Legislature(2013 - 2014)HOUSE FINANCE 519

03/25/2014 01:30 PM House FINANCE


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01:34:29 PM Start
01:35:48 PM Presentation: Black & Veatch - Memorandum of Understanding, "transcanada Participation in Aklng Project"
03:29:33 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Black & Veatch - Memorandum of Understanding TELECONFERENCED
"TransCanada Participation in AKLNG Project"
+ Bills Previously Heard/Scheduled TELECONFERENCED
                  HOUSE FINANCE COMMITTEE                                                                                       
                      March 25, 2014                                                                                            
                         1:34 p.m.                                                                                              
                                                                                                                                
1:34:29 PM                                                                                                                    
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair Austerman called the House Finance Committee                                                                           
meeting to order at 1:34 p.m.                                                                                                   
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Representative Alan Austerman, Co-Chair                                                                                         
Representative Bill Stoltze, Co-Chair                                                                                           
Representative Mark Neuman, Vice-Chair                                                                                          
Representative Mia Costello                                                                                                     
Representative Bryce Edgmon                                                                                                     
Representative Les Gara                                                                                                         
Representative David Guttenberg                                                                                                 
Representative Lindsey Holmes                                                                                                   
Representative Cathy Munoz                                                                                                      
Representative Steve Thompson                                                                                                   
Representative Tammie Wilson                                                                                                    
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
None                                                                                                                            
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Deepa Poduval, Principal Consultant, Consulting Division,                                                                       
Black & Veatch Management; Peter Abt, Managing Director,                                                                        
Consulting Division, Black & Veatch Management.                                                                                 
                                                                                                                                
PRESENT VIA TELECONFERENCE                                                                                                    
                                                                                                                                
Jason De Stigter, Senior Consultant, Consulting Division,                                                                       
Black & Veatch Management.                                                                                                      
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
PRESENTATION: BLACK & VEATCH - MEMORANDUM OF UNDERSTANDING                                                                      
     "TRANSCANADA PARTICIPATION IN AKLNG PROJECT"                                                                               
                                                                                                                                
1:35:48 PM                                                                                                                    
                                                                                                                                
^PRESENTATION:    BLACK   &    VEATCH    -   MEMORANDUM    OF                                                                 
UNDERSTANDING, "TRANSCANADA PARTICIPATION IN AKLNG PROJECT"                                                                   
                                                                                                                                
DEEPA  PODUVAL, PRINCIPAL  CONSULTANT,  CONSULTING  DIVISION,                                                                   
BLACK  & VEATCH  MANAGEMENT, introduced  herself. She  stated                                                                   
that she  was working  with Department  of Natural  Resources                                                                   
(DNR)  to develop  economic analysis  and commercial  support                                                                   
for the Alaska (AK) Liquid Natural Gas (LNG) Project.                                                                           
                                                                                                                                
PETER ABT,  MANAGING DIRECTOR,  CONSULTING DIVISION,  BLACK &                                                                   
VEATCH MANAGEMENT, introduced himself.                                                                                          
                                                                                                                                
Ms.   Poduval   discussed   the    PowerPoint   presentation,                                                                   
"TransCanada  Participation in  AK LNG Project;  Presentation                                                                   
to House Finance Committee" (copy on file).                                                                                     
                                                                                                                                
Ms. Poduval looked  at slide 3, "Memorandum  of Understanding                                                                   
- Highlights of the Deal on the Table."                                                                                         
                                                                                                                                
     TransCanada Holds the State's Equity Share in GTP+Pipe                                                                     
                                                                                                                                
     SOA Option to Buy Back 40 percent of TC's Share at                                                                         
     ~FEED                                                                                                                      
                                                                                                                                
     State Commits to 25 Year Transportation Agreement with                                                                     
     TransCanada                                                                                                                
                                                                                                                                
     Agreement Commits TC to a WACC of 6.75 percent                                                                             
                                                                                                                                
     Various Milestones & Off Ramps for SOA and TransCanada                                                                     
                                                                                                                                
Ms.  Poduval  highlighted  slide 4,  "Options  Identified  by                                                                   
State for  Equity Participation."  She stated that  the slide                                                                   
represented a  picture of TransCanada's participation  in the                                                                   
project.  There  were three  different  options  represented:                                                                   
The first  option was the State  of Alaska (SOA)  Alone. This                                                                   
option did  not partner with  TransCanada. With a  25 percent                                                                   
state equity participation  would mean that the  state held a                                                                   
25 percent in the  GTP. 25 percent in the pipeline;  and a 25                                                                   
percent stake  in the  LNG plant. The  second option  was SOA                                                                   
plus   TransCanada  (TC)   with  no   buyback.  This   option                                                                   
contemplates that  TC held and invested an  equivalent to the                                                                   
state's  interest  in  the GTP  and  pipeline,  therefore  TC                                                                   
would  hold  25  percent  of  the  GTP,  25  percent  in  the                                                                   
pipeline, and  the state would  retain 25 percent in  the LNG                                                                   
plant.  The third  option was  SOA plus TC  with the  buyback                                                                   
option. In  this scenario,  TC would  initially have  the SOA                                                                   
25 percent  interest through  the GTP  and pipeline,  but SOA                                                                   
would be able  to exercise an option where  it purchases back                                                                   
up to  40 percent  of TC's  share. Therefore,  40 percent  of                                                                   
the  25 percent  share,  would  result in  a  10 percent  SOA                                                                   
holding  through the  GTP  and pipeline;  TC  would hold  the                                                                   
remaining 15  percent through the  GTP and pipeline;  and SOA                                                                   
would  continue  to have  25  percent  ownership in  the  LNG                                                                   
plant.  The state  would continue  hold 25  percent stake  in                                                                   
the LNG  plant through  each option.  She stressed  that that                                                                   
option  that  involves  TC  revolved  around  optimizing  the                                                                   
state's ownership of the GTP and pipeline.                                                                                      
                                                                                                                                
