Legislature(2013 - 2014)SENATE FINANCE 532

03/10/2014 09:00 AM FINANCE


Download Mp3. <- Right click and save file as

* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+= SB 138 GAS PIPELINE; AGDC; OIL & GAS PROD. TAX TELECONFERENCED
Heard & Held
+ SB 137 EXTEND SEISMIC HAZARDS SAFETY COMMISSION TELECONFERENCED
Moved SB 137 Out of Committee
+ HB 298 CONFIDENTIALITY OF PERFORMANCE REVIEWS TELECONFERENCED
Moved SCS HB 298(FIN) Out of Committee
+ Bills Previously Heard/Scheduled TELECONFERENCED
SENATE BILL NO. 138                                                                                                           
                                                                                                                                
     "An Act relating  to the purposes of the  Alaska Gasline                                                                   
     Development Corporation  to advance to develop  a large-                                                                   
     diameter   natural  gas   pipeline  project,   including                                                                   
     treatment  and  liquefaction   facilities;  establishing                                                                   
     the large-diameter  natural  gas pipeline project  fund;                                                                   
     creating  a  subsidiary   related  to  a  large-diameter                                                                   
     natural  gas pipeline project,  including treatment  and                                                                   
     liquefaction  facilities; relating  to the authority  of                                                                   
     the  commissioner  of  natural  resources  to  negotiate                                                                   
     contracts related  to North Slope natural  gas projects,                                                                   
     to enter  into confidentiality agreements  in support of                                                                   
     contract  negotiations and  implementation, and  to take                                                                   
     custody  of   gas  delivered  to  the  state   under  an                                                                   
     election  to  pay the  oil  and  gas production  tax  in                                                                   
     kind;  relating to  the sale, exchange,  or disposal  of                                                                   
     gas  delivered to  the state  under an  election to  pay                                                                   
     the  oil and  gas production  tax in  kind; relating  to                                                                   
     the  duties of  the commissioner  of  revenue to  direct                                                                   
     the   disposition   of  revenues   received   from   gas                                                                   
     delivered to  the state in kind and to  consult with the                                                                   
     commissioner  of natural  resources on  the custody  and                                                                   
     disposition  of  gas delivered  to  the state  in  kind;                                                                   
     relating  to  the  authority   of  the  commissioner  of                                                                   
     natural resources  to propose modifications  to existing                                                                   
     state  oil and  gas leases;  making certain  information                                                                   
     provided  to the  Department  of  Natural Resources  and                                                                   
     the Department  of Revenue  exempt from inspection  as a                                                                   
     public  record; making certain  tax information  related                                                                   
     to an  election to  pay the oil  and gas production  tax                                                                   
     in  kind  exempt from  tax  confidentiality  provisions;                                                                   
     relating   to  establishing  under   the  oil   and  gas                                                                   
     production  tax a  gross tax  rate for  gas after  2021;                                                                   
     making  the  alternate  minimum   tax  on  oil  and  gas                                                                   
     produced north  of 68 degrees North latitude  after 2021                                                                   
     apply  only to  oil; relating  to apportionment  factors                                                                   
     of  the  Alaska  Net  Income   Tax  Act;  authorizing  a                                                                   
     producer's  election to pay  the oil and  gas production                                                                   
     tax  in  kind  for  certain  gas  and  relating  to  the                                                                   
     authorization;    relating   to   monthly    installment                                                                   
     payments  of the oil  and gas  production tax;  relating                                                                   
     to  interest payments  on  monthly installment  payments                                                                   
     of  the  oil   and  gas  production  tax;   relating  to                                                                   
     settlements  between producers  and  royalty owners  for                                                                   
     oil  and   gas  production   tax;  relating   to  annual                                                                   
     statements  by  producers  and  explorers;  relating  to                                                                   
     annual   production  tax   values;  relating   to  lease                                                                   
     expenditures;  amending the  definition  of gross  value                                                                   
     at the  'point of  production' for  gas for purposes  of                                                                   
     the  oil  and gas  production  tax;  adding  definitions                                                                   
     related  to natural  gas terms;  clarifying that  credit                                                                   
     may not  be taken  against the in-kind  levy of  the oil                                                                   
     and  gas production  tax  for gas  for  purposes of  the                                                                   
     exploration  incentive credit, the  oil or  gas producer                                                                   
     education  credit, and the  film production  tax credit;                                                                   
     making  conforming  amendments;  and  providing  for  an                                                                   
     effective date."                                                                                                           
                                                                                                                                
9:13:46 AM                                                                                                                    
                                                                                                                                
LARRY  PERSILY,  FEDERAL  COORDINATOR,   ALASKA  NATURAL  GAS                                                                   
TRANSPORTATION    PROJECTS,    discussed    the    PowerPoint                                                                   
presentation,   "Alaska   gas    pipeline   project.   What's                                                                   
different this time?" (copy on file).                                                                                           
                                                                                                                                
Mr. Persily looked at slide 1, "The world changed, not us."                                                                     
                                                                                                                                
