Legislature(2017 - 2018)SENATE FINANCE 532
03/22/2018 09:00 AM Senate FINANCE
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| Audio | Topic |
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| Start | |
| Department of Revenue's Role in the Alaska Lng Project | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| + | TELECONFERENCED |
SENATE FINANCE COMMITTEE
March 22, 2018
9:02 a.m.
9:02:18 AM
CALL TO ORDER
Co-Chair MacKinnon called the Senate Finance Committee
meeting to order at 9:02 a.m.
MEMBERS PRESENT
Senator Lyman Hoffman, Co-Chair
Senator Anna MacKinnon, Co-Chair
Senator Click Bishop, Vice-Chair
Senator Peter Micciche
Senator Donny Olson
Senator Gary Stevens
Senator Natasha von Imhof
MEMBERS ABSENT
None
ALSO PRESENT
Sheldon Fisher, Commissioner, Department of Revenue; Maria
Tsu, Specialist, Alaska Gasline Project Financing; Mike
Barnhill, Deputy Commissioner, Department of Revenue.
SUMMARY
^DEPARTMENT OF REVENUE'S ROLE IN THE ALASKA LNG PROJECT
9:03:48 AM
SHELDON FISHER, COMMISSIONER, DEPARTMENT OF REVENUE,
discussed the presentation, "DOR Update on Alaska LNG
Project State as Potential Investor/Owner" (copy on file).
9:04:45 AM
AT EASE
9:05:17 AM
RECONVENED
9:06:07 AM
Commissioner Fisher highlighted slide 2, "Presentation
Outline":
DOR Role
? Legislative role as project advances
? DOR deliverables under SB 138
o Property tax/Payment-In-Lieu-of-Tax (PILT)
o Report on plan for State/Alaskan equity
ownership
? Anticipated timing for legislative approval
State as potential investor/owner and DOR Role
? DOR evaluation process for potential state
ownership
? Interface with AGDC
o DOR staff positions/time commitments
o DOR consultants
Commissioner Fisher addressed slide 3, "Legislative Role on
DOR Lead Items":
PAYMENT-IN LIEU- OF TAX (PILT)
Property Tax Proposal and Property Tax Allocation
and Disbursement Proposal/Recommendations
MAGPR/DOR
Alaska LNG Project Entity Owners
Legislative Approval
Sec. 74, SB 138: Payment-in-lieu-of-Tax
(PILT) needs to be analyzed in light of
anticipated equity ownership mix (AGDC,
State, Private).
SOA PARTICIPATION
Finance options for State ownership and
participation in Alaska LNG project
AGDC/DOR
Alaska LNG Project Company
Authorization of Funding
ALASKAN PARTICIPATION
Plan to allow a municipality, regional
corporation or state resident to participate as
co-owner in Alaska LNG project AGDC/DOR In-State
Investors Review Plan, Provide Feedback, and
Possible Legislation
Sec. 76, SB 138: requires DOR to present
plan to Legislature.
9:10:57 AM
Co-Chair MacKinnon wondered when the administration would
advance the detailed numbers on the advancement of the
project. Commissioner Fisher replied that he would separate
whether the project was good for Alaska and whether the
state would choose to invest in the project. He understood
that they may be the same or different questions. He noted
that the statute was created at a time when the concept was
different that the current concept. He stated that as
Alaska Gasline Development Corporation (AGDC) developed its
financing structure would result in a process. He remarked
that there was work to develop a financial model, which
would be the foundation for any investment. The model would
be central to all future decisions of the viability of the
project. As that model is finalized, there would be points
of equity investments. He remarked that it was typical to
receive the investments in stages. He noted that there
would be a series of decisions, and on each stage of
financing the valuation increased.
9:14:52 AM
Co-Chair MacKinnon wondered how a model would be developed
without knowing whether the legislature was willing to
invest in the project. She asked whether it was assumed by
the governor that the state would not financially invest in
the project. Commissioner Fisher replied in the negative.
He sensed that the governor and AGDC would be pleased in
state participation at any level.
Co-Chair MacKinnon wondered whether there was a request to
pledge resources to the project. Commissioner Fisher
replied in the affirmative. He explained that the current
model included required financial investments and assumed a
certain profile based in costs and revenues. The result was
a return profile to model assumptions about the investment.