1:42:28 PM                                                                                                                    
                                                                                                                                
Ms. Poduval discussed  slide 5, "Implications  of Options and                                                                   
Potential Off Ramps."  She explained that the  Pre-FEED stage                                                                   
would  be  from   2014  to  2015.  During   that  stage,  the                                                                   
engineering  and technical  aspects of  the project  would be                                                                   
worked out between  the different parties. The  stage was not                                                                   
a  very expensive  stage of  the  project's development,  but                                                                   
only involved technical  analysis and studies  that helped to                                                                   
narrow the  range of  the project's  capital costs.  The next                                                                   
stage would  be the FEED,  from 2016  to 2018, which  was the                                                                   
front-end engineering  and design. She remarked  that the SOA                                                                   
go it alone  option on the  slide showed that the  dollar was                                                                   
greatly  increased  as  the  project  advanced  through  each                                                                   
stage. She  remarked that there  were some important  aspects                                                                   
that would be  worked through during the FEED  stage, such as                                                                   
the technical  analysis and cost  estimates. She  stated that                                                                   
commercial  agreements and  terms of  sale would  be made  in                                                                   
the FEED  stage. The  financing would  also be sorted  during                                                                   
the FEED  stage. With  all of the  decisions and  analysis in                                                                   
the FEED  stage, the FID would  occur, where the  decision to                                                                   
proceed with the  project takes place. The last  phase of the                                                                   
project  was construction,  which  was slated  to take  place                                                                   
from  2019 to  2023.  If  the state  were  to  embark on  the                                                                   
project  without  TC, it  would  be  $108 in  pre-FEED,  $450                                                                   
million in  FEED, and $13.2  billion in construction.  If the                                                                   
state  partnered with  TC with  no buyback,  the state  would                                                                   
pay $43 million  in pre-FEED, $180 million in  FEED, and $6.7                                                                   
billion  in construction.  If  the  state partnered  with  TC                                                                   
with a  40 percent  buyback it  would invest  $43 million  in                                                                   
pre-FEED,  $360   million  in  FEED,  and  $9.3   billion  in                                                                   
construction.                                                                                                                   
                                                                                                                                
1:47:52 PM                                                                                                                    
                                                                                                                                
Co-Chair Austerman asked that the acronyms be specified.                                                                        
Ms. Poduval replied that AFUDC stood for "Allowance for                                                                         
funds during construction."                                                                                                     
                                                                                                                                
Ms. Poduval displayed slide 6, "Key Questions in Looking at                                                                     
Value of TransCanada's Participation."                                                                                          
                                                                                                                                
     Economic impact to the state from TransCanada?                                                                             
                                                                                                                                
     Can the state go it alone?                                                                                                 
                                                                                                                                
     Is TransCanada a good partner?                                                                                             
                                                                                                                                
     Does TransCanada bear any financial risk?                                                                                  
                                                                                                                                
Ms. Poduval addressed slide 7, "What is the Economic Impact                                                                     
to State from TransCanada's Participation?"                                                                                     
                                                                                                                                
     During  project development  and  construction, TC  pays                                                                   
     60 to 100  percent of state's up front  capital cost for                                                                   
     GTP and pipeline                                                                                                           
                                                                                                                                
     Once   project   is  operational,   state   pays  TC   a                                                                   
     negotiated  tariff  for 60  to 100  percent  of GTP  and                                                                   
     pipeline capacity used to move state gas                                                                                   
                                                                                                                                
     Economic  analysis examines  the net  impact of  reduced                                                                   
     upfront  payments  and  tariff  expenses  over  25  year                                                                   
     period of operation                                                                                                        
                                                                                                                                
Ms. Poduval looked at slide 8, "TransCanada's Participation                                                                     
Impacts SOA Up Front Cash Calls and Revenues from Project."                                                                     
                                                                                                                                
     TransCanada's  participation  reduces  the  state's  up-                                                                   
     front  cash calls  by $1.4  to 2.2  billion, assuming  a                                                                   
     70-30 debt equity                                                                                                          
                                                                                                                                
     TransCanada's   participation    reduces   the   state's                                                                   
     revenues by $200 to $360 million per year                                                                                  
                                                                                                                                
1:53:31 PM                                                                                                                    
                                                                                                                                
Ms. Poduval highlighted slide 9, "What is the Economic                                                                          
Impact to State from TransCanada's Participation?"                                                                              
                                                                                                                                
     TransCanada  participation  reduces  the  state's  total                                                                   
     cash flows with buy back option                                                                                            
                                                                                                                                
     Minimal  impact  on  the  state  on an  NPV  basis  with                                                                   
     TransCanada participation                                                                                                  
                                                                                                                                
Ms.  Poduval  discussed  slide  10,  "Can  the  State  go  it                                                                   
Alone?"                                                                                                                         
                                                                                                                                
     What are  the capital  cost and investment  implications                                                                   
     of going it alone?                                                                                                         
                                                                                                                                
     What are the debt implications of going it alone?                                                                          
                                                                                                                                
Ms. Poduval  addressed slide 11,  "SOA Upfront  Capital Coast                                                                   
Exposure is Reduced Through TransCanada Participation."                                                                         
                                                                                                                                
     Highest  risk exposure  is prior  to project start  when                                                                   
     cash calls are not supported by project revenues                                                                           
                                                                                                                                
     TransCanada   ("TC")  participation   allows  State   to                                                                   
     retain 20  percent-25 percent  of gas share  while being                                                                   
     responsible  for  only  13  percent-18  percent  of  the                                                                   
     upfront costs                                                                                                              
                                                                                                                                