     Global LNG trade has quadrupled since 1995                                                                                 
                                                                                                                                
     Asian LNG demand alone could double by 2025                                                                                
                                                                                                                                
     China demand growing double-digit annual rate                                                                              
                                                                                                                                
     Europe looking for alternatives to Russian gas                                                                             
                                                                                                                                
     Worldwide concerns over coal, nuclear plants                                                                               
                                                                                                                                
     Alaska LNG could be the victor of circumstances                                                                            
                                                                                                                                
Mr.  Persily   highlighted  slide   2,  "Global   gas  prices                                                                   
diverge."  The divergence  in price  between U.S.,  European,                                                                   
and Asian  LNG prices  has recently  changed over  the years.                                                                   
He  stressed that  the  gap would  not  continue  to grow  as                                                                   
rapidly  as the  graph indicated.  The supply  and demand  on                                                                   
commodities would  shift that  gap. The marked  realizes that                                                                   
it  is expensive  to  liquefy  and move  gas  into the  Asia-                                                                   
Pacific   market,   and   prices   would   acknowledge   that                                                                   
realization.                                                                                                                    
                                                                                                                                
Mr. Persily discussed  slide 3, "China's domestic  gas supply                                                                   
deficit."  The real  growth in  demand  for imported  natural                                                                   
gas was  China. The  red bars  on the  graph represented  the                                                                   
deficit of  what they could  produce versus their  need. From                                                                   
an  exporter's  perspective,  there  was  a  definite  growth                                                                   
market.                                                                                                                         
                                                                                                                                
Mr. Persily addressed slide 4, "Price is everything."                                                                           
                                                                                                                                
     Japan paid $70-plus billion for LNG in 2013                                                                                
                                                                                                                                
     Energy a big reason for $112 billion trade gap                                                                             
                                                                                                                                
     Third year in a row of trade deficit in Japan after                                                                        
     more than 30 years of a trade surplus                                                                                      
                                                                                                                                
     Japan leading the charge for new suppliers, more                                                                           
     competition and lower LNG pricing regime                                                                                   
                                                                                                                                
     Alaska could be price competitive in the market                                                                            
                                                                                                                                
Mr. Persily displayed slide 5, "No project has it easy."                                                                        
                                                                                                                                
     BG Group says 525-mile natural gas pipeline to Prince                                                                      
     Rupert could cost up to $10 billion                                                                                        
                                                                                                                                
     LNG tax debate under way in British Columbia                                                                               
                                                                                                                                
     Dredging, harbor, berthing costs estimated at $1.5                                                                         
     billion for Australia's Wheatstone LNG                                                                                     
                                                                                                                                
     Russian politics out ahead of project economics                                                                            
                                                                                                                                
     Buyers hold back, wait to see LNG pricing trend                                                                            
                                                                                                                                
9:19:14 AM                                                                                                                    
                                                                                                                                
Mr. Persily addressed slide 6, "Alaska has changed, too."                                                                       
                                                                                                                                
     Prudhoe Bay  growing older, economics look  better as an                                                                   
     oil and gas play rather than oil only                                                                                      
                                                                                                                                
     Point  Thomson under  development  and  would supply  25                                                                   
     percent of the gas for the LNG project                                                                                     
                                                                                                                                
     Major   North   Slope   producers   willing   to   spend                                                                   
     significant money to advance the gas project                                                                               
                                                                                                                                
     Alaskans   appear   willing    to   consider   investing                                                                   
     significant state money into the LNG project                                                                               
                                                                                                                                
Mr. Persily highlighted slide 7, "Patience is a virtue."                                                                        
                                                                                                                                
     Patience is a must for state LNG investment                                                                                
                                                                                                                                
     Long wait for the first check - but long payback                                                                           
                                                                                                                                
     Norway  invested  billions  in  oil  and  gas  and  then                                                                   
     waited  years for any  return; it  took a decade  before                                                                   
     real investment payback started to roll in                                                                                 
                                                                                                                                
     If  it  wants to  act  like  an  oil and  gas  business,                                                                   
     Alaska must think like one - and think long term                                                                           
                                                                                                                                
9:20:53 AM                                                                                                                    
                                                                                                                                
Co-Chair  Kelly wondered  if the  challenge  of a  successful                                                                   
LNG  business  was  to  ensure there  were  no  massive  cost                                                                   
overruns.  Mr.   Persily  replied  in  the   affirmative.  He                                                                   
stressed  that  there was  no  return  on investment  in  the                                                                   
early  years of  a  project's inception,  but  the long  term                                                                   
investment was inevitable.                                                                                                      
                                                                                                                                
Co-Chair  Kelly understood  that  there would  already be  an                                                                   
outline  of an  investment  return,  to lure  investors.  Mr.                                                                   
Persily  agreed,  and  stressed  that  the  costs  should  be                                                                   
limited and carefully managed.                                                                                                  
                                                                                                                                
