHNSON calculated  that under  the [yellow]  bar                                                               
scenario  [no TransCanada,  70/30  debt/equity  split] the  state                                                               
receives  a  15-16 percent  return  on  investment.   He  further                                                               
calculated that under the red  bar scenario [TransCanada and 7/30                                                               
debt/equity  split] the  state receives  a 13  percent return  on                                                               
investment.   He said  he wants  "to ask  Representative Hawker's                                                               
question again."                                                                                                                
MR. MAYER responded that a  very important point is being raised,                                                               
which is  the basic  nature of  fixed claims.   Fixed  claims can                                                               
come  from debt  on the  project or  fixed claims  can come  from                                                               
participation of a  partner that takes a tariff.   It is a bigger                                                               
impact  with a  partner that  takes a  tariff, like  TransCanada,                                                               
because  the implied  financing cost  is  a little  higher.   The                                                               
basic nature  of fixed  claim on  the project  cash flow  is that                                                               
when prices  are low,  and revenues  are lower  than anticipated,                                                               
the effect of  that change is amplified because  someone else has                                                               
a fixed  claim on the  project cash; thus, the  relative movement                                                               
is borne by the state.                                                                                                          
REPRESENTATIVE JOHNSON said his basic  premise is the state still                                                               
makes less money  in a worst case scenario with  TransCanada as a                                                               
MR.  MAYER  replied  that  the   worse  the  scenario,  the  less                                                               
attractive  TransCanada looks.   In  an optimal  world there  are                                                               
many reasons  the state might  like having TransCanada  and other                                                               
reasons  the state  might not,  but  overall the  share taken  by                                                               
TransCanada is really very small.   Definitely, however, in lower                                                               
price environments and lower  utilization environments, the basic                                                               
nature  of any  fixed claim  is  that it  has a  disproportionate                                                               
impact  when  prices  are  low, when  utilization  is  low,  when                                                               
revenue is  low in  the future.   That is  also true,  he pointed                                                               
out, when taking higher debt on  the project, but that is true to                                                               
a  slightly  lesser extent  because  the  cost  of that  debt  is                                                               
slightly less.                                                                                                                  
REPRESENTATIVE JOHNSON  remarked he looks forward  to enalytica's                                                               
future slides, but he remains unconvinced.                                                                                      
7:46:29 PM                                                                                                                    
CO-CHAIR  SADDLER  requested  further  elaboration  of  the  term                                                               
"fixed claims."                                                                                                                 
MR.  MAYER answered  the  basic idea  is that  the  state, as  an                                                               
equity holder in  the project, has an entirely  variable claim on                                                               
the project cash flows.  When  the project does well and rakes in                                                               
lots of cash,  the state rakes in lots of  cash; when the project                                                               
does poorly  and has  very little  cash, the  state takes  only a                                                               
little bit of cash.   An entity that is not  an equity holder but                                                               
that loans  money to the  project or to  the state, or  an entity                                                               
that is  a pipeline company that  has a tariff, is  entitled to a                                                               
known fixed  amount of  money each  year into  the future.   That                                                               
fixed claim  is a small  percentage of the overall  total project                                                               
when times are good and there  is lots of revenue, but when times                                                               
are  bad and  there  is substantially  less  revenue, that  fixed                                                               
claim takes up more and more of the total.                                                                                      
7:47:34 PM                                                                                                                    
REPRESENTATIVE HAWKER  understood the  point of  the chart  is to                                                               
show  that  these  projects never  turn  negative  once  started.                                                               
However, he said,  it is still relevant to legislators  as to how                                                               
much  the state  is going  to get  in a  negative situation.   He                                                               
further understood  there is not  much difference [in  the effect                                                               
on revenue] between the state  choosing to do a debt/equity basis                                                               
without  TransCanada or  a  debt/equity  basis with  TransCanada.                                                               
Regarding a systemic low market  price environment of $7, he said                                                               
the  Alaska LNG  Project would  be  a non-starter.   However,  he                                                               
pointed out, it could be possible  to have the project get as far                                                               
as  being  sanctioned or  final  investment  decision with  a  25                                                               
percent  increase in  capital expenditure  and/or sub-utilization                                                               
once  the project  comes into  operation.   He  asked whether  it                                                               
would  it  not  be  more  realistic for  members  to  instead  be                                                               
considering a  chart that shows only  increased construction cost                                                               
and sub-optimal utilization, with no decrease in market price.                                                                  
MR. TSAFOS responded  enalytica will be breaking  the three risks                                                               
down as  per Co-Chair Saddler's  request.  He concurred  that, if                                                               
at the point of final investment  decision, the sales price is $7                                                               
the project would  not be sanctioned.  However, he  said, that is                                                               
not really the risk.  The  risk is that the project is sanctioned                                                               
and four  years later the price  of oil crashes and  the price of                                                               
gas drops  to $7.   The state is  basically taking a  25-year bet                                                               
because  it is  going  to be  5 years  before  the project  comes                                                               
online and then has to run for 20 years after that.                                                                             
7:50:36 PM                                                                                                                    
CO-CHAIR FEIGE  inquired whether  that bet  is being  taken given                                                               
that the sales  price is locked in at the  start with a marketing                                                               
contract, which is before the final investment decision.                                                                        
MR. TSAFOS replied that if the  contract is written as things are                                                               
in today's world, it will be linked  to oil so that the gas price                                                               
will go  up and down  together with the price  of oil.   How much                                                               
the gas  price goes  up and  down will  be known  at the  time of                                                               
signing the  contract, but the  price of  oil will not  be known.                                                               
As enalytica has  explained in the past, the state  is not taking                                                               
on  price risk  in the  conventional  way of  thinking about  oil                                                               
price risk,  which is that if  a new supplier starts  selling gas                                                               
into Asia  for $10 it will  not matter for the  state because the                                                               
state already has  its contract and price.   Instead, the state's                                                               
contract price  is going  to be  indexed to  something.   In Asia                                                               
today that  something is oil.   So if the  price of oil  goes up,                                                               
the state's gas  price will go up,  and if the price  of oil goes                                                               
down, the  state's gas  price will  go down.   There are  ways in                                                               
which the  state can limit  what that  high number and  what that                                                               
low number may be.   The state might be able  to say that because                                                               
$7 looks so bad it does not want  the price to ever go below $10.                                                               
The buyer  may agree  to that  as long as  the state  also agrees                                                               
that the  price may never go  above $15, because that  is how the                                                               
trade works.   The state will absolutely be taking  on price risk                                                               
if not selling at a fixed  price.  The state will understand what                                                               
that relationship,  that exposure, looks  like before it  makes a                                                               
decision;  and the  state can  also take  measures to  reduce its                                                               
exposure by giving some upside to protect against the downside.                                                                 
7:53:36 PM                                                                                                                    
REPRESENTATIVE  KAWASAKI asked  whether marine  transportation is                                                               
included in the estimated costs of  $45 billion, a $4 billion gas                                                               
treatment plant (GTP), and $3 billion upstream.                                                                                 
MR. TSAFOS answered marine transportation  is not in the total of                                                               
$49 billion.   The reason  it is excluded from  these calculation                                                               
is because  sometimes the buyers  arrange the  transportation and                                                               
sometimes the  sellers, and sometimes  the seller builds  its own                                                               
ships and  sometimes the ships  are leased.   A number  of things                                                               
will be discussed  during the contract bid; if  the state decides                                                               
to build  its own ships  it would  probably look at  ordering the                                                               
ships around 2020.                                                                                                              
MR. MAYER added that there  is, instead, a tariff subtracted from                                                               
the revenues; the cost of shipping is netted off the cash flow.                                                                 
7:54:50 PM                                                                                                                    
REPRESENTATIVE  KAWASAKI requested  the committee  be provided  a                                                               
chart  that  models  a  higher  capital  expenditure,  given  the                                                               
overrun  examples  of TAPS  and  other  countries.   Regarding  a                                                               
utilization of  80 percent  and the  state as  sovereign possibly                                                               
taking some gas for in-state use,  he asked when the best time is                                                               
for making  that decision.   He  asked whether  any of  the other                                                               
partners might decide to sell in-state.                                                                                         
MR. TSAFOS  responded utilization  could be  100 percent  and the                                                               
