Legislature(2013 - 2014)BARNES 124
02/26/2014 01:00 PM House RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| Overview(s): Gas Pipeline Issues - Fiscal Perspective | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE RESOURCES STANDING COMMITTEE
February 26, 2014
1:08 p.m.
MEMBERS PRESENT
Representative Eric Feige, Co-Chair
Representative Dan Saddler, Co-Chair
Representative Peggy Wilson, Vice Chair
Representative Craig Johnson
Representative Kurt Olson
Representative Paul Seaton
Representative Scott Kawasaki
Representative Geran Tarr
MEMBERS ABSENT
Representative Mike Hawker
OTHER LEGISLATORS PRESENT
Representative Andrew Josephson
COMMITTEE CALENDAR
OVERVIEW(S): GAS PIPELINE ISSUES - FISCAL PERSPECTIVE
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
ANGELA RODELL, Commissioner
Department of Revenue (DOR)
Anchorage, Alaska
POSITION STATEMENT: Presented a PowerPoint titled "AK LNG: Long
and Short Term Fiscal Impacts."
DEEPA PODUVAL, Principal
Management Consulting Division
Black & Veatch Corporation;
Consultant, Department of Natural Resources (DNR)
Houston, Texas
POSITION STATEMENT: Answered questions during Commissioner
Rodell's presentation.
ACTION NARRATIVE
1:08:44 PM
CO-CHAIR ERIC FEIGE called the House Resources Standing
Committee meeting to order at 1:08 p.m. Representatives Feige,
Seaton, P. Wilson, Tarr, Kawasaki, and Saddler were present at
the call to order. Representatives Johnson and Olson arrived as
the meeting was in progress. Representative Josephson was also
present.
^OVERVIEW(S): Gas Pipeline Issues - Fiscal Perspective
OVERVIEW(S): Gas Pipeline Issues - Fiscal Perspective
1:09:12 PM
CO-CHAIR FEIGE announced that the only order of business was a
presentation by Commissioner Rodell, Department of Revenue,
regarding the long and short term fiscal impacts of the proposed
Alaska Liquefied Natural Gas (LNG) Project.
1:09:30 PM
ANGELA RODELL, Commissioner, Department of Revenue (DNR), said
that she would talk about the long and short term fiscal impact
of participation by the state in the Alaska LNG project. She
relayed that there were three aspects to review before the state
could determine its capacity for participation in the project.
The first aspect, debt capacity, entailed outstanding state debt
for commitments and what the state could afford to add to this.
The second aspect, the gas line analysis, would be presented by
Black and Veatch. The third aspect would entail the revenue
forecast.
COMMISSIONER RODELL directed attention to her presentation
titled "AK LNG: Long and Short Term Fiscal Impacts." She
addressed slide 3, "A note on uncertainty...." which detailed
that the goal was for determination of the project impact on the
short term, mid-term, and very long term. She reported that
currently the state was reviewing whether it could manage its
way through the short and mid-term impacts in order to benefit
in the long term. She said that this analysis would include a
range of possible outcomes based on the adjustment of these
assumptions, which would be continually refined as the project
moved forward.
1:11:43 PM
REPRESENTATIVE KAWASAKI, referencing slide 3, asked why the
state was introducing the proposed LNG bill without doing
refinements to the analysis.
COMMISSIONER RODELL explained that the state had prepared the
proposed bill with an analysis to determine the best way to move
forward, which had led to agreement for the Heads of Agreement
(HOA), the Memorandum of Understanding (MOU), and the currently
proposed bill. She pointed out that this analysis was being
shared with the legislature for clarification to the direction
the state should take.
REPRESENTATIVE KAWASAKI said that he would have expected a
refined analysis prior to the actual decision for an HOA or an
MOU.
COMMISSIONER RODELL replied that not all the decisions had been
made, and a bill had not yet been passed that would determine
the gas tax. She declared that the current analysis was based
on what the administration had included in the proposed bill,
and the analysis would continue to be revised.
1:14:25 PM
The committee took an at-ease from 1:14 p.m. to 1:19 p.m. due to
technical difficulties.
1:19:11 PM
REPRESENTATIVE P. WILSON asked whether DOR had taken into
account PERS [Public Employee Retirement System] and TRS
[Teacher Retirement System], and the effect of each aspect on
the state's fiscal status.
COMMISSIONER RODELL confirmed that all the state obligations had
been reviewed, although not all were discussed in this
presentation.
REPRESENTATIVE P. WILSON asked if the payments for these
obligations were also considered.
COMMISSIONER RODELL expressed her agreement.
1:21:08 PM
COMMISSIONER RODELL, in response to Representative Tarr,
explained that the assumptions were being made using today's
market conditions, although it was unknown what interest rates
would be in eight years. She noted that there was a federal
proposal to remove tax exemptions for some debt, which would
include this type of debt. She explained that this projection
assumed that the debt was taxable and that interest rates would
remain unchanged from today. She relayed that all of this could
change, hence the periodic adjustments to project outcomes.
1:22:11 PM
REPRESENTATIVE KAWASAKI inquired whether the models take into
account the long-term, major maintenance needs 20 years from the
present. He offered examples of roads and other current
construction projects that would need future maintenance.