     This is especially  important if cost overruns  occur on                                                                   
     project                                                                                                                    
                                                                                                                                
1:57:56 PM                                                                                                                    
                                                                                                                                
Ms. Poduval  looked at slide  12, "SOA Upfront  Capital Coast                                                                   
Exposure is  Reduced Through TransCanada  Participation." She                                                                   
stated  that  the   left  side  represented   a  $45  billion                                                                   
project, which  was the base  cost assumption.  A partnership                                                                   
with   TC   would   reduce   the    state's   investment   by                                                                   
approximately $3 billion.  If there was a cost  overrun of 20                                                                   
percent with  a $54 billion  project, a TC partnership  would                                                                   
reduce the state's  potential investment by  approximately $4                                                                   
billion.                                                                                                                        
                                                                                                                                
Ms.  Poduval discussed  slide 13,  "SOA Investment  for a  25                                                                   
Percent  Ownership with  TransCanada is  Expected to  be $1.3                                                                   
to $4  billion Lower  than for a  20 percent Ownership  Going                                                                   
Alone"  and  slide   14,  "SOA  Revenue  for   a  25  Percent                                                                   
Ownership with  TransCanada are Expected  to be $0.4  to $0.5                                                                   
billion  per Year  Higher  Than for  a  20 percent  Ownership                                                                   
Going Alone."  The slides compared  scenario where  the state                                                                   
went alone,  with a 25  percent equity  in the project  and a                                                                   
scenario that partnered  with TC. The slides  showed that the                                                                   
state's  resources   are  finite.   She  stressed   that  the                                                                   
analysis  focused on a  way for  the state  to get  a greater                                                                   
cash  share by  partnering with  TC.  The three  alternatives                                                                   
that  were represented  were  20 percent  equity  alternative                                                                   
with  SOA go  it  alone at  $11  billion;  25 percent  equity                                                                   
alternative  with  SOA  and  TV  with no  buy  back  at  $9.7                                                                   
billion; and  25 percent equity  alternative with SOA  and TC                                                                   
with buy back at $7 billion.                                                                                                    
                                                                                                                                
Ms. Poduval  discussed slide 15,  "25 Percent  Ownership with                                                                   
TransCanada  Increases  State of  Alaska  NPV  by $2  billion                                                                   
Compared to  a 20 percent  Ownership Going Alone."  The slide                                                                   
showed that  the state  would have  approximately $2  billion                                                                   
less in  NPV going it  alone with a  20 percent  equity share                                                                   
than  it  could  by  taking a  25  percent  equity  share  by                                                                   
partnering with TC.                                                                                                             
                                                                                                                                
Ms. Poduval addressed  slide 16, "Can the State  Go it Alone?                                                                   
- State's Debt Capacity."                                                                                                       
                                                                                                                                
     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 general fund                                                                     
          unrestricted revenue (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                                                                              
                                                                                                                                
2:04:44 PM                                                                                                                    
                                                                                                                                
Ms. Poduval  looked at  slide 17, "The  Amount of  Cheap Debt                                                                   
Available to the State Could be Limited."                                                                                       
                                                                                                                                
     Indicative Levels of Debt for State to Finance 20                                                                          
     Percent Equity Stake in AKLNG Project                                                                                      
                                                                                                                                
          Analysis   based   on    high   level,   indicative                                                                   
          assumptions  based  on  input  from  Department  of                                                                   
          Revenue.  Financing   arrangements  for  the  AKLNG                                                                   
          project  will  become   clearer  further  into  the                                                                   
          development process.                                                                                                  
                                                                                                                                
2:10:49 PM                                                                                                                    
                                                                                                                                
Ms. Poduval looked  back at slide 16. She  remarked that when                                                                   
the second  and third scenarios  were considered, there  is a                                                                   
consideration  of  a 5  to  6  percentage  of the  GFUR.  She                                                                   
stated that the  treasury had a guidance that  the total debt                                                                   
servicing  for  the  state  should not  exceed  more  than  8                                                                   
percent  of   GFUR.  If   the  state   tried  to   finance  a                                                                   
significant portion  of the AK  LNG project, the  state would                                                                   
use  up  the   state's  debt  servicing  capacity   and  only                                                                   
allowing 2 to 3  percent of GFUR to serve all  of the state's                                                                   
debt.                                                                                                                           
                                                                                                                                
Ms.  Poduval highlighted  slide  18, "Is  TransCanada a  Good                                                                   
Partner for the State of Alaska in the AKLNG Project?"                                                                          
                                                                                                                                
     Extensive experience in building, owning and operating                                                                     
     northern pipelines                                                                                                         
                                                                                                                                
     Long history of interest in Alaska Pipeline                                                                                
                                                                                                                                
     Retains momentum in the project                                                                                            
                                                                                                                                
     Facilitates expansion                                                                                                      
                                                                                                                                
2:16:59 PM                                                                                                                    
                                                                                                                                
Ms.  Poduval  discussed  slide  19,  "Retaining  Momentum  on                                                                   
Project  Could   be  More   valuable  than  Securing   Better                                                                   
Commercial Terms."                                                                                                              
                                                                                                                                
     State of Alaska NPV:                                                                                                       
                                                                                                                                
     Debt/Equity percentage                                                                                                     
                                                                                                                                
          Each 5 percent decrease in equity ratio is                                                                            
          equivalent to $200MM in additional NPV to State                                                                       
                                                                                                                                
     ROE                                                                                                                        
                                                                                                                                
          Each 1 percent decrease in ROE is equivalent to                                                                       
          $100MM in additional NPV to State                                                                                     
                                                                                                                                
     Project Delay                                                                                                              
                                                                                                                                
          Each 1 percent decrease in ROE is equivalent to                                                                       
          $100MM in additional NPV to State                                                                                     
                                                                                                                                