Alaska  market still  be  flooded,  so it  is  not about  whether                                                               
Alaskans are  or are not getting  gas.  For example,  Egypt could                                                               
develop  fields  that produce  seven  million  tons and  build  a                                                               
facility  that exports  five million  tons and  have two  million                                                               
tons going to  the domestic market.  Then Egypt  has a revolution                                                               
and the  government decides  to push  gas to  the market,  so now                                                               
five million  tons go to the  domestic market and two  million go                                                               
to export.   Another example  could be a country  producing seven                                                               
million tons  equivalent that  goes down to  five.   No sovereign                                                               
would  decide to  export  all  that and  deliver  no  gas to  its                                                               
electric utilities;  the sovereign would at  least prioritize the                                                               
domestic market.   This  does not  imply that  supplying Alaskans                                                               
with gas is going to lead  to a lower utilization.  The structure                                                               
and the  size of the Alaska  project embeds a cushion  of Alaskan                                                               
gas, so  it would be  very hard for the  state to divert  so much                                                               
gas as  to actually  hurt the utilization  of this  project, with                                                               
the exception  of perhaps  an extremely cold  winter where  for a                                                               
month there  may be  less utilization because  of having  to meet                                                               
in-state  demand.   He  clarified  that  what he  was  suggesting                                                               
earlier  is that  when  looking  at utilization  and  why it  may                                                               
deviate from  100 percent, domestic  gas diversion tends to  be a                                                               
pretty common  reason.  However, that  would not be a  number one                                                               
reason for concern in Alaska.                                                                                                   
7:58:37 PM                                                                                                                    
REPRESENTATIVE TARR said  she would like to add tax  as gas (TAG)                                                               
and royalty-in-kind  to the  topic of oil  linked to  gas prices.                                                               
She  surmised that  in a  low price  environment the  state would                                                               
receive more revenue  by taking production tax  based on per-unit                                                               
volume than it  would by taking tax  as gas.  She  asked how this                                                               
could be evaluated in a stress case scenario.                                                                                   
MR. MAYER replied  it is an excellent question  and enalytica has                                                               
modeled and  presented this to  the committee previously.   While                                                               
the aforementioned  phrasing of  the question  is what  one would                                                               
intuitively think, in  reality it is exactly  the opposite, which                                                               
is the reason  why modeling is done.   It comes back  to the idea                                                               
of fixed  claims on cash flow.   When last before  the committee,                                                               
enalytica presented  a working of  production tax and  royalty to                                                               
compare them to  oil and expressing everything  in oil equivalent                                                               
terms.   He  posed a  scenario  of $100  for oil  price, $10  for                                                               
combined  total  tariff on  transportation  for  TAPS and  marine                                                               
tariff  combined, which  results in  $90 at  the wellhead  on the                                                               
North Slope.  In  a world of gas and LNG, that  oil price of $100                                                               
would  lead to  about $80  per barrel  of oil  equivalent of  LNG                                                               
delivered to  Tokyo.  Because  the midstream  is so much  of this                                                               
project, the  tariff would be  more like  $60-$66 than $10.   The                                                               
result  is  about $15  in  value  at  the  wellhead and  a  small                                                               
movement in oil price would completely  wipe that out.  The state                                                               
is the shock absorber, everything else  is fixed to get its fixed                                                               
claim of the value.  It is correct  that if the state did reach a                                                               
circumstance  where project  cash  flows  are actually  negative,                                                               
then there  is a weakness  that comes from being  in-kind because                                                               
with royalty  the state would  at least effectively have  a floor                                                               
of zero,  although zero  is not  strictly true  when it  comes to                                                               
profit-based  production tax  on oil.   In  a truly  catastrophic                                                               
world, the  state could actually  lose money, but short  of that,                                                               
overall in  low-price cases  the state does  as well  or slightly                                                               
better at high prices.  If it  were certain that the price of LNG                                                               
was going to  stay where it is  for the next 20 years  and it was                                                               
possible to have  a project through the  in-value structure, then                                                               
the state  would probably rather  take in-value.   But, if  it is                                                               
thought that the  price could go down to $10/MMBTU,  value to the                                                               
state looks much  better in the equity and in-kind  world than in                                                               
the  in-value taxing  world because  the state  is not  the shock                                                               
absorber  absorbing all  of the  price risk  while the  midstream                                                               
gets its fixed cut, instead everyone rises and falls together.                                                                  
MR. TSAFOS  added that  another way  to think about  it is  $7 in                                                               
Japan and taking out transportation,  liquefaction, pipe, and gas                                                               
treatment  plant.   This would  leave  the state  with less  than                                                               
zero.   Royalty and tax would  be multiplied by zero  so there is                                                               
nothing left,  which is what Mr.  Mayer was describing.   [As the                                                               
project is  proposed], the state  would still make some  money if                                                               
prices go low  because the state is not taking  what is left over                                                               
after subtracting these other things,  but rather the state has a                                                               
piece of all these things.                                                                                                      
8:03:52 PM                                                                                                                    
REPRESENTATIVE TARR  inquired whether that  would be true  in all                                                               
four of the scenarios being talked  about.  She surmised it would                                                               
be true  in the  scenarios involving  TransCanada because  of its                                                               
fixed claims.                                                                                                                   
MR. MAYER  answered the fixed  claim he  is talking about  is the                                                               
implied  tariff   of  not  being   an  equity  holder,   not  the                                                               
involvement  of  TransCanada  --   having  value  solely  at  the                                                               
wellhead that is determined by  subtracting a tariff, whoever and                                                               
however that is  calculated.  The other uncertainty  in this case                                                               
is transparency  in how that  tariff is  calculated, particularly                                                               
on the  midstream.  When the  state takes value solely  by taking                                                               
tax or  royalty in-value at  the wellhead, the variable  claim in                                                               
the system and everything else gets  its fixed share of the value                                                               
because the state subtracts that  fixed amount before it assesses                                                               
its value.                                                                                                                      
CO-CHAIR  FEIGE  understood  that  if the  state  is  taking  its                                                               
royalty and  taxes in-kind, then as  long as the pipe  is putting                                                               
out  something the  state is  always getting  something.   If the                                                               
state takes  in-value and  the price  gets too  low, then  by the                                                               
time all the costs are pulled out the state could go negative.                                                                  
MR. MAYER [indisc.] zero.                                                                                                       
MR. TSAFOS  added it  is the  equivalent of $10  TAPS and  an oil                                                               
price of $9.                                                                                                                    
8:05:56 PM                                                                                                                    
REPRESENTATIVE SEATON  noted the  project cost estimate  has been                                                               
presented as $45-$65 billion.   But in these slides, he observed,                                                               
the  depicted stress  case cost  is  $61 billion.   He  therefore                                                               
asked whether $61 billion is a reasonable stress case figure.                                                                   
MR.  MAYER responded  that  when running  the  economics on  this                                                               
project, he  and Mr. Tsafos struggled  to see an initial  case of                                                               
the cost being in the range  of $65 billion and the project being                                                               
sanctioned at that  range.  The project is  attractive at $50-$55                                                               
billion, so enalytica added the 25 percent on top of that.                                                                      
8:07:09 PM                                                                                                                    
MR.  TSAFOS moved  to slide  12,  "Stress Test:   Restricted  vs.                                                               
Unrestricted Revenues,"  explaining that  the three sets  of bars                                                               
on  the graph  depict the  total income,  total income  minus the                                                               
permanent fund,  and total  income minus  the permanent  fund and                                                               
minus property taxes due to  municipalities.  He pointed out that                                                               
the  revenue to  the state  is positive,  but once  the money  is                                                               
taken  out for  the permanent  fund  and the  property taxes  the                                                               
state would have to put in  an approximate $63 million [under the                                                               
scenario of TransCanada 100 percent  gas treatment plant and pipe                                                               
and 7/30 debt/equity split].                                                                                                    
8:08:37 PM                                                                                                                    
MR. MAYER addressed  slide 13, "SOA Needs to  Carefully Weigh Key                                                               
Questions," noting  this slide was  presented when  enalytica was                                                               
previously before  the committee.   The slide is  a non-financial                                                               
standpoint  of  TransCanada's  involvement   as  written  in  the                                                               
Memorandum  of   Understanding  (MOU)  and  it   compares  [four]                                                               
possible ways  of doing the  project.  During  that presentation,                                                               