COMMISSIONER RODELL acknowledged that the model did not yet
include this, as there was not enough information for the
necessary reserves for operations and maintenance for this
project. She offered her belief that this early analysis would
need refinement, and due diligence for these future requirements
for infrastructure surrounding the project. She noted that the
roads, bridges, schools, and support networks had not been
included in this projection of demands to be placed on the
state. She allowed that the state did not yet have a sense of
this impact, which was why this was being conducted "as a stage
gated approach." This would allow reassessment for state
participation.
REPRESENTATIVE KAWASAKI noted that the license for the Alaska
Gasline Inducement Act (AGIA) had a lot of this data, especially
for labor and work force development, and the demands on
communities. He opined that the total cost of the project was
being understated if this was not included in the model.
1:25:09 PM
COMMISSIONER RODELL directed attention to slide 5, "Debt
capacity: current debt outstanding," and she reviewed the
state's outstanding debt for the years 1999 to 2014. She
pointed to the significant increase in the general obligation
and the state-supported debt during that time period. This debt
was on the books for the state to support. She directed
attention to the general obligation debt which included a $450
million general obligation bond authorization for transportation
and ports in 2012. She explained that, as $303 million was
still authorized but not yet issued, it was not yet outstanding
debt. She noted that there was an additional authorization for
$695 million under the State Guaranteed, which had not yet been
issued by the Alaska Housing Finance Corporation, although it
was still guaranteed by the state.
1:26:19 PM
REPRESENTATIVE SEATON referenced the Knik Arm Bridge project
(KABATA), which required a $125 million bond in addition to the
capital from the state, and the possibility for Alaska
Industrial Development and Export Authority (AIDEA) to issue a
few hundred million in bonds for oil and gas processing
facilities. He asked whether these increases of debt categories
would significantly impact this analysis for bonding ability, or
should they be reviewed individually.
COMMISSIONER RODELL replied that these projects would be added
to the debt and would impact the amount of additional debt which
the state could incur. She noted that a question that must be
reconciled was whether a portion of the debt capacity should be
reserved for other state government business, or should it all
be used for an Alaska LNG project. She declared that this was a
tension for the project although she opined that there was a way
to preserve the debt capacity for state government operations,
such as road infrastructure and marine facilities, while
utilizing other financing mechanisms for the Alaska LNG project,
which made the Trans Canada MOU very attractive.
1:28:33 PM
COMMISSIONER RODELL moved on to slide 6, "Debt capacity:
Historically, debt service has been low relative to revenue,"
and stated that the state had an historical practice for pay as
you go, while limiting the amount of overall debt issued. She
pointed to the debt service in Fiscal Year 2013, which was 1.7
percent of revenue.
COMMISSIONER RODELL, responding to Representative Tarr regarding
slide 5, said NTSC was the Northern Tobacco Securitization
Corporation, which was the tobacco settlement money.
1:29:33 PM
CO-CHAIR SADDLER asked if the percentage of revenue was
undesignated general fund.
COMMISSIONER RODELL confirmed this was unrestricted general
fund.
1:29:51 PM
COMMISSIONER RODELL referenced slide 7, "Debt capacity:
Projected debt service," which included projected debt service
along with the school debt reimbursement program. She reminded
the committee that the state would support a majority of debt
issued by municipalities and school districts for school capital
construction. She pointed out that the highest supported debt
was 9.3 percent in 1987, and when the school debt was included
this became 15.8 percent. She said that the state debt levels
had been significantly higher in past years than currently
contemplated without the Alaska LNG project. She stated that it
was important to note that the state had an A rating in 1987,
which was significantly lower than the current rating.
REPRESENTATIVE SEATON asked for clarification that this depicted
a percentage of unrestricted revenue, and not dollars, as the
current outstanding debt was currently much higher, although the
current revenue was also much higher.
COMMISSIONER RODELL acknowledged that unrestricted revenues were
currently higher than 1987, and she explained that a volatile
revenue source created a challenge for forecasting forward using
certain assumptions as the percentage for level of debt could
shift significantly.
COMMISSIONER RODELL, in response to Representative Tarr, said
the top line on slide 7 included the school debt.
1:32:19 PM
COMMISSIONER RODELL addressed slide 8, "Financial Management and
Debt Metrics," and said that, as general obligation (G.O.) bonds
carried a pledge of the full faith, credit, and resources of the
state, any taxes necessary would be raised to repay this debt.
She stated that state policy, approved by the State Bond
Committee, limited debt service to less than 8 percent of
general fund unrestricted revenue; debt service had remained low
for 15 years, with a 10 year average of 1.5 percent and 3.3
percent when the school debt reimbursement was included. She
relayed that the historical preference had been for pay as you
go funding versus debt, which accounted for the low debt
relative to most other states.
CO-CHAIR SADDLER asked about the genesis for the aforementioned
state policy.
COMMISSIONER RODELL replied that this was an administration
policy, explaining that the long-standing State Bond Committee
was comprised of the commissioners of Department of Revenue,
Department of Administration, and Department of Commerce,
Community & Economic Development. She declared that this was a
good practice policy, and noted that the State Bond Committee
also fulfilled the obligations directed to it by the legislature
and the executive branch.