Co-Chair MacKinnon stressed that there was some concern
about the financial aspect of the project, specifically the
rate of return for the state's investment. She stressed
that there was a desire to provide the stable resource to
Alaskans, and there as an expectation of a blended
diversified portfolio. She expressed concern that there was
not an internal rate of return hurdle for the state. She
requested the Alaska rate of return and the risk of
ownership by someone other than Alaska. Commissioner Fisher
replied that he could not know at this stage. He was
defaulting to a process rather than an answer.
9:21:18 AM
Co-Chair MacKinnon stressed that people wanted to know the
terms of the project. She wondered whether there was an
unacceptable rate of return for Alaska. Commissioner Fisher
stated that he could not make that determination until the
model was completed.
Co-Chair MacKinnon wondered whether the administration
would take a project without revenue. She requested the
internal rate of return. She appreciated the legislative
role in the department. She queried any legal binding to
allow the legislature to weigh in on accepting to much risk
on the project. Commissioner Fisher replied that there was
a certain amount of risk that the state had taken. He
remarked that there had been meaningful investments, that
were sunk. He understood that there was a concern about the
return based on the current investments.
9:26:36 AM
Co-Chair MacKinnon wondered whether the proposal would be
shared with the legislature. She wondered whether the
administration represented to potential partners the need
to receive any information to the legislature. Commissioner
Fisher replied that he did not know the answer to that
question.
Senator von Imhof understood that a financial model would
be created. She asked whether a confidentiality agreement
was signed and whether he had seen the AGDC model.
Commissioner Fisher responded that he had not seen the
model.
Senator von Imhof understood that there would be close work
with the AGDC model. Commissioner Fisher agreed. He stated
that the model was currently under development.
Senator von Imhof wondered whether there were
confidentiality agreements signed in order to see the
models. Commissioner Fisher replied that that he had not
signed a confidentiality agreement.
9:29:59 AM
MARIA TSU, SPECIALIST, ALASKA GASLINE PROJECT FINANCING,
replied that she worked for the department, but there was
an agreement with the president of AGDC that to best
address the goals of the state was to imbed her into the
team and be given full access to the other AGDC staff were
granted access. She stated that she had full access to the
model.
Senator von Imhof wondered whether there was a conversation
about what could be shared with the legislature about the
model. Ms. Tsu replied that she was operating under the
assumption that she would maintain the confidentiality of
the information presented in the model. She shared that
there was an exploration of potential information protocol,
because the model was quite fluid.
Senator von Imhof felt that there should be an inclusion of
the acceptable rate of return within the model. She felt
that Alaska should be considered an "early investor."
Commissioner Fisher agreed.
9:35:49 AM
Senator Micciche would wait to ask his questions.
Co-Chair MacKinnon stated that the committee was attempting
to do its fiduciary responsibility.
Commissioner Fisher stated that the PILT was important to
the model, because it was a cost-driver.
9:37:02 AM
MIKE BARNHILL, DEPUTY COMMISSIONER, DEPARTMENT OF REVENUE,
looked at slide 4, "DOR Deliverables: Payment-in-lieu-of-
Tax":
DOR has direct responsibility under SB 138 for the
following:
Section 74 of SB 138: Requests that governor
establish an advisory planning group to advise
governor on municipal involvement in a North
Slope natural gas project and make
recommendations related to property tax under AS
43.56 and AS 29.45
? Municipal Advisory Gas Project Review
Board (MAGPR) - established by AO 269 in
2014 to discuss property tax issues
associated with the project and recommend
possible options
? Last meeting was in February 2016
? Tentative decisions regarding Payment-in-
lieu-of-Taxes (PILT) were reached, but more
work is required
? DOR intends to start up MAGPR Board
meetings again shortly
Mr. Barnhill discussed slide 5, "Payment-in-lieu-of-Tax
(PILT)":
The MAGPR Board last met February 2016. Board members'
terms have expired and board needs to be re-
constituted.
While additional discussions must occur prior to a
final recommendation, the board agreed to the
following:
Construction PILT (C-PILT) should be distributed
based on the merit of applications by impacted
communities.
Operations PILT (O-PILT) should be allocated on a
formula-driven calculation based on two criteria:
Physical location of the project's real property
and a per-capita distribution.
