Legislature(2015 - 2016)HOUSE FINANCE 519
10/26/2015 01:30 PM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| HB3001 | |
| Presentation: Transcanada Buyout Proposal, Black and Veatch Report | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB3001 | TELECONFERENCED | |
HOUSE FINANCE COMMITTEE
THIRD SPECIAL SESSION
October 26, 2015
1:38 p.m.
1:38:31 PM
CALL TO ORDER
Co-Chair Neuman called the House Finance Committee meeting
to order at 1:38 p.m.
MEMBERS PRESENT
Representative Mark Neuman, Co-Chair
Representative Steve Thompson, Co-Chair
Representative Dan Saddler, Vice-Chair
Representative Bryce Edgmon
Representative Les Gara
Representative Lynn Gattis
Representative David Guttenberg
Representative Scott Kawasaki
Representative Cathy Munoz
Representative Tammie Wilson
MEMBERS ABSENT
Representative Lance Pruitt
ALSO PRESENT
Marty Rutherford, Deputy Commissioner, Department of
Natural Resources; Deepa Poduval, Principle Consultant,
Black and Veatch; Representative Liz Vazquez;
Representative Geran Tarr; Representative Dan Ortiz;
Representative Paul Seaton; Representative Andy Josephson;
Representative Gabriel LeDoux; Representative Shelley
Hughes; Representative Sam Kito III; Representative Cathy
Tilton.
SUMMARY
HB 3001 APPROP: LNG PROJECT & FUND/AGDC/SUPP.
HB 3001 was HEARD and HELD in committee for
further consideration.
PRESENTATION: TRANSCANADA BUYOUT PROPOSAL, BLACK and VEATCH
REPORT
Co-Chair Neuman relayed that the committee would continue
to address the presentation from the previous day
["TransCanada's AKLNG Participation" dated October 25, 2015
(copy on file)]. He noted that if there was time he would
ask Pat Pitney, Director, Office of Management and Budget,
Office of the Governor to continue further discussions on
the HB 3001 budget analysis.
Representative Gattis asked if the presenters were free to
discuss anything outside of proprietary information. She
wondered if the presenters had been prepared by the
attorney general to speak only about certain subjects.
MARTY RUTHERFORD, DEPUTY COMMISSIONER, DEPARTMENT OF
NATURAL RESOURCES (DNR), responded that they had done some
preparations for the meeting, but that was not unusual. The
only issues they could not discuss was AKLNG confidential
data. She noted that the state's Precedent Agreement (PA)
with TransCanada had been released and was now available
for discussion.
Representative Gattis remarked that the committee should be
provided with organizational charts and other similar
items. She stated there appeared to be significant hold
back.
Co-Chair Neuman noted that the co-chairs were starting to
compile all of the information, which he believed was
available in paper format and online. He pointed to a Black
and Veatch report in members' packets on the TransCanada
decision primer ["TransCanada AKLNG Participation Decision
Primer" dated October 24, 2015 (copy on file)].
House Bill No. 3001
"An Act making supplemental appropriations; making
appropriations to capitalize funds; making
appropriations to the general fund from the budget
reserve fund (art. IX, sec. 17, Constitution of the
State of Alaska) in accordance with sec. 12(c), ch. 1,
SSSLA 2015; and providing for an effective date."
1:42:27 PM
^PRESENTATION: TRANSCANADA BUYOUT PROPOSAL, BLACK and
VEATCH REPORT
1:42:27 PM
Ms. Rutherford addressed a PowerPoint presentation titled
"TransCanada's AKLNG Participation" dated October 25, 2015
(copy on file). She began with slide 2 titled "Executive
Summary." She read from the slide:
Background:
· In June 2014, the State of Alaska (SOA) and
TransCanada Alaska Midstream LP (TransCanada) entered
into a key agreement authorizing TransCanada to pay
the upfront capital costs and hold the State's 25
percent share of ownership in the midstream components
of the Alaska LNG (AKLNG) Project. These midstream
components are the Gas Treatment Plant (GTP) and
pipeline portions of the overall project.
· The agreement, called the Precedent Agreement (PA),
was based on terms of a Memorandum of Understanding
(MOU) between the State and TransCanada signed in
December 2013. While the Alaska Legislature was not a
party to the PA, it reviewed and debated the terms of
the MOU during the 2014 legislative session.
Co-Chair Neuman asked for a brief summary of the content of
the MOU and the PA.
Ms. Rutherford referred to the key terms of the PA between
the state and TransCanada on slide 5.
· TC Owns the State's ~25 percent Entitlement to GTP +
Pipeline
· Funds up front midstream cash calls
· Technical lead for pipeline during pre-FEED
· State to Commit to 20-25 Year Transportation Agreement
with
· TC by December 2015 to Pay for Using GTP + Pipe
Ms. Rutherford elaborated that the FTSA [Firm
Transportation Services Agreement] laid out the commercial
agreement between the state and TransCanada; it outlined
how the state would repay the costs once the project was
operational. She noted that the costs were throughput
charges.
Co-Chair Neuman wondered if the administration had a flow
chart showing how the state would repay the costs. Ms.
Rutherford replied that the administration was working on
the information for the committee. She relayed that the
state's contracted financial experts including Greengate
LLC, FirstSouthwest, and Lazard had presented to the
committee earlier in the week. The finance group worked
with the Department of Revenue (DOR) and was primarily
responsible for talking to the legislature about the
financial side of the project. The current presentation was
related to the initial payback responsibilities and how the
department saw the exchange of values.
1:46:42 PM
Representative Wilson asked if the DOR commissioner would
be available to testify on the financial portion of the
project.
Co-Chair Neuman replied that he would put in the request,
but he did not know if the commissioner was available.
Representative Wilson wondered about other issues including
royalty in kind [RIK] and royalty in value [RIV]. She
thought the special session related to contracts in
addition to the consideration of buying out TransCanada.
She asked if there was another checklist.
Ms. Rutherford responded in the negative. She explained
that the Heads of Agreement (HOA), which the legislature
was party to, specifically laid out that the RIK versus RIV
decision would follow the completion of commercial
agreements that would affect the decision. She elaborated
that there was nothing in SB 138 [legislation passed in
2014 related to a gas pipeline, AGDC, and oil and gas
production tax] that specified due dates with the exception
of a couple of reports that would be due to the legislature
from AGDC and DNR (none of the dates had been triggered
yet). The department was compiling information that would
show the committee the dates and what they were linked to.
Representative Wilson remarked that the decision to
terminate TransCanada could have already been made by the
DNR commissioner. She believed the state had 90 days from
the point of termination to pay off the contract. She
wondered why the department had not terminated the contract
and come to the legislature for a supplemental
appropriation during the regular legislative session [in
2016].
Ms. Rutherford answered that the primary reason was that a
work plan and budget decision needed to be made
simultaneously. The original commitment date by every party
to AKLNG, was November 15 [2015], but the parties had
agreed to delay the date to December 4, 2015 at the latest.
She continued that the work plan and budget funding would
have to be available in order to continue moving the
project forward if the state decided to terminate the PA
with TransCanada.
1:49:50 PM
Representative Wilson suggested that DNR did have an
approved budget. She reasoned that the purpose of the
supplemental budget was to pay for items that had not been
anticipated in the original budget (e.g. funding for
wildfires). She understood that the department could not
appropriate. She stated that year after year issues had
been taken care of with the supplemental budget. She noted
that the appropriation [in HB 3001] was one amount of
around $144 million that could have been included in the
governor's supplemental request. She remarked that the
legislature had already communicated that it would pay the
amount by passing the legislation [SB 138].
Ms. Rutherford responded in the negative. She explained
that there had been money appropriated for the various
agencies. For example, DNR had received approximately $8.9
million out of its $13 million request; the department had
known the charges associated with the commercial agreements
would run high and HB 3001 included a request from DNR for
half of the additional funding that had been eliminated.
Additionally, the Department of Law (DOL) was asking for
funds for work conducted by outside law firms (Greenberg
Traurig LLP and Milbank, Tweed, Hadley & McCloy LLP)
because the state was working diligently to get the
commercial agreements in place. She relayed that DOR had an
additional funding request as well. However, the real
critical component was the additional pre-FEED [Front End
Engineering and Design] work funding that must be
appropriated by the legislature in order for AGDC to commit
to the work plan and budget no later than December 4, 2015.
