Legislature(2003 - 2004)
03/17/2004 01:45 PM House FIN
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* first hearing in first committee of referral
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+ teleconferenced
= bill was previously heard/scheduled
HOUSE FINANCE COMMITTEE
March 17, 2004
1:45 PM
TAPE HFC 04 - 59, Side A
TAPE HFC 04 - 59, Side B
CALL TO ORDER
Co-Chair Harris called the House Finance Committee meeting
to order at 1:45 PM.
MEMBERS PRESENT
Representative John Harris, Co-Chair
Representative Bill Williams, Co-Chair
Representative Kevin Meyer, Vice-Chair
Representative Mike Chenault
Representative Eric Croft
Representative Hugh Fate
Representative Richard Foster
Representative Mike Hawker
Representative Reggie Joule
Representative Carl Moses
Representative Bill Stoltze
MEMBERS ABSENT
None
ALSO PRESENT
Jim Whitaker, Fairbanks North Star Borough, Alaska Gasline
Port Authority; Bill Walker, Alaska Gasline Port Authority,
Valdez; Dave Dengel, City Manager, Valdez, Alaska Gasline
Port Authority
PRESENT VIA TELECONFERENCE
There were no teleconference testifiers.
GENERAL SUBJECT(S):
Alaska Gasline Port Authority Application/Stranded Gas
The following overview was taken in log note format. Tapes
and handouts will be on file with the House Finance
Committee through the 23rd Legislative Session, contact 465-
2156. After the 23rd Legislative Session they will be
available through the Legislative Library at 465-3808.
LOG SPEAKER DISCUSSION
TAPE HFC 04 - 59
SIDE A
002 Jim Whitaker, Observed that the state has fiscal
Fairbanks North Star difficulties and is reliant on resources.
Borough He pointed out that nothing compares to
natural gas. Half a trillion dollars
could be generated from natural gas [in
Alaska]. There is a Constitution al
requirement that state resources be
developed with maximum benefit to the
state.
013 Mayor Whitaker The Alaska Gasline Port Authority was
formed in 1999 by an average of 80% vote
of the citizens of the North Slope
Borough, the Fairbanks North Star
Borough, and the City of Valdez.
124 Mayor Whitaker Reviewed the Authority's mission: to
enable the development of Alaska's North
Slope gas to the maximum benefit to all
Alaskans. To bring Alaskan natural gas to
North American markets at long-term
competitive prices. To bring the benefits
of a tax-exempt structure to a North
Slope gas project. To support all routes
except the "over-the-top" route through
the Mackenzie Delta.
307 Mayor Whitaker In furthering its mission, the Port
Authority has partnered with:
Bechtel Corp., which now has a complete,
hard dollar price for the project; Taylor
DeJongh, (description), that has provided
a comprehensive economic model of the
project; and the firms of O'Melveny and
Myers and Walker and Levesque who have
provided project counsel
522 Mayor Whitaker Reviewed the evolution of the project.
The Port Authority has:
Obtained a ruling from the IRS declaring
that income to the Port Authority would
be exempt from federal income taxes.
Completed a comprehensive hard-dollar
project cost estimate
Developed a series of economic models
that show the projected revenue benefits
of the Port Authority structured project
based upon a range of assumptions
Obtained an MOU with Crystal Energy to
provide LNG to a receiving terminal off
the coast of California, and has entered
into confidentiality agreements as a
preliminary step toward MOU's with three
gas purchasers both on the US West Coast
and within Alaska
• And on the th of February, the
27
Alaska Gasline Port Authority has
submitted an application under the
auspices of the Stranded Gas Development
Act and upon acceptance of that
application, intends to negotiate a
contract for payment in lieu of taxes
with the Department of Revenue.
1005 Mayor Whitaker Discussed the Alaska Stranded Gas
Development Act. He observed that the
purpose of Alaska Stranded Gas
Development Act was not for an automatic
reduction in tax regime and stressed that
need must be demonstrated.
The Act:
Encourage new development by allowing
fiscal terms to be established
relative to a North Slope gas project,
Allow fiscal terms to be tailored to
particular economic conditions of the
project, and to
Maximize the benefit to the people of the
state of the development of the
state's stranded gas resources.
1247 Mayor Whitaker Discussed the slide 6 observed that there
are three components to the gas
distribution system: a pipeline from
Prudhoe Bay to Valdez for West Coast LNG,
a line from Delta Junction to the Canada
border and a line from Glennallen to
existing South-central gas grid. He
emphasized that a competitive gas supply
is needed and can be meet through a LNG
line.
1549 Mayor Whitaker Reviewed cost estimates, which would
total $26.05 billion dollars: $4.3
billion for a gas conditioning plant,
$10.15 billion for pipelines; $3.7
billion for LNG plant and port
facilities; $.5 billion for LPG
extraction facility and $7.4 billion in
soft costs. He stressed that the LNG
component is necessary to achieve maximum
benefits for Alaska.
2017 Mayor Whitaker Observed that some are surprised at the
cost of the project, but emphasized that
the Port authority project estimates
sufficient.
2145 Mayor Whitaker Referred to federal income tax relief
that would aid the project. The Port
Authority has a letter indicating that it
can take advantage of federal tax relief.