Co-Chair   Kelly  shared   that   he  had   recently  had   a                                                                   
conversation  with a  constituent.  That constituent  pointed                                                                   
out that  there was  too much  competition across  the world,                                                                   
so they  felt that  Alaska's LNG would  not sell,  because it                                                                   
was  too difficult  to bring  it  to market.  He queried  the                                                                   
problems  of the  competing projects.  Mr. Persily  responded                                                                   
that the  closest competition  was Canada.  There were  12 or                                                                   
13 LNG  proposed projects for  British Columbia (BC),  but he                                                                   
stressed that  none of those  projects had embarked  on final                                                                   
investment decision;  had any permits in hand;  and announced                                                                   
customers. The  BC government had  announced a new  tax rate,                                                                   
but did  not expect  the legislation and  the details  on the                                                                   
fiscal regimes until  much later. He stressed  that companies                                                                   
were  reluctant  to  embark  on  final  investment  decisions                                                                   
until   those  details   were   outlined.   He  stated   that                                                                   
consultations  with First  Nations was  an issue  in BC,  and                                                                   
there were some  air quality issues in certain  regions. Many                                                                   
of  the proposed  shale  fields had  substantial  development                                                                   
fields. The U.S.  Gulf Coast had an advantage,  because there                                                                   
was mostly  a conversion  of existing  import terminals  into                                                                   
export terminals.  The politics in  the Lower 48  for getting                                                                   
the export licenses approved was a major issue.                                                                                 
                                                                                                                                
9:25:54 AM                                                                                                                    
                                                                                                                                
Mr. Persily explained slide 8, "What's changed since 2002."                                                                     
                                                                                                                                
     DOR 2002 report looked at pipeline, not LNG                                                                                
                                                                                                                                
     Different markets, sales, risks and regulations                                                                            
                                                                                                                                
     State is in a better cash position today ($17 billion                                                                      
     in savings) than 2002 ($2 billion)                                                                                         
                                                                                                                                
     State equity investment in 2002 might have needed                                                                          
     assistance from the Permanent Fund                                                                                         
                                                                                                                                
     100 percent state ownership was on the table in 2002                                                                       
                                                                                                                                
Mr.  Persily   discussed  slide   9,  "Some  things   haven't                                                                   
changed."                                                                                                                       
                                                                                                                                
     DOR 2002 report recommended the state match pipeline                                                                       
     capacity with its share of the gas                                                                                         
                                                                                                                                
     Report said conflicts as an owner and regulator are                                                                        
     real, but state-owned corporation could provide a                                                                          
     partial barrier to minimize the conflicts                                                                                  
                                                                                                                                
     Minority ownership doesn't give state control                                                                              
                                                                                                                                
     Report warned: Keep politics out of the business                                                                           
                                                                                                                                
Co-Chair Kelly  felt that the cost  of Pre FEED and  FEED was                                                                   
extremely expensive to the state.                                                                                               
                                                                                                                                
9:30:58 AM                                                                                                                    
                                                                                                                                
Mr.  Persily stated  that the  expense was  worth ensuring  a                                                                   
sound investment,  in order  to engineer  the best  solutions                                                                   
for the problems.                                                                                                               
                                                                                                                                
Co-Chair  Kelly   queried  Mr.  Persily's  thoughts   on  the                                                                   
proposed business  arrangement with TransCanada.  Mr. Persily                                                                   
responded that  the $17 billion  was not a "bottomless  pit",                                                                   
but by  partnering with  TransCanada the  state would  reduce                                                                   
its  initial financial  investment.  He felt  that  it was  a                                                                   
smart  business  arrangement.   If  the  state  took  its  25                                                                   
percent equity share  in the entire project,  it was probably                                                                   
more than the state could afford.                                                                                               
                                                                                                                                
Co-Chair  Kelly  stated  that  it was  the  largest  proposed                                                                   
pipeline, so  the state probably  should not invest  money it                                                                   
does not already have.                                                                                                          
                                                                                                                                
Senator Dunleavy  wondered if the state should  invest in Pre                                                                   
FEED. Mr. Persily replied in the affirmative.                                                                                   
                                                                                                                                
Senator   Dunleavy  asked   if   there   were  any   negative                                                                   
indicators  that  the  state   should  focus  on,  especially                                                                   
issues that  the state  could not alter  after Pre  FEED. Mr.                                                                   
Persily   joked  that   the  federal   government  was   only                                                                   
considered  with   35  percent   corporate  income   tax.  He                                                                   
stressed  that  the  chart  should not  be  drafted  at  high                                                                   
prices.  He felt  that  the analysis  should  be  run at  the                                                                   
lowest possible price of LNG.                                                                                                   
                                                                                                                                
Senator Olson  wondered how Alaska  could regulate  itself as                                                                   
a  sovereign  being  as  part   owners  of  the  project.  He                                                                   
specifically  asked  if  there  was a  consideration  of  the                                                                   
federal government  inhibiting  Alaska's opportunity  to make                                                                   
a  profit.  Mr.  Persily  replied  that  the  Federal  Energy                                                                   
Regulatory Commission  (FERC) did not currently  regulate the                                                                   
tariffs on liquefaction plants.                                                                                                 
                                                                                                                                