She stressed that AGDC could not make the commitment
without the funds.
Representative Wilson suggested having David Teal,
Director, Legislative Finance Division explain the
difference between the supplemental before the committee
and the typical supplemental budget bill. She thought the
legislature had budgeted through June 30, 2016. She
reasoned that DOL and DNR still had money. She stated that
the departments may have to take funds from other areas to
fulfill the need. She wanted a better understanding why the
issues could not have been addressed during a regular
session.
1:52:26 PM
Representative Gara believed that a large gas pipeline that
would make gas available to Alaskans and for export, had
been a dream of Alaskans for a long time. He stated that
the last thing the state would want to do was kill the
project. He referred to testimony that continuing with
TransCanada would cost the state significantly more due to
the 7 percent interest on top of TransCanada's costs. He
reasoned that if the stated continued forward with
TransCanada, no legislative appropriation would be
necessary, but testimony had asserted that the cost was
higher than the state should pay. Alternatively, if the
state chose to terminate TransCanada and did not receive an
appropriation to cover the costs, it would inadvertently
kill or temporarily halt the project.
Ms. Rutherford responded in the affirmative. She elaborated
that the AKLNG partners had specifically stated that the
project could stop (employees would begin to be removed
from the AKLNG office) if any particular party failed to
fund the work plan and budget by December 4 [2015] through
the end of pre-FEED. She furthered that project was
required to have the appropriation in place. She discussed
that FY 15 budget funded AGDC for the liquefaction portion
of the work plan and budget. The administration's proposal
was to replace TransCanada's role in the pipeline and gas
treatment plant (GTP) with ADGC, which required an
appropriation to fund those portions of the work plan and
budget going forward. She stated that without the
appropriation, the project would either stop completely or
slow down.
Representative Gara elucidated that when the budget was
passed in 2015, TransCanada had been in the project paying
the costs and charging what he believed to be an excessive
interest of 7 percent. He asked for verification that the
legislature did not appropriate any funds for the state to
take TransCanada's place.
Ms. Rutherford replied in the affirmative.
Representative Gara asked for verification that the purpose
of asking for an appropriation was that money would be
saved by removing TransCanada from the project, but money
was needed to make the project move forward.
Ms. Rutherford answered in the affirmative. She detailed
that the monies were built into the analysis that
DeepaPoduval with Black and Veatch had provided in terms of
the additional upfront costs that were the exchange for the
higher cash values to the state once the project was
operational.
1:55:39 PM
Vice-Chair Saddler disputed Ms. Rutherford's statements. He
communicated that money had been provided for the project
to continue absent a TransCanada termination. He stated
that Ms. Rutherford was making the case that the money was
needed because it was not available to terminate
TransCanada. He stated that the status quo was to proceed
with TransCanada. He furthered that money had been provided
and under the traditional financing mechanisms, the
administration was able to adjust money to cover exigencies
for supplemental expenses such as wildfires. He believed
the money was available. He pointed to background
information on slide 2, specifically to language stating
that the legislature was not a party to the PA, but that it
had reviewed and debated the MOU. He agreed, but noted it
had taken place over 1.5 years earlier. He remarked that
the legislature had only received the PA earlier in the day
and the administration was asking the legislature to
execute the termination, which he believed to be one of the
most critical elements. He stressed the importance of
knowing what the PA included prior to moving forward.
Ms. Rutherford clarified that she had understood
Representative Wilson's earlier question to be about why
the administration had come forward with the proposal at
the current time. She explained that the commitment to the
work plan and budget would have to be made by December 4
[2015]. She furthered that if the state was going to remove
TransCanada from the project, it had to be done at present.
Alternatively, the state had the option of entering into an
FTSA with TransCanada by the end of December [2015]. She
explained that once the state entered into an FTSA it would
be much more difficult to terminate its relationship with
TransCanada, given that the company would be provided with
back-in rights. She noted that Ms. Poduval would discuss
back-in rights in her presentation. She explained that the
state did not want to lock-in the FTSA with TransCanada and
did not want the back-in rights. Additionally, the state
did not want to carry the 7 percent interest. She
recognized that the legislature had just received the PA,
which had previously been confidential (TransCanada had
agreed to make the document public). She certainly
appreciated that the legislature was not ready to take an
action based upon the document after four hours of review.
The administration was not asking the legislature to make
the decision that day.
1:58:41 PM
Vice-Chair Saddler surmised that Ms. Rutherford's
implication was that the inhibiting factor had been
TransCanada's unwillingness to have the PA made public.
From the perspective of the administration, he wondered at
what point the PA could have been made public. Ms.
Rutherford replied "yesterday morning."
Vice-Chair Saddler asked if it could have been any earlier
than the previous day. Ms. Rutherford in the negative. She
detailed that the state did not have an agreement with
TransCanada to release the PA until the previous day.
Vice-Chair Saddler asked for verification that it was not
only up to TransCanada to determine whether the document
was made public. Ms. Rutherford replied that the state
could not release the PA without TransCanada's approval.
She stated that the document had been confidential and
TransCanada got to make the decision about whether to make
it public. Additionally, the administration had been asking
TransCanada to allow the state to release the PA for some
time.
Vice-Chair Saddler asked when DNR would have been ready to
release the PA with TransCanada's approval. Ms. Rutherford
believed she had first asked TransCanada for the ability to
release the document one month earlier.
Vice-Chair Saddler remarked that Ms. Rutherford's testimony
that the document could not be released without
TransCanada's approval implied that TransCanada had been
the hold up. He furthered that it implied that DNR would
have been willing to make the document public at any time.
He asked if his statements were accurate. He asked if the
administration would have agreed to release the documents 6
months earlier if TransCanada had approved.
Ms. Rutherford answered that she had not asked TransCanada
for its approval to release the PA until about one month
earlier. She would have been happy to release the document
that day if they had approved. She stressed that she had
not asked the question 6 months ago.
2:00:36 PM
Vice-Chair Saddler asked absent the permission from
TransCanada when DNR would have been willing to release the
PA. Ms. Rutherford responded that the state was not the
party that had been unwilling to release the PA. She
relayed that the state probably would have made the
document public from the day the administration took
office.
Co-Chair Neuman asked if there was a provision in the PA
that addressed the authority for either party to decline
releasing the document to the public. Ms. Rutherford
believed there was. She qualified that it had been some
time since she had read the entire document.
Co-Chair Neuman asked for verification that the PA included
language specifying that both parties had to agree before
the document could be released to the public. Ms.
Rutherford replied in the affirmative.
Vice-Chair Saddler referred to the commitment to the work
plan and budget. He wondered why the decision to get the
appropriation in time for the work plan and budget was
occurring at present. He wondered if the issue was outlined
in the PA. He asked where it was decided and by whom.
Ms. Rutherford responded that the November 15 date that had
slipped to December 4 was a function of the joint venture
agreement on AKLNG.
Representative Munoz addressed that SB 138 had contemplated
an integrated model with the state participating as an
owner throughout the value chain. She wondered what would
happen in the future with the process that had been
established in SB 138 if the state chose to buyout
TransCanada from the project. She was concerned that the
governor had stated that he had inherited a flawed process.
Ms. Rutherford did not believe that TransCanada's role
impacted the path forward. She believed the reason Governor
Walker had referred to SB 138 as flawed related to the fact
that if any party that owned gas in Prudhoe Bay and Point
Thomson backed out of the project that the project could
arguably be stopped or stalled. She furthered that the
governor had been concerned about a commitment from the
parties in AKLNG to commit their gas should they decide not
to continue to move AKLNG forward for one reason or
another.
2:04:22 PM
Co-Chair Thompson asked if the PA was the only agreement
between the state and TransCanada. He had heard that an
amended PA had been considered during the summer.
Ms. Rutherford responded that the current PA was the only
agreement that she was aware of. She elaborated that since
the new administration came into office there had been some
discussions about some potential amendments to the PA. She
furthered that like any new administration it had looked
for ways to improve the state's position. She conferred
with Ms. Poduval who agreed with the information she had
provided. She reiterated that there had been discussions
about an additional amendment, perhaps a termination to the
PA, but the administration had determined that it was not
willing to terminate the agreement without coming to the
legislature to find out whether the legislature was willing
to fund the termination and the cash calls moving forward.
