Legislature(2013 - 2014)BARNES 124

01/29/2014 01:00 PM House RESOURCES


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01:22:14 PM Start
01:22:45 PM Overview(s): Alaska Lng Project - Memorandum of Understanding
03:01:10 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Overview: Alaska LNG Project - Memorandum of TELECONFERENCED
Understanding
by Joe Balash, Commissioner, Dept. of Natural
Resources & Mike Pawlowski, Deputy Commissioner,
Dept. of Revenue
                    ALASKA STATE LEGISLATURE                                                                                  
               HOUSE RESOURCES STANDING COMMITTEE                                                                             
                        January 29, 2014                                                                                        
                           1:22 p.m.                                                                                            
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Representative Eric Feige, Co-Chair                                                                                             
Representative Dan Saddler, Co-Chair                                                                                            
Representative Peggy Wilson, Vice Chair                                                                                         
Representative Mike Hawker                                                                                                      
Representative Craig Johnson                                                                                                    
Representative Kurt Olson                                                                                                       
Representative Paul Seaton                                                                                                      
Representative Scott Kawasaki                                                                                                   
Representative Geran Tarr                                                                                                       
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
All members present                                                                                                             
                                                                                                                                
OTHER LEGISLATORS PRESENT                                                                                                     
                                                                                                                              
Representative Andrew Josephson                                                                                                 
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
OVERVIEW(S):  ALASKA LNG PROJECT - MEMORANDUM OF UNDERSTANDING                                                                  
                                                                                                                                
     - HEARD                                                                                                                    
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
No previous action to record                                                                                                    
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
JOE BALASH, Commissioner                                                                                                        
Department of Natural Resources (DNR)                                                                                           
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:  Provided a PowerPoint overview of the                                                                    
memorandum of understanding (MOU) between the State of Alaska                                                                   
and TransCanada for the Alaska Liquefied Natural Gas Project.                                                                   
                                                                                                                                
ANGELA RODELL, Commissioner                                                                                                     
Department of Revenue (DOR)                                                                                                     
Anchorage, Alaska                                                                                                               
POSITION  STATEMENT:    Assisted  Commissioner  Balash  with  his                                                             
PowerPoint overview  of the MOU  between the State of  Alaska and                                                               
TransCanada for the Alaska Liquefied Natural Gas Project.                                                                       
                                                                                                                                
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
1:22:14 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  ERIC   FEIGE  called   the  House   Resources  Standing                                                             
Committee meeting to order at  1:22 p.m.  Representatives Hawker,                                                               
Kawasaki, Tarr,  P. Wilson,  Saddler, and  Feige were  present at                                                               
the call  to order.   Representatives Olson, Seaton,  and Johnson                                                               
arrived  as  the meeting  was  in  progress.   Also  present  was                                                               
Representative Josephson.                                                                                                       
                                                                                                                                
^OVERVIEW(S):  Alaska LNG Project - Memorandum of Understanding                                                                 
 OVERVIEW(S):  Alaska LNG Project - Memorandum of Understanding                                                             
                                                                                                                              
1:22:45 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE  announced that the  only order of business  is an                                                               
overview  of the  memorandum of  understanding (MOU)  between the                                                               
State  of  Alaska  and  TransCanada  [for  the  Alaska  Liquefied                                                               
Natural Gas (LNG) Project].                                                                                                     
                                                                                                                                
1:23:07 PM                                                                                                                    
                                                                                                                                
JOE BALASH, Commissioner, Department  of Natural Resources (DNR),                                                               
began his  PowerPoint overview  by stating  that on  December 13,                                                               
2013, he  and Commissioner  Rodell of  the Department  of Revenue                                                               
signed  a memorandum  of understanding  with TransCanada  [Alaska                                                               
Company, LLC (TransCanada)] for the  Alaska LNG Project.  The MOU                                                               
was posted  online and made  public at  the same time,  about two                                                               
weeks ago,  as was  the Heads  of Agreement (HOA).   How  the MOU                                                               
fits into the  larger construct of the HOA will  be explained, as                                                               
well as  why he and Commissioner  Rodell find pursuit of  being a                                                               
part of this overall project to be in the state's interest.                                                                     
                                                                                                                                
COMMISSIONER BALASH,  to put the  MOU into context,  first turned                                                               
to the Heads  of Agreement [slide 2].  He  said the project being                                                               
contemplated includes  a gas treatment  plant (GTP),  a pipeline,                                                               
and a  liquefaction plant, and the  HOA describes how all  of the                                                               
parties intend to  work together to advance  this project through                                                               
development and  ultimately into construction.   [The parties are                                                               
State   of   Alaska,    ExxonMobil   Alaska   Production,   Inc.,                                                               
ConocoPhillips Alaska, Inc., and BP Exploration (Alaska) Inc.]                                                                  
                                                                                                                                
COMMISSIONER BALASH  specified that the overall  structure of the                                                               
HOA contemplates an  alignment of the state's  production tax and                                                               
royalty interests in  the gas with a corresponding  stake in each                                                               
of the aforementioned  project components [slide 3].   Each party                                                               
will  hold a  position in  each component  commensurate with  the                                                               
party's respective  interest, he  explained, and each  party will                                                               
be free to set up its  financing and partnerships as it sees fit,                                                               
which  is  one   of  the  challenges  that  the   state  has  had                                                               
historically  with  these  companies and  which  was  experienced                                                               
under  the  Trans-Alaska  Pipeline  System  (TAPS).    This  will                                                               
preclude interfering with and complicating  the business needs of                                                               
the other parties, he noted.                                                                                                    
                                                                                                                                
1:26:01 PM                                                                                                                    
                                                                                                                                
COMMISSIONER  BALASH  explained  that the  MOU  with  TransCanada                                                               
covers  the  state's  portion  of the  gas  treatment  plant  and                                                               
pipeline  [slide  4].   Under  this  agreement, TransCanada  will                                                               
provide transportation  services on  the gas treatment  plant and                                                               
pipeline.  The state's interest in  the LNG plant will be held by                                                               
the  Alaska  Gasline  Development Corporation  (AGDC)  subsidiary                                                               
contemplated in  the HOA  and enabling legislation  [HB 277].   A                                                               
reason for this  is that the core competencies  of TransCanada do                                                               
not lend  themselves to liquefaction, given  that liquefaction is                                                               
not a  business that TransCanada  is in.   "It is  also something                                                               
that we think is going to  be important for us to preserve either                                                               
for ourselves or  as part of our ultimate  marketing efforts," he                                                               
added.   Continuing, he  noted that the  pipeline will  have five                                                               
offtake points that  will be identified by  the administration in                                                               
consultation with AGDC.                                                                                                         
                                                                                                                                
1:27:32 PM                                                                                                                    
                                                                                                                                
COMMISSIONER   BALASH   outlined   the  reasons   for   involving                                                               
TransCanada  [slide  5].   First,  TransCanada  is  a  preeminent                                                               
pipeline company in  North America with a  stellar reputation for                                                               
delivering projects  on time  and on budget.   Second,  the state                                                               
has   an  aligned   interested  with   TransCanada  to   have  an                                                               
independent  pipeline operating  in  the state  and expanding  on                                                               
terms  that are  in  Alaska's interest.    Third, the  commercial                                                               
terms underlying  this arrangement provide economic  benefits [to                                                               
Alaska],  and  fouth,  TransCanada  has  experience  building  in                                                               
discontinuous permafrost  and mountainous  areas like  that found                                                               
between the North Slope and  Nikiski.  Additionally, he said, the                                                               
data  generated and  the information  gathered  under the  Alaska                                                               
Gasline Inducement Act  (AGIA) will be contributed  to the Alaska                                                               
LNG  effort.   Fifth,  TransCanada's involvement  will provide  a                                                               
seamless transition  out of  the AGIA license  and into  this new                                                               
commercial arrangement with  all of the parties so  that there is                                                               
no  impact  on the  overall  timeline.    The momentum  from  the                                                               
current  year will  continue, allowing  for a  full summer  field                                                               
season in  2014 and completion  of the  Pre-Front-End Engineering                                                               
and Design ("Pre-FEED") phase in 2015.                                                                                          
                                                                                                                                
1:30:02 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TARR inquired whether  working with TransCanada is                                                               
necessary  because  it has  the  expertise  or because  the  AGIA                                                               
license  with TransCanada  is still  in  place and  the State  of                                                               
Alaska would be exposed to a lawsuit over damages.                                                                              
                                                                                                                                