enalytica  said  the state  clearly  would  not  want to  have  a                                                               
project that  is purely  a producer project  with no  interest by                                                               
the state or by  a third party.  This is  because of the question                                                               
of  alignment and  possibilities  for disputes  over where  value                                                               
could  be, and,  in  particular,  when it  comes  to third  party                                                               
expansion  and wanting  to have  someone in  the mix  that has  a                                                               
clear interest or  that makes money from  expansions and pursuing                                                               
expansions.    A  project  consisting   solely  of  the  existing                                                               
producers would  be executed very  well, but the  producers would                                                               
not have  a clear  and compelling interest  in wanting  to expand                                                               
the project  to accommodate  other people's  gas.   The producers                                                               
are companies that make money  by moving molecules to market, not                                                               
by  moving other  people's molecules  through a  pipeline.   In a                                                               
scenario of the producers with the  State of Alaska, which is the                                                               
world anticipated  by the  Heads of  Agreement (HOA)  without the                                                               
MOU,  there is  better alignment  between the  producers and  the                                                               
state in terms  of the question of possibilities  of dispute over                                                               
tariff and so forth.  In  this scenario there is a question about                                                               
what things would look like at  a later date for expansion.  This                                                               
is because  all of the  impetus would be  on the state  to pursue                                                               
expansions either by  itself or by a producer trying  to bring in                                                               
a pure midstream company as  a partner to pursue those expansions                                                               
assuming  that  the  other  producers   were  not  interested  in                                                               
undertaking expansions.                                                                                                         
8:11:12 PM                                                                                                                    
REPRESENTATIVE SADDLER  requested an  explanation of the  x marks                                                               
and check  marks on slide  13 and whether  the lines and  text on                                                               
the chart align with the charts that follow.                                                                                    
MR. MAYER  replied there is  no correlation with the  charts that                                                               
follow;  it is  a summary.   The  check marks  represent positive                                                               
aspects, x  marks represent negative aspects,  and question marks                                                               
represent things that are indeterminate or difficult to weigh.                                                                  
8:12:00 PM                                                                                                                    
MR.  MAYER resumed  his discussion  of slide  13, reiterating  it                                                               
looks  at  the non-financial  aspects  of  the MOU  and  bringing                                                               
TransCanada  into  the pipeline  and  gas  treatment plant.    He                                                               
reiterated that  in a scenario  of producers only there  would be                                                               
clear ability  to execute  the pipeline  and gas  treatment plant                                                               
without an  additional dedicated  midstream party.   The question                                                               
becomes one of ability to  execute future expansions to get other                                                               
people's  gas in  the pipeline  and encouraging  other people  to                                                               
explore the North Slope.  Another  question asked for each of the                                                               
four  scenarios  is  whether  there  is  a  cost  and  a  benefit                                                               
associated with continuity  and momentum in this  project and, if                                                               
so, what  are the  potential costs of  postponing the  project or                                                               
not going ahead  with what is being proposed.   In looking at the                                                               
scenario  of  producers,  State of  Alaska,  and  TransCanada  as                                                               
suggested in  the MOU, enalytica  saw many of the  same strengths                                                               
seen in  the scenario of producers  and the State of  Alaska, but                                                               
also seen are  substantial benefits in third  party expansion and                                                               
ability  to execute  on those  third  party expansions.   In  the                                                               
scenario of  producers, the state,  and a third party  other than                                                               
TransCanada, the primary difference  is the question of alignment                                                               
of interest and  disputes around tariff and  allocation of value,                                                               
and  what  the  tariff  would  be  if  the  third  party  is  not                                                               
TransCanada.  The answer is unknown  and can only be found out by                                                               
going to a competitive bid.   In this last scenario there is also                                                               
the  question  of  whether  continuity   and  momentum  would  be                                                               
maintained with a third party that is not TransCanada.                                                                          
8:14:41 PM                                                                                                                    
MR. MAYER said an important question  the state needs to weigh is                                                               
the exit  from the Alaska  Gasline Inducement Act  (AGIA) process                                                               
if the  state does not want  to go down  the path of the  MOU and                                                               
what  compensation  the   state  might  have  to   pay  and  what                                                               
intellectual  property  the  project  would  retain.    A  second                                                               
important question  for the state  is whether the HOA  process in                                                               
the  broader  project framework  might  slow  down if  there  was                                                               
substantial  dispute around  the  midstream.   A third  important                                                               
question  is having  either a  different midstream  player or  an                                                               
open competitive  process and whether this  process would deliver                                                               
better terms  than those under the  MOU.  Related to  that is the                                                               
scarcity  of  bidders  involved  in  the  AGIA  process  and,  in                                                               
particular,   the  very   few  that   actually  made   qualifying                                                               
competitive   bids.     The   question   is   whether  that   was                                                               
representative of the industry's  interest in an Alaskan pipeline                                                               
in general or whether it was  specific to what happened then, and                                                               
might there  be more interest  today.   The last key  question is                                                               
the  possibility  of  a  better  tariff  being  offered  under  a                                                               
competitive bid process  and how to weigh the  possible, but very                                                               
uncertain,  benefit and  possible cost  against the  questions of                                                               
benefits  that come  from  momentum and  the  potential costs  of                                                               
dissolving AGIA.  These are  questions that need to be considered                                                               
further in  regard to the non-financial  aspects of TransCanada's                                                               
8:17:01 PM                                                                                                                    
MR. MAYER  turned to slide  14, "TransCanada Tariff  Offer Within                                                               
Market  Norms," to  begin addressing  the questions  of how  much                                                               
value  of  the  overall  project does  TransCanada  take  up  and                                                               
whether that  is a good deal.   The first question  is about what                                                               
is  proposed under  the  MOU  in terms  of  tariff  and how  that                                                               
compares to trying to bring in  a different third party through a                                                               
competitive process.   The  best way  to begin  understanding the                                                               
answer to  this question  is to  benchmark against  market norms.                                                               
To do this, enalytica analyzed all  of the 2012 data presented to                                                               
the Federal Energy Regulatory Commission  (FERC) on Form 2, which                                                               
is the annual report that  FERC regulated U.S. pipeline companies                                                               
are required  to submit.  The  cost of debt, cost  of equity, and                                                               
the relative  share between  the two are  regulated by  FERC, and                                                               
this is what  enalytica is presenting in the charts  on slide 14.                                                               
The left  chart is the  capital structure for proportion  of debt                                                               
to proportion  of equity.  The  right chart is the  cost of debt,                                                               
the cost  of equity,  and the overall  weighted cost  of capital.                                                               
Mr. Mayer explained the charts  consist of "box plots," which are                                                               
the way of showing the distribution  of a variable.  The vertical                                                               
lines above  and below the boxes  are the maximum and  minimum of                                                               
the dataset.  In the chart  for capital structure, it can be seen                                                               
that the proportion  of debt varies from no debt  to 68.1 percent                                                               
debt.  Between  those two numbers are the box  plots which depict                                                               
the twenty-fifth  percentile, the  median, and  the seventy-fifth                                                               
percentile.   The  bottom quarter  of all  data observations  are                                                               
below the  level of 34.7  percent debt in the  capital structure.                                                               
The  bottom half,  or those  observations below  the median,  are                                                               
below 40.2  percent debt  in the capital  structure.   The bottom                                                               
three-quarters  are  below  46.7  percent  debt  in  the  capital                                                               
structure.  The top quarter, or  the highest ratio of debt in the                                                               
capital structure, is between 46.7 and 68.1 percent.                                                                            
8:20:16 PM                                                                                                                    
CO-CHAIR SADDLER understood the top line of the box is three-                                                                   
quarters and above, the middle line  is 50 percent, and the lower                                                               
is 25 percent.                                                                                                                  
MR.  MAYER answered  yes, clarifying  that  this is  in terms  of                                                               
proportion to the total sample  that is being represented in each                                                               
of those areas.                                                                                                                 
CO-CHAIR SADDLER inquired about the source of the data.                                                                         
MR.  MAYER responded  it was  the most  recent year  available of                                                               
FERC-reported  data that  pipeline  companies  regulated by  FERC                                                               
report on FERC's Form 2, and opined that the data year was 2012.                                                                
CO-CHAIR SADDLER offered his understanding  that the chart is for                                                               