He held that the estimates of savings
have doubled.
2317 Mayor Whitaker Stressed that the LNG is sold on long-
term contracts. A 20-year contract is
being sought. Separated from LNG,
pipeline gas is sold at the discretion of
the market place. Long-term contracts
with LNG along with the price floor by
the federal government are advantageous.
2529 Mayor Whitaker The Port Authority is not asking for tax
revisions at the state, municipal or
federal level.
2718 Representative Joule Questioned if the project had been
accepted by the state.
2807 Mayor Whitaker Observed that the Administration is
reviewing the application and felt that
there would be a reasonable conclusion.
He pointed out that statute allows
movement without being under the Alaska
Stranded Gas Act.
2859 Representative Joule Noted that the North Slope Borough has
supported stranded gas. He recalled
discussions with the North Slope
Borough's mayor and questioned the cost
of the application.
2942 Bill Walker, Alaska Stated that the application costs have
Gasline Port not been negotiated. He pointed out that
Authority they are a non-profit entity. The fee
would be determined by the state of
Alaska. The cost of gathering the
information is separate.
3116 Representative Joule Stated that he had heard that the fee
could be as high as $750 thousand.
3136 Mr. Walker Could not comment.
3150 Representative Joule Asked if the Port Authority Board had
time to review the application.
3208 Mr. Walker Observed that the Board has received the
information, but indicated that they had
not met on subsequently.
3305 Representative Joule Create a development plan for
municipalities and review significant
changes. He observed that a spur line
through Matsu and a change in the revenue
split has been changed.
3358 Mr. Walker Noted that the discussion was to wait
until a final footprint is agreed on for
review of changes. The distribution of
funding has not been changed. The split
is still 30 to municipalities, 60 percent
to the state and 10 percent to the Port
Authority.
3446 Representative Joule Questioned the cost of spur line in the
application.
3502 Mr. Walker The cost estimate is $250 million
dollars.
3518 Representative Joule Questioned if there is a conflict with
the municipal advisory committee.
3539 Mr. Walker Responded that the municipal advisory
group is made up of nine municipalities.
The three participating municipalities do
not have a stronger voice. The Board is
only advisory.
3641 Representative Joule $15 spent by the Port Authority in favor
of an all Alaskan line, while Valdez
favored a different route.
3717 Mayor Whitaker Noted that the positions have been
reconciled.
3820 Representative Fate Referred to the Memorandum of
understanding with the California
receiving stations and observed that 2.3
BCF was earmarked for the California
market. There are no receiving stations
currently located in California. He
questioned if there were alternative
plans in the event that the permits are
not issued. He noted that the gas would
impact the dynamics of a Canadian line,
which was planned at 4.5 BCF.
3911 Mayor Whitaker Stressed that the demand for gas in
California is extreme. He maintained that
some supply of LNG is imperative. There
have been meetings with the federal side
to assure that permits would be available
and quickly issued. There were also
meetings with the members of Governor
Schwarzenegger's administration in
California where the same assurances were
given. He observed that others are
pursuing the same market: ConcoPhillips,
Exxon, and BP are also pursing the
market. He acknowledged that there could
be problems permitting receiving stations
in California, but felt that they would
be overcome. He emphasized that there are
three components in the project:
facilitating the project through Alaska
and Canada, which would be accomplished
through risk sharing and market
acquisition; LNG; and providing gas to
the Cook Inlet Basin and the Kenai
Peninsula.
4141 Representative Fate Conditioning plant reflects shared costs.
4200 Mr. Walker Assumes no facility on the North Slope.
No efficiencies of existing facilities
were considered.
4249 Representative Fate Asked if there have been discussions with
producers in relation to sharing costs
and referred to costs for the
conditioning plant.
4325 Mr. Walker Noted that they met with producers in
Houston in August 2001. The estimates are
based on the roughest road, since there
are no guarantees with producers.
Economics could not be predicated on
shared costs.
4444 Representative Fate Questioned if there have been
consideration of an expansion of the line
through Canada up front, in preliminary
costs.
4647 Mr. Walker Stated that they had anticipated the
larges pipes: 56 inch line to delta, 46
inch Canada
TAPE HFC 04 - 59, Side B
4655 Vice-Chair Meyer Expressed support for a pipeline. He
questioned if a timeline had been
created.
4602 Mr. Walker Stated that the project would be
completed in 2010 and they would like to
start immediately.
4458 Vice-Chair Meyer Clarified that funding would be by bonds.
He questioned if they would work with
Alaska Natural Gas Pipeline Development
Authority or producers.
4406 Mayor Whitaker Recognized that any project would be a
cooperative and emphasized that there is
enough risk for everyone. They are
committed to working through political
problems with combining efforts. They
have cooperated with producers and ANGDA.
Stakeholders need to sit down and have
discussions.
4233 Vice-Chair Meyer Asked if they would keep the tax
exemption if there were surplus gas.
4143 Mr. Walker There is no restriction on export. He
observed that estimates hold that 95
percent of financing would be taxable.
4055 Vice-Chair Meyer Questioned if discussion had occurred
regarding Alaska hire.