Ms.  Poduval highlighted  slide  20, "Does  TransCanada  Bear                                                                   
any Financial Risk?"                                                                                                            
                                                                                                                                
     TransCanada  has committed  to the  following terms  for                                                                   
     providing  treating and transportation  services  to the                                                                   
     State                                                                                                                      
                                                                                                                                
          D/E split of 75 percent/25 percent                                                                                    
          Return on equity of 12 percent; Cost of debt of 5                                                                     
          percent                                                                                                               
                                                                                                                                
     Given the  scale of this  project and the  uncertainties                                                                   
     associated  with  it, financing  remains  a  significant                                                                   
     risk                                                                                                                       
                                                                                                                                
     Locking   in  this  capital   structure  before   actual                                                                   
     financing  arrangements have been  made for  the project                                                                   
     places  a  risk  on  TransCanada  of  under-earning  its                                                                   
     expected return  on equity and eroding its  expected NPV                                                                   
     from the project                                                                                                           
                                                                                                                                
2:24:42 PM                                                                                                                    
                                                                                                                                
Ms. Poduval  addressed slide 21,  "Does TransCanada  Bear any                                                                   
Financial  Risk?" She  stated  that TC  carried  the risk  of                                                                   
achieving  a  lower  ROE  if it  is  unable  to  finance  the                                                                   
project at  the contractual  rate of  5 percent. She  pointed                                                                   
out that  if the two triggers  were moved slightly,  TC would                                                                   
commit  to using  a 5  percent  cost of  debt. Regardless  of                                                                   
what  TC was  actually  able to  borrow  the  money for,  the                                                                   
tariff  that the  state would  pay  to TC  would assume  that                                                                   
their cost  of debt was  not more than  5 percent. If  TC had                                                                   
to borrow  at 6 or 7  percent, their absorbed  the difference                                                                   
in the  cost of debt.  She stressed  that this TC  debt would                                                                   
not be carried over to the state.                                                                                               
                                                                                                                                
Ms. Poduval  displayed slide 22,  "Does TransCanada  Bear any                                                                   
Financial  Risk?" She  stated  that the  state's  NPV to  the                                                                   
project was  approximately $13 billion,  and TC's NPV  to the                                                                   
project was approximately  $150 to 200 million,  depending on                                                                   
the  equity  share for  the  state  and the  buyback  option.                                                                   
TransCanada had a  very small portion of the  project's total                                                                   
cash flow.                                                                                                                      
                                                                                                                                
looked at slide 23, "Summary on Four Key Questions."                                                                            
                                                                                                                                
     Economic impact to the state from TransCanada?                                                                             
                                                                                                                                
          Total cash flows reduced by $4 billion; NPV                                                                           
          impact is marginal                                                                                                    
                                                                                                                                
     Can the state go it alone?                                                                                                 
                                                                                                                                
          TC can reduce SOA investment by $4 billion-$7                                                                         
          billion                                                                                                               
                                                                                                                                
          SOA may hit debt limits going alone                                                                                   
                                                                                                                                
     Is TransCanada a good partner?                                                                                             
                                                                                                                                
          Experience                                                                                                            
                                                                                                                                
          Momentum                                                                                                              
                                                                                                                                
          Expansion                                                                                                             
                                                                                                                                
     Does TransCanada bear any financial risk?                                                                                  
                                                                                                                                
          Change in financing could materially lower                                                                            
          TransCanada's ROE and NPV                                                                                             
                                                                                                                                
2:31:28 PM                                                                                                                    
                                                                                                                                
Co-Chair Austerman  queried the time  frame of the  debt. Ms.                                                                   
Poduval  replied that  the time  frame  looked at  a 25  year                                                                   
loan.                                                                                                                           
                                                                                                                                
Co-Chair  Austerman stressed  that  the  state's major  asset                                                                   
was  the Permanent  Fund,  and wondered  how  that asset  was                                                                   
considered  when  deciding how  much  debt could  occur.  Ms.                                                                   
Poduval  replied  that  there  was  no  assumption  that  the                                                                   
Permanent  Fund  would  be  invested   in  the  project.  She                                                                   
furthered that the  fund could be used as  collateral against                                                                   
what could  be borrowed.  She deferred  further inquiries  to                                                                   
the Treasury Division.                                                                                                          
                                                                                                                                
Co-Chair Austerman  felt that  there was potential  for other                                                                   
structures  of debt,  rather  than  what was  presented.  Ms.                                                                   
Poduval agreed,  and furthered  that it was  too early  to go                                                                   
to  the markets  with  a  clear  representation of  what  the                                                                   
project will  look like.  She felt that  there would  be more                                                                   
financial  discoveries   as  the   details  on   the  project                                                                   
emerged.                                                                                                                        
                                                                                                                                
Co-Chair  Austerman  recalled  some  conversations  regarding                                                                   
incorporating  the long-term debt  into the long-term  sales.                                                                   
Ms.  Poduval  stated  that  the   sales  agreements  must  be                                                                   
finalized before the financing could be secured.                                                                                
                                                                                                                                
Co-Chair  Austerman   wondered  if   the  current   debt  was                                                                   
considered,  when the total  debt was  joined with  the GFUR.                                                                   
Ms. Poduval replied  that the presentation only  analyzed the                                                                   
AK LNG  project, and not  consider any other  debt obligation                                                                   
to the  state. She  was attempting to  highlight that  the AK                                                                   
LNG project  alone could  absorb between 5  and 6  percent of                                                                   
the GFUR.                                                                                                                       
                                                                                                                                