comparing the costs for the  proposed Alaska project versus other                                                               
FERC-regulated projects.                                                                                                        
MR. MAYER replied yes.  In  further response, he said the overall                                                               
dataset was all  of the Form 2 reports available,  which were 45-                                                               
56  observations for  those companies  that submit  a Form  2 and                                                               
that on  that form report  cost of debt and  cost of equity.   He                                                               
further explained  that Form 2  is a regulatory filing  with FERC                                                               
that contains  a wealth of  information about  pipeline companies                                                               
and includes on one page the cost of debt and cost of equity.                                                                   
8:22:09 PM                                                                                                                    
REPRESENTATIVE  HAWKER inquired  whether the  charts on  slide 14                                                               
are relevant to this discussion  given the slide's title is about                                                               
TransCanada's tariff  being within market  norms.  He said  he is                                                               
unsure  that  a FERC  pipeline  is  comparable to  this  pipeline                                                               
because everything heard to date is  that this will not be a FERC                                                               
regulated pipeline.   This  pipeline is  essentially one  big gas                                                               
gathering line  feeding a proprietary  industrial process,  not a                                                               
classic FERC pipeline with multiple  customers that crosses state                                                               
borders.  It  would seem reasonable that should  the state become                                                               
involved in developing proprietary  gathering lines that there be                                                               
a tariff structure  that is not necessarily  representative of an                                                               
average  FERC-type line.   He  asked  what the  grounding is  for                                                               
using a  FERC regulated pipeline  to benchmark this  project that                                                               
was  presented  as  having  no  desire to  be  a  FERC  regulated                                                               
MR.  TSAFOS explained  that this  reflects data  availability and                                                               
the  market.   There  is no  intent  for FERC  data  to be  shown                                                               
because this  pipeline will  be regulated  by FERC.   TransCanada                                                               
has made an offer to charge a  tariff to the State of Alaska that                                                               
is  based on  75  percent debt  and 25  percent  equity, cost  of                                                               
equity 12  percent, cost of debt  5 percent, plus a  rate tracker                                                               
to  the yield  of the  U.S.  Treasury.   The question  is how  to                                                               
assess this offer.   One way is to go to bid and  see if there is                                                               
a  better offer.   The  other  way is  to look  at what  pipeline                                                               
companies typically  make, what the  market is for  these things.                                                               
Is  there a  market  for an  800-mile pipeline  in  Alaska?   No,                                                               
because no one  has built one yet; so there  is absolutely unique                                                               
character to this project that  cannot be benchmarked as there is                                                               
not anything to benchmark against.   While there may not be other                                                               
pipelines  of this  length  to  compare, there  is  a market  for                                                               
building  pipelines  and  charging  companies  to  transport  gas                                                               
through them  and that market  can be  reviewed.  Does  this mean                                                               
that the  offer on  the table  is the best  possible offer?   The                                                               
analysis is  how that  offer compares  relative to  what pipeline                                                               
companies  are expected  and able  to make  in a  market that  is                                                               
regulated similar to  the U.S.  This analysis is  not intended to                                                               
say that  FERC is going to  regulate this pipeline; it  is to use                                                               
benchmarking instead  of a completely arbitrary  analysis.  Slide                                                               
15 reflects  rates of return  (ROE) for FERC versus  the National                                                               
Energy Board (NEB) Canada, as  TransCanada is a Canadian company.                                                               
It is  not because that number  is the relevant price,  but it is                                                               
to give members information to put in context for this deal.                                                                    
8:27:01 PM                                                                                                                    
REPRESENTATIVE  P. WILSON  requested further  explanation to  the                                                               
charts on slide 14.                                                                                                             
8:27:41 PM                                                                                                                    
CO-CHAIR FEIGE drew  attention to the line between  0 percent and                                                               
34.7 percent  on the  left chart, explaining  that if  there were                                                               
100 projects, 25 of those  projects would fall within that range.                                                               
The next  25 projects would  fall between 34.7 and  40.2 percent.                                                               
The next  25 projects  would fall between  40.2 and  46.7 percent                                                               
and  the final  25  projects  would fall  between  46.7 and  68.1                                                               
percent.  The chart shows the distribution of these projects.                                                                   
MR. MAYER confirmed Co-Chair Feige's  explanation is correct.  In                                                               
further response  to Representative P. Wilson,  he confirmed that                                                               
this same principle was used for  the box plots on the two charts                                                               
on slide 14.                                                                                                                    
8:28:29 PM                                                                                                                    
MR. MAYER continued his review of  slide 14, noting that debt and                                                               
equity  on  the left  chart  are  directly proportional  to  each                                                               
other; if  there is  40 percent  debt there  is by  definition 60                                                               
percent equity.  The MOU proposes  a 75/25 debt/equity split.  It                                                               
can be seen from  the left chart that 75/25 is  out of the sample                                                               
in terms  of U.S.  FERC regulated  pipelines; the  state is  at a                                                               
higher level  of debt relative  to equity than anything  that has                                                               
been reported to FERC through [Form 2].                                                                                         
8:29:16 PM                                                                                                                    
REPRESENTATIVE HAWKER noted  it had been said  earlier that there                                                               
is nothing  to benchmark this  project against, yet  these charts                                                               
are benchmarking  this project  against FERC  regulated pipelines                                                               
in  the  Lower  48.   He  expressed  agreement  with  enalytica's                                                               
question of  whether TransCanada's offer makes  sense, but argued                                                               
that the real  decision and the real benchmark  are comparing the                                                               
TransCanada  offer  to   what  else  Alaska  might   be  able  to                                                               
accomplish,  irrelevant  of  what  goes on  with  FERC  regulated                                                               
pipelines  in the  Lower 48.   Basically,  it is  what the  state                                                               
could  come up  with in  the open  marketplace for  a debt/equity                                                               
structure.  He  said this chart bothers him,  suggesting it might                                                               
actually point legislators in the  wrong direction when comparing                                                               
FERC  regulated  projects  to a  completely  unique,  stand-alone                                                               
Alaska project that has nothing to do with FERC regulation.                                                                     
8:31:13 PM                                                                                                                    
MR. MAYER, in response to  Representative Hawker, said there were                                                               
two questions  for how  this compared:  what we  could do  on our                                                               
own,  or if  we  tried  to seek  a  different  partner through  a                                                               
competitive process.  He said that  it did not help to answer the                                                               
first  question for  comparison if  the state  went ahead  on its                                                               
own.   He explained that the  slide aimed at the  second question                                                               
to how  this might  compare with  other offers  if there  were an                                                               
open and  competitive process.  He  said there was not  a perfect                                                               
answer without  a competitive process,  as it could be  better or                                                               
it  could be  worse.   He offered  his belief  that to  establish                                                               
whether this  was a direction  to pursue, the first  question was                                                               
to  ask for  the  available data  points  for the  capitalization                                                               
structures  and cost  of  debt and  equity  for other  pipelines.                                                               
These  would give  a basic  idea  for the  reasonableness of  the                                                               
offer,  as any  other bidding  company would  also be  subject to                                                               
either FERC or NEB (Canadian)  regulations and would have certain                                                               
standards for cost of debt and cost of equity.                                                                                  
8:32:51 PM                                                                                                                    
MR. TSAFOS added  that he accepted the limitation  to the utility                                                               
of the  chart.   He directed  attention to  the weighted  cost of                                                               
capital,  and  theorized  that  the  maximum  for  all  the  U.S.                                                               
pipelines in this  analysis was 5, in comparison  to the weighted                                                               
cost of  capital from TransCanada  of almost  7.  He  pointed out                                                               
that they  were trying to figure  out how the offer  on the table                                                               
compared  to  other  pipelines  in the  world  for  expected  and                                                               
attained returns and capitalization  structures.  He acknowledged                                                               
that  the utility  of the  chart was  somewhat limited,  although                                                               
there  would not  be  a  clear answer  unless  there was  another                                                               
competitive bid.                                                                                                                
8:34:37 PM                                                                                                                    
REPRESENTATIVE HAWKER asked  why there was a  comparison with all                                                               
the FERC pipelines,  instead of only comparing  the benchmarks of                                                               
all the other TransCanada projects.                                                                                             
MR.  MAYER  offered  to  discuss  data  points  relevant  to  the                                                               
TransCanada projects.                                                                                                           