Co-Chair Thompson wondered if the current PA laid out how
the state would exit the partnership with TransCanada in
the event of a buyout. Ms. Rutherford stated that the PA
laid out the prerogatives for the state to terminate either
by December 31 [2015] or subsequently; it also laid out the
conditions the terminations meant. Additionally, the PA
provided that TransCanada had the right to terminate the
agreement as well. She believed SB 138 had laid out that in
addition to holding the state's liquefaction asset, it
would also hold the pipeline and GTP if TransCanada was no
longer in the project.
2:07:37 PM
Vice-Chair Saddler wondered if Ms. Rutherford had been
party to discussions about any amendments to the PA. Ms.
Rutherford answered that she had been party to discussions
with TransCanada beginning in December [2014] until the end
of May about potential changes to some of the commercial
terms of the FTSA. Subsequent to that she had not been
party to any discussions with TransCanada about a potential
termination, which had been an additional amendment under
consideration.
Vice-Chair Saddler relayed that he planned to ask others in
the administration about knowledge of any amendment to the
PA. He pointed to the administration's recommendation to
terminate the state's relationship with TransCanada by
December 2015 (slide 2). He stated that the previous day
DNR Commissioner Mark Myers had acknowledged that the
current law gave the DNR commissioner the authority to make
the determination. He remarked that the state was
recommending that action be taken, but Commissioner Myers
had "refused to make that termination decision." He
wondered about all of the reasons that the administration
was unwilling to make the determination and follow the
process through to the conclusion.
Ms. Rutherford replied that she could only speak to the
reasons that she knew about. She reported that Commissioner
Myers felt strongly that it was a significant decision and
that even though he had the prerogative, it would have been
presumptuous to terminate the PA and provide the
legislature with a $68 million bill in addition to the
necessary cash calls for the work plan and budget required
for the completion of the pre-FEED stage. She added that
under the scenario if the appropriation was not made, the
project would stop. She and the commissioner had discussed
the option and had determined that it was not the right
path forward. She presumed the reasons she had cited were
also the reasons that Governor Walker had agreed with the
decision by Commissioner Myers.
2:10:51 PM
Co-Chair Neuman asked about the type of decisions the DNR
commissioner would have to deal with when making the final
decision to exit the agreement with TransCanada.
Ms. Rutherford replied that the commissioner would look at
the same information that was being provided to the
committee from Black and Veatch and the state's financial
advisors. She stressed that it had been fairly easy to know
what the legislature may need in order to make the
decisions, based on the questions the commissioner had
asked [in his evaluation].
Co-Chair Neuman was interested in a flow chart on the
development and how the decisions had to be made.
Vice-Chair Saddler recalled Ms. Rutherford's earlier
testimony that SB 138 envisioned the TransCanada
termination buyout. He stated that the bill also envisioned
that the decision would be made at the [DNR] commissioner's
discretion. He had also heard that the review of the bill
by the administration had discovered the flaw that there
was not any compulsion on all of the parties to proceed to
FID, which he noted was not new. He did not consider it a
flaw, but a perspective. He thought the entire process was
predicated on people agreeing and working together towards
success. He reasoned that working towards success meant
that less time was spent worrying about failure. He wanted
clarity what would happen if the legislature did not pass
the appropriation and the commissioner did not sign a
[termination] decision.
Ms. Rutherford discussed a distinction between not going to
FID versus not having the gas. She elaborated that FID
would be based on many things including the final
engineering and design, the ability to obtain buyers for
the gas, and all of the issues associated with financing.
The governor had been concerned about the potential of a
partner opting out of the project and taking its gas. She
specified that it was a different thing than whether or not
an appropriate determination on FID would be made. She
relayed that assuming TransCanada was willing, the
administration would sign the FTSA by December 31 [2015] if
the legislature did not fund the buyout of TransCanada or
AGDC stepping into the pre-FEED work plan and budget role.
She explained that under the FTSA TransCanada would have a
long-term back-in right if the project was terminated at a
later date.
2:14:27 PM
Representative Saddler asked if the path forward was
acceptable and was something that DNR could work with.
Ms. Rutherford responded in the affirmative. She relayed
that the department had asked the question many times of
its attorneys. The department believed it would take
approximately 2 weeks to finalize the FTSA.
Representative Saddler asked for verification that if the
legislature did not fund the appropriation that the DNR
commissioner would not make the decision [to terminate
TransCanada]. Ms. Rutherford answered in the affirmative.
She stated that the costs to the state would be higher
under the scenario.
Representative Saddler remarked that the costs had always
been known. He thought it was curious that the
administration's recommendation was that the agreement with
TransCanada should be terminated, but it would not proceed
forward with the decision if the legislature failed to fund
the appropriation. He thought there was a logical
disconnect about making a recommendation but not following
through with the decision if the legislature did not
provide the funding. He did not understand the line of
thinking.
Ms. Rutherford replied that the state would not have the
work plan budget monies to allow AGDC to step forward
[without an appropriation]. She stressed that it was a huge
amount of money. She agreed that the administration could
have made the decision without the legislature's
involvement and the legislature would have received the
bill for paying off TransCanada; however, the state would
not have the money for AGDC under the scenario.
Representative Saddler reasoned that the issue was one of a
separation of powers. He stated that the administration was
responsible for making policy decisions and the legislature
was responsible for paying them or not. He believed it was
an important distinction to keep in mind.
2:16:21 PM
Representative Neuman remarked that the administration had
made a recommendation that the state should terminate its
partnership with TransCanada. He wondered what the
decisions were based on. He asked if the issue was
financial, political, mechanical, commercial agreements
that could not be achieved, or that the two entities could
not work together. He stated wondered if there were
specific parts or principles within the information that
had been provided that the administration had looked at in
coming to a decision to recommend terminating with
TransCanada.
Ms. Rutherford replied in the affirmative. She spoke to the
issue of alignment. She detailed that the administration
felt strongly that having an alignment between the gas
throughput and the state's direct ownership in the project
at approximately 25 percent for both was critical.
The administration believed that voting on the state's 25
percent interest in the project would be much cleaner if
there was only one party owning all three project elements.
Additionally, removing TransCanada would eliminate the
struggle about determining who would vote under what
circumstances. She relayed that there would be less
confusion about how to access information. Mostly, the
administration had been affected by the economic analysis
that Black and Veatch had been providing to the committee.
She noted that the findings had been supported by the
financial group's analysis, which specified that the state
could afford to finance the project moving forward without
TransCanada's involvement. She emphasized that she and
Commissioner Myers were concerned about the negative net-
back risk that could occur once the project was in place.
She furthered that oil prices had crashed, which had not
been expected; she added that it would be a couple of years
of dealing with the situation. Once the state had an equity
position in the pipe and had gas throughput, negative net-
back could occur where both the state's production taxes
and royalties went negative. She stressed that the
additional $150 million to $400 million cushion [estimated
savings without TransCanada] that would be available to the
state would be significant in a potential risk situation.
She characterized the final point as the most important
element in the decision.
2:19:22 PM
Representative Guttenberg asked if the PA had been
available to anyone who would sign a confidentiality
statement. Ms. Rutherford answered in the negative. She
elaborated that the existing confidentiality agreements
between the legislature and DNR and DOR were specific to
AKLNG and not to the confidential relationship between the
state and TransCanada.
Representative Guttenberg remarked that the PA had been
signed January 14, 2014. He asked if anyone had requested
the release of the document during the two legislative
sessions since that time. Ms. Rutherford replied that she
could not speak to anything prior to her most recent
employment with DNR, which began in December 2014. She
relayed that approximately 2 months ago the department had
received the first request for the PA.
Representative Guttenberg remarked that the committee had
heard considerable information from Black and Veatch and
the financial consultants. He believed it seemed clear that
the [DNR] commissioner did not want to make a unilateral
decision on canceling the relationship with TransCanada
because of the fiscal responsibility. He applauded that
decision. He agreed that there were separation of powers,
which he believed were very important. He would have been
concerned if the commissioner had made the decision [to
terminate the agreement with TransCanada] and had put the
obligation onto the state. He thought there would have been
"fire in the building," which he believed would have been
justified. He remarked that the fiscal analysis on the
separation of the state's relationship was clear. He
believed the commissioner was probably working on a final
best interest findings or something similar. He wondered
when the analysis was expected to be completed.