Representative  Wilson looked  at  slide 4,  and wondered  if                                                                   
the agreement  with TransCanada  would  cost the state  money                                                                   
to  exit  the   obligation  with  TransCanada.   Ms.  Poduval                                                                   
deferred to DNR.                                                                                                                
                                                                                                                                
Representative  Wilson   remarked  that  if   the  state  was                                                                   
partnered  with  TC, it  narrowed  the state's  options.  She                                                                   
wondered  if the  buyback  option was  too  limiting for  the                                                                   
state.  Ms. Poduval  deferred to  DNR for  the cost of  AGIA.                                                                   
She  announced   that   the  perspective   was  based   on  a                                                                   
standalone agreement,  and not taking into  consideration any                                                                   
other TC agreements.                                                                                                            
                                                                                                                                
2:37:31 PM                                                                                                                    
                                                                                                                                
Representative   Wilson   stressed   that   there   must   be                                                                   
determination  whether  or  not   the  legislature  wants  to                                                                   
partner  with TransCanada  based  on  the HOA.  She  stressed                                                                   
that she  would like  to understand what  would occur  if the                                                                   
state wanted to sever ties with TransCanada.                                                                                    
                                                                                                                                
Representative  Holmes looked  slide 17,  and she  understood                                                                   
why the state  was partnering with TransCanada.  If there was                                                                   
an analysis of  what the state could afford,  she queried the                                                                   
importance  of the  percentage  split.  She wondered  if  the                                                                   
state  or  any   of  the  other  partners   cared  about  the                                                                   
percentage split.  She asked  for more explanation  regarding                                                                   
the relative  debt equity  structure for  the state,  and how                                                                   
that  might affect  the  state or  other's  interests in  the                                                                   
project.  Ms. Poduval  replied  that the  capital  structure,                                                                   
debt  equity  mix,   and  the  return  on   equity  was  most                                                                   
impactful when  there was a  tariff attached to  the project.                                                                   
If the  state invested  in the project,  the focus  would not                                                                   
be  on  the  state's  shipment  of gas.  There  would  be  an                                                                   
expectation  of  the  subsidiary  to  earn a  return  on  its                                                                   
equity.  The  focus became  relevant  when  contemplating  an                                                                   
expansion  of  the  project,   and  creating  access  in  the                                                                   
project. There  should be an  competitive tariff  offered for                                                                   
the subsidiaries  that may use  the project for  undiscovered                                                                   
gas. She  stressed that  there should be  a return  on equity                                                                   
in the  state's investment to  facilitate the  expansion. The                                                                   
state would  be acting  as a third  party pipeline  owner and                                                                   
offering commercial terms.                                                                                                      
                                                                                                                                
Representative  Holmes  queried how  the  expansion would  be                                                                   
contemplated. Ms.  Poduval responded that the  HOA embraced a                                                                   
"pipe within  a pipe", which allowed  each of the  parties to                                                                   
initiate  an   expansion.  The  provision  would   allow  the                                                                   
combination of  the state and  TC to expand the  project. The                                                                   
state would  look like  the equivalent of  TC, as  a pipeline                                                                   
owner, which  offered a  service for  other producers  on the                                                                   
North  Slope to  use the  GTP  pipeline and  LNG capacity  in                                                                   
return  for   a  service   fee.  The   state  would   have  a                                                                   
competitive  tariff   to  earn   a  return  on   the  state's                                                                   
investment for  the expansion.  There would be  a negotiation                                                                   
with  the state  for  the capacity,  so  the  state would  be                                                                   
encouraged to facilitate the expansion.                                                                                         
                                                                                                                                
2:43:36 PM                                                                                                                    
                                                                                                                                
Representative Holmes  wondered if the debt equity  ratio was                                                                   
important  in the  build out,  without  looking at  expansion                                                                   
Ms.  Poduval   replied  that   the  debt  equity   ratio  was                                                                   
important,  even  without  expansion,   because  the  state's                                                                   
funds  were  limited.  She  stressed   that  there  was  some                                                                   
analysis of  the GFUR, which was  around $4 to $5  billion to                                                                   
the state,  annually. When that was  put with the peak  of $2                                                                   
billion  annually   to  the  project,  the  state   would  be                                                                   
strained  if  it  was  only  financed   through  equity.  She                                                                   
stressed that  the project  should be  financed with  debt in                                                                   
order  to retain  the current  revenues to  fund other  state                                                                   
project.                                                                                                                        
                                                                                                                                
2:45:13 PM                                                                                                                    
                                                                                                                                
Representative  Gara felt that  the state was  being slightly                                                                   
leveraged by TransCanada.  He referred to testimony  from DNR                                                                   
which  claimed that  TC did not  have an  AGIA claim  against                                                                   
the state, because  this project took its place.  He surmised                                                                   
that the  state would  be required  to pay TC  all of  the TC                                                                   
investments,  if the state  refused to  sanction the  project                                                                   
at that phase.  Ms. Poduval replied with slide  5, and agreed                                                                   
with Representative  Gara's assumption.  She stated  that the                                                                   
state would  be required to  pay back approximately  $230 and                                                                   
$390 million,  depending on whether  the state  exercised its                                                                   
buyback option before FEED.                                                                                                     
                                                                                                                                
Representative Gara  stressed that it was a  substantial cost                                                                   
to the  state, and  wondered why that  would be  considered a                                                                   
good  option.  Ms. Poduval  replied  that  there could  be  a                                                                   
focus  on the  AFUDC  numbers, and  consider  those costs  as                                                                   
incremental  with  TC.  She stressed  that  the  state  would                                                                   
still be required  to make payments to the  development costs                                                                   
with or  without a  TC partnership.  The additional  expenses                                                                   
was the interest  on the TC money, which was  slightly over 7                                                                   
percent. If  the state were to  look for a partner  who would                                                                   
provide a  service as  an expert to  watch over  the project,                                                                   
she  wondered if  the state  would  be able  to find  someone                                                                   
with the same expertise as TC.                                                                                                  
                                                                                                                                