MR.  TSAFOS,  in response  to  Representative  Hawker, read  from                                                               
Section 9, page  121, of the recently  published TransCanada 2013                                                               
annual report.  He spoke about  a recent decision by the National                                                               
Energy Board (NEB)  of Canada, which allowed a  rate increase for                                                               
the Canadian  Mainline pipeline,  one of  the largest  in Canada.                                                               
This decision established  a return on equity of  11.5 percent on                                                               
a deemed common equity of 40 percent.   Moving on to page 122, he                                                               
relayed that  another settlement  with the National  Energy Board                                                               
of  Canada had  established a  10.1 percent  return on  equity on                                                               
deemed common  equity of  40 percent.   He directed  attention to                                                               
the  A &  R Pipeline  in the  U.S., owned  by TransCanada,  which                                                               
reported a  9 percent cost  of debt and  a 12.25 percent  cost of                                                               
equity.   He declared that  the challenge was to  distinguish the                                                               
difference  between  a  long  established   pipeline  and  a  new                                                               
pipeline with risks similar to  an Alaska pipeline.  He explained                                                               
they  offered  all   the  data,  instead  of   limiting  to  only                                                               
TransCanada,  as TransCanada  invested in  Canada, the  Lower 48,                                                               
and Alaska.                                                                                                                     
8:40:00 PM                                                                                                                    
REPRESENTATIVE SEATON  asked how  dependent the weighted  cost of                                                               
capital was to the "75 - 25 debt equity."                                                                                       
MR.  MAYER replied  that it  was  very dependent,  and using  the                                                               
parameters  from the  MOU,  the  12 percent  cost  of equity  was                                                               
multiplied  by  25  percent,  the  5 percent  cost  of  debt  was                                                               
multiplied  by  75 percent,  and  these  totals were  then  added                                                               
together for the 6.5 percent weighted cost of capital.                                                                          
REPRESENTATIVE  SEATON   referenced  earlier   discussions  which                                                               
stated a  goal of 70  - 30 on pipeline  issues, as it  would save                                                               
money, although  there were  difficulties in  those negotiations.                                                               
He asked if 75 - 25 was considered very good.                                                                                   
MR. MAYER  expressed his  agreement that this  was very  good for                                                               
the  pure debt  equity split,  and  he pointed  out that  getting                                                               
below 70 percent debt was unusual  and aggressive.  He noted that                                                               
there could be  separate discussion for the cost of  debt and the                                                               
cost  of equity,  but for  the  pure capital  structure used,  he                                                               
declared that 75 - 25 was quite aggressive.                                                                                     
CO-CHAIR  FEIGE asked  if the  tariff was  based on  the 75  - 25                                                               
equity split,  in this case.   He asked  about the effect  on the                                                               
actual rate  of return for  TransCanada if they could  not borrow                                                               
75 percent of their commitment.                                                                                                 
MR. MAYER, in response, said that  there were two ways to answer.                                                               
The first was  to explain that structure and cost  of capital for                                                               
rate making  purposes was  intended to have  some bearing  on the                                                               
actual  structure and  cost  of capital  of  a pipeline  company,                                                               
although,  to some  extent,  it  was a  regulatory  fiction.   He                                                               
pointed out that there could  be a difference between the allowed                                                               
structure and  the allowed cost  of capital in comparison  to the                                                               
actual underlying costs which the  company used.  In the majority                                                               
of cases, although there was a  60 - 40 structure, many companies                                                               
were able to finance at 70  percent above debt and maintain their                                                               
cost of equity, which would  increase the actual return on equity                                                               
versus the  regulatory allowed return  on equity.  He  noted that                                                               
although  most  tariff  setting  did not  involve  more  than  70                                                               
percent debt, it  was possible to raise that much  debt even with                                                               
the limits  and risks for  higher amounts.   He pointed  out that                                                               
the  lower percent  of debt  would  reduce the  actual return  on                                                               
equity.   He declared that the  financing risk was limited  by an                                                               
option to terminate  in the MOU, if  satisfactory financing could                                                               
not be arranged.   In this circumstance, the State  of Alaska was                                                               
still required  by the MOU  to repay the development  costs, with                                                               
7.1 percent interest.                                                                                                           
8:44:51 PM                                                                                                                    
MR. MAYER  resumed his  review of  slide 14,  "TransCanada Tariff                                                               
Offer Within Market  Norms," noting that to the  extent that this                                                               
was a useful  comparison, there was a  substantially higher level                                                               
of  debt in  the rate  setting  capital structure,  which was  an                                                               
advantage to the state.  He  said that an overall review for cost                                                               
of  equity,  cost of  debt,  and  the  weighted average  cost  of                                                               
capital  revealed  terms  toward  the bottom  of  "what  was  out                                                               
there."   Directing  attention to  the weighted  average cost  of                                                               
capital with  a median of 9.8  percent [graph on bottom  right of                                                               
slide], the lowest data point in  this sample was 6.5 percent and                                                               
the resulting cost of capital under  the MOU during the period of                                                               
pipeline  operation, not  including the  time of  development and                                                               
time for future  expansions, would be 6.75 percent,  which was at                                                               
the  lowest end  of the  sample.   He  allowed that  it could  be                                                               
useful to make  comparisons of FERC regulated  pipelines with the                                                               
allowable returns, the weighted cost  of capital, and the returns                                                               
on equity under the NEB in Canada.                                                                                              
8:46:20 PM                                                                                                                    
MR. MAYER moved  on to slide 15, entitled  "FERC ROE HISTORICALLY                                                               
EXCEED NEB  (CANADA) ROE".   He  pointed out  that the  return on                                                               
equity allowed  by FERC was  above those historically  allowed by                                                               
the NEB.   He  directed attention to  the FERC  settlement cases,                                                               
the end result  of a dispute.   He stressed that, to  the best of                                                               
enalytica's knowledge, most of the sample  projects had a 60 - 40                                                               
debt equity  split.  He explained  that an 8.5 percent  return on                                                               
equity would  result in  a 6.4 percent  [cost of  capital], still                                                               
near the  6.75 percent range  previously discussed.  He  shared a                                                               
caveat  that  Canadian  pipeline   companies  had  been  fiercely                                                               
contesting these very low returns on  equity in recent years.  He                                                               
directed  attention to  the NGTL  system in  Canada, which  had a                                                               
settlement with the  shippers, approved by the  NEB, which raised                                                               
the allowed return  on equity to 10.1 percent.   He reported that                                                               
the Canadian  Mainline pipeline  had a  return on  equity revised                                                               
upward  by the  NEB to  11.5 percent.   He  said that  these more                                                               
recent returns  reflected a much  closer return to  those allowed                                                               
by FERC, and he  noted that both of these projects had  a 60 - 40                                                               
percent debt to equity ratio.                                                                                                   
8:49:57 PM                                                                                                                    
MR.  MAYER addressed  slide  16, entitled  "SOA  EQUITY LEADS  TO                                                               
HIGHER GOV'T TAKE  ON AVERAGE" and referenced  the overall shares                                                               
of cash flow to  the State of Alaska.  He  referred to an earlier                                                               
question  by Representative  Tarr for  the comparison  of overall                                                               
value to the  state if the state was a  taxing entity for royalty                                                               
and  value at  the  wellhead versus  having a  share  of gas  and                                                               
equity.  He  compared the overall split of the  project cash flow                                                               
for  in value  versus  in kind  with 20  percent  and 25  percent                                                               
equity as  entailed by the  HOA.  If  it was guaranteed  that the                                                               
higher prices in Asia would  continue, then there was an argument                                                               
for the  state project to  remain with  in-value, as long  as the                                                               
price remained high.   However, he pointed out that  as the price                                                               
declined and the tariffs remained  static, the revenue would also                                                               
decrease quite  dramatically.  He  acknowledged the benefit  to a                                                               
higher  share of  equity,  especially an  equity  share that  was                                                               
proportionately better across the prices to an in value share.                                                                  
8:53:09 PM                                                                                                                    
CO-CHAIR SADDLER  asked if the  graph reflected property  tax and                                                               
corporate income tax.                                                                                                           
MR. MAYER  replied that the graph  depicted everything, including                                                               
cash flows  to the  state from being  an equity  participant with                                                               
saleable gas.                                                                                                                   
CO-CHAIR SADDLER  directed attention to  the graph for  in value,                                                               
and  asked  if  that  included production  tax  value,  corporate                                                               
income tax, and royalty.                                                                                                        
MR. MAYER expressed his agreement.                                                                                              
CO-CHAIR SADDLER  asked for clarification  for what  was included                                                               