Ms. Rutherford thanked Representative Guttenberg for his
comments. She relayed that the finding on the RIK decision
that would trigger the option for the producers to pay
their production tax as gas, would be made as quickly as
the commercial agreements that affect the royalty values
could be agreed upon. Some of which were the most difficult
agreements because they were underpinned by an agreement
between the companies on how they would participate between
Point Thomson and Prudhoe Bay, which had also not been
completed. She furthered that there was often a large
amount of integration between the agreements, but
agreements on gas supply, field cost allowance, upstream
cost allowances, and disposal of carbon dioxide were
critical to making a finding and showing the analysis to
the legislature and public about what the tradeoffs would
be in value. As soon as the commercial agreements were
complete the state had agreed to have the finding complete
within 60 days; the framework was completed and the
department had been collecting and developing all of the
background data, but the final analysis could not be done
before it was known how the agreements would affect the
state's royalty values.
2:24:38 PM
Representative Guttenberg wondered what the PA contained
that had made the document confidential until the current
day.
Ms. Rutherford stated that TransCanada was a very
successful private commercial party; there were terms under
which the company would make transportation arrangements
with potential shippers, which TransCanada had been
concerned about releasing. She believed the company had
gone a very long way in limiting the amount of information
it had redacted in the PA in favor of providing the
document to the legislature and the public. She thought the
company had stretched its willingness to provide
information, but had done so in the interest of trying to
be supportive.
Representative Gara discussed that out of all the gasline
projects the legislature had discussed, the AKLNG project
brought Alaskans the cheapest gas and the most revenue. He
would have been disappointed if the administration did not
come to the legislature for the funds needed to move the
project forward. He stated that if the department had made
the unilateral decision to terminate the agreement with
TransCanada it would save the state money, but there would
have been no money to move forward with the project, which
would inadvertently stopped the project. He discussed that
the testimony thus far had been that TransCanada was not
thrilled about being in the project and that the company
would like the state to buy it out. He believed the state
should buy a company out when it was charging more than it
would cost for the state to finance the project on its own.
He stated that if TransCanada was kept in the project, it
had a blanket right under the current structure to get paid
its full costs plus a 7 percent interest. He remarked that
if he were to build a house he would not want to hire
someone who did not really want to do the work and who
would charge the cost plus 7 percent. He surmised that
there did not appear to be a perfect incentive for
TransCanada to minimize the cost and be completely
efficient in the project. He continued that the state's
promise was to pay all of the company's costs plus 7
percent interest, but the company did not want to be
involved. He wondered if it was the optimal arrangement.
2:28:16 PM
Representative Wilson interjected that the committee had
not heard from TransCanada and she believed to assume that
the company did or did not want to be a part of the project
was premature. She noted that the company was on the
schedule to present to the committee at a later time. She
believed that putting down a company that the state had an
agreement with was the wrong way to conduct business.
Representative Gara believed he was allowed to ask a
question. He addressed Ms. Poduval. He discussed that he
would like to be a partner to entities with an incentive to
keep costs down. The word the committee had received was
that TransCanada would rather not be in the project. He
noted that under the agreement the company would get fully
reimbursed for its costs in addition to a 7 percent
interest. He asked if the arrangement was the most optimal
regarding maintaining low costs.
Ms. Poduval answered that the agreement was structured so
that costs TransCanada incurred would be passed through to
the state. She addressed the checks and balances in the
system and broke the costs out into two buckets. She
explained that the largest "cost bucket" was related to the
AKLNG work plan and budget. Those costs were controlled and
managed by the AKLNG project management team (PMT); the
state had the opportunity to direct TransCanada's vote on
related items. She detailed that the producer parties and
the state wanted to keep the costs very low in order to
maximize value from the gas and even though TransCanada was
a midstream player that passed the costs through, the
process was set up where cost control should work
efficiently. The second bucket was related to TransCanada's
internal costs. She explained that there was process for
review of the costs and hopefully that process also worked
well. She remarked that the items she had discussed were
the checks and balances in the system to counter the fact
that any pipeline company made more money the higher its
rate base and cost basis was.
2:31:12 PM
Representative Gattis referred to Representative Gara's
analogy of building a house. She addressed what provided
incentive to keep costs down. She stated that she had built
houses "like that" and she stated that the owner was the
person ensuring costs did not get out of control. She
understood that there were checks and balances in the AKLNG
project and it was the state or project's job to ensure
that TransCanada was held in check. She believed it
appeared the checks and balances had been set up correctly.
She remarked that at one point TransCanada was revered and
the state had wanted the company in the project. She
discussed the current day and remarked that the governor
and the [DNR] commissioner had already made the decision
(and had the right) that TransCanada needed to be out of
the project. She believed the administration wanted the
money to make the decision possible. She believed it seemed
relatively simple. She asked for verification that the
reason for the current special session was to discuss
whether the legislature would pay to get TransCanada out of
the project.
Ms. Rutherford agreed that the administration was present
to request the legislature's support for the money to
buyout TransCanada, for the work plan and budget funds that
would allow AGDC to take on TransCanada's role going
forward, and for the agencies to continue to negotiate the
commercial agreements.
Representative Gattis asked for verification that the
decision related to TransCanada had been made along with
the other items Ms. Rutherford had listed. Ms. Rutherford
responded that the administration did recommend the actions
[removal of TransCanada] and did request the money.
However, the administration had not sent a termination
notice to TransCanada, which constituted a big difference
because it was a contractual action that had not occurred.
Representative Gattis surmised that the technicalities had
not been dealt with, but the administration had made the
decision [that it wanted to terminate the agreement with
TransCanada]. Ms. Rutherford responded that it was the
administration's recommendation; however, it would proceed
with the FTSA with TransCanada by the end of December if
the legislature did not fund the appropriation.
2:35:09 PM
Co-Chair Neuman asked for clarification about the
vernacular "buying out TransCanada." He stated that it was
not actually a buyout of TransCanada; there was debt due
for services. Ms. Rutherford in the affirmative. She stated
that she did not mean "buying out" or "terminating"
TransCanada. She clarified that she meant terminating the
PA and buying out TransCanada's interest in the AKLNG
project for the state.
Co-Chair Thompson assumed that the December 4 deadline was
for the budget to enable the AKLNG project to move forward
and that it was the budget put out by the three producers,
TransCanada, and the state.
Ms. Rutherford responded that the work plan and budget was
the appropriation to AGDC to pick up the responsibility
currently held by TransCanada. She detailed that the
numbers had been created by the AKLNG project made up of
the three producers, AGDC, and TransCanada.
Co-Chair Thompson asked for verification that AGDC was the
state's representative. Ms. Rutherford replied that AGDC
was the state's representative for the liquefaction portion
of the project.
Co-Chair Thompson remarked that the committee had received
information that the cost through FEED was $675 million;
however, a Black and Veatch report showed that the state
was asking for $490 million through December 31, 2018. He
stated that there were conflicting numbers. He asked for
clarification.
Ms. Rutherford deferred to Ms. Poduval.
DEEPA PODUVAL, PRINCIPLE CONSULTANT, BLACK AND VEATCH,
replied that the $490 million was an approximate estimate
of the amount it would take to terminate the agreement with
TransCanada. Alternatively, if the PA was not terminated
and TransCanada remained in the project through FEED the
appropriation would need to be approximately $500 million
(the number was higher because the costs associated with
TransCanada would continue to grow, which would be
compounded by interest). Funds needed at present were
approximately $70 million to repay TransCanada's
development costs plus interest and about $60 million to
fund AGDC for the remaining pre-FEED work.
Ms. Rutherford noted that Ms. Poduval's explanation
pertained to the distinction between $490 million and $675
million (slide 15).
Co-Chair Neuman asked the presenters to identify slide
numbers when speaking.
Co-Chair Thompson discussed that to fund the current budget
cycle the legislature had withdrawn money from the
Constitutional Budget Reserve (CBR). Additionally, the
legislature had added $500 million to the CBR draw in
anticipation that money may be needed to advance the AKLNG
project. He surmised that some of the money would be spent
on the supplemental budget due to the number of wildfires
and other. He explained that the money had been set aside,
but an appropriation by the legislature would be required
in order to spend the funds. He furthered that the
committee was currently considering the appropriation bill
to determine whether the state would continue forward with
or without TransCanada. He agreed with Representative
Gattis that the decision to terminate the contract with
TransCanada had been made by the governor and the DNR
commissioner; however, until the legislature approved the
appropriation no action [to end the contract with
TransCanada] would be taken.