COMMISSIONER RODELL, in response to Representative Tarr,
acknowledged that a debt service in excess of 8 percent was
merely a violation of a self-imposed policy.
COMMISSIONER RODELL turned to slide 8, saying the state planned
to issue a Bond Anticipation Note in March, 2014, to replace the
existing note and to add additional proceeds. The original note
sold for a 0.09 percent interest rate. There was anticipation
for this note to be $230 million, with an additional sale for
$35 million of a Certificate of Participation to benefit the
residential facility for the Alaska Native Tribal Health
Consortium, approved by the legislature in 2013.
1:36:01 PM
COMMISSIONER RODELL, responding to Co-Chair Saddler, explained
that a Bond Anticipation Note was in anticipation for the
issuance of a long term bond. This allowed the management of
costs as the issuance of long term tax exempt bonds was a
commitment to spend the money within three years. She reported
that the money was not always spent in the time frame
anticipated, and, as it was necessary to keep the money liquid,
it could cost the state a significant amount, negative
arbitrage. This was the difference between the payment and the
amount of investment income. The Bond Anticipation Note allowed
for more prudent money management with no long term high debt
cost if the money was not spent in a timely fashion.
COMMISSIONER RODELL returned to slide 8, and shared that there
had been discussions about state financial support for a number
of strategic capital initiatives.
1:38:12 PM
COMMISSIONER RODELL moved on to slide 10, "Options Identified by
State for Equity Participation - 20%," the Black & Veatch
analysis. There were three options identified by the state for
equity participation at the 20 percent level: the State of
Alaska goes it alone for all three components of the project;
the State of Alaska works with Trans Canada on the GTP and the
Pipeline, does not exercise any option to participate further,
and the cash participation is solely for the LNG facility; or,
the State of Alaska exercises its option within the MOU with
Trans Canada to buyback 6 percent of the GTP and the Pipeline,
and still invest 20 percent for the LNG facility.
1:39:33 PM
COMMISSIONER RODELL directed attention to slide 11,
"Implications of Options and Potential Off Ramps - 20%." She
reported that the State of Alaska would go it alone during pre-
FEED, although it would require support of $87 million for 20
percent participation. She said that participation in the
liquefaction would cost the State of Alaska $35 million, which
would be the same at that time with the 30 percent buyback
option with TransCanada, as the state would not exercise its
option until the end of pre-FEED. She described the FEED stage,
which would require approximately $360 million for the state to
go it alone, and would require $144 million for the liquefaction
facility with TransCanada. If the state exercised its 30
percent equity option with TransCanada, it would be necessary
for the state to generate $226 million.
COMMISSIONER RODELL offered her belief that the State of Alaska
was in a comfortable position to exercise an option in any of
the scenarios. She said that the issue would arise at the FID
gate, and she reported that for the State of Alaska to go it
alone would cost more than $10.6 billion while the liquefaction
with TransCanada would require more than $5 billion. If the
state exercised its option with TransCanada, this would be
closer to $7 billion. These decisions would require careful
thinking to manage 2019 through 2023 for ways to generate
participation at any of these levels.
1:41:46 PM
COMMISSIONER RODELL discussed slide 12, "Can the State Go It
Alone? State's Debt Capacity." In terms of financing the
state's share and debt service, she described the scenarios as
outlined by Black & Veatch: the first scenario to not affect the
state rating, the projection of all debt on the books including
debt authorized but not issued would be 5 percent of general
fund revenue. This would allow about 3 percent of general fund
unrestricted revenue to work with in order to maintain the state
policy of debt service less than 8 percent, and it would
generate the lowest cost of interest for participation, about
4.6 percent on a taxable basis. The second scenario, to allow
the State to exceed the 8 percent ceiling for debt service and
structure the debt to an A rating, would have a higher cost for
credit, and the debt cost would be about 4.9 percent. The final
scenario to move the ceiling of debt service to 11 percent of
unrestricted revenue would offer a BBB+ rating, with a 5.6
percent debt cost.
REPRESENTATIVE SEATON asked for clarification that the bond
rating agencies reviewed the self-imposed 8 percent debt ceiling
to give the state a AAA rating, whereas a 10 percent debt
ceiling service would give the state an A+ rating. He asked if
this was speculation for these ratings and cost of debt service.
COMMISSIONER RODELL explained that it was an assumption based on
criteria of the state's position today, knowing that the revenue
source was volatile and there were other commitments, and
reviewing the revenue during that time period of 2019 - 22. She
acknowledged that revenues would be lower, but that the state
would manage its way through the expenses, as there were
benefits at the end. She reported that the state needed to
manage its expenses to keep them low, as that would make more
unrestricted general fund revenue available for debt service,
which would change the metric. She said that as the state knew
what the criteria were for the various ratings this was an
estimation of the costs and how to affect them.
REPRESENTATIVE SEATON inquired whether permanent fund earnings
were calculated as revenue in these forecasts, or did this just
include the oil, fish, and mining taxes as revenue sources.