Co-Chair Austerman handed the gavel to Vice-Chair Neuman.                                                                       
                                                                                                                                
Representative  Gara expressed  concern  about whether  there                                                                   
could  be  a  better  deal  with   a  different  partner.  He                                                                   
wondered if  there was a  bid for partnership,  or if  TC was                                                                   
the only partner  considered. Ms. Poduval replied  that there                                                                   
was  no bid  for partnership,  but rather  a negotiated  deal                                                                   
with TC.  She stated that there  was an analysis  regarding a                                                                   
commercial  bid that would  provide value  to the  state, and                                                                   
the potential downside  from losing momentum on  the project.                                                                   
She   stressed   that   the   AGIA   bidding   process   took                                                                   
approximately two years to complete.                                                                                            
                                                                                                                                
Representative  Gara looked  at  page 11,  and remarked  that                                                                   
the  state  got a  royalty  and  production tax  without  the                                                                   
pipeline. He  noted that  the cost to  the state would  be $7                                                                   
to $10 billion  to be an  owner of certain components  of the                                                                   
line, just  for the  privilege of not  receiving any  tax. He                                                                   
felt  that  there   was  no  discussion  of   taxing  like  a                                                                   
sovereign,   and  not  paying   the  $   7  to  $10   million                                                                   
investment.  He queried  the benefit of  that structure.  Ms.                                                                   
Poduval  replied that  the question  was not  related to  the                                                                   
deal  with TC.  She  stated that  there  had been  discussion                                                                   
regarding  that  issue,  especially   around  the  commercial                                                                   
attractiveness   of   the   project   without   the   state's                                                                   
investment.  She stated  that the analysis  with the  royalty                                                                   
showed that  the AK  LNG project  was complex and  expensive,                                                                   
and  would  likely  need  some  changes  to  compete  in  the                                                                   
market.  She  shared   that  there  was  an   examination  of                                                                   
maintaining  the royalty  and  tax regime,  and reducing  the                                                                   
tax rate  to improve the  attractiveness of the  project. She                                                                   
stated  that  the  results  showed   very  little  change  in                                                                   
revenue,   because  there   was  a  $45   million  up   front                                                                   
investment  in the project.  The initial  investment  did not                                                                   
impact the  producer returns  on the  project. She  furthered                                                                   
that,  by reducing  royalty and  tax, there  was value  being                                                                   
transferred  from  the state  to  the producers.  She  stated                                                                   
that it  could be effective,  if it benefitted  the producers                                                                   
enough  to  make the  project  commercially  attractive.  Her                                                                   
analysis showed  that it did  not change the  scenario enough                                                                   
to make it  commercially attractive for the  producers, which                                                                   
initiated considerations  of other  options to provide  value                                                                   
to the producers without the state losing its value.                                                                            
                                                                                                                                
Vice-Chair Neuman handed the gavel to Co-Chair Austerman.                                                                       
                                                                                                                                
Representative  Gara  asked  how   meetings  with  Black  and                                                                   
Veatch could  be scheduled.  Co-Chair Austerman  replied that                                                                   
meetings could be scheduled through DNR.                                                                                        
                                                                                                                                
2:55:34 PM                                                                                                                    
                                                                                                                                
Vice-Chair  Neuman was  attempting  to measure  the value  of                                                                   
the dollars.  He wondered if the  wall street was  assumed as                                                                   
the  "market." Ms.  Poduval  replied  that her  reference  to                                                                   
"market" pertained  to two  aspects: 1)  the LNG market;  and                                                                   
2) the financial market.                                                                                                        
                                                                                                                                
Vice-Chair Neuman  stated that his inquiries  would reference                                                                   
the  financial market.  He believed  that  the state  already                                                                   
paid TC  $300 million, with  a cap of  $500 million  in AGIA.                                                                   
He  wondered if  there  was a  discussion  regarding how  the                                                                   
money would be  used, if TC's exclusive license  was revoked.                                                                   
Ms. Poduval deferred to the administration.                                                                                     
                                                                                                                                
Vice-Chair  Neuman wondered  the total  value and total  cost                                                                   
of the pipeline.  Ms. Poduval replied that the  total cost of                                                                   
the project was $45 billion.                                                                                                    
                                                                                                                                
Vice-Chair  Neuman remarked  that  the  financial market  was                                                                   
approximately at  3 or 3.5 percent.  He felt that  the market                                                                   
had a  substantial effect on  the interest rate.  Ms. Poduval                                                                   
responded   that   the  different   scenarios   reflected   a                                                                   
sensitivity to what the possible cost of debt could be.                                                                         
                                                                                                                                
3:00:01 PM                                                                                                                    
                                                                                                                                
Vice-Chair  Neuman announced  that he  was trying to  measure                                                                   
the risk  of the project.  Ms. Poduval  replied that  the two                                                                   
most  important  risks  were price  and  capital  costs.  She                                                                   
stressed that  the price was the  most impactful risk  to the                                                                   
project.                                                                                                                        
                                                                                                                                
Vice-Chair  Neuman surmised  that  the project  would not  be                                                                   
sanctioned.  Ms. Poduval  agreed that  the project would  not                                                                   
be sanctioned.                                                                                                                  
                                                                                                                                
Vice-Chair   Neuman    stressed   that   there    should   be                                                                   
consideration   of   the   differentials   related   to   the                                                                   
availability of oil and gas in the global market.                                                                               
                                                                                                                                