2:41:04 PM
Co-Chair Neuman asked what the state would be committing to
if it signed an FTSA with TransCanada by December 31
[2015].
Ms. Poduval replied that if the state committed to an FTSA
with TransCanada in December, it would be committing to a
long-term arrangement where TransCanada would continue to
hold the 25 percent equity in the GTP and pipeline and the
state would contract for capacity, processing, and
transportation service from TransCanada; the state would
pay TransCanada a tariff for the service over a 20 to 25-
year period, which would include a 7 percent interest
expense.
Co-Chair Neuman asked if the state could commit to shipping
gas to TransCanada by December 31 [2015]. Ms. Poduval
responded in the affirmative.
2:42:49 PM
Co-Chair Thompson commented that the presentation primarily
used a cost of debt assumption of 5 percent. He remarked
that the state did not know what its credit rating and
[interest] rates would be by 2018. He requested an analysis
showing what it would cost the state at 6 and 6.5 percent
interest.
Ms. Poduval provided clarification on Co-Chair Thompson's
earlier question about how the $490 million at the end of
FEED compared with the $675 million shown on slide 15. She
explained that the $490 million was the amount that
TransCanada would accrue in cost for the GTP and pipeline
on the state's behalf to get through FEED (including
TransCanada's internal and interest costs). The $675
million was the amount the state would be contributing to
FEED in a scenario without TransCanada. The $365 million
shown on slide 15 [under the column titled "SOA Current Up
Front Cash Calls w/ TC" associated with FEED] was the LNG
component. The $310 million shown on the slide [under the
column titled "SOA Up Front Cash Calls w/o TC" associated
with FEED] was the GTP and pipeline component. The state's
total investment in FEED given preliminary cost estimates
was approximately $675 million.
Co-Chair Neuman believed the biggest question was related
to how the state would fund the project. He was very
concerned about the financial plan and where the state
would come up with the money.
Ms. Poduval addressed Co-Chair Thompson's question related
to the presentation's 5 percent interest rate assumption
for the state's cost of debt. She addressed a scenario
where the state's financial position worsened over time and
how the state would be impacted by a higher cost of debt.
She directed attention to slide 21. She relayed that the
baseline for the data assumed that the state would finance
the project with a standard 70 percent debt/30 percent
equity structure; the debt cost was assumed at 5 percent.
She furthered that under the scenario the state was
expected to achieve additional net cash flows of $360
million (rounded up to $400 million in the presentation).
However, if the state opted to finance the entire project,
there were different assumptions for what the cost of debt
would be. The bars shown on the chart (slide 21)
represented what the incremental value would be for the
state without TransCanada at various costs of debt. For
example, if the state was able to obtain a 5 percent cost
of debt, the additional value it would receive without
TransCanada on an annual basis would be about $170 million.
She detailed that at a 6 percent cost of debt, the state
would still receive an additional $100 million per year
without TransCanada.
Ms. Poduval continued to address Co-Chair Thompson's
question. She noted the importance of understanding where
the state was likely to land amongst the different costs of
debt. She referred the committee back to a recent
presentation from the finance team. The team had considered
that the amount of money the state would borrow was
significant and would have a credit rating impact on the
state (with or without TransCanada). The analysis had
showed that at a credit rating as low as A-, the state's
cost of debt would be about 5.5 percent in the present day
conditions. She noted that it was important to think about
the relative cost of debt between the state and
TransCanada. She highlighted two factors could increase the
state's cost of debt. The first was the state's credit
rating, which impacted the state alone. She explained that
the state's cost of debt could rise if its credit rating
deteriorated (as shown by the bar chart on slide 21). The
second factor was a general inflationary environment. She
discussed that interest rates were currently at historic
lows and there was a likelihood that they would begin
climbing. She added that the agreement with TransCanada
built in a rate tracker where if the 30-year Treasury yield
increased the 5 percent cost of debt and 12 percent return
on equity would increase. She expounded that under an
inflationary environment the cost of debt for the state and
TransCanada would increase. She concluded that the state
should be focused on the differential movement between the
state's cost of debt and TransCanada's cost of debt, which
would be affected by the state's credit rating.
2:50:19 PM
Co-Chair Thompson asked the presenters to have the state
financial advisors look at the chart (slide 21) and provide
the committee with advice.
Co-Chair Neuman agreed.
Ms. Rutherford responded that the administration had asked
Black and Veatch to work with enalytica [advisor to the
legislature]. The two firms had been working together over
the past several weeks in order to share the state's model
and premises.
Co-Chair Neuman remarked that the legislature had been
presented with a multitude of numbers in the past and had
been given many opinions that may not have been the most
accurate. He wanted to double check with the financial
advisors.
Ms. Poduval replied that Black and Veatch had worked
closely with enalytica. She relayed that enalytica had seen
the numbers before they had been presented to the
committee.
Representative Munoz asked about the withdrawal agreements
that were anticipated from other producers. She believed
the governor had announced a deadline of early December for
the commitment agreements. She queried the state's plan to
move the project forward if the agreements were not
obtained.
Ms. Rutherford replied that she did not have the answer.
The companies had indicated a commitment to develop sales
agreements with the state by that date [early December
2015]. She had not been party to any discussions about what
may happen if the companies did not sign agreements.
2:52:33 PM
Representative Munoz stated that it was unique to require a
company to commit gas to a project that it may or may not
have ownership in. She asked if the withdrawal agreement
concept was unique to Alaska.
Ms. Rutherford replied that there had been some
presentations the past Saturday by some financial advisors
that indicated it was not unusual. She furthered that the
governor's request of the producers was to either make some
tolling or gas sales arrangements. She believed the
producers were probably more interested in the gas sales
arrangement based upon past discussions. She affirmed that
gas sales agreements did occur around the world in certain
situations.
Representative Munoz asked if the state had commitment from
all of the producers to move forward with the agreements by
early December. Ms. Rutherford had seen letters from BP and
ConocoPhillips, but had not seen one from ExxonMobil. She
noted that the governor had indicated that ExxonMobil was
working on a letter, but she did not know the status. She
added that in the past ExxonMobil had been more than
willing to discuss some sort of withdrawal agreement;
therefore, she guessed that it was not outside "the
possible."
Vice-Chair Saddler did not think anyone begrudged a company
for making a profit for its labor, but he thought he had
heard the 7.1 percent interest [charged to the state by
TransCanada] characterized as pure profit. However, his
understanding from SB 138 was that it was allowance for
funds used during construction (AFUDC). He asked if it was
properly understood as profit.
Ms. Poduval stated that she had never characterized the 7.1
percent as profit because she thought of profit as being
different. She relayed that she had maybe approximated it
as a 7 percent interest to TransCanada. She explained that
it actually represented a weighted average cost of capital
with two different components. She expounded that the
TransCanada agreement assumed that it would be 70 percent
debt and 30 percent equity during construction up to the
second year of project operation; the cost of debt was
assumed to be 5 percent and the return TransCanada would
earn on its equity was 12 percent. Once the project was in
operation the debt equity mix would become 75 percent debt
and 25 percent equity; the 5 percent cost of debt and the
12 percent return on equity would remain.
2:56:10 PM
Vice-Chair Saddler remarked that he had wrongly assumed
that the 75/25 debt to equity was throughout the entire
project. He asked for verification that it only applied to
project operation through the initial term (23 years).
Ms. Poduval replied that the AFUDC built up at a 70/30 debt
to equity ratio and starting from the second year of
operation it switched to 75/25 debt to equity.
Vice-Chair Saddler asked for verification that it was not a
guaranteed 7.1 percent profit; it was allowance for funds
used or interest costs the state would have to pay anyway.
Ms. Poduval answered that the interest costs that
TransCanada would presumably be passing through would be
associated with a 70 or 75 percent debt component, which
related to the 5 percent. The equity that TransCanada put
into the project would earn a 12 percent return.
Vice-Chair Saddler surmised that the state was uncertain
about what may happen absent TransCanada's participation.
He stated that under the scenario the debt to equity ratio
was not known; therefore, it was difficult to determine an
exact estimate of AFUDC to the state.