COMMISSIONER RODELL replied that it excluded the other revenue
to the state because that revenue had not been counted on in the
same way as the unrestricted revenue. She relayed that the
desire was to keep this as "a pure unrestricted revenue tax
obligation of the state."
REPRESENTATIVE SEATON declared that there was a huge amount of
unrestricted general fund revenue that came from investments,
and although it was not necessary to spend it, it could be used
to calculate a bond rating. He questioned why this revenue
would be hidden, allowing the bond rating to decrease and the
price of the project to increase. He expressed his concern, and
suggested that this be reviewed and all available revenues be
included in the calculations.
COMMISSIONER RODELL expressed her agreement to include that
analysis. She offered her belief that the feedback received
from the rating agencies, which she deemed to be fair, was that
the state was unwilling to tap those resources for debt, and was
more willing to cut expenses, instead. She declared that the
corpus of the permanent fund did not give the state its AAA
rating, and it was not counted by the rating agencies.
REPRESENTATIVE SEATON clarified that he was referring to the
earnings as 50 percent of those were appropriated each year to
pay the permanent dividends, and the balance was available as an
asset. He stated that, as the project was significant and
valuable to the state, the legislature should determine whether
these earnings could be available for this calculation. He
requested an estimate using these earnings.
COMMISSIONER RODELL said that the constitutional budget reserve
was taken into account for the credit ratings, and the permanent
fund earnings reserve was also used.
1:51:48 PM
CO-CHAIR SADDLER directed attention to slide 12, and asked about
the various levels of debt. He asked about the debt service in
scenario 1, and if this was limited to the proposed pipeline or
in addition to the other 5 percent obligated for debt.
COMMISSIONER RODELL replied that this was the amount for the
Alaska LNG project, which was in addition.
CO-CHAIR SADDLER mused that each scenario became more expensive.
CO-CHAIR SADDLER referenced slide 11, and asked if the red boxes
were the off-ramps should the state decide not to proceed.
COMMISSIONER RODELL stated that this was the cost to the state
to exercise those off-ramps.
CO-CHAIR SADDLER asked how the costs could be so precise.
COMMISSIONER RODELL deferred to Ms. Poduval.
DEEPA PODUVAL, Principal, Management Consulting Division, Black
& Veatch Corporation; Consultant, Department of Natural
Resources, said that these costs were attained from the cost
estimates for the project. Although there were better
understandings for the project costs in the Pre-FEED stage, it
was less precise in the FEED stage, and the construction stage
should be estimated to the nearest hundred million dollars.
CO-CHAIR SADDLER asked if the $5.4 billion was the cost for the
liquefaction construction.
COMMISSIONER RODELL acknowledged this.
1:54:48 PM
COMMISSIONER RODELL directed attention to slide 13, "Can the
State Go It Alone? State's Debt Capacity," which reviewed the
portion of debt to equity and the range that the state could
adjust. The range between debt and equity was the factor for
determining the credit rating and the interest cost. She stated
that the higher the rating, the lower the interest cost, and the
lesser amount of debt. She pointed to the graph as a reflection
of the effect of market conditions on February 20, 2014. She
expressed her interest in the comparison of the TransCanada
options with the state to "go it alone." She noted that a
tremendous amount of cash would be necessary in any scenario;
however, inclusion of TransCanada in each scenario created
relief to the state for generating so much cash for
participation.
REPRESENTATIVE SEATON asked for clarification to the cost
scenarios for TransCanada with no buyback and with 30 percent
buyback. He asked whether this was just the portion of the
state investment, and if the total investment would be the same
in each scenario.
COMMISSIONER RODELL expressed her agreement that this graph just
showed the investment from the State of Alaska, and its
requirement for participation in each of these three scenarios.
Addressing Scenario 1, Go it Alone, she declared that the state
would have an investment of $11 billion, with more than $8
billion in equity. If the state did not exercise its buyback
option with TransCanada, the state would still have to raise
money for its participation in the liquefaction, about $5.6
billion, with half being equity. This graph explained the cost
of state participation and the amount of debt necessary to raise
the cash.
CO-CHAIR FEIGE asked for an explanation to the debt/equity range
boxes for each bar of the graph on slide 13.
COMMISSIONER RODELL deferred to Ms. Poduval.
1:59:29 PM
MS. PODUVAL explained that slide 13 showed the debt equity
range, and how much debt the state could accept in each of the
three scenarios. She pointed to scenario 1, the lowest interest
costs with the highest quality debt through scenario 3, with the
lowest quality debt and the highest interest costs. She said
that associated with this was the percentage of general funds
that needed to be dedicated to service the debt. The lower the
percentage of dedicated general funds to service the debt, the
more comforts to the lender and the lower the interest cost.
MS. PODUVAL explained that the general fund over the 25 year
loan period was reviewed to obtain the debt equity range. She
noted that, as this would change annually dependent on the
revenue forecast for the Alaska LNG project and the other state
revenues, they chose the lowest unrestricted general fund
revenue over this 25 year period with the assumption to not
exceed 3 percent of this for debt service. That makes the loan
amount part of the debt equity range. The higher part of the
debt equity range was an average of the unrestricted general
fund revenue over this 25 year period with the assumption for
the debt service to not exceed 3 percent. She opined that this
offered a mid-range and a conservative estimate for debt
service.