9:37:59 AM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
9:45:11 AM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
ANGELA   RODELL,   COMMISSIONER,   DEPARTMENT   OF   REVENUE,                                                                   
discussed the  PowerPoint, "AK LNG: Potential  State Revenues                                                                   
and Debt  Capacity" (copy  on file).  She explained  that the                                                                   
date was incorrect on the first page of the presentation.                                                                       
                                                                                                                                
Commissioner  Rodell   discussed  slide  2,   "Fiscal  Impact                                                                   
Analysis." She explained  that the presentation  aimed to tie                                                                   
together several  different sources  of analysis,  to provide                                                                   
a comprehensive  overview  of the Alaska  LNG project  fiscal                                                                   
impacts to the state.                                                                                                           
                                                                                                                                
Commissioner   Rodell   addressed  slide   3,   "A  note   on                                                                   
uncertainty."                                                                                                                   
                                                                                                                                
     Goal:  To  give  a  reasonable  view of  how  the  AKLNG                                                                   
     project  could impact Alaska's  financial position  both                                                                   
     over the:                                                                                                                  
                                                                                                                                
          short term (next few years),                                                                                          
          mid term (next decade), and                                                                                           
          long term (to 2040 and beyond)                                                                                        
                                                                                                                                
     Analysis  presented represent a  set of scenarios  taken                                                                   
     from a range of possible outcomes                                                                                          
     Different   assumptions    may   produce   significantly                                                                   
     different results.                                                                                                         
                                                                                                                                
     Department  of  Revenue   and  consultants  are  in  the                                                                   
     process of  refining this analysis. As a  result, future                                                                   
     analysis      could     have     different      results.                                                                   
                                                                                                                                
Commissioner  Rodell looked at  slide 4,  "AKLNG -  Long term                                                                   
potential: assumptions."                                                                                                        
                                                                                                                                
     Incremental    analysis:    Gas   revenues    forecasted                                                                   
     independent of oil                                                                                                         
                                                                                                                                
     Long-term  forecast  assumes  the following  trends  for                                                                   
     oil and gas related revenues                                                                                               
                                                                                                                                
          Oil revenues - GFUR mid/high case through 2024,                                                                       
          then trend from 2020-2024 projected forward                                                                           
          (decline of ~2 percent/yr)                                                                                            
          Gas  revenues - AKLNG  Project revenues  assumed to                                                                   
          begin in 2024                                                                                                         
          Assumptions underlying gas revenues                                                                                   
                                                                                                                                
     AKLNG project comes online in 2024                                                                                         
                                                                                                                                
          Export volume  of 2.5 Bcf/d and in-state  volume of                                                                   
          0.25 Bcf/d                                                                                                            
          Oil  price  =  $90/bbl  in  2013$  growing  at  2.5                                                                   
          percent  a  year;  LNG  Price  =  13.5  percent*Oil                                                                   
          Price + $1                                                                                                            
          GFUR   is  assumed   to  include   75  percent   of                                                                   
          royalties,   25  percent   of  property   tax,  100                                                                   
          percent of  state corporate income  tax, production                                                                   
          tax   and  return  on   equity  on  AKLNG   project                                                                   
          investment                                                                                                            
                                                                                                                                
     Three    different    scenarios   for    State    equity                                                                   
     participation:                                                                                                             
                                                                                                                                
          Go it  alone - State holds 20 percent  equity stake                                                                   
          in GTP, Pipeline and LNG Plant                                                                                        
          TC with  no buy back  - TC holds 20  percent equity                                                                   
          stake in  GTP and Pipeline, State holds  20 percent                                                                   
          equity stake in LNG Plant                                                                                             
          TC with  buy back - initially, TC  holds 20 percent                                                                   
          equity  stake in GTP  and Pipeline, State  holds 20                                                                   
          percent  equity stake  in  LNG Plant.   State  buys                                                                   
          back  30  percent of  TC's  stake at  beginning  of                                                                   
          FEED                                                                                                                  
                                                                                                                                
Commissioner  Rodell   highlighted  slide  5,   "North  Slope                                                                   
Production   Forecast."  She   stated  that  the   production                                                                   
forecast baseline  was the  top line  along the GVR  eligible                                                                   
(new oil), which  was the starting point. The  explained that                                                                   
DOR assumed  a mid-high, which  was 50 percent of  the upside                                                                   
potential, in order  to consider the potential  of additional                                                                   
oil revenue  over the next 10  years going into when  the gas                                                                   
would be flowing.                                                                                                               
                                                                                                                                
Commissioner  Rodell addressed slide  6, "Revenue  Forecast -                                                                   
Official,  and Mid/  High Case."  She stated  that the  slide                                                                   
represented  the impact on  UGF revenue.  The black  line was                                                                   
the fall  2013 forecast, and the  blue line was  the mid-high                                                                   
case, which  was a slightly  higher revenue forecast  than in                                                                   
the fall 2013.                                                                                                                  
                                                                                                                                
9:50:29 AM                                                                                                                    
                                                                                                                                
Commissioner  Rodell looked  at  slide  7, "Revenue  Forecast                                                                   
vs.  AKLNG Obligations  and  20  percent State  Ownership  in                                                                   
Millions of  Dollars." She stated  that the slide  showed the                                                                   
revenue  forecast   at  20   percent  state  ownership.   She                                                                   
explained the graph:                                                                                                            
                                                                                                                                