Co-Chair Neuman referred to Ms. Rutherford's earlier
testimony related to the effects of negative netback. He
believed the issue may pertain to part of what Vice-Chair
Saddler was discussing. He referenced slide 26 of a Black
and Veatch report ["TransCanada Participation Decision
Impact on State of Alaska" dated September 30, 2015 (copy
on file)] that discussed negative netback. The slide
addressed that with a RIK election, the state could be
exposed to negative netback if the volumes or value of gas
were down. He asked Ms. Poduval to address the issue.
Ms. Poduval explained that the state would have a certain
cost basis for the project and the revenues the state would
achieve through the sale of LNG needed to cover the cost
basis. The higher the cost basis, the higher the bar would
be that revenues would have to cover to prevent negative
cash flows to the state (or the need to request an
appropriation from the legislature). She furthered that
because there was an expectation that the state had a lower
cost of debt than the 7 percent it was paying TransCanada,
without TransCanada the state's cost basis would be
decreased. She expounded that because the cost basis was
lower, the revenue needed to prevent a negative netback was
lower as well. She relayed that the Black and Veatch
analysis estimated the difference at about $0.90 per
million British thermal units (mmbtu). She detailed that
having TransCanada in the project would increase the cost
basis by about $0.90 per mmbtu, meaning that the state's
price would need to be that much higher in order to cover
the cost basis. She added that it assumed that all of the
state's costs need to be covered with just the revenues
coming from the sale of its LNG and not from other tax
payments from the project (i.e. payment in lieu of taxes
(PILT) or state corporate income tax) or the General Fund.
Co-Chair Neuman asked Ms. Poduval to expand on the topic
when the committee had time to go through the Black and
Veatch presentation. He stated that the committee had spent
a considerable amount of time discussing the time value of
money and the state's exposure to having the money in the
market versus in hand. He was interested in hearing
specifically about the state's exposure and risk. He
remarked that the state was using someone else's money, but
reasoned that it could use its own money to make more
money.
3:00:40 PM
Representative Wilson asked for verification that the state
would be paying TransCanada for duties that would need to
be performed either in house or by another company.
Ms. Poduval answered that there were several different
components of the state's obligation to repay TransCanada.
The first was the AKLNG work plan and budget. She agreed
that the state would have borne the cost regardless of
TransCanada's involvement. The second was internal costs,
which would possible come to fruition with or without
TransCanada. The third cost was the interest expense (the 7
percent weighted average cost of capital). She elaborated
that it was the third cost that the state believed it would
have a lower cost basis and could fund the financing for
less than 7 percent.
Representative Wilson asked for verification that the state
would not save the entire 7 percent because it would still
be responsible for paying some interest (i.e. 5 or 6
percent).
Ms. Poduval pointed to the presentation [slide 21 of the
presentation titled "TransCanada's AKLNG Participation"]
and agreed that if the state financed the project on its
own at an interest rate of 5 percent, it would have a
savings of 2 percent, which would result in about $170
million per year in additional net cash flows to the state.
Representative Wilson remarked that the analysis assumed a
significant number of things. She reasoned that currently
the state essentially had a bank that would fund the
state's portion of the project through construction as long
as the partnership remained intact. Alternatively, the
state would have to go to the open market in hope of
finding money. She furthered that the state did not know
how much money it would have in its coffers at that point
and how difficult it may be to get the money. She believed
it was a guessing game and that the state's ability to
obtain the funding in the future was not guaranteed.
Ms. Poduval recommended speaking to the finance team in
more detail about the subject. She believed the finance
team had mentioned that the state's credit rating had never
been worse than A- since the 1970s (prior to Trans-Alaska
Pipeline System). The finance team had showed that at an A-
credit rating, the state's cost of borrowing in the current
market would be about 5.5 percent. She believed that even
if "things get pretty bad" there was probably some cushion
in terms of the state being able to finance cheaper than
the robust rate of 7 percent. TransCanada did have the
option of walking away from the project if the financing
terms did not line up with its expectations. She furthered
that TransCanada had committed to a 5 percent cost of debt
to the state in the PA and were not able to finance within
that; TransCanada could walk away, which would mean the
state would have to go to the financial market for
financing, potentially with short notice.
3:05:21 PM
Representative Wilson queried how there had been a December
31 deadline, which she believed had been moved up to
December 4, 2015. She wondered if there was something in
writing from the partners specifying that they would be out
if the state did not provide money for the transaction by
December 4.
Ms. Poduval responded that the December 4 date was not
relevant to the PA with TransCanada. She clarified that the
state needed to make a decision by December 31, 2015 on
whether to terminate the PA or continue.
Representative Wilson asked "and with the money as well."
Ms. Poduval replied in the affirmative. She noted that Ms.
Rutherford would clarify what it meant from an
appropriation perspective, but the PA itself was not hinged
on the December 4 date.
Ms. Rutherford expounded that the date had been November
15, 2015, but due to special session the AKLNG joint
venture partners had agreed to push the date to December 4,
2015. She clarified that it was a date that was embedded in
the joint venture agreement, which was confidential.
Representative Wilson asked about $500 million the
legislature had appropriated in the past year. She wondered
if the current request to fund the contract would come out
of the $500 million.
Ms. Rutherford deferred the question to Ms. Pitney. She
believed there was a net increase beyond the amount.
Representative Wilson referred to the first section in oil
and gas statute AS 31.25.080 related to powers and duties
of AGDC. She believed the statute would allow AGDC to take
on all of the powers to take over for TransCanada's current
role, including the gasline, infrastructure, and shipping
to partners. However, she observed that under subsection 23
of the statute it appeared that the powers for AGDC would
be limited to an instate gasline only. She believed that
based on the section someone else would be in charge of
shipping and other responsibilities. She was concerned that
AGDC may not have all of the necessary approval to make all
of the needed decisions.
Ms. Rutherford replied that DOL was looking into the
question that had been raised by House leadership. She
noted that subsection 23 of the statute dealt with
liquefaction, which AGDC already held. She relayed that the
administration was fairly comfortable that AGDC already had
the authority because they were holding the liquefaction;
however, it would be DOL that would respond.
Representative Wilson wanted to know whether AGCD would
have the ability to act on the state's behalf in the role
currently held by TransCanada without any further
legislation.
Ms. Rutherford replied in the affirmative. She stated that
the same section that dealt with liquefaction also dealt
with the pipeline and GTP.
3:10:03 PM
Co-Chair Neuman believed the committee had also asked the
question the previous day.
Representative Guttenberg remarked that TransCanada was a
respected and well established company. He stated that the
project had a gated decision making process. He stressed
that it was not a random decision by the governor; SB 138
had envisioned that the legislature and administration
would conduct the analysis at the current point in order to
determine the best interest of the state. He imagined that
if the administration had determined that maintaining the
PA with TransCanada was the best action for the state there
would have been an announcement on the decision and a
special session would have been unnecessary. He discussed
that the fiscal analysis had been going on for a long time
to get to the current point. He addressed the cost of money
and the difference between TransCanada and the state doing
the work. He continued that TransCanada had done "hundreds
of millions of dollars of work" for the state already. He
surmised that the company had probably gone to the bank to
cover the costs. He reasoned that because the project was
not yet in construction, there was no debt ratio. He
elaborated that TransCanada had borrowed the money at a low
interest rate and the company was billing the state for the
work including the cost of borrowing capital. He stressed
that the company was getting 7 percent on top of the work
cost. He asked for verification that the 7 percent was not
included in TransCanada's cost of capital.
Ms. Poduval replied that she did not know. She clarified
that she did not believe that the amount the state was
paying to TransCanada was 7 percent on top of a cost of
capital for the company. She explained that the cost
components of the $70 million the state currently owed
TransCanada consisted of the work plan and budget,
TransCanada's internal costs (i.e. costs for management,
lawyers, and commercial people), and the interest expense.
The third component was the weighted average cost of
capital of 7 percent that represented the interest the
state was paying on the first two cost components for
TransCanada.
Representative Guttenberg remarked on Ms. Poduval's
response that she did not know if it was part of the
equation. He did not know if TransCanada had been audited
and "that has been perceived as part of it or not."
Ms. Poduval responded that the AKLNG work plan and budget
only included the engineering and technical work and did
not include anyone's cost of capital. Additionally,
TransCanada's cost of capital could not be claimed as an
internal cost. She stated that TransCanada was permitted to
earn 7 percent interest on top of all of the combined
allowed costs.