COMMISSIONER BALASH  replied it is  a combination of things.   If                                                               
the  state  were  to  go  out  cold  looking  for  a  partner  to                                                               
participate in the  pipeline, TransCanada would be at  the top of                                                               
the list due  to the aforementioned reasons.  That  is not to say                                                               
that TransCanada would  be a shoe-in, but TransCanada  has been a                                                               
partner with the  state for the last six years,  is familiar with                                                               
the  environmental and  commercial conditions  in Alaska,  and is                                                               
well acquainted  with the state's  interests.   Thus, TransCanada                                                               
does  not have  the  same learning  curve  that another  pipeline                                                               
company  might   have.    The  existing   commercial  contractual                                                               
relationship under  the AGIA  license remains  in place  and will                                                               
wind  down later  this year  if the  legislature adopts  enabling                                                               
legislation.   It will  provide an  orderly transition  where the                                                               
state does  not face  a potentially "messy  divorce."   Under the                                                               
AGIA statute there  are two paths to winding up  the license, and                                                               
this is the amicable one.                                                                                                       
                                                                                                                                
1:32:17 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE  presumed the  MOU is an  amicable split  from the                                                               
AGIA  process.   He asked  what risks  would be  involved if  the                                                               
state were to  divorce TransCanada and have a  bidding process to                                                               
provide more competition in the  selection of who would build the                                                               
pipeline.                                                                                                                       
                                                                                                                                
COMMISSIONER  BALASH responded  that  this is,  in  many ways,  a                                                               
continuation or  evolution of the  course the state has  been on.                                                               
Preserving  the   AGIA  license  framework  was   considered  and                                                               
ultimately  set aside,  but not  because of  dissatisfaction with                                                               
the partnership.   Many of  the terms  contained in this  MOU and                                                               
attached  Exhibit  C  are  similar  to  the  terms  in  the  AGIA                                                               
application filed  by TransCanada and  improved over time  in the                                                               
course  of competition  with the  Denali  Project.   While not  a                                                               
direct parallel, a footing was established  in 2010 as to what an                                                               
appropriate split  on the debt  and equity  might be, as  well as                                                               
the  returns on  that  equity.   However, the  nature  of an  LNG                                                               
project is different and the  risks associated to all the parties                                                               
are different  in an  LNG project.   Engaging in  a new  round of                                                               
competitive  bidding would  require the  legislature's engagement                                                               
on what that framework would  look like, which would take several                                                               
months.   Then there  would be  the course  of going  through the                                                               
solicitation process, the review  process, and the award process,                                                               
each of which  takes time.  While  all of that could  be done, it                                                               
was found during  negotiation with TransCanada this  past fall to                                                               
be an  unnecessary step because the  present arrangement achieves                                                               
the needed things.                                                                                                              
                                                                                                                                
1:35:26 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE  asked how long  the aforementioned  process would                                                               
take.                                                                                                                           
                                                                                                                                
COMMISSIONER BALASH  answered by  citing the  AGIA process:   the                                                               
legislature  passed the  statute  in May  2007;  the request  for                                                               
applications went  out in  July 2007;  the original  deadline for                                                               
the applications was end of October  2007, but was pushed back to                                                               
end of  November 2007; and  by the time  the review was  done and                                                               
the license awarded and adopted  by the legislature it was August                                                               
2008, an  18 month  process.   When the  effective dates  and the                                                               
actual signing  of the license  in December 2008  are considered,                                                               
it took nearly 24 months.                                                                                                       
                                                                                                                                
1:36:34 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE KAWASAKI  understood about  $300 million  has been                                                               
spent under the AGIA license.                                                                                                   
                                                                                                                                
COMMISSIONER BALASH said it is a little more than that.                                                                         
                                                                                                                                
REPRESENTATIVE KAWASAKI inquired when  the legislature will see a                                                               
product from the AGIA process.                                                                                                  
                                                                                                                                
COMMISSIONER BALASH responded  that a number of  things were done                                                               
with  the funds  spent by  TransCanada  and its  partners in  the                                                               
Alaska  Pipeline Project  (APP).   The  information gathered  and                                                               
generated was  fed into a  series of draft resource  reports that                                                               
were filed in 2012 with  the Federal Energy Regulatory Commission                                                               
(FERC), which were  then sent to agencies for  initial review and                                                               
comment.   Under  the terms  of the  statute, the  state has  the                                                               
option  to buy  out all  of  the data  and information  generated                                                               
under  that process  at  a cost  of  approximately $130  million.                                                               
However,  at this  time, it  is  not being  recommended that  the                                                               
state exercise this  option, in part because  TransCanada and its                                                               
partners in  the APP are  expected to  be partners in  the Alaska                                                               
LNG Project.   They  are going  to contribute  to the  Alaska LNG                                                               
Project  the  information gathered  and  avoid  a duplication  of                                                               
effort and cost for the project being talked about today.                                                                       
                                                                                                                                
1:38:27 PM                                                                                                                    
                                                                                                                                
COMMISSIONER  BALASH turned  back  to  his presentation,  drawing                                                               
attention  to  the  definition  of a  typical  MOU  according  to                                                               
Investopedia.com [slide 6]:                                                                                                     
                                                                                                                                
     A  legal document  outlining  the terms  and  details of  an                                                               
     agreement   between   parties,   including   each   parties'                                                               
     requirements  and responsibilities.   The  MOU is  often the                                                               
     first stage in  the formation of a formal contract.   An MOU                                                               
     is far more  formal than a handshake and is  given weight in                                                               
     a  court  of   law  should  one  party  fail   to  meet  the                                                               
     obligations of the memorandum.                                                                                             
                                                                                                                                
COMMISSIONER  BALASH said  the  MOU for  the  Alaska LNG  Project                                                               
outlines the  terms of the state's  relationship with TransCanada                                                               
in  the  midstream  components  of the  project,  which  are  the                                                               
transmission  lines  coming into  the  gas  treatment plant,  the                                                               
plant, and  the pipeline.   However,  he and  Commissioner Rodell                                                               
cannot  enter  into the  terms  identified  in  the MOU  and  the                                                               
exhibits with  any force  of law  or binding  commitment.   It is                                                               
specifically  and explicitly  spelled  out that  the  MOU is  not                                                               
binding until  the legislature  enacts the  enabling legislation.                                                               
As  the  legislature's permission  and  authority  are sought  to                                                               
enter into  the various contracts  associated with  this project,                                                               
the intent with both  the MOU and the HOA is  to provide a window                                                               
into  what the  agreements  will  look like  when  they come  out                                                               
before 2015.  This way, the  public and legislators will know the                                                               
intent of the parties so there  can be a measure against which to                                                               
evaluate the product in the fall of 2015.                                                                                       
                                                                                                                                
1:40:34 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON understood  that the  enabling legislation                                                               
would  make the  terms in  the MOU  legally enforceable  and, [if                                                               
passed], would go into place this legislative session.                                                                          
                                                                                                                                
COMMISSIONER BALASH said that is correct.                                                                                       
                                                                                                                                
REPRESENTATIVE SEATON  said he further  understood that  when the                                                               
MOU  terms   became  legally  binding,   the  state   would  have                                                               
liabilities should things fall apart.                                                                                           
                                                                                                                                
COMMISSIONER BALASH answered "the MOU  is an agreement to agree."                                                               
The term sheets in exhibits B  and C are for agreements that will                                                               
be struck  later this  year if  the enabling  legislation passes,                                                               
and  those  agreements  will  contain  the  terms  in  these  two                                                               
exhibits.    Under those  terms,  the  State  of Alaska  will  be                                                               
potentially exposed to development costs  incurred on the part of                                                               
TransCanada during  the Pre-FEED phase.   The state would  not be                                                               
required  to meet  the  cash  calls of  the  project during  this                                                               
initial/development  phase; TransCanada  will be  incurring those                                                               
cash calls  and obligations.  In  a success case, the  state will                                                               
start  paying TransCanada  when the  pipeline goes  into service.                                                               
That  is one  of  the benefits  of having  a  partnership in  the                                                               
midstream as  outlined with TransCanada.   Also, potentially, the                                                               
state  may  see  additional   partnership  opportunities  on  the                                                               
liquefaction but does not have  specific partners contemplated at                                                               
this time.                                                                                                                      
                                                                                                                                
1:43:02 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  KAWASAKI  understood  that  if [HB  277]  is  not                                                               
passed, the MOU will expire midsummer 2014.                                                                                     
                                                                                                                                
COMMISSIONER BALASH  responded that  the authority to  enter into                                                               
the agreements  contemplated in  the MOU is  the request  that is                                                               
being made  in HB 277.   If HB 277  does not pass, then  this MOU                                                               
[will expire].                                                                                                                  
                                                                                                                                