     Solid green line: GFUR - fall 2013 official forecast                                                                       
     Dotted green line: GFUR - fall 2013 forecast, Mid/High                                                                     
     case                                                                                                                       
     Grey line: AK LNG obligation - 20 percent equity, no                                                                       
     TC                                                                                                                         
     Blue line: AK LNG obligation - 20 percent equity, TC,                                                                      
     no buyback                                                                                                                 
     Red line: AK LNG obligation - 20 percent equity, TC,                                                                       
     with buyback                                                                                                               
                                                                                                                                
Commissioner  Rodell addressed  slide  8, "AKLNG  Obligations                                                                   
vs.  GFUR  Forecast  at  20  percent  State  Ownership."  She                                                                   
explained the graph on the slide:                                                                                               
                                                                                                                                
     Grey line: 20 percent equity, no TC                                                                                        
     Blue line: 20 percent equity, TC, no buyback                                                                               
     Red line: 20 percent equity, TC, with buyback                                                                              
                                                                                                                                
Commissioner  Rodell explained  slide  9, "AKLNG  Obligations                                                                   
vs. GFUR Forecast  at 20 percent State Ownership  in Millions                                                                   
of  Dollars."  She  stated  that   the  actual  numbers  were                                                                   
represented on the  graph. She noted that in FY  20, the base                                                                   
case official forecast  was $4.8 billion in  UGF revenue. The                                                                   
mid/high  case showed  additional  revenues of  approximately                                                                   
$400  million, so  there would  be $5.2  million in  revenue.                                                                   
The obligation  with 20  percent equity  with no  partnership                                                                   
would  be  to  outlay  $2.5 billion,  so  it  would  take  53                                                                   
percent  of the  UGF  revenue if  there  was a  pay-as-you-go                                                                   
appropriation   of   UGF   revenue.    This   would   decline                                                                   
significantly if partnering with TC to 27 percent.                                                                              
                                                                                                                                
Commissioner  Rodell addressed  slide 10, "AKLNG  Obligations                                                                   
vs. GFUR Forecast  at 20 percent State Ownership  in Billions                                                                   
of Dollars."  The slide was  the same  as slide 9,  but moved                                                                   
from  20  percent  to  25  percent   equity.  The  slide  was                                                                   
showcased  in billions  of dollars,  and  the previous  slide                                                                   
was millions of dollars.                                                                                                        
                                                                                                                                
9:53:47 AM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
9:54:22 AM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
9:54:27 AM                                                                                                                    
                                                                                                                                
Commissioner  Rodell explained  that  the left  hand side  of                                                                   
the slide 10 should read "20 percent equity."                                                                                   
                                                                                                                                
Commissioner Rodell  discussed slide  11, "AKLNG -  Long Term                                                                   
Potential."  She stated that  the slide  showed an  upside to                                                                   
the  state investing  without  TC. She  noted  that the  cash                                                                   
outlay  was  significant,  but  produced  approximately  $300                                                                   
million in  additional revenue cash  flow to the state  on an                                                                   
annual basis,  as evidenced  by the blue  line at the  top of                                                                   
the  graph.  She remarked  that  there  was a  difference  of                                                                   
about  $100  million,  depending   on  the  option  of  a  TC                                                                   
partnership.                                                                                                                    
                                                                                                                                
Commissioner Rodell  explained slide  12, "AKLNG -  Long Term                                                                   
Potential -  20 percent equity  in Millions of  Dollars." The                                                                   
slide showed the details related to slide 11.                                                                                   
                                                                                                                                
Co-Chair  Kelly wondered  if the  "20 percent"  was meant  to                                                                   
read  "25  percent."  Commissioner Rodell  replied  that  the                                                                   
slide was correct, and should read "20 percent."                                                                                
                                                                                                                                
Commissioner  Rodell  continued  to  discuss  slide  12.  She                                                                   
explained  that the net  cash flow  ranged from $3.1  billion                                                                   
to  $3.5 billion,  depending on  the option.  The slide  gave                                                                   
the details of the majority of the revenue sources.                                                                             
                                                                                                                                
9:57:17 AM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
9:58:20 AM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
Commissioner  Rodell addressed  slide  13, "Revenue  Forecast                                                                   
vs.  AKLNG  Obligations  at 25  percent  State  Ownership  in                                                                   
Millions of Dollars." She explained the slide:                                                                                  
                                                                                                                                
     Green line: GFUR - fall 2013 official forecast                                                                             
     Dotted green line: GFUR - fall 2013 forecast, Mid/High                                                                     
     case                                                                                                                       
     Grey line: AK LNG obligation - 25 percent equity, no                                                                       
     TC                                                                                                                         
     Blue line: AK LNG obligation - 25 percent equity, TC,                                                                      
     no buyback                                                                                                                 
     Red line: AK LNG obligation - 25 percent equity, TC,                                                                       
     with buyback                                                                                                               
                                                                                                                                