REPRESENTATIVE TARR asked if the 0.5 figure in the bar graph on
page 13 represented $500,000.
MS. PODUVAL replied that this was $500 million.
CO-CHAIR SADDLER asked for clarification that the high point of
the range was calculated on the highest percentage of the
unrestricted general fund revenue, while the lowest point of the
range was the lowest percentage. He asked if there was a hard
number limit.
MS. PODUVAL replied that the low part of that range was using
the lowest unrestricted general fund revenue over the 25 year
period, while the high part of the range was using the average
unrestricted general fund revenue over the same period.
2:03:38 PM
COMMISSIONER RODELL addressed slide 15, " AKLNG - Long Term
Potential: Assumptions." She first outlined the assumptions used
in order to manage through the amount of cash necessary, which
were a review of the revenue forecast and the value to the state
for participation in the project. She reported that the long
term revenue forecast assumed a 2 percent annual decline for oil
revenues and brought the gas revenues on line beginning in 2024.
She shared the export volume assumption of 2.5 Bcf per day and
an in-state volume of 0.25 Bcf per day for these modeling
purposes. They also assumed that the price of oil would be $90
per barrel in 2014, with a 2.5 percent increase annually. The
calculated LNG price was estimated from the oil price at 13.5
percent the price of oil plus $1. The general fund unrestricted
revenue was assumed to include royalties, property tax, and
state corporate income tax, production tax, and return on equity
on the Alaska LNG project investment. She declared that the
same three aforementioned scenarios were used, Go it alone,
TransCanada with no buy back, and TransCanada with buy back.
These all assumed that the state participation would continue at
20 percent, in order to maintain consistency throughout the
modeling.
REPRESENTATIVE TARR, referencing the bullet point on slide 15
which assumed the general fund unrestricted revenue to include
75 percent of royalties, asked if this was projected for 2024
and beyond, when the Alaska LNG project came on-line.
COMMISSIONER RODELL expressed her agreement and noted that the
revenue forecast was used during the construction period. She
reminded the committee that 25 percent of the royalty revenue
would go to the permanent fund.
CO-CHAIR FEIGE stated, "We don't want to touch that."
REPRESENTATIVE OLSON reflected on the Amerada Hess fund, noting
that although the interest could be spent, the principal could
not be used "because it would taint any future jury pools on the
permanent fund which is why we have it sitting off in space."
He asked how much was currently in the fund.
COMMISSIONER RODELL replied that she would have to research
this.
REPRESENTATIVE OLSON asked if this could be used as security, or
to pay down, on the proposed pipeline.
COMMISSIONER RODELL replied that Department of Revenue would
review this and get back to the committee.
REPRESENTATIVE OLSON opined that this was only discussed every
four or five years.
REPRESENTATIVE SEATON compared the first bullet point on slide
15, which listed an annual 2 percent decline of oil revenues
between the years 2020-2024, with another bullet point that
stated the oil price was increasing annually at 2.5 percent. He
asked whether the decline in oil production was overpowering the
value of the oil.
COMMISSIONER RODELL, in response, said that this was not a
straight line projection; although there was a projected decline
in production which would affect the top oil revenue decline.
Within the revenue forecast, there was an assumption for this
increase in oil prices, which was consistent with the forecasted
revenue projections.
2:09:44 PM
REPRESENTATIVE SEATON asked about the annual decline of 2
percent in revenue, although the revenue projections included an
annual increase of 2.5 percent. He asked about the projection
for 2020 - 2024, as it appeared that this loss of production
should also be reflected in the revenue projection.
COMMISSIONER RODELL replied that price and production impact
differently and therefore the numbers could not be added to
create an adjustment factor. She relayed that production had
one effect on the revenue forecast. She reported that the
Office of Management & Budget (OMB) assumed a slightly higher
level of production for its trend. The price for oil was
consistent with the forecast of a 2.5 percent growth rate,
although making a determination of LNG prices required a
different index than oil.
2:12:06 PM
COMMISSIONER RODELL moved on to slide 16, "North Slope
Production Forecast," the oil production forecast for 2014 -
2023. She said that the assumption by the Department of Revenue
forecast was the band labeled GVR Eligible (New Oil). She
directed attention to the OMB Upside Potential, 50 percent of
which had been incorporated into the revenue assumption model,
as well.
CO-CHAIR SADDLER asked for clarification to the definition of
upside potential.
COMMISSIONER RODELL replied that upside potential was defined as
the barrels which Department of Revenue would have included in
past forecasts as under development or under exploration. She
explained that the methodology had been changed two years prior
to account for all the risk under that method, as it could be an
overly optimistic projection. She stated that the further out
the expectation for those barrels to come on-line, the more it
was assumed that it would not happen. She said that those
projected barrels were added back into the projection when it
was more apparent the barrels would come on-line and produce
revenue to the state. The upside potential was available in the
previous forecasting methodology as work that was being done and
the expectation for those barrels to come on-line.