REPRESENTATIVE  KAWASAKI asked  what  happens  if amendments  are                                                               
made to HB 227 that the parties have not yet agreed to.                                                                         
                                                                                                                                
COMMISSIONER BALASH replied  by reading Article 2.1(d)  on page 6                                                               
of the MOU, which states:                                                                                                       
                                                                                                                                
          The Parties agree to support the approval of the                                                                      
     Operative  Terms  in   the  Enabling  Legislation,  but                                                                    
     acknowledge that  the Enabling Legislation  may include                                                                    
     authorizations   or  conditions   that  vary   from  or                                                                    
     conflict with the Operative Terms.   In such event, and                                                                    
     if Parties  agree to  accept the  Enabling Legislation,                                                                    
     then  the   Transition  Agreements  will   reflect  the                                                                    
     Enabling     Legislation    terms     and    conditions                                                                    
    notwithstanding   the   Parties'   acknowledgement   in                                                                     
     Article 2.1(c) above.                                                                                                      
                                                                                                                                
1:45:04 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  queried whether Article 2.1(d)  means that                                                               
passage of  HB 277 would  give the  ability to modify  the terms,                                                               
and the  legislature is  agreeing to those  terms even  though it                                                               
does  not know  what those  terms will  be and  that those  terms                                                               
could be  in conflict  with the  terms of the  MOU passed  by the                                                               
legislature.                                                                                                                    
                                                                                                                                
COMMISSIONER  BALASH  replied  that, speaking  generally  to  the                                                               
bill,  the authority  being asked  for is  not specific  to these                                                               
terms;   it  is   asking  for   general  authority   and  general                                                               
applicability.   The intention  with that  authority is  to enter                                                               
into agreements that reflect the  terms contained in this MOU and                                                               
the exhibits.  If that  requested authority is somehow limited or                                                               
conditioned by the  bodies, then this section is  saying that "if                                                               
we  are both  prepared to  continue to  move forward  under those                                                               
limitations  or conditions,  then we  will do  so."   He expected                                                               
that  all of  the  parties  will be  engaged  in the  legislative                                                               
process and,  if changes are  made to  the bill, each  party will                                                               
provide  testimony  reflecting  its   appetite  to  accept  those                                                               
conditions or further  limitations.  He said the  parties are not                                                               
the legislature,  but the  administration, TransCanada,  and [BP,                                                               
ExxonMobil, and ConocoPhillips].                                                                                                
                                                                                                                                
1:47:41 PM                                                                                                                    
                                                                                                                                
COMMISSIONER   BALASH  reviewed   the  "success   case"  timeline                                                               
contemplated  in the  MOU  and that  fits in  with  the Heads  of                                                               
Agreement [slide  7]:   enabling legislation  would be  passed in                                                               
April 2014  and the  Precedent Agreement  (PA) and  Equity Option                                                               
Agreement  in Exhibit  B would  be executed  90 days  later [July                                                               
2014].  The Precedent Agreement  would govern the Pre-FEED period                                                               
with regard  to development costs  and associated activities.   A                                                               
more  specific  and  more binding  Firm  Transportation  Services                                                               
Agreement (FTSA)  would be developed,  which would come  back for                                                               
public review and legislative approval  in 2015.  The expectation                                                               
is that  the FTSA  would be a  part of the  larger body  of other                                                               
contracts necessary  to enable  the project  to move  forward and                                                               
move  into the  Front-End  Engineering and  Design (FEED)  stage.                                                               
Until  December  31, 2015,  or  the  entry into  FEED,  whichever                                                               
occurs first,  [the state] has an  option to call back  a portion                                                               
of its equity in the midstream.                                                                                                 
                                                                                                                                
1:49:45 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SADDLER inquired as to what is included in a FTSA.                                                                     
                                                                                                                                
COMMISSIONER BALASH  said that  the Firm  Transportation Services                                                               
Agreement is  the binding  contract between  a transporter  and a                                                               
shipper for  service on  the pipeline.   It  gives the  shipper a                                                               
contractual right to  capacity in the pipe to move  gas under the                                                               
terms  in  the contract,  including  the  tolling structure,  the                                                               
capital  structure for  rate making,  and  the conditions  around                                                               
interruptions  or  delays   in  service.    The   terms  are  not                                                               
necessarily standard.   Certain features of  such agreements vary                                                               
from place to place or between regulatory regimes.                                                                              
                                                                                                                                
1:51:18 PM                                                                                                                    
                                                                                                                                
COMMISSIONER  BALASH,  continuing   his  presentation,  addressed                                                               
Exhibit  B  in the  MOU  [slide  8],  which  lays out  an  equity                                                               
callback option  that has been  negotiated as  part of this.   If                                                               
the  state's  overall position  in  the  project is  25  percent,                                                               
TransCanada would be  at 25 percent in the GTP  and the pipeline,                                                               
and the AGDC subsidiary would be  in the LNG plant at 25 percent.                                                               
However,  if the  state wished  to exercise  its option  it could                                                               
call  back 40  percent of  that  midstream interest.   The  state                                                               
would rely  on the  AGDC subsidiary that  was established  in the                                                               
legislation to hold that equity  interest, so then there would be                                                               
a split  between AGDC subsidiary  and TransCanada.  Using  the 25                                                               
percent  example, TransCanada  would be  at 15  percent and  AGDC                                                               
subsidiary would  be at  10 percent.   A  reason for  having this                                                               
option is  the potential revenue opportunity  associated with it.                                                               
That revenue  opportunity, however,  while real  and substantial,                                                               
comes at a cost of capital  that the state very likely would have                                                               
to bear.   So,  it is  not a foregone  conclusion that  the state                                                               
will want to do this; it  will be part of the considerations that                                                               
will be undertaken in the next 18-24 months.                                                                                    
                                                                                                                                
1:53:35 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE KAWASAKI asked  what amount of cash  would that 40                                                               
percent represent.                                                                                                              
                                                                                                                                
COMMISSIONER BALASH replied  that the total estimate  for the GTP                                                               
and pipeline together is about $22  billion.  If the state was at                                                               
25 percent in  the project, then the state would  be looking at a                                                               
total share  that is about  $5.75 billion.   If the state  was to                                                               
then take  responsibility for 40 percent  of that, it would  be a                                                               
little more than $2 billion.                                                                                                    
                                                                                                                                
1:54:57 PM                                                                                                                    
                                                                                                                                
COMMISSIONER BALASH addressed  Exhibit C [slide 9],  which is the                                                               
term sheet for  the midstream transportation services.   He noted                                                               
that these  are the typical  terms seen in a  Precedent Agreement                                                               
and  ultimately a  Firm Transportation  Services  Agreement.   He                                                               
reviewed some  of the key terms  and benefits that accrue  to the                                                               
state from this particular structure.   The first key term is the                                                               
state's  very favorable  debt to  equity  ratio.   On the  second                                                               
anniversary  of  in-service, the  tariffs  charged  to the  state                                                               
would be calculated on a 75/25  basis.  The amount of leverage in                                                               
the capital  structure has tremendous  power in driving  down the                                                               
tariff.   Keeping tariffs low  is important to the  state because                                                               
it results in a higher wellhead  value and also lowers the hurdle                                                               
to additional  parties to  bring in gas  from beyond  Prudhoe Bay                                                               
and Point Thomson.   It is in the state's  interest to keep those                                                               
terms  low  even if  the  state  is one  of  the  owners of  this                                                               
pipeline.   Those lower  tariffs improve  the state's  cash flows                                                               
overall and  that shows  up on  the royalty side  as well  as the                                                               
production  tax side.   The  second key  term, said  Commissioner                                                               
Balash, relates to the state's  exposure to cash calls during the                                                               
development  period.   TransCanada,  under  its equity  position,                                                               
will  be  responsible  for meeting  cash  calls  and  obligations                                                               
during the  development period.   The state, unless  it exercises                                                               
its equity option, will not be  responsible until gas flows.  The                                                               
third  key term,  he said,  is  where the  Department of  Revenue                                                               
(DOR)  becomes a  much  more important  player  in the  calculus.                                                               
When the  opportunity cost on  the state's capital is  taken into                                                               
consideration, the  state's net  present value (NPV)  is improved                                                               
overall by  relying on  TransCanada to use  its cash  and balance                                                               
sheet.   The cash requirements of  the state are going  to become                                                               
very  important over  the  next 10  years.   Commissioner  Balash                                                               
related  that  the  fourth  key term  continues  the  issues  and                                                               
priorities identified in  the AGIA structure in  that it provides                                                               
a favorable expansion policy to  govern the project.  TransCanada                                                               
has committed to structuring future  expansions on a 70/30 basis,                                                               
thereby providing low  tariffs for expansion to  shippers.  Under                                                               
the fifth  key term,  gas will  be provided  to Alaskans  with at                                                               
least  five offtake  points and  will provide  distance sensitive                                                               
rates in  three zones -  Nenana, Big Lake,  and at the  LNG plant                                                               
itself.  This means that  the largest communities in Southcentral                                                               
will not  pay the same tariff  to get the gas  connected into the                                                               
ENSTAR system  as the export volumes  that go all the  way to the                                                               
plant, and  the offtakes  at Nenana  and above  will pay  less in                                                               
transportation  cost for  gas coming  off the  main line  in that                                                               
part of the state.                                                                                                              
                                                                                                                                