The board left several unresolved issues for both C-
PILT and O-PILT. These issues (see next slide) remain
unresolved.
9:41:02 AM
Co-Chair Hoffman wondered whether it was normal PILT was
levied during the construction process. Mr. Barnhill
replied that he did not know what was normal. He agreed to
provide further information. He stated that in the property
tax statute, there was a tax exemption during the
construction period.
Mr. Barnhill addressed slide 6, "Unresolved Issues for C-
PILT and O-PILT":
The unresolved issues for C-PILT include the
following:
? Will the state pay into the C-PILT fund the
same as private-sector partners, given that State
is not a taxable entity?
? How exactly will impacted municipalities draw
on the fund, and how will their requests be
decided?
? Will the state be allowed to draw on the fund
the same as municipalities?
? And will municipalities outside of the
footprint of the project be allowed to draw on
the fund for direct and indirect impacts?
9:44:41 AM
Senator von Imhof noted that the PILT was a significant
component of the financial model. She remarked that the
components and elasticity of PILT. She asked for more
information about the determination of what was put into
PILT. She was pleased, but stressed that she wanted to see
the underlying assumptions and factors into PILT and their
effects. Mr. Barnhill replied that he did not want to
ascribe any of the work of the Municipal Advisory Review
Board to Department of Revenue (DOR). He stressed that DOR
facilitated that board, but it was not work in DOR. He
stated that the computation and derivation of the numbers
was absolutely important. He noted that a PILT that was too
high could produce a negative net present value of the
project.
9:54:02 AM
Mr. Barnhill continued to discuss slide 6:
The unresolved issues for O-PILT include the
following:
? Will the state pay into the O-PILT the same as
private-sector partners?
? How will the fund be distributed to
municipalities? Strictly based on project mileage
or value within each municipality's boundaries?
Or based on some hybrid formula? What amount, if
any, should be assigned to a statewide municipal
per-capita sharing of the PILT money?
? Will the state receive funds from the account
for the project mileage/value not within a
municipal tax jurisdiction?
9:55:32 AM
Co-Chair MacKinnon wanted to be able to examine the
expenses to make a competitive project.
Senator Micciche expressed concerns with PILT. He stressed
that many Alaskans were concerns. He felt that there was a
high level of fanfare with the Chinese partnerships. He
wanted DOR to bring the project back to the people.
Senator von Imhof stressed that the model included factors
like thresholds. She stressed that it was the hope that DOR
would be objective, and use financial lens to create the
model.
10:05:35 AM
Senator Micciche understood that forced political projects
may not be able to conclude.
Commissioner Fisher looked at slide 7, "DOR Deliverables:
State/Alaskan Participation":
Section 76 of SB 138: DOR to provide report on
financing options, including options for
municipalities, residents, or regional corporations to
invest in the project and proposed legislation.
? In 2015, DOR engaged Lazard to prepare an
interim draft report, which was delivered to the
legislature.
? DOR is working with AGDC to update/revise draft
report (1) to reflect new project structure and
financing options, and (2) evaluate options to
provide mechanism for Alaskan participation in
ownership.
? Regarding options for municipalities,
residents, or regional corporations, Lazard's
summary assessment stated:
"Although Regional Corporations, Municipalities
and Individual Residents may provide potentially
viable funding sources that align Project
stakeholder incentives, certain practical
constraints (e.g., potentially limited overall
availability of funds, liquidity preferences,
investment mandates, and structuring, marketing
and monitoring costs) may be prohibitive."
Co-Chair MacKinnon wondered whether Lazard was still under
contract with the state. Commissioner Fisher replied in
the negative.
10:10:12 AM
Co-Chair MacKinnon wondered whether Black and Veatch was
still under contract with the state. Commissioner Fisher
replied in the affirmative.
10:10:25 AM
Commissioner Fisher introduced Ms. Tsu.
Ms. Tsu discussed her background.
10:17:29 AM
Ms. Tsu highlighted slide 8, "Evaluation Process for
Potential Equity Stake":
DOR is responsible for evaluating whether State should
take equity interest in Alaska LNG.
DOR has hired Maria Tsu as Alaska Gasline Project
Financing Specialist to lead effort.