CO-CHAIR SADDLER reflected that this was an artifact of the
truing up of the forecast model, as in the past it would have
been counted, whereas it was now being hoped for.
COMMISSIONER RODELL agreed.
2:14:38 PM
COMMISSIONER RODELL directed attention to slide 17, "Revenue
Forecast-Official, and Mid/High Case." She pointed to the
official fall forecast, 2013, in comparison to the mid/high case
forecast if 50 percent of the upside potential materialized,
with the major differences coming in the Fiscal Years 2020 to
2024 as discussed previously.
2:15:10 PM
COMMISSIONER RODELL presented slide 18, "Revenue Forecast vs
AKLNG Obligations," which compared the obligations for the
proposed gas pipeline project to the prior slide. She reported
that the general unrestricted forecast, as well as the official
forecast, was near $5 billion annually, compared to the
obligations for all three scenarios, which depicted that amount
available for the other state government funding necessities.
REPRESENTATIVE SEATON asked for clarification that the lower
bars on the graph were the costs from the project, compared to
the upper bars depicting the projected revenue.
COMMISSIONER RODELL acknowledged this, and added that it also
showed the value of a partnership for lowering the obligation
costs.
CO-CHAIR SADDLER referred to slide 18, and asked for
clarification to the lower lines, whether they were debt service
or total equity cost.
COMMISSIONER RODELL explained that the blue line was the
required cash obligation to TransCanada as a 100 percent partner
through either debt service or equity. She pointed out the
percentage relationship of the lower lines for debt service to
the upper lines depicting the general fund unrestricted revenue,
and noted that this had to be financed through either debt or
equity. She reminded the committee that, as the state did not
have the capacity for 100 percent debt, it would be necessary to
finance the equity portion. She declared that this was what
slide 18 was designed to show.
REPRESENTATIVE TARR asked if the data points on the graph line
reflected a fiscal year.
COMMISSIONER RODELL replied that this was correct.
2:19:29 PM
COMMISSIONER RODELL offered slide 19, "AKLNG Obligations vs.
GFUR Forecast," and explained that this represented a conversion
of the obligation dollar amounts from the previous slide to a
percentage of unrestricted general fund revenue.
2:20:02 PM
COMMISSIONER RODELL turned to slide 20, "AKLNG - Long term
potential," and opined that the reason for taking on this
obligation was for its long term potential and its long term
fiscal impact on the state. She pointed out that there was
tremendous revenue to the state once gas was flowing, although
this would require careful management until that point. She
said that, although there was more upside if the state goes it
alone, the risk was lower with partnerships, even though it
meant lower revenue. She pointed out the cost difference to the
state for a "go it alone" versus a "TC No Buyback" was $300
million annually.
REPRESENTATIVE TARR, referencing slide 20, pointed out that the
label on the vertical axis was labeled millions of dollars, and
she asked if it should actually reflect billions of dollars.
COMMISSIONER RODELL concurred.
REPRESENTATIVE SEATON offered his belief that the graphs on
slide 19 and slide 20 showed that the amount of unrestricted
general revenue for investment between 2020 and 2023 shifted
between 30 and 60 percent, if all the costs remained as
anticipated. He mused that this would be even more if there
were higher costs, especially if the state was a 20 percent
equity owner without any investment from TransCanada.
COMMISSIONER RODELL confirmed that Representative Seaton was
reading this correctly, and pointed to the negative revenue on
slide 20 between 2014 through 2024 as a reflection of the
percentages on slide 19.
REPRESENTATIVE SEATON pointed out that it was questionable
whether the state could sustain the level of expenditure in the
intervening years prior to 2024 without finding another source
of revenue.
COMMISSIONER RODELL confirmed his analysis, and expressed her
confidence that the state could manage through this and would be
able to find partnerships and negotiate contracts. She opined
that this would be more definitive in the upcoming year,
especially after the FEED stage. She stated that, as all the
other partners were interested in limiting the cost overruns,
there was encouragement for participation with the large oil
producers. She opined that discussion for equity participation
greater than the illustrated 20 percent would be very difficult
for the state to absorb. She reported that this range of
participation had been deemed beneficial for royalties while
allowing for management of cash flow. She allowed that
potentially there would still be some hard decisions.
REPRESENTATIVE SEATON requested that slides 18, 19, and 20 be
offered showing equity of 25 percent to compare with the 20
percent equity currently portrayed.
COMMISSIONER RODELL said that would be done.
CO-CHAIR SADDLER directed attention to slide 20, and noted that
it was obvious that the state made more money if we "go it
alone." He asked if this calculation was net for all the
opportunity cost.
COMMISSIONER RODELL replied that this slide assumed there was an
opportunity cost and the state was foregoing any investment
income on that money.
CO-CHAIR SADDLER asked to see the opportunity cost factored in.
COMMISSIONER RODELL agreed to do so.
CO-CHAIR SADDLER asked if it was possible to quantify the risks,
or if it was simply a judgment call for this policy decision.
COMMISSIONER RODELL offered her belief that the department had
attempted to do this with the analysis, as it portrayed the
percentage it would demand on unrestricted general fund revenue.