Representative Guttenberg asked Ms. Poduval to look into
the question.
3:14:40 PM
Representative Guttenberg asked if the producers were
capable of continuing with the project if the state was
unable to continue forward for some reason.
Ms. Rutherford responded that the producers could continue;
however, they were concerned about having to carry the
transportation costs for the state on its RIV gas and felt
that they needed certain fiscal stability terms. There were
various reasons the producers may have concerns about
moving forward without the state. On the other hand, the
state had a lease relationship with each of the producers
and there was a duty to develop. Therefore, an argument
could be made that the producers would have a
responsibility to finding a path forward without the state
should it become necessary. She believed one of the reasons
SB 138 was working for people was because it began to align
some of the interests. She stressed that it was critically
important that the state pay attention to what additional
responsibilities and risks it was taking on in exchange for
moving the project forward. She noted that it was part of
the dialogue associated with the commercial agreements and
would be part of the finding on RIK versus RIV.
Representative Gattis noted that one of the presenters had
mentioned that if the state did not terminate the PA with
TransCanada, the company could continue on with the state
and could also choose to walk away from the project. She
wondered if a decision by TransCanada to exit the project
was a clear indication that the project did not pencil out
for the company. She wondered if there would be merit for
the state to keep TransCanada or another entity in the
project instead of paying its own way "when it doesn't
pencil out." She noted that at one point the state believed
that TransCanada's partnership had its advantages. She
believed there had to be some positives associated with
maintaining the PA with TransCanada. She surmised that if
the PA was maintained and TransCanada decided to walk away
from the project in the future because it was not working
it may be a helpful signal to the state that there were
problems [with the project].
Ms. Poduval believed Representative Gattis was asking
whether the state needed TransCanada to be a litmus test in
the project. She did not know that TransCanada would add
much under the specified circumstance. She continued that
each of the producer parties had strong commercial interest
in the project and were all sophisticated participants. She
reasoned that if the project did not inherently pencil out,
the state or any of the producers would walk away at that
point. She noted that in some ways TransCanada's role and
perspective in the project was different from that of the
state and producers. She detailed that the producers and
the state were all gas owners in the project and had
interest in maximizing their resources. TransCanada's
perspective was slightly different as a commercial
participant because they were an infrastructure owner and
service provider. The factors that drove TransCanada's
decision may be very different from the factors driving the
producers and the state.
3:19:52 PM
Co-Chair Neuman suggested that Representative Gattis ask
the question of enalytica when they addressed the committee
later in the week.
Representative Munoz discussed that several years earlier,
legislation had been passed requiring the administration to
submit a 10-year budgeting plan to the legislature. She
asked if the legislature would receive the analysis,
specifically related to the AKLNG project.
Ms. Rutherford deferred to Ms. Pitney related to the 10-
year budget analysis. She noted that DNR staff were
currently working on the department's portion; therefore,
she believed it was underway. Some of the 10-year forward
looking perspective was provided by Black and Veatch, but
most of the information was provided as part of the
financial analysis (that had been presented by Lazard,
Greengate LLC, and FirstSouthwest). She thought it may be
beneficial to bring the companies back before the committee
now that it had been given a chance to understand the
material. She thought the advisors would do a better job of
talking about different ways the state could deal with the
cash calls and financing challenges.
Representative Munoz noted that she would bring the
question up when Ms. Pitney addressed the committee at a
later time.
3:21:59 PM
Representative Gara addressed slide 21 showing the extra
annual revenue the state was projected to earn without
TransCanada. At the state's current credit rating and at
current interest rates it was an extra $360 million per
year, which could go down if those items worsened.
Currently there was a danger that the state's credit rating
would get worse. He noted that the state had a large debt
and that "we're all arguing about what a fiscal plan should
be." He remarked that one of the presentation slides showed
that the large costs would not begin until 2019 when
construction on the facilities began. He stated that if a
fiscal plan had not been agreed on by 2019 "shame on all of
us." Assuming a fiscal plan and balanced budget occurred by
2017 or 2018, he asked if it was fair to assume that the
state's credit would be good enough at that point where it
would earn the larger amount of annual revenue [projected
on slide 21] rather than the smaller amount.
Ms. Poduval directed Representative Gara to the finance
team for its expert view. She addressed how the project
development would proceed (pre-FEED, FEED, and so on); the
project would reach a critical point at FID and by then
(2018 or 2019) hopefully the state would have addressed its
fiscal challenges. At that point in time the pieces of the
puzzle would need to come together to take FID. The FEED
work including the technical and engineering details would
have been worked out, the cost estimates for the project
would have been narrowed down, the state would have its
long-term buyers lined up, and most importantly the state
would have already approached the financing community to
understand the options available to the state and to
establish a financing plan. Taking FID in the project would
require all of the components to come together; it would be
the same for each of the producers. The 95 percent of the
project's costs that would be spent during the construction
stage would not hit the state as a surprise year over year;
the state would already have the financing in place for the
entire construction of the project well before construction
began.
3:25:57 PM
Co-Chair Neuman wondered how the state could sign a FTSA
with TransCanada without knowing the cost of the project
and without an RIK agreement in place.
Ms. Rutherford answered that there would have to be a
condition that assumed the state would use the RIK method.
She stated that "you can say, assuming we're going to go
RIK and assuming the producers provide their tax as gas in
approximately 13 percent gross, then here's our commitment
to the project." Shortly thereafter, there would be
supporting commercial agreements in place.
Co-Chair Neuman wanted additional information to answer his
question. He noted he would get the question to Ms.
Rutherford in written form. He remarked that the previous
day the committee had requested a basic outline of SB 138
in order to understand the jobs of everyone involved and
the current status. He wondered how soon the information
would be provided.
Ms. Rutherford replied that the request had come over the
weekend and staff from DNR and DOL had not all been
available to respond. The structure including the December
31 [2015] date had assumed there would be commercial
agreements in place so the state could have made the RIK
decision. The problem was that commercial negotiations only
move as fast as the slowest party, particularly when there
were four or five companies involved. She relayed that the
state was not in control of the discussions unless it
rolled over and agreed to everything. She expounded that
the state and the companies were all putting their
commercial agreements together as quickly as possible. She
relayed that there was no way to do a FTSA that assumed RIK
until the predecessors to the decision were completed.
3:29:19 PM
Representative Gara wanted to better understand the chart
on slide 21. He spoke to the baseline assumption of $360
million in additional revenue to the state without
TransCanada. He asked for verification that the baseline
meant the state's current credit rating with the current
interest rate environment.
Ms. Poduval answered that the baseline was assuming a
standard financing structure of 70 percent debt/30 percent
equity and a 5 percent cost of debt for the state.
Representative Gara remarked that there were different
levels of additional state revenue under different
scenarios [slide 21]. He asked if it was still Ms.
Poduval's opinion that the state would earn more without
TransCanada.
Ms. Poduval responded in the affirmative, based on the
opinion the financial team had provided. The financial team
had assessed that the state should be able to finance at a
much cheaper rate than 7 percent to achieve the values
shown on slide 21.
Representative Gara referred to slide 15. He initially
thought the middle column reflected what the state's cost
would be without TransCanada, including $70 million owed by
the state for the company's past work, $61 million for pre-
FEED, and $310 million. He surmised that with TransCanada's
participation the pre-FEED number was $66 million and the
FEED number was $365 million. He wondered if he was reading
the numbers correctly.
Ms. Poduval explained that the middle column outlined in
red (slide 15) showed the incremental cash calls the state
would need to make if the agreement with TransCanada was
terminated; the costs were all associated with the GTP and
pipeline. The $70 million was associated with the
termination of the agreement TransCanada, the $61 million
was AGDC's additional contribution to complete the
remaining pre-FEED work, and the $310 million and $6.5
billion to $7.8 billion was for FEED and construction
costs. She noted that all of those costs were associated
with the GTP and pipeline. The first column pertained to
the LNG plant and the last column showed the total cost.
3:32:07 PM
Representative Gara recalled that the presenters had
testified the previous day that the state's costs would be
lower (even if the project failed) without TransCanada. He
discussed that when the Alaska Gasline Inducement Act
(AGIA) started there had been a point when TransCanada was
paying 90 percent and the state was paying 10 percent,
which had become 50/50 at some point. He asked for
verification that the cost to buy TransCanada out of the
project did not include any money owed from AGIA.