4023 Mr. Walker Stated that the intent is to maximize
Alaskan hire and pointed to the
constitutional mandate to maximize
benefits to Alaskans.
3922 Representative Questioned if another entity would be
Hawker formed to hold the assets and conduct
operations.
3902 Mr. Walker The Port Authority is a tax-exempt
structure with a small number of
employees. The intent is that the project
would be built and operated by others.
The Port Authority Act provides financial
protection to the state of Alaska and
municipalities. The Port Authority would
own the assets.
3721 Representative Observed that there would be no private
Hawker equity invested in the project.
3704 Mr. Walker Agreed and noted that private equity
would result in a loss of the tax-exempt
status.
3637 Representative How would the community dividend be
Hawker structured.
3619 Mr. Walker The Port Authority is designed to return
as much money as possible to all
municipalities: 60 percent to State, 30
percent to municipalities, and 10
retained by the Port Authority. In
addition, the state would collect
severance tax, corporate income tax. The
municipalities created the funding
division. Changes would require a
unanimous support by the participating
municipalities.
3509 Mayor Whitaker Pointed out that the amount of funds to
the state through royalty, severance and
income taxes is not relative to the Port
Authority; this comes from the producers.
He pointed out that the legislation can
change the law.
3213 Mr. Walker Interjected that the legislature can
amend the terms.
3126 Representative Referred to project financing. He
Hawker observed that statements were made that
95 percent of the debt would be taxable.
He observed that the Port Authority's
documentation cites that 24 percent would
be exempt, and 45 percent would be
taxable.
3020 Mr. Walker Stressed that the percentages are
dependent on the debt service ratio and
the amount of equity. He observed that a
1.7 debt service ratio is needed. The
project meets the threshold for
financing.
2838 Mr. Walker In response to a question by
Representative Hawker, clarified that
taxable status is dependent on use. Use
by private entities would result in
taxable bonds.
2732 Representative Referred to the taxable status of the
Hawker debt and questioned what would determine
its status.
2642 Mr. Walker Explained that the tax status is
dependent on who is using the end result.
If the gas from the Port Authority
pipeline all went to the Cook Inlet and
was used by within a governmental entity
the debt would be exempt. This will not
be the case. Debt service recovery ratio
could be improved if the tax status was
changed
2615 Representative Clarified that the fact that government
Hawker is the ultimate beneficiary does not
change the status. Questioned if the
state of Alaska invested public funds in
the project that the coverage ratio would
be lowered and improve the quality of
executing debt.
2598 Mr. Walker Agreed that the debt coverage ratio could
be reduced, perhaps to 1.5. There are no
scenarios that are less than 1.7.
2542 Representative Questioned the proposed line size to the
Chenault South-central gas grid.
2526 Mr. Walker Responded that there have been
discussions of a 24 to 36 line sized; it
would be based upon volume.
2437 Co-Chair Harris Questioned if the three communities are
in unanimity.
2403 Mayor Whitaker Observed that the North Slope Borough has
indicated concerns regarding to another
project. They are working with the North
Slope Borough to resolve these issues and
felt that they had a positive working
relationship.
2329 Co-Chair Harris Questioned their relationship to
organized labor.
2313 Mayor Whitaker Observed that there is a commitment to
acquiring an acceptable project labor
agreement and anticipates that they will
be successful. They support Alaskan hire
and a labor agreement would also help to
know costs.
2149 Co-Chair Harris Questioned how much of the $300 million
annual revenue to municipalities how much
to Anchorage
2122 DAVE DENGEL, CITY Observed that $30 - $50 million would be
MANAGER, VALDEZ, appropriated annually to Anchorage based
ALASKA GASLINE PORT on per capita. There is a minimum $50
AUTHORITY thousand for smaller communities.
2032 Co-Chair Harris Observed that municipalities would
directly benefit from the project and
questioned if other communities have
given input.
1935 Mr. Walker 35 resolutions from governments
supportive of the project, the Alaska
Municipal League has not yet been
involved.
1856 Mayor Whitaker Thought that the Nome conference of
mayors has passed a resolution.
1837 Co-Chair Williams Prudhoe bay to Valdez for LNG questioned
if it is competitive.
1815 Mr. Walker Noted that Alaska has exported LNG since
1969 in the Kenai. He observed that
energy crisis in the US has occurred. LNG
is going to be needed to take up the
drop. LNG in the lower 48 usually comes
from other countries. He stressed that
importation of LNG creates an opportunity
for Alaska.
1617 Mayor Whitaker Stressed that the questioned is whether
LNG would come from Alaska or other
countries and maintained that it would
not compete with a Transalaska pipeline.
1518 Representative Referred to slide 8 and questioned the
Hawker calculations.
1439 Mr. Walker Observed that $299 to municipalities
includes 30 percent of the revenue
sharing and property tax. The amount
indicated for the state of Alaska would
also include royalty, severance and
income taxes.
1308 Representative Clarified that municipalities along the
Chenault line would receive funding dependent on
the tax structure under AS 43.56, up to
20 mils.
ADJOURNMENT The meeting was adjourned at 3:16 PM
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