on the remaining two graphs.                                                                                                    
MR.  MAYER explained  that  the two  other  graphs also  included                                                               
revenue to  the state  from the  sale of LNG,  net of  the costs,                                                               
plus property tax and state income tax.                                                                                         
MR. TSAFOS  clarified that the  graphs were adding up  the annual                                                               
revenues presented earlier and included the other partners.                                                                     
8:54:25 PM                                                                                                                    
REPRESENTATIVE  SEATON asked  for clarification  that the  graphs                                                               
reflected the decline  of the percentage of  revenue, noting that                                                               
the state only had 25 percent of the gas sales.                                                                                 
MR.  MAYER explained  that  this  was a  proportion  of gas  flow                                                               
rather than revenue,  although, in absolute terms,  the total was                                                               
also dropping.  When the price  dropped, the cash flow to all the                                                               
parties would also drop.                                                                                                        
REPRESENTATIVE SEATON  asked for clarification that  with a price                                                               
increase, there was a percentage drop.                                                                                          
MR.  MAYER  expressed his  agreement,  stating  that the  overall                                                               
shares of cash flow were highest in the low price environment.                                                                  
8:55:54 PM                                                                                                                    
MR. MAYER  directed attention to  slide 17, entitled  "TC'S SHARE                                                               
OF CASH IS HIGHEST AT LOW  PRICES," which described the equity at                                                               
25 percent and compared it to two  of the MOU options.  The first                                                               
was  for  the no  buyback  option  and  the second  included  the                                                               
exercise of the buyback option by the State of Alaska.                                                                          
CO-CHAIR  SADDLER  asked if  the  definition  of the  TransCanada                                                               
share of cash  included cash flow, all the  revenue going through                                                               
the pipeline.                                                                                                                   
MR.  MAYER explained  that this  was the  percentage of  net cash                                                               
flow of  the entire project  over its  lifetime.  He  pointed out                                                               
that  the net  cash flow,  net of  all costs  for developing  and                                                               
running the project, could go to  one of the three producers, the                                                               
federal  government  through federal  income  tax,  the State  of                                                               
Alaska, or TransCanada as a tariff.                                                                                             
CO-CHAIR SADDLER  asked for an  estimate of the  three producers'                                                               
share of the net  cash flow over the life of  the project, net of                                                               
all expenses.                                                                                                                   
MR.  MAYER said  that, without  TransCanada, and  its 25  percent                                                               
equity,  there would  be 40  - 50  percent of  the total  project                                                               
value to the State of Alaska.                                                                                                   
8:58:33 PM                                                                                                                    
CO-CHAIR FEIGE  asked what  percentage of the  value would  go to                                                               
debt  service, if  the  state  had to  borrow  money without  the                                                               
TransCanada option.                                                                                                             
MR.  MAYER  replied  that  this  would  be  better  addressed  in                                                               
upcoming slides,  but it would  be expected that the  state would                                                               
have a 4.5  to 5.5 percent cost  of debt, as opposed  to the 6.75                                                               
percent weighted average  cost of capital.  He  stressed that the                                                               
weighted cost of capital included  a 12 percent return on equity,                                                               
and was  an after tax return.   He suggested that  there would be                                                               
"an  effective   cost  of  somewhere   in  the  8's"   under  the                                                               
TransCanada option, as  tax was not included in  the 6.75 percent                                                               
weighted average cost of capital.                                                                                               
9:00:43 PM                                                                                                                    
REPRESENTATIVE HAWKER, addressing  the cost of gas  on the graph,                                                               
mused that  $8/MMBTU was a  project non-starter  and consequently                                                               
an irrelevant  number; whereas,  the $18/MMBTU  was a  higher end                                                               
benchmark.     He  reflected  that  the   difference  between  no                                                               
TransCanada and the TransCanada  involvement with no buyback only                                                               
projected  an  increased cumulative  return  to  the state  of  a                                                               
couple percent.   Moving on to the graph of  TransCanada with the                                                               
buyback, he surmised that the  return was only one percent higher                                                               
to the state.  He opined  that a state buyback of ownership, with                                                               
its commensurate  risks and costs,  would only have  a cumulative                                                               
return of a fraction more while  assuming all the risk.  He asked                                                               
if it was possible to  see quantifiable numbers, as this appeared                                                               
to be  at odds  with his  perception of the  return on  an annual                                                               
basis.   He  questioned  the  additional risk  for  such a  small                                                               
MR. MAYER, in response, said that  these were the same numbers as                                                               
expressed previously.  He offered  his belief that there were two                                                               
fundamentally counter  intuitive issues  relative to the  HOA and                                                               
the MOU.   First,  the assumption  for taking  gas in  kind along                                                               
with a  25 percent project  share actually allowed the  state for                                                               
between 40 - 50 percent of the  project value, as the state was a                                                               
project participant and a sovereign  entity that actively charged                                                               
state income  tax and property  tax from the  other participants.                                                               
He  pointed out  that  the municipalities  were  included in  the                                                               
analysis  as   part  of  the   state  as  a  whole.     Regarding                                                               
TransCanada, he pointed out that,  although a 25 percent share of                                                               
the  project to  TransCanada was  half the  capital value  of the                                                               
project, there  were different  ways for  each party  to generate                                                               
value  through the  project.    To generate  full  value, it  was                                                               
necessary to have  an equity stake in the project  as well as gas                                                               
and the  revenues generated from its  sale.  He pointed  out that                                                               
it  was possible  to  have a  tariff that  only  allowed for  the                                                               
initial outlay of capital, with no  net cash flow return for debt                                                               
or equity.   He reported that  the tariff structure on  the chart                                                               
allowed  for a  return  on debt  and a  return  on equity,  which                                                               
provided a  portion of the project  cash flow.  This  portion was                                                               
greater  at low  prices  because  it was  a  fixed  claim on  the                                                               
project  cash flow,  so it  represented  more at  low cash  flow.                                                               
However,  in   a  higher  price  scenario,   assuming  the  state                                                               
exercised  its  buyback, it  would  be  1  percent of  the  total                                                               
project cash  flow.   In this same  scenario, assuming  the state                                                               
did not exercise its buyback, it  would be closer to 2 percent of                                                               
the  total  project cash  flow.    He  reported that  this  could                                                               
increase to 7 percent if prices  were lower and the state did not                                                               
exercise its  buyback.  He  expressed agreement that  the overall                                                               
share of total  value created on an undiscounted  basis over time                                                               
did not take a big portion of the value.                                                                                        
9:06:24 PM                                                                                                                    
MR. TSAFOS drew attention to the  graph on the far right of slide                                                               
17,  "TC   [TransCanada]  with  Buyback,"  and   explained  that,                                                               
although  there  was  payment  of  a  tariff  to  TransCanada  in                                                               
addition to  the sales  price for  its share,  there was  not any                                                               
payment  for  the  gas  that  the state  shipped  using  its  own                                                               
capacity.    He  pointed  out that  this  lowered  the  realistic                                                               
tariff, and that  it was necessary to place the  relative cost of                                                               
these  components in  perspective.   As  the tariff  was a  fixed                                                               
amount, the higher  the cost of the gas, the  lower the tariff as                                                               
a percentage.                                                                                                                   
9:08:20 PM                                                                                                                    
REPRESENTATIVE HAWKER  relayed that it was  necessary to remember                                                               
that the gas  going through the pipeline was  the state's royalty                                                               
and tax.   He suggested  that the  graphs include a  straight bar                                                               
line illustration  which would  remain a  constant no  matter the                                                               
price of  gas.  He  declared a need  to evaluate the  gain versus                                                               
the  assumption of  risk with  the addition  of TransCanada  as a                                                               
business  partner.   He  opined  that  the chart  revealed  "very                                                               
marginal,  cumulative, ultimate,  hypothetical cash  returns over                                                               
the project  life."  He  asked for the  number of years  this was                                                               
MR. MAYER, in response, said it was 25 years.                                                                                   
REPRESENTATIVE HAWKER  declared that these returns  were marginal                                                               
for the assumption of a great deal of risk with state ownership.                                                                
MR.  TSAFOS asked  what Representative  Hawker  was comparing  to                                                               
state ownership.                                                                                                                
REPRESENTATIVE  HAWKER referenced  the  charts on  slide 17,  and                                                               