She pointed out that the legislature understood the demands on
the state for having to meet education, university, Medicare,
Medicaid, and transportation costs. She opined that this was a
policy call on the legislature for how to address these other
demands and constitutional requirements, while accepting the
constitutional requirement to maximize the resources for the
benefit of all Alaskans.
CO-CHAIR SADDLER asked about any calculation for the price risk
of commodity costs and overruns associated with ownership of the
project.
COMMISSIONER RODELL replied that those costs had a very generic
number attached to them as there was not enough information to
fine tune it. She offered to provide insight into the various
contingencies, 10 - 15 percent, in the project costs, and for
any greater detail to provide to the committee.
CO-CHAIR SADDLER expressed his appreciation that this had been
considered, as more information leveraged against bad outcomes.
2:31:25 PM
REPRESENTATIVE P. WILSON surmised that it would be necessary for
legislators to review the budget, that it would be necessary to
cut back between 20-25 percent in order to manage this project.
COMMISSIONER RODELL, in response, expressed her agreement,
stating "that's all things being equal with what we know today."
She opined that the revenue forecast could change and she
expressed her belief that there would be more revenue during the
years when the budget would become much tighter.
REPRESENTATIVE P. WILSON declared that, as it was already tough
to make cuts, it would be even more difficult to make an
additional 20 percent cut. She said "this is very, very, very
serious."
COMMISSIONER RODELL offered her belief that this also emphasized
the value for partnerships, and that the state still had the
opportunity for further decision making at the ends of the pre-
FEED and FEED. She acknowledged that although both of these
decisions had financial impacts, the $10 billion investment was
not going to be made until there was a lot more information and
the long term sales contracts were in place allowing for an
expectation for the revenue. She reassured that there were ways
out of this and opportunities to adjust if it looked like it
could not be done.
2:33:50 PM
CO-CHAIR FEIGE asked what debt instruments would be available to
the state, especially during the construction period, while
waiting for revenue. He further asked about short term bridge
loans and if these would be manageable for a short term.
COMMISSIONER RODELL replied that there were a number of
different avenues which the state could explore. Assuming the
state invested at 20 percent and wanted to "go it alone," at the
construction phase there would need to be $6-8 billion
generated. She directed attention to the credit rating, and
questioned whether the state was willingly to take more in debt
proceeds and pay a higher interest rate, so not as much capital
need be generated. She noted that other debt options, such as
bonds, could be reviewed. As debt was fairly straightforward,
the cash equity portion offered a variety of options, including
the opportunities for additional investors or sale of a portion
of the liquefaction project. She suggested that additional
financing mechanisms, such as private equity or master and
limited partnerships, could be other investment options for
outside capital so that the state did not have to generate as
much cash. She said that a cost for this would be to forego a
portion of the revenue, similar to the projection of the
TransCanada partnership.
REPRESENTATIVE SEATON asked to follow up regarding risk,
investment decisions, and partnerships. He offered his belief
that the state was not comfortable with a role as an oil
company, or manufacturer, and asked about a partnership with a
production revenue sharing agreement from the royalty and taxes
that released the liability for project costs. This would
release the legislature from the demands for fiscal investment
beyond the state budget. He asked if this type of partnership
was being investigated.
COMMISSIONER RODELL replied that these options would be explored
if they were successful with enabling legislation, as this would
be part of the due diligence during the pre-FEED stage. The
enabling legislation would also allow for a marketing effort
over the next 15 to 18 months to better understand which
partners were willing to take on part of the infrastructure.
REPRESENTATIVE SEATON asked if there was discussion for a large
gas purchaser interested in owning aspects of the entire revenue
stream.
COMMISSIONER RODELL relayed that it was important to recognize
that no one was going to make that commitment while this was
still in the concept phase, and probably not until the pre-FEED
stage. She noted that this was the reason to remain a party to
this through the pre-FEED.
2:43:14 PM
CO-CHAIR SADDLER asked for clarification regarding the
obligation to reduce the annual budget expenses by 25 percent in
order to accommodate this project. He offered his understanding
that the state would have options to finance its obligations
once it arrived at the Final Investment Decision (FID).
Referring to slide 18, he asked if the billions of dollars
forecast for the AKLNG project was cash out of pocket or
financing cost, and whether these obligations could be
significantly lowered if they were financed.
COMMISSIONER RODELL replied that this did not make any
assumptions about the financing cost; it only reflected the
state's obligation to the project. How that money was going to
be generated would be discussed at the FID stage. She explained
that the obligation to the project was compared to the
unrestricted general fund revenue, in case it had to be cash
funded. A large portion of the project funding was equity, not
debt. She expressed her agreement that partnerships would
reduce the costs.
CO-CHAIR SADDLER suggested that a 25 percent reduction in the
unrestricted general fund was a possible solution, though not
necessarily the preferred alternative.
COMMISSIONER RODELL expressed her agreement.
2:45:24 PM
REPRESENTATIVE TARR commented that it would be helpful to have
more detail for the possibility of deficit spending and the
impact on financing. She asked about the relationships for
additional investment in the liquefaction facility.