2:00:13 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON offered his  understanding that there would                                                               
be no royalty  or production tax impacts because  the state would                                                               
be taking gas in kind and  that that split would be be determined                                                               
up  front.    Asking  whether he  is  misunderstanding  this,  he                                                               
inquired  how   the  tariff  will   influence  the   royalty  and                                                               
production tax.                                                                                                                 
                                                                                                                                
COMMISSIONER  BALASH  stated  that  there is  confusion,  and  he                                                               
answered by  using oil as an  example.  When the  state takes in-                                                               
kind for oil on the North Slope,  he explained, it does so with a                                                               
price that is pegged to the  Alaska North Slope (ANS) West Coast;                                                               
a  transportation differential  is then  subtracted to  get to  a                                                               
wellhead value for that oil.  The  same is true for gas.  A price                                                               
will be achieved  for the sale of the LNG,  and then calculations                                                               
will  be  worked back  through  the  chain of  infrastructure  to                                                               
arrive at a wellhead value for that royalty and production tax.                                                                 
                                                                                                                                
2:01:47 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON said his understanding  of the structure is                                                               
that the state would take both  its royalty and its tax liability                                                               
in  kind,  thereby taking  it  as  a  percentage  of gas,  not  a                                                               
percentage of value.  He asked  how the tariff is going to reduce                                                               
the amount of the state's gas in kind.                                                                                          
                                                                                                                                
COMMISSIONER BALASH responded that it  will not reduce the amount                                                               
of  gas the  state gets;  rather, it  will impact  the value  the                                                               
state ultimately receives  for its share of the gas  when the gas                                                               
is sold  in market.   The state  will take its  gas at  the North                                                               
Slope and  will be  responsible for moving  that gas  through the                                                               
infrastructure.   The state will  therefore need capacity  in the                                                               
gas treatment  plant, the pipeline,  and the  liquefaction plant,                                                               
and  all of  those costs  will  have to  be accounted  for.   The                                                               
benefit of  this structure is that  the state will be  in control                                                               
of  the decisions  affecting  those  tolls.   The  state will  be                                                               
making the  decisions about  the relative  debt to  equity ratios                                                               
and the  associated financing costs,  rather than relying  on the                                                               
decisions made by the other three parties.                                                                                      
                                                                                                                                
2:03:25 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON pointed out that  a big problem and dispute                                                               
with oil has  been the producers shifting costs  to the midstream                                                               
or downstream, thereby  lowering the value and causing  a loss in                                                               
production tax  to the  state.   He reiterated  his understanding                                                               
that the state will take both  its royalty and its production tax                                                               
in kind as a split of the actual  raw product in order to avoid a                                                               
shifting of where to take the  profit.  He requested a flow chart                                                               
showing how all of the aforementioned will work.                                                                                
                                                                                                                                
COMMISSIONER BALASH agreed to provide such a flow chart.                                                                        
                                                                                                                                
REPRESENTATIVE SEATON maintained it is  a critical element if the                                                               
state is not avoiding that same dispute.                                                                                        
                                                                                                                                
2:04:44 PM                                                                                                                    
                                                                                                                                
COMMISSIONER BALASH turned to slide  10, saying that it will help                                                               
explain the aforementioned point but  that it needs to be thought                                                               
about  in the  context of  the overall  structure.   He said  the                                                               
chart  on slide  12  illustrates how  a favorable  debt-to-equity                                                               
ratio  affects the  tariff.   Each bar  on the  left side  of the                                                               
chart depicts  a different debt-to-equity  scenario for  the same                                                               
project cost, and  the bars on the right show  the changes in the                                                               
return of  equity (ROE).  The  chart shows that the  same project                                                               
cost,  financed in  different ways,  results in  higher or  lower                                                               
tariffs.   The state would prefer  to see a higher  percentage of                                                               
debt because that  drives the overall tariff down.   However, the                                                               
state's partners  are injecting  and using  their own  equity for                                                               
their portion  of the  project and are  less concerned  about the                                                               
tariff, and  this is where  there have  been tussles in  the past                                                               
over the TAPS tariffs, among other  things.  Part of the struggle                                                               
over  gas is  how to  finance  this infrastructure  and what  the                                                               
resulting tariffs will be.  The  four holders of gas - the state,                                                               
Conoco, BP, and  Exxon - all have somewhat different  views as to                                                               
the  appropriate financing  structure  that will  be employed  in                                                               
this project.   The Heads of  Agreement allows for each  party to                                                               
pursue its financing separately  and independently.  For example,                                                               
BP can go  for a split of  55 percent debt to  45 percent equity,                                                               
with a  resultant tariff  of $4.64  [per million  British Thermal                                                               
Units (MMBTUs)],  if that is  what works for  BP.  The  state, on                                                               
the other  hand, can drop  its tariff by  more than 60  cents [to                                                               
$4.03]  by going  to a  split of  75 percent  debt to  25 percent                                                               
equity.   The  freedom  of  this structure  allows  the state  to                                                               
pursue that higher leverage for  the components that the state is                                                               
invested in and shipping on.                                                                                                    
                                                                                                                                
2:07:59 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE understood that would  be the debt-to-equity ratio                                                               
on the state's  share with a combined  state/TransCanada share of                                                               
the pipe.   He further  understood that  the state will  not have                                                               
any control  on the debt-to-equity  ratios that the  partners are                                                               
going to  use, yet that  will contribute into calculation  of the                                                               
tariff.   He asked  how much  predictability is  had here  by the                                                               
state.                                                                                                                          
                                                                                                                                
COMMISSIONER BALASH answered that  each party will be responsible                                                               
for its  own capacity and will  have its own tariff.   The tariff                                                               
charged by Exxon  for Exxon gas will not affect  the state in tax                                                               
and  royalty terms.   By  aligning  the state's  interest in  the                                                               
infrastructure with  the state's interest  in the gas,  the state                                                               
is free  to set  up financing  on terms that  the state  wants or                                                               
with partners that are prepared to  do it on terms that serve the                                                               
state's interest.                                                                                                               
                                                                                                                                
2:09:11 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SADDLER, observing  the chart on slide  10, inquired why                                                               
the state  would choose a  75 percent  debt to 25  percent equity                                                               
[and a  resultant tariff of  $4.03 per  MMBTU] when a  95 percent                                                               
debt to 5  percent equity would provide an even  lower tariff [of                                                               
$3.46].                                                                                                                         
                                                                                                                                
COMMISSIONER BALASH  replied that  the "amount  of skin"  a party                                                               
has in  a major undertaking  like this project really  matters to                                                               
the people who  are lending the billions of dollars.   In further                                                               
response, he confirmed that this is not a "zero down" situation.                                                                
                                                                                                                                
2:09:57 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON,  in regard  to the initial  spare capacity                                                               
and the share each party will  have of that spare capacity, asked                                                               
how the tariff will be assessed and who will get that tariff.                                                                   
                                                                                                                                
COMMISSIONER BALASH responded that the  scenario is not in any of                                                               
today's forthcoming  slides, but  he would be  happy to  show the                                                               
mechanics.   Continuing,  he said  that the  Heads of  Agreement,                                                               
Article  6 and  Appendix  A,  contemplates that  any  one of  the                                                               
parties can  expand any component in  the project so long  as the                                                               
party does  so at  its sole risk.   For example,  if BP  wants to                                                               
expand but nobody  else does, then BP can expand  but BP must pay                                                               
for  the cost  of the  compressor  station involved.   The  state                                                               
would be  unaffected - its tariff  would neither go up  nor down.                                                               
It is expected that the state  and its portion of the project are                                                               
going to be  providing service for third parties who  show up and                                                               
want to  pay for service.   TransCanada is prepared  to undertake                                                               
those  expansions on  a 70/30  basis, the  structure of  which is                                                               
outlined in Exhibit C.                                                                                                          
                                                                                                                                