Representative  Munoz looked  at  the proposal  on slide  11,                                                                   
and remarked  that TransCanada  25 percent  ownership  of the                                                                   
GTP and pipeline;  and the state had 25 percent  ownership of                                                                   
the  LNG plant  and 25  percent of  the gas  share. She  also                                                                   
addressed  slide 8  related to  revenue, with  $4 billion  in                                                                   
revenue.   She  queried   the   split   in  revenue   between                                                                   
TransCanada  and state  once the  project  was complete.  Ms.                                                                   
Poduval deferred to Mr. De Stigter.                                                                                             
                                                                                                                                
JASON  DE STIGTER,  SENIOR CONSULTANT,  CONSULTING  DIVISION,                                                                   
BLACK & VEATCH  MANAGEMENT (via teleconference),  stated that                                                                   
the state's  revenues would be  approximately $4  billion per                                                                   
year,  beginning in  2024.  TransCanada's  revenues would  be                                                                   
approximately $400 million per year.                                                                                            
                                                                                                                                
Ms.  Poduval  asked if  the  TC  revenue  was the  return  on                                                                   
investment  component. Mr.  De  Stigter replied  that it  was                                                                   
the net cash flow after taxes.                                                                                                  
                                                                                                                                
Representative  Munoz looked  at  slide 21,  and wondered  if                                                                   
there  was a  point at  which the  project became  uneconomic                                                                   
for TC  as the  cost of debt  increased by  6 and  7 percent.                                                                   
Ms. Poduval  replied  that there  could be  a point at  which                                                                   
the project  was uneconomic for TC,  as the cost of  debt was                                                                   
6 or 7  percent. She stressed  that the key factor  was about                                                                   
what would  increase the  cost of  debt. The market  movement                                                                   
would keep  the rate tracker intact,  but if it was  based on                                                                   
a  change  on TC's  financial  health  and  assumptions,  the                                                                   
project would be uneconomic.                                                                                                    
                                                                                                                                
3:05:16 PM                                                                                                                    
                                                                                                                                
Representative  Costello queried what  would happen  with the                                                                   
damages  issue  with  AGIA.  Ms.   Poduval  deferred  to  the                                                                   
Department of Law (DOL).                                                                                                        
                                                                                                                                
Representative  Costello  wondered  if  TC would  be  someone                                                                   
that the state  could depend on, in terms of  brining the gas                                                                   
to  market.  Mr. Abt  replied  that  TransCanada was  not  an                                                                   
active participant  in  the LNG market,  but TransCanada  was                                                                   
only a  transporter of  gas. Ms.  Poduval furthered  that the                                                                   
arrangement  was   that  the  HOA  included   intent  by  the                                                                   
producers  to market  a proportionate  share  of the  state's                                                                   
gas.  Rather than  competing with  the  producers, the  state                                                                   
would obtain a percentage of the gas market.                                                                                    
                                                                                                                                
Representative   Costello   asked   if   TC  had   the   same                                                                   
opportunity  to  extricate  itself   from  the  project.  Ms.                                                                   
Poduval  responded  that TC  probably  had that  option,  but                                                                   
deferred to the DOL.                                                                                                            
                                                                                                                                
Representative  Costello looked at  slide 20, and  noted that                                                                   
TransCanada  had determined  certain terms:  the debt  equity                                                                   
ratio and return  on equity of 12 percent.  She surmised that                                                                   
the terms  could change,  if the  underlying market  changed.                                                                   
She  queried  who  would  make  the  determination  that  the                                                                   
underlying market  would change.  Ms. Poduval responded  that                                                                   
the  MOU included  the  concept of  the  rate tracker,  which                                                                   
would measure  the difference  in the  30-year treasury  rate                                                                   
between when  the transportation  service was signed  between                                                                   
the  state and  TC  and when  the project  went  to FID.  The                                                                   
number would  be available at  the market, so there  would be                                                                   
no dispute.                                                                                                                     
                                                                                                                                
Representative   Costello   queried   the  latest   date   to                                                                   
determine  the market change.  Ms. Poduval  replied that  the                                                                   
date would  be at  FID, because the  rate tracker  would show                                                                   
the four or five years of movement in the market.                                                                               
                                                                                                                                
3:10:01 PM                                                                                                                    
                                                                                                                                
Representative  Costello queried  the  risk to  the state  as                                                                   
the market was  determined. Ms. Poduval responded  that there                                                                   
was  a general  expectation  that  rates with  increase.  She                                                                   
opined that the rate tracker would most likely be positive.                                                                     
                                                                                                                                
Representative  Guttenberg surmised  that  the project  would                                                                   
not  be  feasible  without  the   state's  participation.  He                                                                   
wondered if  the project was  feasible, because the  value of                                                                   
the gas  would be transferred  to the producers.  Ms. Poduval                                                                   
replied that  there was no  clear definition  of "uneconomic"                                                                   
versus "economic."  The global  LNG market was  very dynamic,                                                                   
so the supply  curve was examined  for the LNG market  to see                                                                   
where  Alaska  fell in  the  supply  curve. She  stated  that                                                                   
Alaska was  out of the money  relative to the band  of demand                                                                   
that one  would expect to see  in the market between  now and                                                                   
2030.  She  emphasized that  it  was  not a  static  picture,                                                                   
because  all of the  different projects  would be  attempting                                                                   
to look  competitive. Therefore,  there  was not a  projected                                                                   
point at which  the project would become economic.  The focus                                                                   
was  on decreasing  project costs  and  increase the  returns                                                                   
for the producers,  so the project could be  more attractive.                                                                   
The state's  equity investment  in the  project would  reduce                                                                   
the producer's upfront investment needs.                                                                                        
                                                                                                                                