Ms. Poduval responded in the affirmative; the costs
included [in the transaction to terminate the agreement
with TransCanada] were all associated with AKLNG. She
expounded that AGIA had been terminated and was complete.
She pointed to footnote 1 on slide 15 acknowledging that
the state had received a credit for $4 million for work
TransCanada brought in from AGIA that the state had already
paid; the $70 million termination cost would have been $4
million higher without the credit.
Representative Gara remarked that in the past he had
considered the possibility of losing money on the pipeline,
and noted that the presenters had brought up the
possibility. He asked for verification that Ms. Poduval had
estimated that with TransCanada's involvement, the cost of
the project and shipping gas would be $0.90 extra per
mmbtu.
Ms. Poduval replied in the affirmative.
Representative Gara asked if that was a way of saying that
with TransCanada in the project the chances of losing money
on the pipeline were greater.
Ms. Poduval answered in the affirmative. She detailed that
because the state's cost basis would be higher, the
likelihood of the state losing money would be higher as
well.
Vice-Chair Saddler remarked that the committee was still
waiting to hear whether the risks of not getting to FID
were greater absent TransCanada's participation. He noted
that while there had been much focus on the possible
additional financial benefits, he had yet to hear whether
the odds of achieving a successful project were higher. He
thought there may be too much focus on the bottom line and
not enough on the finishing line. He referred to a
discussion the previous day related to voting rights and
confidentiality. He asked if Ms. Rutherford was ready to
discuss voting rights.
Ms. Rutherford replied that the administration had
discussed the issue the previous evening. She explained
that there were limitations on what she could say about
voting rights because it was AKLNG project specific. She
relayed that there was existing confusion going into
negotiating a commercial agreement on how the state's 25
percent equity ownership would be voted in the project
should TransCanada and AGDC both continue to hold their
various elements of the project.
3:36:02 PM
Vice-Chair Saddler discussed that the governor had stated
that one of his primary reasons for encouraging the
termination of the agreement with TransCanada was that it
would strengthen the state's voting rights position. He
remarked that Ms. Rutherford had also stated that it was
one of the main reasons for the recommendation. He wanted
to better understand the voting mechanisms. He asked for a
description of the decision making mechanism in which the
state would cast its vote. He stated that if the state's
voting power would increase with a 1 in 4 vote instead of
the current 1 in 5. He wondered how substantial the
material change in power would be.
Ms. Poduval replied that the governance structures were
still under negotiation (for FEED through to project
operation), which would determine how the voting rights
would be established. The expectation was that the state's
voting rights would be split between TransCanada and AGDC;
they did not necessarily represent two separate votes or
seats at the table. She pointed to slide 12 and addressed
that one potential solution was that TransCanada would vote
on issues impacting the GTP and pipeline, whereas, AGDC
would vote on issues impacting the LNG plant. She explained
that it raised the question about who would vote or speak
for the state when it was an issue impacting the entire
project. Some of the issues had highlighted the fact that
having the state's vote split between TransCanada and AGDC
created significant complexity and compromised the state's
ability to have its interests represented.
Co-Chair Neuman relayed that AGDC could address the
questions when it testified the following day. He noted
that he had asked AGDC to explain its role as the state's
representative.
3:38:58 PM
Vice-Chair Saddler referred to the first point on slide 26,
which stated that the proposed FTSA was expected to include
a commitment to give back-in rights [to TransCanada]. He
wondered why the FTSA that was currently under negotiation
included the 5-year back-in right option if the
administration's desire to buyout TransCanada was largely
predicated on the desire to have a clean off-ramp with no
back-in rights.
Ms. Rutherford replied that the back-in rights had already
been negotiated as part of the PA; the provision was not
something that the state could remove. Additionally, it was
not possible to change the primary FTSA elements, which had
been negotiated and were imbedded in the PA. The state had
taken the information and embedded it into a draft FTSA,
but most of the substantive issues had been resolved by the
prior administration [Parnell Administration].
Vice-Chair Saddler surmised that it was a done deal and
that the administration had not tried to negotiate the
provision out. Ms. Rutherford responded "I didn't say that
I didn't try to negotiate it out of there." However, she
confirmed that it was a done deal.
Vice-Chair Saddler asked if Ms. Rutherford had tried to
negotiate the provision out. Ms. Rutherford replied that
she was not at liberty to comment.
Vice-Chair Saddler noted that he would ask about voting
rights the following day. He pointed to language on slide
23 specifying that [certain] key decisions would be made in
the next six months, which was critical for the state to
have expanded voting rights. He remarked that the
presentation included a somewhat cryptic description of the
key decisions, which included the disposal of by-products.
He asked what specific decisions were slated to be decided
within the next six months where it was important for the
state to have expanded voting rights.
Ms. Poduval replied that much of the terms were still under
negotiation; therefore, she spoke fairly generally. She
relayed that the by-product handling (carbon dioxide
disposal) was one potential decision, which would influence
the DNR commissioner's RIK determination. She detailed that
because of the high percentage of carbon dioxide in the gas
at Prudhoe Bay, it needed to be extracted at the GTP and
then something needed to be done with the waste product.
The current idea was that the carbon dioxide would get
reinjected back into the Prudhoe Bay unit; the associated
commercial arrangement had not yet been finalized, which
could happen in one of many ways. Either each of the
parties could negotiate bilaterally with the Prudhoe Bay
unit or the negotiation could occur on behalf of the AKLNG
project. Under the second option the GTP unit would also
cover the disposal of the carbon dioxide through
negotiations it had with the Prudhoe Bay unit. She remarked
that it was an example of a place where the state's
interests were very different than those of TransCanada.
She explained that because TransCanada was representing the
state's interest in the GTP, the state did not have a
direct say in the positions that TransCanada would take.
From TransCanada's perspective it would be a simple pass
through cost because the state would ultimately repay
TransCanada for the cost. From the state's perspective, it
was actual money out of the state's pockets; therefore, the
state was much more vested in the outcome of the
negotiation.
Ms. Poduval highlighted the governance agreements as
another complex area that all of the parties were working
to resolve. She remarked that hopefully there would be
further discussion about voting rights during the committee
meeting the following day. She relayed that as the
governance agreements were being implemented, it had become
apparent that the complexity introduced into the process
because of the state's voting rights being split between
TransCanada and AGDC were fairly challenging. She stated
that it was slowing down the process of the parties
reaching agreement on the key governance terms. She stated
that it was a very specific area where making the
TransCanada decision at present and creating clarity on how
the state's voting rights would be represented would help
the project significantly in the near-term.
3:44:36 PM
Vice-Chair Saddler recalled a statement by Mr. David Van
Tuyl of BP that if the project was not hitting road blocks,
progress was not being made. He remarked that the state had
a lot of high paid legal talent working on the issues. He
reasoned that the governance agreements and how to split
the votes may not be the most challenging issues going
forward. He did not believe the issue was a reason to
terminate the entire process and participation.
Ms. Poduval clarified that she would not characterize it as
the only reason to terminate the relationship with
TransCanada. She hoped she and Ms. Rutherford had been able
to explain the different aspects contributing to the
decision. Her reference to the voting rights was meant to
be one example of an area that would be impacted in the
near-term by the termination of the agreement with
TransCanada and of how it may help the process.
Co-Chair Thompson stated that he had hoped PILT would be
included in the governor's call to special session. He did
not know the details of the PILT agreement between all of
the parties involved in the project; however, he knew that
it would amount to over $16 billion over the life of the
project. He wondered if the state would be responsible for
over $4 billion in PILT payments if TransCanada was no
longer in the project. He wondered if the question was more
appropriate for Ms. Pitney.
Ms. Rutherford believed the question should go to DOR. She
committed to putting together a written response. She could
not provide the necessary detail.
Co-Chair Neuman remarked that the question had been asked
and further information should be forthcoming for upcoming
meetings. He reviewed the agenda for the following day.
HB 3001 was HEARD and HELD in committee for further
consideration.
ADJOURNMENT
3:47:37 PM
The meeting was adjourned at 3:47 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| Black&Veatch TC_Participation_Report.pdf |
HFIN 10/26/2015 1:30:00 PM |
HB3001 |
| Alaska PA FINAL 0614 with final confidentiality headers REDACTED.pdf |
HFIN 10/26/2015 1:30:00 PM |
HB3001 |