REPRESENTATIVE  SEATON offered  his understanding  that if  there                                                               
was expansion, everybody would benefit  if rates were going down.                                                               
However, he  is hearing Commissioner  Balash say that  rates will                                                               
not go  down because  whoever expands  is solely  responsible, so                                                               
there would  not be a general  lowering of tariffs among  all the                                                               
parties.                                                                                                                        
                                                                                                                                
COMMISSIONER  BALASH   answered  that  Appendix   A  contemplates                                                               
scenarios where capital  costs, as well as  equity ownership, are                                                               
reallocated.                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  urged further investigation of  this point                                                               
because the committee's general  impression was that as expansion                                                               
took place the  parties' tariffs would go down or,  if costs were                                                               
more, then only the new players would pay.                                                                                      
                                                                                                                                
COMMISSIONER BALASH  pointed out that the  fight over incremental                                                               
versus  rolled-in  pricing caused  much  befuddlement  and was  a                                                               
challenge to  breaking through  on an overall  deal.   Taking the                                                               
road that allows  each party to set its  financing and associated                                                               
tariffs as it  sees fit, and that allows expansions  to happen on                                                               
a sole-risk  basis, provides an  ability to maneuver  around that                                                               
struggle in a way that [the parties] are satisfied with.                                                                        
                                                                                                                                
2:14:22 PM                                                                                                                    
                                                                                                                                
COMMISSIONER BALASH  returned to  his presentation  and continued                                                               
to address  the favorable  debt-to-equity ratio.   He  noted that                                                               
slide 11  is another  way to illustrate  the benefits  for Alaska                                                               
and the  state's tax and  royalty revenues.  When  DNR considered                                                               
the  debt-to-equity ratio  and the  ROE during  negotiations with                                                               
TransCanada,  the department  looked at  the 12  percent ROE  and                                                               
determined that  that should be  pushed down  a bit.   During the                                                               
tug and  pull of  negotiation - moving  down the  ROE, revisiting                                                               
the debt-to-equity  structure -  it was  found that  the debt-to-                                                               
equity structure  is far  more powerful  in reducing  the state's                                                               
tariffs  and  increasing the  state's  value,  which is  what  is                                                               
reflected in slide 11.                                                                                                          
                                                                                                                                
2:15:41 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SADDLER  inquired  whether  the  return  on  equity  is                                                               
determined by regulation or by market conditions.                                                                               
                                                                                                                                
COMMISSIONER BALASH  replied that the  ROE is a component  of the                                                               
contract  and sometimes  those contracts  are purely  commercial,                                                               
purely civil, and  agreed to by the two parties.   But sometimes,                                                               
depending  on the  regulatory regime,  that ROE  is reviewed  and                                                               
approved by a rate-making body.   Responding further, he said the                                                               
lower the  return on equity,  the higher the netback,  the higher                                                               
the associated NPV.   He confirmed that  [debt-to-equity and ROE]                                                               
are two  different levers and  [slide 11] shows the  magnitude of                                                               
the move  with each of those  levers.  He further  confirmed that                                                               
while the  chart on  slide 11 shows  bars for  debt-to-equity and                                                               
bars for ROE, there is no interplay between those two factors.                                                                  
                                                                                                                                
2:16:59 PM                                                                                                                    
                                                                                                                                
COMMISSIONER  BALASH   commenced  his  presentation,   moving  to                                                               
discussion of the  capital that will be needed  for the project's                                                               
three   components  of   gas  treatment   plant,  pipeline,   and                                                               
liquefaction (slide 12).   That capital will be  a combination of                                                               
equity, cash,  and debt.   He  explained that  each of  the three                                                               
scenarios  depicted  on  slide  12   have  a  20  percent  equity                                                               
alternative  and a  25 percent  equity alternative  because those                                                               
are the boundaries  agreed to in the HOA.   Under a scenario with                                                               
no TransCanada participation,  the State of Alaska  would need to                                                               
come up  with about $9.1 billion  for a 20 percent  equity option                                                               
[$2.7 billion in equity, $6.4  billion in debt], or $11.4 billion                                                               
for  a 25  percent equity  option [$3.4  billion in  equity, $8.0                                                               
billion in  debt].   Under a scenario  in which  TransCanada owns                                                               
the gas  treatment plant and  the pipeline in the  state's shoes,                                                               
the state's capital would be  invested solely in the liquefaction                                                               
plant.   In this scenario,  the state would provide  $4.6 billion                                                               
for  a 20  percent equity  option [$1.4  billion in  equity, $3.2                                                               
billion in debt], or $5.8 billion  for a 25 percent equity option                                                               
[$1.7  billion  in  equity,  $4.1  billion in  debt].    Under  a                                                               
scenario in  which the  state exercises  its 40  percent buyback,                                                               
the  state's  capital  expenditure  requirements  during  project                                                               
development would  go up  [$6.9 billion for  a 20  percent equity                                                               
option, with  $2.1 billion  in equity and  $4.8 billion  in debt;                                                               
$8.6 billion  for a 25  percent equity option, with  $2.6 billion                                                               
in equity and $6.0 billion debt].                                                                                               
                                                                                                                                
2:19:31 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE JOHNSON queried whether  an analysis has been done                                                               
for bonding at an [interest] rate of 2 percent or 3 percent.                                                                    
                                                                                                                                
ANGELA  RODELL,   Commissioner,  Department  of   Revenue  (DOR),                                                               
answered that she  does not think it is a  good starting point to                                                               
assume  that the  state  can sell  $11  billion of  debt  at a  3                                                               
percent  rate.   This project  is not  going to  qualify for  tax                                                               
exemption, she pointed out, and  the aforementioned is assuming a                                                               
tax exempt rate.   She further said she does  not want to promise                                                               
that  the state  can  raise  $11 billion  today  in this  market,                                                               
especially at those levels.                                                                                                     
                                                                                                                                
REPRESENTATIVE  JOHNSON pointed  out that,  in theory,  the state                                                               
could write  that check and  thereby take bonding off  the table.                                                               
He asked whether  an analysis has been done over  the life of the                                                               
project at a return of 12 percent.                                                                                              
                                                                                                                                
COMMISSIONER RODELL  responded that  some analysis has  been done                                                               
and will be  presented in a forthcoming slide.   Having the state                                                               
write a check today to get a  potential for 12 percent ROE was an                                                               
option  looked at.   Under  this option  that money  is not  then                                                               
available to do other things  within the state, plus the pipeline                                                               
is not expected to actually  start delivering revenue until 2022.                                                               
Thus, it  would be a 10-year  tie-up of that money.   An analysis                                                               
was done  regarding whether  there is  a way  that the  state can                                                               
account for those cash calls  today, keep that money invested for                                                               
the state,  and use  it for the  state's purposes,  and basically                                                               
leverage the state's  balance sheet.  That analysis  will be seen                                                               
in a few slides.                                                                                                                
                                                                                                                                
2:22:26 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE JOHNSON  said he  is trying  to determine  who the                                                               
state should partner  with and what is best for  the state.  Once                                                               
this pipeline  is built, the state  is going to be  "on the hook"                                                               
for 20 or 25  percent of the volume should there  be a failure of                                                               
the  pipeline for  a period  of time.   Noting  TransCanada would                                                               
have bankruptcy protection, but the  state would not, he inquired                                                               
whether the  state can contractually  say that TransCanada  is on                                                               
the hook for its portion.                                                                                                       
                                                                                                                                