3:14:50 PM                                                                                                                    
                                                                                                                                
Representative  Guttenberg surmised  that  the alignment  was                                                                   
not realistic. He  felt that the competition  was merely more                                                                   
blurred.  He  remarked that  the  transfer  of value  to  the                                                                   
producers was  considered the  state's full value  and moving                                                                   
it downstream  to processing. He  stressed that there  was an                                                                   
issue of the  difference between tariffs and  wellhead price,                                                                   
and this  deal would force  the state to  pay TC to  ship the                                                                   
gas. He queried  the place of the state in  the negotiations.                                                                   
Ms. Poduval  responded that the state's  equity participation                                                                   
in the project  provided each party an equivalent  portion of                                                                   
gas and an equivalent equity ownership through the project.                                                                     
                                                                                                                                
3:18:03 PM                                                                                                                    
                                                                                                                                
Representative Guttenberg  wondered if the state  should take                                                                   
the gas  as far  downstream as  possible or  take the  gas at                                                                   
the wellhead.   Ms. Poduval replied  that the state  would be                                                                   
receiving its  gas at  the wellhead, and  own a  path through                                                                   
the project  to move  the gas  through the  LNG plant  at the                                                                   
very least.                                                                                                                     
                                                                                                                                
Representative  Guttenberg  remarked that  he  knew what  the                                                                   
pipe feels  like when it is  cold and empty versus  when it's                                                                   
full. He  understood each  step of  manipulation of  the gas.                                                                   
He  felt that  there  should be  a careful  consideration  of                                                                   
each step of the process.                                                                                                       
                                                                                                                                
Representative  Edgmon  looked at  slide  19,  and asked  for                                                                   
more  information regarding  the  net present  value and  the                                                                   
cost  of capital  price.  He  specifically queried  what  the                                                                   
state would lose  in the project. Ms. Poduval  responded that                                                                   
the "do  not delay"  path showed  the project operational  in                                                                   
2024, and followed  the presented timeline with  a five- year                                                                   
construction period.  The one- and two-year delays  moved the                                                                   
project back  a couple  of years,  but the early  investments                                                                   
could grow  and continue  to be  invested. She stressed  that                                                                   
there would  be a  cost to the  state with  each delay  at an                                                                   
estimated  $800 billion  per year.  She  stressed that  there                                                                   
could  be a  consideration of  sensitivity  on prices,  which                                                                   
would result  in a similar projection  of costs. She  did not                                                                   
believe  that  the price  would  offset  the effects  of  the                                                                   
relative  impacts of  the commercial  terms  that the  equity                                                                   
structure versus the impact of a project delay.                                                                                 
                                                                                                                                
Co-Chair Austerman handed the gavel to Vice-Chair Neuman.                                                                       
                                                                                                                                
Representative   Edgmon  understood   the   urgency  of   the                                                                   
project, and would ask his questions off the record.                                                                            
                                                                                                                                
Vice-Chair Neuman handed the gavel to Co-Chair Austerman.                                                                       
                                                                                                                                
3:23:24 PM                                                                                                                    
                                                                                                                                
Representative Thompson  wondered if there would  be an issue                                                                   
with TransCanada,  if the Keystone project was  not complete.                                                                   
Ms. Poduval deferred to TransCanada.                                                                                            
                                                                                                                                
Representative  Thompson  felt   that  simultaneous  projects                                                                   
might  put  a  strain on  the  pipe  building  capacity,  and                                                                   
sacrifice the  integrity of the  project. Ms.  Poduval agreed                                                                   
that it would be  a factor, and stressed that  the LNG market                                                                   
was highly competitive.                                                                                                         
                                                                                                                                
                                                                                                                                
Co-Chair Austerman  looked at slide 5, and  remarked that the                                                                   
range  was total  cost $45  billion- $55  billion. He  stated                                                                   
that  Alaska had  historically  been a  tax-based state,  and                                                                   
would change  to a  profit-based state.  He wondered  if that                                                                   
was  a  fair   assessment.  Ms.  Poduval  replied   that  his                                                                   
summation would be accurate.                                                                                                    
                                                                                                                                
Co-Chair  Austerman  wondered   how  much  involvement  there                                                                   
should be with the citizens regarding this "leap of faith."                                                                     
                                                                                                                                
Representative  Gara surmised  that there  was a total  state                                                                   
cost of  $7 to $10 billion,  which did not include  the costs                                                                   
of the  producers' reimbursements  of construction  costs and                                                                   
the  cost of  other  forms  of shipping  infrastructure  like                                                                   
roads. Ms. Poduval  agreed that the proposal  did not include                                                                   
those costs.                                                                                                                    
                                                                                                                                
Representative Gara  wondered if deductions were  included in                                                                   
the  cost to  the state.  Ms. Poduval  asked what  deductions                                                                   
Representative Gara was referring.                                                                                              
                                                                                                                                
Representative  Gara  understood that  Exxon,  ConocoPhilips,                                                                   
and   BP  could   deduct   certain  upstream   costs   before                                                                   
production from  their oil taxes.  He queried the  total cost                                                                   
of  the   project  plus  the   cost  of  infrastructure   and                                                                   
deductions. Ms.  Poduval replied that the cost  of deductions                                                                   
that  were  available  for upstream  infrastructure  was  not                                                                   
shown  in the  cost picture  for  the AK  LNG project.  Those                                                                   
costs were,  however, incorporated when examining  the impact                                                                   
of  the state's  revenue. The  net of  any costs  on the  oil                                                                   
site  from  Pt.  Thompson's  upstream   costs  allowed  as  a                                                                   
deductions.                                                                                                                     
                                                                                                                                
ADJOURNMENT                                                                                                                   
3:29:33 PM                                                                                                                    
                                                                                                                                
The meeting was adjourned at 3:29 p.m.                                                                                          

Document Name Date/Time Subjects
3.25.14 HFIN BV Presentation - TC.pdf HFIN 3/25/2014 1:30:00 PM
AKLNG