Commissioner    Rodell   highlighted    slide   14,    "AKLNG                                                                   
Obligations   vs.  GFUR   Forecast   at   25  percent   State                                                                   
Ownership." She explained the lines on the graph:                                                                               
                                                                                                                                
     Grey line: 25 percent equity, no TC                                                                                        
     Blue line: 25 percent equity, TC, no buyback                                                                               
     Red line: 25 percent equity, TC, with buyback                                                                              
                                                                                                                                
9:59:19 AM                                                                                                                    
                                                                                                                                
Commissioner  Rodell discussed  slide 15, "AKLNG  Obligations                                                                   
vs. GFUR Forecast  at 25 percent state ownership  in millions                                                                   
of dollars."  She remarked  that there  would be revenues  of                                                                   
between  $4.8  billion  and  $5.2 billion  in  2020,  and  an                                                                   
obligation under  AK LNG of $3.2  billion, which would  be 67                                                                   
percent of the unrestricted revenue.                                                                                            
                                                                                                                                
Commissioner  Rodell displayed  slide 16, "AKLNG  Obligations                                                                   
vs. GFUR Forecast  at 25 percent State Ownership  in Billions                                                                   
of  Dollars."    She stated  that  the  slide  converted  the                                                                   
million dollars into billion dollars.                                                                                           
                                                                                                                                
Commissioner  Rodell  highlighted  slide  17, "AKLNG  -  Long                                                                   
Term  Potential."  The  blue  line  represented  the  "Go  It                                                                   
Alone", which  would generate  more revenue  to the  state at                                                                   
approximately  $400 million  versus having  TransCanada  as a                                                                   
partner.                                                                                                                        
                                                                                                                                
Commissioner Rodell  addressed slide  18, "AKLNG -  Long Term                                                                   
Potential -  25 percent equity  in Millions of  Dollars." The                                                                   
slide showed  that the revenues  to the state  were generated                                                                   
between  $4 billion  down to  $3.7 billion  over the  initial                                                                   
year. The  slide outlined the  royalty production  tax, state                                                                   
corporate income  tax, property tax, and  ownership receipts.                                                                   
She reiterated that  the cash flows would be  required out of                                                                   
general unrestricted revenue.                                                                                                   
                                                                                                                                
Commissioner  Rodell  discussed  slide  20,  "Debt  Capacity:                                                                   
Current  Debt Outstanding."  She stated  that the first  step                                                                   
in  the  analysis  was to  examine  the  state's  outstanding                                                                   
debt. The  slide was  previously presented  to the  committee                                                                   
when  the  debt manager  had  reviewed  the state  debt.  The                                                                   
majority of  debt in  2014 was  either in general  obligation                                                                   
or state supported  debt. There was also  some collateralized                                                                   
and moral obligation debt.                                                                                                      
                                                                                                                                
Commissioner  Rodell  looked  at slide  21,  "Debt  capacity:                                                                   
Historically,   debt  service  has   been  low   relative  to                                                                   
revenue."  She  explained that,  historically,  debt  service                                                                   
was  kept at  a lower  percentage. The  ten-year average  was                                                                   
1.5 percent of unrestricted revenues.                                                                                           
                                                                                                                                
Co-Chair  Kelly wondered  if  the debt  capacity  was at  3.5                                                                   
percent. Commissioner  Rodell responded  that the  State Bond                                                                   
Committee  had  a debt  capacity  policy  of 8  percent.  She                                                                   
stated that  there was a projection  to go to 5  percent debt                                                                   
capacity. Historically,  the state remained  at approximately                                                                   
1.5 percent for the 10 year average.                                                                                            
                                                                                                                                
Commissioner  Rodell  explained  slide  22,  "Debt  Capacity:                                                                   
Projected debt  service." The  slide showed that  the highest                                                                   
state  supported  debt  was  in  1987  at  9.3  percent,  but                                                                   
including school debt, it was 15.8 percent.                                                                                     
                                                                                                                                
Commissioner   Rodell   discussed    slide   23,   "Financial                                                                   
Management and Debt Metrics."                                                                                                   
                                                                                                                                
     G.O. bonds carry pledge of full faith, credit and                                                                          
     resources of the State                                                                                                     
                                                                                                                                
          State policy limits debt service to less than 8                                                                       
          percent of General Fund unrestricted revenue                                                                          
                                                                                                                                
          Debt service as a percentage of unrestricted                                                                          
                                                                                                                                
          General Fund revenues has remained low for 15                                                                         
          years                                                                                                                 
                                                                                                                                
               10-year average 1.5 percent; FY2013 was 1.7                                                                      
               percent (3.3 percent including school debt                                                                       
               reimbursements)                                                                                                  
                                                                                                                                
     Use of executive power to control expenses                                                                                 
                                                                                                                                
     Historical Preference for utilizing payas-you-go                                                                           
     funding versus debt                                                                                                        
                                                                                                                                
     Current and Future borrowing:                                                                                              
                                                                                                                                
          2012 G.O. Authorization for State transportation                                                                      
          projects (up to $453 million)                                                                                         
                                                                                                                                