compared  the bar  depicting $18/MMBTU  on each  chart.   He said                                                               
that the  percentage of cumulative  cash flows to the  state over                                                               
the project  life was only  minimally increased by  a partnership                                                               
with TransCanada  versus having no  equity position.   He pointed                                                               
out that there was risk with an equity position.                                                                                
9:10:27 PM                                                                                                                    
MR.  MAYER acknowledged  the small  portion of  royalty that  was                                                               
foregone with  TransCanada owning all  the equity.   He expressed                                                               
disagreement  that  there  was   not  any  risk  without  equity;                                                               
reporting  that   companies  accepted  fixed,   highly  regulated                                                               
returns  as  they were  low  risk,  low  reward, and  low  return                                                               
relative to other  investments.  He shared that  a pipeline would                                                               
have a  tariff, and  that according  to the  MOU, there  was very                                                               
little risk for TransCanada between  now and the final investment                                                               
decision (FID),  as they were able  to "walk away at  a number of                                                               
points  and be  fully reimbursed."   He  stated that  TransCanada                                                               
would  need a  substantial outlay  of  capital at  some point  to                                                               
build  the pipeline,  at which  time they  would charge  a tariff                                                               
proportional to the capital outlay.   He said there were benefits                                                               
for  TransCanada involvement,  including being  expansion capable                                                               
and expansion  minded as a  partner during negotiations  with the                                                               
producers.  He  noted that TransCanada did  absorb financing risk                                                               
if not able  to raise the 75 percent debt,  even though the state                                                               
did bear a lot of risk as it paid the shipping tariff.                                                                          
REPRESENTATIVE  HAWKER  responded  that this  was  presuming  the                                                               
state  passed  enabling legislation  as  it  would not  have  any                                                               
review  for  the  MOU which  involved  the  indemnifications  for                                                               
TransCanada  insulating them  from risks.   He  acknowledged that                                                               
the state  would keep the risk,  however the choice by  the state                                                               
was whether or not to own a "chunk  of the pipe."  He offered his                                                               
belief that  the chart  on slide 17  reflected that  ownership of                                                               
this "chunk  of the pipe"  offered a minimal ultimate  return for                                                               
this additional risk.                                                                                                           
9:14:00 PM                                                                                                                    
MR.  TSAFOS  expressed  agreement   that  what  the  state  would                                                               
transfer to TransCanada  was not that high.  He  pointed out that                                                               
the assumption  of risk was  a fixed  claim, and that  the tariff                                                               
paid  to  TransCanada   was  fixed  to  an   agreed  upon  tariff                                                               
structure.   He reiterated that  the overall percentage  share of                                                               
the tariff was lower at higher gas prices.                                                                                      
REPRESENTATIVE HAWKER offered his  belief that $8/MMBTU would not                                                               
result in a successful project for the state.                                                                                   
MR.  MAYER,  in  response  to  Representative  Johnson,  directed                                                               
attention to slide  18, entitled "'IN KIND'  W/EQUITY OFFERS MORE                                                               
DOWNSIDE  PROTECTION."   He  explained  that  this reflected  the                                                               
absolute value  for undiscounted, cumulative cash  flows over the                                                               
project  life   as  a  taxing   entity  compared  to   an  equity                                                               
participant with gas.  He  directed attention to the three charts                                                               
depicting   the  State   of   Alaska,   Producers,  and   Federal                                                               
Government.    He  reported  that an  "in  value"  structure  was                                                               
preferable if  there were higher  MMBTU prices for the  entire 25                                                               
year span  of the  project, although value  fell very  quickly as                                                               
the  prices dropped  because of  the  fixed claims  charged.   He                                                               
noted that an "in kind"  structure gained more value with greater                                                               
participation,   as  a   25  percent   share  was   substantially                                                               
preferable  to a  20  percent  share.   He  noted  that this  was                                                               
limited to  the share amount  that could be financed  for capital                                                               
expenses and the  share size to which the  producers would agree.                                                               
He reported  that the HOA had  anticipated a share range  of 20 -                                                               
25  percent.   He  pointed  out that  the  producers had  greater                                                               
returns  for the  "in  kind" structure  with  higher LNG  prices,                                                               
however with falling prices, the value fell quickly.                                                                            
9:19:18 PM                                                                                                                    
MR.  MAYER moved  on to  discuss  the comparative  value for  the                                                               
state with  a 20 percent share  versus a 25 percent  share, slide                                                               
19, entitled "LIMITED VALUE FOREGONE  UNDER TC W/BUYBACK OPTION".                                                               
He described  the left chart as  being the State of  Alaska total                                                               
cash flows,  comparing the range  of value for 20  percent equity                                                               
share  and no  involvement  with TransCanada,  25 percent  shares                                                               
with  the TransCanada  buyback, and  the  sum of  the total  cash                                                               
flows from the  project undiscounted over time.   The right chart                                                               
compared the same flows, but with  a 10 percent discount rate for                                                               
net present value.  The idea for  this was to look at the capital                                                               
outlay  required  to  build  the project,  and  the  benefit  for                                                               
financibility.  The outlay after  paying the debt equity ratio of                                                               
70/30 was  about the same  in both the aforementioned  20 percent                                                               
and 25 percent  examples, and if just comparing  this outlay, the                                                               
choice would  be for the 25  percent share with TransCanada.   He                                                               
pointed out that there was foregone  value by not having the full                                                               
25 percent.   He  reported that the  difference was  the greatest                                                               
when  viewed on  an  undiscounted basis,  simply  for total  cash                                                               
flows.   When  there  was  a discount  for  the  upfront cost  by                                                               
TransCanada, which emphasized that they  had the majority of this                                                               
cost, the difference was much smaller.   He offered an example of                                                               
a $15 MMBTU price, with a $75  billion value to the state for the                                                               
life  of the  project,  and he  estimated a  loss  of about  $5-6                                                               
billion to TransCanada for tariff.   He pointed out that the loss                                                               
to the  state was about  $400 million after reviewing  the effect                                                               
of  the reduction  to  the  net present  value  discounted at  10                                                               
9:22:14 PM                                                                                                                    
MR.  MAYER pondered  the  different  ways to  think  of the  non-                                                               
financial benefits  with TransCanada,  which included  its active                                                               
role  in future  expansion  during contract  discussion with  the                                                               
producers.   He  also  reviewed  the role  for  TransCanada as  a                                                               
finance option.  Although there  was a marginally increased value                                                               
for the state  to finance the project  without TransCanada, there                                                               
was the  question for the  capital constraint and  that resulting                                                               
loss  of  value.   He  acknowledged  that  there  were a  lot  of                                                               
unknowns  that may  be answered  further along  the project,  and                                                               
that there was still the option  for the "off ramps" to terminate                                                               
the project agreements.                                                                                                         
9:24:43 PM                                                                                                                    
REPRESENTATIVE SEATON, comparing  slide 19 and slide  9, asked if                                                               
the difference was all because of a NPV (net present value) 10.                                                                 
MR. MAYER  expressed agreement, and  noted that the chart  on the                                                               
left was undiscounted,  whereas the chart on  the right reflected                                                               
the impact of the 10 percent discount rate.                                                                                     
REPRESENTATIVE  HAWKER referenced  an  earlier  statement by  Mr.                                                               
Mayer as the cumulative take  away of the entire presentation and                                                               
asked  if the  title of  slide 19  was saying  the same  thing as                                                               
"there is little to be gained by us going it alone."                                                                            
MR. MAYER  replied that, relatively  speaking, it was  saying the                                                               
same thing.                                                                                                                     
REPRESENTATIVE JOHNSON  pointed out that, although  a few billion                                                               
was  relatively small  given the  scope  of the  project, it  was                                                               
"still a whole  truckload of money."  He referred  to the earlier                                                               
discussion  of non-tangible  aspects  for having  someone at  the                                                               
table to support expansion.                                                                                                     
MR. MAYER  reflected on  the Washington,  D.C. dictum  "a billion                                                               
dollars  here,  a  billion  dollars  there,  pretty  soon  you're                                                               
talking real money."                                                                                                            
REPRESENTATIVE  JOHNSON  mused  about   the  current  budget  for                                                               
education relative to this money.                                                                                               
9:27:55 PM                                                                                                                    
MR. MAYER  moved on  to slide 20,  entitled "OTHER  QUESTIONS FOR                                                               
THE MIDSTREAM," which stemmed from  the micro level detail of the                                                               
MOU.  He said that it  was important to be aware that TransCanada                                                               