COMMISSIONER RODELL replied that the AGDC subsidiary had no cash
and had no capital, and in order to participate in the
liquefaction, the subsidiary would require appropriations for
every decision. She reported that the state would be discussing
its progress with the liquefaction program. Given the size of
this program within the total project, she opined that there
would be discussions for partnerships at the end of the pre-
FEED. She declared that there was not enough information to
make these decisions at this time; however, as the value of the
potential revenue could not be ignored, there was a commitment
to keep the project moving forward. She expressed her relief
that there was time to make these decisions.
2:49:07 PM
REPRESENTATIVE TARR referenced an article regarding "optimism
bias" and asked if the discussion had included all the
considerations for the worst possible case scenario.
COMMISSIONER RODELL allowed there probably was some "optimism
bias" and that it is important to be continually reminding
oneself of the reality of the project. She said that a lot of
this optimism arose from the willingness of the three major
producers to work with the state in a way unlike any past
negotiation. She opined that this willingness came from
recognition of the potential and a need for their companies to
commercialize the resource. She suggested that the state had
been motivated for the last 30 to 40 years to recognize this
resource. She stated that it was necessary to take advantage of
this optimism bias, and that it was owed to Alaskans to go on to
the next stage.
2:51:22 PM
REPRESENTATIVE SEATON referenced the graph on slide 18, and the
three cost bars at the bottom. He noted that the obligation
existed regardless of debt or equity, and referenced slide 13,
which projected the amount of equity versus debt that was
possible. He opined that suggested partnerships included a
partnership for the liquefaction project, which would also
change the projected revenue to the same degree.
COMMISSIONER RODELL directed attention to the grey bar on slide
18 which depicted the state obligation without a partner. She
referenced the blue bar which reflected the substantial
reduction in cash outlay and obligation for having TransCanada
as a partner. She directed attention to slide 20, which
reflected the reduction in revenue between the blue line for "go
it alone" and the light green line for the partnership with
TransCanada. She pointed to the chart which quantified the
revenue loss of $300 million annually with a partner to pay the
cash outlay on the gas treatment facilities and pipeline during
construction.
REPRESENTATIVE SEATON asked about a project partnership, beyond
that of TransCanada in the treatment plant and pipeline. He
asked if there was a way to review a 50 percent partnership, and
its effect on the revenues and the costs.
2:55:10 PM
REPRESENTATIVE JOHNSON reflected on the alignment of the
producers and the state, noting that the state also "had skin in
the game." He asked if there had been any discussion with the
producers for the level of state involvement in the project that
would keep the roles from becoming adversarial.
COMMISSIONER RODELL, acknowledging that this was a good point,
explained that this was an attempt to find partners for the
infrastructure while retaining ownership of the resource. She
declared that the partners were paid with the value of that
resource in exchange for a share of the infrastructure cost.
She offered her belief that all partnerships would evaporate at
some point, and, as long as the state was the taxing power and
royalty owner and retained the right to administer the resource,
the state could pledge to repay the partners in return for their
activities and development of infrastructure. She opined that,
as long as the state retained 20 to 25 percent control of the
project, it could bring in as many partners as desired as it was
the state revenue, not the producers revenue, which was being
paid out.
REPRESENTATIVE JOHNSON explained his point that, although the
state was giving up that revenue, it could recoup that loss
through taxes. He opined that there would not be any alignment
with the producers if the state released too much of its
ownership and simply relied on the revenue from taxes and
royalties.
2:59:48 PM
CO-CHAIR FEIGE referenced the initial contract term (ICT) for a
25-year term, which offered several options for the state at the
end of this term.
COMMISSIONER RODELL responded that the primary option at the end
of the initial contract term was for a renewal of the
partnership for the operation of the pipeline and gas treatment
facility, as well as re-negotiation for the transportation
agreements. She pointed out that the state could also terminate
the partnership with TransCanada, although there would be a cost
associated with this decision. She opined that, as TransCanada
would be depreciating the project value over the contract, this
would not be an excessive cost. The state could then operate
its portion of the project without a partner. She declared that
this mechanism for re-calculating the tariff contracts or taking
control of the project had been an important aspect of the MOU.
3:02:48 PM
COMMISSIONER RODELL, in response to Representative Seaton,
explained that the royalty rate was tied to the leases, which
were very long term contracts. Regarding the tax rate, the
state retained the right for any future legislature to adjust
this and this would be addressed in the contract.
REPRESENTATIVE SEATON asked for clarification that the
royalties, property taxes, or production tax rate could not be
revised during the term of the contract.
COMMISSIONER RODELL replied that the state would have a 25-year
agreement "that will contemplate a certain tax rate." She
reported that the contract would have consequences for any tax
rate changes so as not to preclude any future legislature from
allowing a change during the term of the contract.
REPRESENTATIVE SEATON asked whether these consequences would be
terminated at the end of the contract period.
COMMISSIONER RODELL agreed.
3:04:56 PM
ADJOURNMENT
There being no further business before the committee, the House
Resources Standing Committee meeting was adjourned at 3:05 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HRES DOR Fiscal Presentation 2.26.14.pdf |
HRES 2/26/2014 1:00:00 PM |