               Issued $149.6 million Bond Anticipation Note                                                                     
               in March 2013                                                                                                    
          Anticipate issuing up to $230 million Bond                                                                            
          Anticipation Note in March 2014 and $35 million                                                                       
          Certificate of Participation in April 2014                                                                            
                                                                                                                                
     State financial support has been discussed for a                                                                           
     number of strategic capital initiatives                                                                                    
                                                                                                                                
10:05:31 AM                                                                                                                   
                                                                                                                                
Commissioner Rodell addressed slide 24, "Can the State go                                                                       
it Alone?"                                                                                                                      
                                                                                                                                
     Financing the State's share of the AKLNG Project on                                                                        
     the State's balance sheet - key issues:                                                                                    
                                                                                                                                
          At what cost of debt?                                                                                                 
                                                                                                                                
          Debt servicing as what percent of general fund                                                                        
          unrestricted revenue                                                                                                  
                                                                                                                                
     Scenario 1                                                                                                                 
     (lower interest)                                                                                                           
                                                                                                                                
          SOA Debt at 4.6 percent                                                                                               
          Debt Service limited to 3 percent of GFUR                                                                             
                                                                                                                                
     Scenario 2                                                                                                                 
                                                                                                                                
          SOA Debt at 4.9 percent                                                                                               
          Debt Service limited to 5 percent of GFUR                                                                             
                                                                                                                                
     Scenario 3                                                                                                                 
     (higher interest)                                                                                                          
                                                                                                                                
          SOA Debt at 5.6 percent                                                                                               
          Debt Service limited to 6 percent of GFUR                                                                             
                                                                                                                                
Co-Chair  Meyer wondered  if the debt  capacity would  remain                                                                   
at 8  percent. Commissioner  Rodell replied  that the  policy                                                                   
was  to keep  the capacity  at 8  percent, which  was a  good                                                                   
financial  metric for  an AAA  state. She  stressed that  the                                                                   
legislation  would   exceed  8  percent,  but   it  would  be                                                                   
structured to  a lower rating,  so the state could  take more                                                                   
debt.  She explained  that taking  less unrestricted  revenue                                                                   
would not  generate as much debt.  She also explained  that a                                                                   
higher interest  rate would  not generate  as much  debt, but                                                                   
targeting  more revenue  toward the  debt at  a lower  rating                                                                   
would have a smaller impact.                                                                                                    
                                                                                                                                
Co-Chair  Meyer remarked  that much  of the  debt was  out of                                                                   
the  state's control,  and wondered  if that  was a  concern.                                                                   
Commissioner   Rodell  replied   in   the  affirmative.   She                                                                   
explained  that  it  was  an opportunity  for  the  state  to                                                                   
examine  opportunities  to  participate  in the  program  and                                                                   
exercise certain control.                                                                                                       
                                                                                                                                
Co-Chair  Meyer felt  that the  all the  scenarios would  put                                                                   
Alaska into significant debt.                                                                                                   
                                                                                                                                
Co-Chair  Kelly  felt that  the  following slide  outlined  a                                                                   
positive scenario for the state.                                                                                                
                                                                                                                                
Commissioner  Rodell explained  slide 25,  "Can the  State go                                                                   
it Alone? -  State's Debt Capacity at 20  percent Ownership."                                                                   
The  slide showed  the total  required  investment under  the                                                                   
three different  scenarios: Go It  Alone; TC with  30 percent                                                                   
Buy  Back; and  TC No  Buy Back.  It assumed  the 20  percent                                                                   
option  as previously  discussed,  under  each scenario.  The                                                                   
higher interest  rate could be  assumed under  each scenario,                                                                   
because  there was  a target  of  more unrestricted  revenues                                                                   
toward the repayment of debt.                                                                                                   
                                                                                                                                
10:11:07 AM                                                                                                                   
                                                                                                                                
Co-Chair Kelly  surmised that  the $2  billion in  Scenario 3                                                                   
was the  amount that  the state  was required to  contribute.                                                                   
Commissioner Rodell replied in the affirmative.                                                                                 
                                                                                                                                
Commissioner  Rodell discussed  slide 26,  "Can the  State Go                                                                   
It Alone? -  State's Debt Capacity at 25  percent Ownership."                                                                   
The 25 percent  ownership scenario showed that  the state was                                                                   
required  to contribute  more  cash, because  of the  limited                                                                   
debt capacity. The  difference between the 20  and 25 percent                                                                   
ownership was  in the form  of equity  and cash that  must be                                                                   
paid in to take on the additional ownership interest.                                                                           
                                                                                                                                
Commissioner   Rodell  clarified   that  the   TC  Buy   Back                                                                   
percentage should be labeled "TC 40 Buy Back."                                                                                  
                                                                                                                                
10:12:32 AM                                                                                                                   
                                                                                                                                
Senator  Hoffman  wondered  if the  numbers  represented  the                                                                   
average  construction  cost  of   $55  billion.  Commissioner                                                                   
Rodell agreed to provide that information.                                                                                      
                                                                                                                                