would recoup  its expenses.   If the  state terminated,  it would                                                               
pay back  TransCanada with a 7.1  percent interest rate.   If the                                                               
project did  not reach a  final investment  decision, TransCanada                                                               
would  be  reimbursed.    If  TransCanada  decided  to  terminate                                                               
because of lack  of board support or lack of  financing, it would                                                               
still  be reimbursed  with this  interest  rate.   He noted  that                                                               
there  were important  questions  regarding the  risk versus  the                                                               
reward, including  control and  the appropriate  split.   He said                                                               
that the second crucial point  was whether the state would decide                                                               
to  terminate  the agreement  with  TransCanada  and go  for  the                                                               
project alone at the time of  final investment decision.  He said                                                               
that the state had numerous  opportunities to terminate along the                                                               
path to  the project.   However,  the state  needed to  offer the                                                               
option  for participation  to TransCanada  within  the next  five                                                               
years, with  a provision that  the cost of  debt and the  cost of                                                               
equity  for  the   tariff  could  be  negotiated   based  on  the                                                               
conditions at  that time.  He  opined that the decision  to go it                                                               
alone should  include a better understanding  for these benefits,                                                               
and  that there  should be  consideration for  what determined  a                                                               
good faith offer  for participation by TransCanada,  and how firm                                                               
was  the "off  ramp."    He offered  his  belief  that the  final                                                               
question for the  midstream should be for who  benefited from and                                                               
who  bears  the cost  for  a  subsequent  expansion.   Under  the                                                               
current  terms of  the HOA,  an  expansion that  raised the  unit                                                               
costs of the  pipeline was paid by the expansion  parties and the                                                               
initial parties were not included in  those costs.  He said there                                                               
were many reasons  to support this decision for  certainty at the                                                               
time  of  final   investment  decisions.    He   said  there  was                                                               
reasonable  question   whether  expansion  which   benefited  the                                                               
economics  of  the  project  should include  those  who  did  not                                                               
support the expansion.                                                                                                          
9:33:44 PM                                                                                                                    
CO-CHAIR FEIGE  requested that Mr.  Mayer and Mr.  Tsafos address                                                               
what the revenue could look like  with expansion.  He offered his                                                               
belief  that  the  pipeline  would  lead  to  "a  great  deal  of                                                               
exploration activity" and  a need to get the  resource to market,                                                               
which  could  benefit the  state.    He  noted that  the  initial                                                               
contract  agreement was  for 25  years, and  the MOU  had details                                                               
which allowed  for a change of  ownership, or not, at  that time.                                                               
He asked  what should be considered  for that time at  the end of                                                               
the initial contract.                                                                                                           
REPRESENTATIVE  TARR asked  what  to review  in  order to  better                                                               
understand the other opportunities and options for expansion.                                                                   
MR. MAYER  replied that there  were a range of  granular options,                                                               
some  of which  were contemplated  in the  MOU and  the HOA.   He                                                               
stated that only  two sets of parties could really  bear the cost                                                               
of  expansion,   either  solely   by  the  parties   seeking  and                                                               
participating in the expansion, or by everyone.                                                                                 
9:37:05 PM                                                                                                                    
REPRESENTATIVE KAWASAKI  referenced slide 6 regarding  the mix of                                                               
debt and  equity and asked whether  it was necessary to  have the                                                               
answers to the questions presented on slide 20.                                                                                 
MR. MAYER  acknowledged that these questions  should be answered,                                                               
although  some  of  the  questions   needed  to  be  weighed  and                                                               
considered for reasonableness  of risk and reward  by each member                                                               
themselves,  and some  questions, including  those regarding  the                                                               
off ramps in the contract, may require legal analysis.                                                                          
MR. TSAFOS  said that the  first two  questions on slide  20 were                                                               
not  legal  or  technical  questions.   The  third  question  for                                                               
solidity of  the off ramp  was a  legal question, and  the fourth                                                               
question was  one of  judgment for whether  the upside  should be                                                               
shared but not the downside.   He stated that questions one, two,                                                               
and four were  facts and each person needed to  determine if they                                                               
were  comfortable  with them,  or  whether  it was  necessary  to                                                               
change them.  He noted that  the third question was a legal fact,                                                               
and he would not presume to offer an answer to it.                                                                              
REPRESENTATIVE  KAWASAKI  paraphrased  from the  LNG  key  issues                                                               
[Included in members' packets] and said:                                                                                        
     from a purely financial  perspective the impact of TC's                                                                    
     involvement may be  seen as akin to a  loan, the reduce                                                                    
     in capital  investment in the  project required  by the                                                                    
     state,  and the  state  pays back  the  loan through  a                                                                    
     fixed payment in  the form of tariff, also  like a loan                                                                    
     it increases  some of the  state's exposure of  risk by                                                                    
     adding a  fixed claim  on the  project cash  flows that                                                                    
     must  be  met  before  the state  receives  its  share.                                                                    
     Compared  to other  forms of  debt, TC's  involvement's                                                                    
     relatively expensive form  of financing, average weight                                                                    
     of capital's  significantly above  the states  own cost                                                                    
     of debt.                                                                                                                   
REPRESENTATIVE   KAWASAKI  questioned,   as  this   was  in   the                                                               
paraphrased  analysis  of the  fiscal  question,  what should  be                                                               
done.   He offered his  belief that it  was not a  huge financial                                                               
benefit,  and he  asked  what  the state  was  getting from  this                                                               
MR.  MAYER,  in  response,  said that  from  a  purely  financial                                                               
perspective this  was not a  net benefit  to the state  and there                                                               
was not a significant foregone value.   It was a relatively small                                                               
amount  of the  overall total  project value.   He  asked if  the                                                               
other  benefits from  the involvement  of TransCanada  outweighed                                                               
the  purely  financial cost  that  was  relatively small  in  the                                                               
scheme of the overall project.                                                                                                  
9:41:25 PM                                                                                                                    
REPRESENTATIVE   SEATON  addressed   the  fourth   question,  and                                                               
expressed concern  with the lack  of liability to  participate in                                                               
the escalated  costs from expansion  and then an  expectation for                                                               
benefits from  the expansion.   He asked  if there  were relative                                                               
terms  for similar  expansion projects  internationally, as  this                                                               
was "an unbalanced formula here  if there's no exposure to higher                                                               
costs, but there's savings on the  downside."  He opined that, as                                                               
the state  would probably be  an expansion party with  others and                                                               
therefore should be  the beneficiary for lower  tariffs, this was                                                               
one  of  those decision  points  that  should be  decided  before                                                               
moving forward.                                                                                                                 
MR.  MAYER  agreed   to  look  into  providing   some  points  of                                                               
comparison to other  projects.  He stated that  the points raised                                                               
were ideal ones  for the producers and the  administration to get                                                               
their  thoughts  and  reasons  on the  nature  of  the  expansion                                                               
MR.  TSAFOS added  that  he  was unsure  whether  there was  more                                                               
analysis that  could be done, as  this was more of  a question of                                                               
judgment.  He  suggested that the administration  could have some                                                               
good reasons that had not been discussed.                                                                                       
REPRESENTATIVE  SEATON  asked  if   there  were  other  expansion                                                               
projects with similar language,  although generally more balanced                                                               
on the downside.                                                                                                                
9:44:47 PM                                                                                                                    
REPRESENTATIVE  JOHNSON  said  that  he wanted  to  look  at  the                                                               
ultimate stress test under the  current agreements for what would                                                               
happen  under a  variety  of scenarios,  including if  ExxonMobil                                                               
Corporation  bought ConocoPhillips  Alaska, Inc.,  if TransCanada                                                               
had to file bankruptcy, and  if Sinopec Group bought TransCanada.                                                               
He  asked to  know  what  the options  were  for  the state,  and                                                               
offered his understanding that the  State of Alaska was the "deep                                                               
9:46:09 PM                                                                                                                    
[CSSB 138(FIN) am was held over.]                                                                                               

Document Name Date/Time Subjects
HRES -enalytica, 3.24.24.pdf HRES 3/24/2014 1:00:00 PM
SB 138
AK LNG Key Issues - Enalytica March 2014.pdf HRES 3/24/2014 1:00:00 PM
SB 138
Leg. Legal 3.22.14 Sectional CSSB138 Version I.A.pdf HRES 3/24/2014 1:00:00 PM
SB 138
Response to HRES 3-21-2014 FINAL signed.pdf HRES 3/24/2014 1:00:00 PM
SB 138