COMMISSIONER BALASH replied that  exactly how the obligations are                                                               
carried will  be the  product of  negotiations between  the state                                                               
and  TransCanada,   negotiations  between   the  state   and  the                                                               
producers, and negotiations  between the state and  the buyers of                                                               
the LNG.   While the terms  of the sales and  purchase agreements                                                               
(SPAs) for the  LNG itself are not yet known,  it can be expected                                                               
that the contract  the state signs with TransCanada  will be used                                                               
by  TransCanada  as a  basis  for  financing  its share  of  this                                                               
project.  The  daily reservation charges that the  state is going                                                               
to  be on  the hook  for, absent  some other  mitigation measure,                                                               
will be substantial  and will be measured in a  couple of million                                                               
dollars  a day.   Mitigating  a risk,  such as  an earthquake  or                                                               
other  disruption,   is  something  the  state   must  absolutely                                                               
undertake  to provide  in this  next period  of development.   In                                                               
some cases, companies/entities acquire  insurance for those kinds                                                               
of things.  In regard to  satisfying the obligations to buyers to                                                               
continue to  find and  provide gas, the  SPA will  typically have                                                               
force majeure  clauses.  Those  kinds of  things will be  part of                                                               
the marketing  arrangements and marketing  engagements undertaken                                                               
in  the next  18 months  because that  is a  component for  which                                                               
there is  not yet a firm  handle.  It  is not yet known  what the                                                               
buyers  are prepared  to  accept in  the way  of  liability.   He                                                               
further  pointed  out  that  the  state does  not  yet  have  any                                                               
partners identified for the liquefaction.   It is not unusual for                                                               
buyers to want to own a  piece of the liquefaction, he continued,                                                               
and if that is something that  the state encounters in the market                                                               
place  the   state  would  certainly  want   to  entertain  that.                                                               
However,  the state  would  also want  to see  what  part of  its                                                               
obligation  with TransCanada  would [the  buyers] be  prepared to                                                               
take on as well.                                                                                                                
                                                                                                                                
2:27:20 PM                                                                                                                    
                                                                                                                                
COMMISSIONER  BALASH  continued  his response  to  Representative                                                               
Johnson:                                                                                                                        
                                                                                                                                
     In  thinking  about  this  total  approach  to  project                                                                    
     ownership or equity participation  in this endeavor, we                                                                    
     did not come  at this particular set  of solutions with                                                                    
     a desire to invest state  capital in a pipeline project                                                                    
     or  an LNG  project.    The folks  in  the division  of                                                                    
     treasury were already  doing that day in  day out; they                                                                    
     can invest  in LNG projects  all over the world.   That                                                                    
     is not  what we  are trying  to do here.   What  we are                                                                    
     trying to do is arrive at  a point where we can see the                                                                    
     resource monetized and  potentially set up arrangements                                                                    
     that satisfy us  and our needs and result  in cash flow                                                                    
     to  the state.    How  much risk  we  want  to take  is                                                                    
     probably going to impact the  amount of cash we get out                                                                    
     of  the resource.   And  one of  the struggles  that we                                                                    
     have   had    in   talking   about    this   particular                                                                    
     commercialization  effort over  the last  15 years  has                                                                    
     been  the  tension  between RIK  and  RIV  [royalty  in                                                                    
     value].   I would  love nothing more  than to  sit here                                                                    
     and stay  in a position where  we are at RIV,  where we                                                                    
     do not  have to  take any  risk, and all  we do  is sit                                                                    
     back  and count  the cash  coming in  when the  project                                                                    
     starts up.   But, that does  not appear to be  a viable                                                                    
     option  for us.   And  as we  engaged the  companies in                                                                    
     this discussion,  they were  pursuing an  RIK solution;                                                                    
     we were  pursuing an  RIV solution.   And what  we have                                                                    
     attempted to do  is try to make RIK look  a little more                                                                    
     like RIV so  that we are in a position  to leverage the                                                                    
     producers' expertise  in marketing  to get  the pricing                                                                    
     terms that  would result in  an RIV-like cash  flow for                                                                    
     the  state.    Ultimately,  we  may  decide  to  pursue                                                                    
     marketing  arrangements that  are different,  financing                                                                    
     arrangements    that   are    different,   and    other                                                                    
     partnerships that  reduce our risk, but  would probably                                                                    
     have some impact on our cash.   But it allows the other                                                                    
     parties   to  make   their  investments   and  business                                                                    
     decisions  in a  way that  allows the  project to  move                                                                    
     forward and  realize this potential that  Alaskans have                                                                    
     been waiting  on for 40 years.   So, there is  a number                                                                    
     of  ways to  look at  these problems  and I  am looking                                                                    
     forward  to  solving  the  challenges  associated  with                                                                    
     direct participation.  I like  puzzles.  I like solving                                                                    
     puzzles.   And it  so happens that  Commissioner Rodell                                                                    
     is quite adept at the  financial aspects of these kinds                                                                    
     of  things.     And  I  think  we  have   got  a  great                                                                    
     opportunity here  to engage the marketplace  where some                                                                    
     of these solutions are going to be found.                                                                                  
                                                                                                                                
2:31:01 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE JOHNSON  stated he  likes solutions,  not puzzles,                                                               
but wants to  make sure that all of the  puzzle pieces are looked                                                               
at.   Recalling the statements  made by Commissioner  Balash that                                                               
TransCanada will be going out  for financing once an agreement is                                                               
had and that the commissioner does  not want to paint the picture                                                               
that  the state  could go  out and  finance this  kind of  money,                                                               
Representative Johnson  queried whether TransCanada has  a better                                                               
credit rating  than does the State  of Alaska.  Someone  is going                                                               
to be  financing the project,  and someone  is going to  reap the                                                               
benefits of  that.  The question  needing to be asked  is whether                                                               
the  state  is better  off  taking  this  on  its own  or  having                                                               
partners and sharing  it.  The state may be  better off with "the                                                               
four of  us" doing a request  for proposals (RFP).   He submitted                                                               
that  the profits  over  the  course of  this  project would  far                                                               
outstrip   any  treble   damages  [that   the  state   would  owe                                                               
TransCanada].   He said he  would like  to explore the  issues of                                                               
whether  the state  would be  better off  cutting its  losses, or                                                               
better off with  a partner, or better off  with [TransCanada], or                                                               
better  off with  another partner.   Because  this MOU  is pretty                                                               
specific, he said  he would like the aforementioned  issues to be                                                               
addressed before  jumping into an  agreement.  In order  for this                                                               
agreement to  be a long marriage,  it needs to be  with the right                                                               
partner.  He added that he  is willing to have another meeting to                                                               
discuss the aforementioned,  so answers to his  questions are not                                                               
needed right now.                                                                                                               
                                                                                                                                
2:33:49 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TARR  inquired  about  the  point  at  which  the                                                               
state's good  credit standing  would be  threatened by  taking on                                                               
too much debt.   She further asked whether  that credit standing,                                                               
as  well as  how that  would impact  other state  priorities, was                                                               
part of the consideration in recommending the 75/25 ratio.                                                                      
                                                                                                                                
COMMISSIONER RODELL answered that  two different things are going                                                               
on  here.   First is  to look  at the  different combinations  to                                                               
determine what the state can do  to push the tariff low.  Second,                                                               
is to  see the  value of  having a partner  in this  project that                                                               
helps with  the cash calls and  the benefit of that  to the state                                                               
versus  the risk.    The risk  on  the rating  is  really one  of                                                               
whether the state will be  able to meet its day-to-day operations                                                               
as a  state.  If the  state was to  put aside $11 billion  as its                                                               
equity investment into the pipeline  - to make that available for                                                               
cash calls when and if they  are requested - creates an inability                                                               
in  the   state's  financial  flexibility   to  meet   its  daily                                                               
operations.  There  is an opportunity here to let  a partner come                                                               
up with  the financing  and to  have an  agreement that  when the                                                               
pipeline comes into use the  state will start repaying those cash                                                               
calls and  repaying that debt.   The value of not  having to come                                                               
up  with cash  over the  next 10  years, and  what the  repayment                                                               
stream looks like,  is reflected in the tariff  that is discussed                                                               
here.   If the  state wants to  use some cash,  there are  the 40                                                               
percent equity  options - [in  the 20 percent equity  option] the                                                               
state can  step in and  actually front-up $6 billion  rather than                                                               
$9 billion;  or, in the  25 percent equity option,  front-up $8.6                                                               
billion rather than  $11.4 billion.  Part of it  in this case was                                                               
TransCanada's  willingness  to  give  the  state  the  option  of                                                               
deciding at  the end of Pre-FEED  whether or not to  actually put                                                               
up 40 percent at that time.                                                                                                     
                                                                                                                                
CO-CHAIR FEIGE  commented that it  is "never  a good idea  to get                                                               
over-extended on your credit card."                                                                                             
                                                                                                                                
2:37:00 PM                                                                                                                    
                                                                                                                                
COMMISSIONER  BALASH, responding  to Co-Chair  Saddler, confirmed                                                               
that  the two  bars on  the far  left of  the chart  on slide  12                                                               
reflect  State of  Alaska ownership  of the  entire project  at a                                                               
cost of $45 billion.  In  further response, he explained that the                                                               
far left  of the  chart reflects  no TransCanada  involvement for                                                               
the  entire project.   The  middle two  bars reflect  TransCanada                                                               
stepping into the state's shoes  for 100 percent ownership of the                                                               
gas treatment plant  and pipeline; the 20 percent  and 25 percent                                                               
equity is the  state's share of the liquefaction  facility and is                                                               
the capital that the state would  need to provide.  Responding to                                                               
a  third  question  from  Co-Chair  Saddler,  he  confirmed  that                                                               
TransCanada would own  100 percent of the  pipeline and treatment                                                               
facility, and  the State of Alaska  would own 100 percent  of the                                                               
LNG plant and associated marine facilities.                                                                                     
                                                                                                                                