MICHAEL  PAWLOWSKI, DEPUTY  COMMISSIONER, STRATEGIC  FINANCE,                                                                   
DEPARTMENT   OF  REVENUE,   replied   to  Senator   Hoffman's                                                                   
question. He  stated that analysis  was based on  taking 13.7                                                                   
multiplied by 4, and would be $54 billion.                                                                                      
                                                                                                                                
Senator   Dunleavy   noted   that   there   had   been   some                                                                   
presentations  that  declared  that, if  nothing  changes  by                                                                   
2024, there  would be  three areas of  the budget  that would                                                                   
consume  the entire  budget: education;  debt  reimbursement;                                                                   
and retirement  and health  care benefits.  He stressed  that                                                                   
the  legislation  would cause  more  debt  to the  state.  He                                                                   
wondered  what the  model would  look like,  if there  was no                                                                   
additional   income  for  the   state.  Commissioner   Rodell                                                                   
replied  that there would  cause a  significant challenge  to                                                                   
the state. She  explained that the legislation  would require                                                                   
modifications to  the operating  budget to service  the debt.                                                                   
She  stressed that  the partnership  would create  agreements                                                                   
where  the  state   may  not  have  to  make   the  immediate                                                                   
financial decisions.                                                                                                            
                                                                                                                                
Co-Chair  Kelly stressed  that the  presentation assumed  the                                                                   
revenue at  the final  investment stage.  He felt  that there                                                                   
would  be a gap  between the  issuing of  debt, payment,  and                                                                   
startup of  the project.  He felt  that Senator Dunleavy  was                                                                   
focused on no revenue from the project.                                                                                         
                                                                                                                                
Senator  Dunleavy explained  that he was  curious about  what                                                                   
would occur from a "worst case scenario."                                                                                       
                                                                                                                                
10:17:49 AM                                                                                                                   
                                                                                                                                
Co-Chair  Kelly felt  that the  "worst  case scenario"  could                                                                   
not  be  projected   until  the  FEED  or   final  investment                                                                   
decision   occurred.   Commissioner    Rodell   agreed.   She                                                                   
understood  that there would  be no  debt issued,  unless the                                                                   
state  could  guarantee  the  sale of  gas.  There  would  be                                                                   
contracts for  the sale of  gas up front.  The debt  would be                                                                   
sold three or four  years in advance of revenue  at the final                                                                   
investment  decision. The  sale of debt  could be  structured                                                                   
to capitalize  the  cost of the  debt over  the time  period,                                                                   
knowing that  the revenue  would flow  based on the  contract                                                                   
agreements.                                                                                                                     
                                                                                                                                
Senator Dunleavy  wondered what the model would  look like if                                                                   
there were no  reserves in 2024. Commissioner  Rodell replied                                                                   
that  the presentation  outlined that  concern. She  stressed                                                                   
that   the  contracts   were   not   yet  written,   so   the                                                                   
presentation  outlined the  effects  from 2018  to 2023,  and                                                                   
the outlying revenue of $4 billion.                                                                                             
                                                                                                                                
SB  138  was   HEARD  and  HELD  in  committee   for  further                                                                   
consideration.                                                                                                                  
                                                                                                                                
10:20:52 AM                                                                                                                   
AT EASE                                                                                                                         
                                                                                                                                
10:25:20 AM                                                                                                                   
RECONVENED                                                                                                                      
                                                                                                                                
Co-Chair Kelly handed the gavel to Co-Chair Meyer.                                                                              
                                                                                                                                

Document Name Date/Time Subjects
ASHSC Sponsor Statement Final.docx SFIN 3/10/2014 9:00:00 AM
SB 137
SB 137 Annual Report 2013.pdf SFIN 3/10/2014 9:00:00 AM
SB 137
SB 137 ASHSC Strategic Plan.pdf SFIN 3/10/2014 9:00:00 AM
SB 137
SB 137 Leg Audit Report.pdf SFIN 3/10/2014 9:00:00 AM
SB 137
SB 137 Supp Letter RobertScher.pdf SFIN 3/10/2014 9:00:00 AM
SB 137
SB 137 Written Testimony John Aho.pdf SFIN 3/10/2014 9:00:00 AM
SB 137
HB 298 Original Legislation HB 30.pdf SFIN 3/10/2014 9:00:00 AM
HB 30
HB 298
HB 298 Senate Hearing Request.pdf SFIN 3/10/2014 9:00:00 AM
HB 298
HB 298 Sponsor Statement.doc SFIN 3/10/2014 9:00:00 AM
HB 298
SCS HB298(FIN) workdraft version U.pdf SFIN 3/10/2014 9:00:00 AM
HB 298
CS SB138 work draft Version Y.pdf SFIN 3/10/2014 9:00:00 AM
SB 138
031014 CORRETED Revenue and Debt Capacity Supplemental for Senate Finance March 10 2014 Corrected.pdf SFIN 3/10/2014 9:00:00 AM
SB 138
Sb 138 3 11 14 Response to Sen Olson_Municipal Taxation.pdf SFIN 3/10/2014 9:00:00 AM
SB 138
031014 March 2014 Persily Senate Finance presentation.pdf SFIN 3/10/2014 9:00:00 AM
SB 138