CO-CHAIR SADDLER  understood that the  two bars on the  far right                                                               
of the chart reflect ownership  by TransCanada for 100 percent of                                                               
the pipeline and treatment facility,  with ownership by the State                                                               
of  Alaska for  100  percent  of the  LNG  plant.   He  requested                                                               
clarification about the amount the state would buy back.                                                                        
                                                                                                                                
COMMISSIONER BALASH  answered that  the state  would buy  back 40                                                               
percent of  the midstream,  which is  the equity  callback option                                                               
that the state has under Exhibit B.                                                                                             
                                                                                                                                
REPRESENTATIVE JOHNSON  clarified that TransCanada would  own 100                                                               
percent of the state's 25  percent; TransCanada would not own 100                                                               
percent of the pipeline.                                                                                                        
                                                                                                                                
COMMISSIONER BALASH concurred.                                                                                                  
                                                                                                                                
2:39:01 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  OLSON inquired  whether there  would be  adequate                                                               
information  by the  end of  the  legislative session  to make  a                                                               
"rational vote" on the enabling legislation.                                                                                    
                                                                                                                                
COMMISSIONER  BALASH replied  he  has "every  confidence in  this                                                               
institution."                                                                                                                   
                                                                                                                                
REPRESENTATIVE  OLSON  pointed  out  that  five  of  the  current                                                               
committee members were present "at this rodeo a few years ago."                                                                 
                                                                                                                                
COMMISSIONER  BALASH  observed  that,   as  an  institution,  the                                                               
committee members are far more  familiar with pipeline operations                                                               
and the  effect of the  key terms on the  state.  He  opined that                                                               
the state's  and the legislature's  higher point on  the learning                                                               
curve will enable  key decisions to be made "for  this step."  He                                                               
emphasized that it is not  necessary to make a 30-year commitment                                                               
today; rather, the  request is for "the ability  to progress this                                                               
through to  the next phase and  stage and level of  commitment by                                                               
respective parties."                                                                                                            
                                                                                                                                
REPRESENTATIVE HAWKER  related that his  desire is to  delve into                                                               
the  overall agreement,  but said  the presentation  needs to  be                                                               
completed.  He  requested that there be a chance  to discuss more                                                               
details with the two commissioners in the near future.                                                                          
                                                                                                                                
CO-CHAIR FEIGE replied that there will be that chance.                                                                          
                                                                                                                                
2:41:08 PM                                                                                                                    
                                                                                                                                
COMMISSIONER BALASH  turned back  to his  presentation, directing                                                               
attention  to  the chart  on  slide  13  depicting the  State  of                                                               
Alaska's annual cash flows associated  with the 25 percent equity                                                               
alternative.  He  noted the blue line represents  State of Alaska                                                               
ownership and the state is  solely responsible for the cash calls                                                               
between now and  project start up.  When  project sanction occurs                                                               
in 2018, upwards  of $1.3 billion annually will  be required from                                                               
the state for construction.   However, once start-up begins, with                                                               
full ramp-up  in 2023, the  state's cash flow will  suddenly turn                                                               
positive.   In 2043,  he continued, the  revenue begins  to taper                                                               
downward because  the chart is  depicting the proven  resource at                                                               
Prudhoe  Bay and  Point Thomson.    However, the  belief is  that                                                               
there will  be additional  gas resources  found, and  rather than                                                               
revenue tapering  off in 2043,  the trajectory out  will continue                                                               
for many,  many years.   Commissioner  Balash confirmed  that the                                                               
aforementioned is a highly conservative  estimate and is based on                                                               
the proven resources  of both fields, as well as  assuming an oil                                                               
linkage for  pricing the  LNG at  $90, which is  a fair  bit less                                                               
than is being seen in the market today.                                                                                         
                                                                                                                                
COMMISSIONER  RODELL   interjected  that   it  is   important  to                                                               
recognize  that the  graphic on  slide  13 does  not include  any                                                               
additional  revenues  to  the  state   that  this  project  might                                                               
produce, such as corporate income tax or property tax.                                                                          
                                                                                                                                
COMMISSIONER BALASH  added that this  estimate is to  isolate the                                                               
revenues that are affected with or without TransCanada.                                                                         
                                                                                                                                
2:44:00 PM                                                                                                                    
                                                                                                                                
COMMISSIONER BALASH moved to slide  14, saying that it is another                                                               
way of  looking at  these same  issues of  concern, and  it takes                                                               
into account the  opportunity cost for the use  of state capital.                                                               
He explained  that the chart  reflects the cumulative  cash flows                                                               
for the three scenarios.                                                                                                        
                                                                                                                                
COMMISSIONER  RODELL pointed  out that  this chart  goes back  to                                                               
Representative Johnson's earlier question  regarding the value of                                                               
having a  partner versus sole  ownership.  She noted  the benefit                                                               
for the state  of not using its cash when  there is participation                                                               
by a partner.                                                                                                                   
                                                                                                                                
COMMISSIONER  BALASH addressed  slide 15,  which illustrates  the                                                               
increase in  annual cash  flows to  the State  of Alaska  with an                                                               
expansion  of the  project under  the  20 and  25 percent  equity                                                               
alternatives.  He explained that  adding a train for liquefaction                                                               
would  require an  additional  train of  treatment  at the  North                                                               
Slope, and  this additional throughput  in the pipeline  would be                                                               
achieved  with compression.   The  state's  future is  incredibly                                                               
bright   when  the   opportunities  for   continued  exploration,                                                               
development, and production of natural  gas are considered.  With                                                               
the  pay-off of  the  pipeline  in 2045,  the  state's cash  flow                                                               
shoots up.   Contemplated in the term sheet in  Exhibit C is that                                                               
at the  end of the  initial contract  term, the state  would have                                                               
the  opportunity  to  buy  out   TransCanada's  interest  in  the                                                               
midstream at the net book value.                                                                                                
                                                                                                                                
2:46:52 PM                                                                                                                    
                                                                                                                                
COMMISSIONER  BALASH directed  attention to  slide 16  portraying                                                               
the   distance-sensitive,   rate-making  element   for   in-state                                                               
deliveries.   Fairbanks  deliveries  would be  within the  Nenana                                                               
zone and  would require a  lateral from Nenana to  Fairbanks with                                                               
an  overall tariff  of  $3.70  [per MMBTU].    Tariff charges  to                                                               
Southcentral Alaska,  the Big  Lake Zone,  [would be  $3.81], and                                                               
charges for the full haul to the  LNG plant [would be $4.02].  He                                                               
pointed  out that  the required  treatment  service, depicted  in                                                               
blue  in the  bar  graph, is  the same  across  all the  delivery                                                               
zones, whereas  the pipeline tariff,  depicted in  green, varies.                                                               
He concluded  his presentation by  expressing his  excitement for                                                               
the opportunity to  work together and maintain  momentum for this                                                               
project (slide 17).                                                                                                             
                                                                                                                                
CO-CHAIR FEIGE  said he is  concerned about the  comparative cost                                                               
of severing  the Alaska Gasline  Inducement Act (AGIA)  ties with                                                               
TransCanada -  a divorce  from TransCanada -  versus the  cost of                                                               
the  negotiated ownership  percentage with  TransCanada for  this                                                               
project.  While the reasons  presented thus far seem logical, the                                                               
specific numbers and  the justification for the way  this deal is                                                               
currently  negotiated, and  its value  to the  state, need  to be                                                               
discussed further.                                                                                                              
                                                                                                                                
2:50:36 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SADDLER  asked  why  only   three  offtake  rates  were                                                               
identified when the plan is for at least five offtake points.                                                                   
                                                                                                                                
COMMISSIONER  BALASH responded  that these  three offtake  points                                                               
could be  specifically identified.  However,  the ultimate number                                                               
of  offtake points  could  be far  more than  five,  and work  to                                                               
identify the  number of  offtake points will  be undertaken.   He                                                               
explained that pre-installation, or tapping  into the line during                                                               
construction,  is not  very  expensive or  cumbersome  to do,  so                                                               
there may be multiple offtake points  that never get used.  These                                                               
three  offtake   points  make  the   most  sense,  as   they  are                                                               
volumetrically  weighted for  the  largest likely  draws off  the                                                               
pipeline.                                                                                                                       
                                                                                                                                
2:52:04 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE HAWKER  pointed out that  the committee has  a due                                                               
diligence  responsibility to  determine  whether this  is a  good                                                               
deal.  "This  is really kind of a take-or-leave-it  deal for us,"                                                               
he said. "We don't have a lot  of latitude."  He noted that those                                                               
members  of the  committee who  "have been  to this  rodeo for  a                                                               
dozen times, have  always had a lot of latitude  in the process."                                                               
He continued:                                                                                                                   
                                                                                                                                
     Here we  have this  necessity for enabling  legislation that                                                               
     is  specifically ...  spelled out.   And,  in order  to exit                                                               
     AGIA, which is necessary to  go forward with another project                                                               
     plan here,  we have to  have both  a trigger event  and this                                                               
     execution  of  these  things called  transition  agreements.                                                               
     Trigger  event means  the effective  date  of that  enabling                                                               
     legislation, and  it actually says that  [TransCanada Alaska                                                               
     Development Inc.]  finds that  legislation acceptable.   So,                                                               
     that seems  to me with all  respect, it is a  veto authority                                                               
     on the  whole if we  make a  change of sufficient  merit and                                                               
     which  is  probably  a  material   change  to  the  enabling                                                               
     legislation that is pretty well  clearly spelled out here in                                                               
     this legislation that  allows you to enter  into these exact                                                               
     terms and conditions that you  are describing up here.  Your                                                               
     partner TransCanada  has the ability  to say no and  we just                                                               
     go back to  square one.  Which seems like  ... we really are                                                               
     not in  a certain situation  here as a legislature  where we                                                               
     have much say  in the policy development....  As  we look at                                                               
     these   components,   and    you   heard   questions   about                                                               
     debt/equity,  you   heard  ...  questions   about  ownership                                                               
     percentages  and  all  those  sort  of  things.    How  much                                                               
     latitude  does  the  legislature  have  to  get  into  being                                                               
     proscriptive  on  such   things  without  jeopardizing  your                                                               
     agreement under  this [MOU] and  then subsequently  the flow                                                               
     through to the HOA?                                                                                                        
                                                                                                                                
COMMISSIONER BALASH replied:                                                                                                    
                                                                                                                                
     In terms of  doing your due diligence, we are  happy to play                                                               
     whatever  role  you  would  like  us to  play  in  that  due                                                               
     diligence.  Your  contractors have made it to town.   We are                                                               
     doing  everything we  can to  help them  understand what  we                                                               
     looked at, how  we looked at it, so that  we are not talking                                                               
     past  each other  in assumptions  and models,  and ...  will                                                               
     continue to do  that.  We looked all of  this information in                                                               
     a variety of ways - far  more than has been presented here -                                                               
     and we  will be  happy to  generate whatever  information we                                                               
     can.   I  would  ask  that we  coordinate  that through  the                                                               
     respective  chairmen  of  the committees,  but  ...  we  can                                                               
     present this  information in any  number of ways and  we can                                                               
     look at various  scenarios.  With regard to  the latitude of                                                               
     the legislature,  we fully respect the  independence of this                                                               
     body.... Again, I would call  members' attention to [Article                                                               
     2.1(d) of  the Memorandum of Understanding]....  The parties                                                               
     in this  case - Commissioner  Rodell and myself,  along with                                                               
     TransCanada - have  agreed to this set of terms  and we have                                                               
     agreed to  agree to contracts or  transition agreements that                                                               
     look  like this.    But, depending  upon  the conditions  or                                                               
     limitations included  in the enabling legislation,  they may                                                               
     walk.   But  ...  that  is a  decision  that  ... they  will                                                               
     make....  That is  something  that I  am  confident the  ...                                                               
     process  for  developing  legislation  - there  will  be  an                                                               
     opportunity  for them  to  review whatever  it  is that  the                                                               
     legislature would like  them to consider and  they will have                                                               
     an  opportunity  to comment  on  it.    That is  what  these                                                               
     hearings are all about.                                                                                                    
                                                                                                                                
2:56:21 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE HAWKER  noted that Article 2.1(d)  says "everybody                                                               
agrees to support everything going  forward."  However, he added,                                                               
the article's language also includes  the word "if" and following                                                               
"if"  is   the  capitalized  word   "Parties".     He  understood                                                               
Commissioner Balash to have said  that "that applied to the other                                                               
guys might choose to walk."  Representative Hawker continued:                                                                   
                                                                                                                                
     Capital P  Parties is actually  both the  administration and                                                               
     the  other guys.   Is  that a  commitment from  you that  no                                                               
     matter  what  legislation  passes here,  the  administration                                                               
     will stand behind it and put  the sole onus for walking away                                                               
     from this on the other guys?                                                                                               
                                                                                                                                
COMMISSIONER BALASH  responded that he would  not characterize it                                                               
that way.  He continued:                                                                                                        
                                                                                                                                
     Whether  we   are  talking  about  this   document  or  this                                                               
     document,  there  may  be  circumstances  or  conditions  or                                                               
     limitations  in  legislation that  is  passed  by this  body                                                               
     where Commissioner Rodell and I  are going to need to decide                                                               
     in our  respective positions whether  we think that  the ...                                                               
     course  laid out  continues to  be  in the  interest of  the                                                               
     state.                                                                                                                     
                                                                                                                                
REPRESENTATIVE HAWKER  said he  appreciates hearing  this because                                                               
he did  not want  to hear the  commissioner abrogating  his role.                                                               
He added:                                                                                                                       
                                                                                                                                
     It is  entirely possible for  us to pass something  that you                                                               
     as  an administration  find an  inappropriate  reason to  go                                                               
     forward with  the other guys,  and for whatever  reason they                                                               
     might love it....                                                                                                          
                                                                                                                                
COMMISSIONER  BALASH  concurred, saying,  "That  is  a very  real                                                               
scenario that we contemplated."                                                                                                 
                                                                                                                                
2:58:08 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE HAWKER said he would  also like to discuss whether                                                               
the  state is  really exiting  AGIA in  this agreement  or really                                                               
just temporarily suspending it.                                                                                                 
                                                                                                                                
CO-CHAIR  FEIGE  responded that  on  February  12, 2014,  another                                                               
hearing  will  be held  on  the  MOU,  where  this issue  can  be                                                               
discussed.    There  is  an   opportunity  in  the  meantime  for                                                               
engagement between the commissioners  and their staff and between                                                               
the companies and their staff.   He concurred with Representative                                                               
Hawker, stating:                                                                                                                
                                                                                                                                
     Whatever we end up deciding,  either it falls within the ...                                                               
     parameters and  the boundaries laid  out in the MOU  and the                                                               
     HOA or  it falls outside those  parameters.  And if  it does                                                               
     fall outside  the parameters I  would hope that  neither any                                                               
     of  the parties  would simply  walk  away, but  we would  be                                                               
     engaged in further negotiation ...  as uncertain as that may                                                               
     be.  So,  with that in mind, I ask  all committee members to                                                               
     ... really  dig down into the  ... hard legal fine  print on                                                               
     these documents.  We've got  our lawyers and please converse                                                               
     with the co-chairs and if  you have specific information for                                                               
     testifiers that  you want to  hear on this subject,  or that                                                               
     you  think   would  bring  good  outside   opinions  to  the                                                               
     conversation, we will  certainly work with you  ... to bring                                                               
     that to the fore.                                                                                                          
                                                                                                                                
REPRESENTATIVE SEATON related that  a general assumption is being                                                               
made that the  lowest possible tariffs are wanted  for the state.                                                               
At some point  in time, he noted, the tariff  could be the income                                                               
stream for the state.   With a low tariff the  state may lose the                                                               
most significant  income stream that  it has, depending  upon the                                                               
price, which  would be  the in-kind  portion.   He said  he would                                                               
like to have  the administration provide a  public discussion "of                                                               
low tariff  and what that gives  us as future limitations  on our                                                               
ability to  have a revenue  stream depending upon the  price that                                                               
we get for royalty and taxes."                                                                                                  
                                                                                                                                
3:01:10 PM                                                                                                                    
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
There being no  further business before the  committee, the House                                                               
Resources Standing Committee meeting was adjourned at 3:01 P.M.                                                                 

Document Name Date/Time Subjects
HRES Memorandum of Understanding 1.29.14.pdf HRES 1/29/2014 1:00:00 PM
Full MOU.pdf HRES 1/29/2014 1:00:00 PM