? Ms. Tsu has 20+ years of institutional
investment experience, including nine years at
the Alaska Permanent Fund Corporation, where she
was most recently Director of Investments for
Private Markets (private equity and
infrastructure). She also worked for the SOA
Treasury Division, for the Municipality of
Anchorage, and for the North Pacific Fisheries
Management Council. Prior to moving to Alaska in
early 2000, Ms. Tsu worked at Goldman Sachs in
New York. She holds B.S. and M.S. degrees in
Chemical Engineering from the University of
Washington, and a Masters degree in economics
from Virginia Tech.
Evaluation steps include:
1. Understand all aspects of Alaska LNG project
2. Develop financial model needed to guide
decision
3. Conduct in-depth due diligence
4. Assist AGDC in identifying sources of equity
funding
5. Assist AGDC in obtaining approvals from
relevant entities
6. Assist AGDC in equity fundraising
10:19:00 AM
Ms. Tsu discussed slide 9, "Evaluation Steps (continued)":
1. Review: Understand project scope, timelines,
underlying economics, cash flows, funding needs,
capital sources, opportunities and risks.
2. Financial Modeling: Model project financials plus
other State revenues (royalties, taxes) and other
economic benefits to Alaska (jobs, growth, fiscal
stability).
3. Due Diligence: In-depth review of project aspects
most relevant to investment decision: sources of
returns and risks (both financial and non-financial,
including impact to State's bonding capacity and
credit rating). Draft due diligence report.
4. Funding Sources: Identify equity funding sources,
including state, Alaskans (individuals,
municipalities, Alaska Native corporations), and non-
Alaskan third-party sources.
5. Obtain Approvals: Assist AGDC in obtaining
necessary approvals from State and national entities
(e.g., CFIUS).
6. Fundraising: Assist with fundraising and
documentation of investment merits and risks.
10:24:39 AM
Senator von Imhof felt reassured that Ms. Tsu was part of
the team. She noted that AGDC was asking for receipt
authority. She assumed that the funding sources would occur
in the upcoming summer. She wondered whether summer was the
time to bring the model to the communities. Ms. Tsu replied
in the affirmative.
10:28:03 AM
Senator von Imhof understood that there was some current
money to complete FERC, but the question was whether $60
million was sufficient. She felt that there was knowledge
about questions to make informed decisions. She imagined
that there would be great detail to make an informed
decision. She wondered whether the third party funding
sources would sign nondisclosure agreements, including
municipalities, individual investors, and the state. Ms.
Tsu replied that securities laws were in place to limit
work with individuals. She stated that there was work with
Hilltop Securities to understand all the requirements. She
stated that there were some concerns about offering it to
unsophisticated investors and the risk without full
understanding.
10:34:54 AM
Senator Micciche understood that there were various factors
in determination. He wondered whether the value of the
peripheral benefits could replace the pure economics, and
bring the state to a zero rate of return. Ms. Tsu replied
that it was not her starting point. She distinguished
between the stage of the project, the financing needs, and
the return potential for that equity capital investment.
She stressed that the early needed capital was to finalize
much of the critical work to proceed with the final
investment decision and construction.
10:40:40 AM
Senator Micciche requested assurance that there would not
be an overplay of the less quantifiable benefits. Ms. Tsu
replied that she hoped to address what could be quantified.
Co-Chair MacKinnon queried the process of the Committee on
Foreign Investment. Ms. Tsu explained intention of the
committee was to evaluate foreign investment in the U.S.
10:46:35 AM
Co-Chair MacKinnon explained that there was a trade deficit
with a partner on the opportunity. She remarked that China
had a different structure. Commissioner Fisher replied that
the group was less involved in those discussions.
Ms. Tsu furthered that in addition to helping the trade
balance and deficit with China, the project would provide
access to a critical natural resource that would grow
China's economy.
10:50:04 AM
Co-Chair MacKinnon stressed that she did not provide risk
to the state with the conduit of financing.
Commissioner Fisher discussed slide 10, "DOR Deliverables:
Tax As Gas (TAG)":
AS 43.05.010(17): DOR commissioner directs disposition
of revenue from TAG
? If DNR elects Royalty-In-Kind (RIK), then
producers have the option to elect Tax-As-Gas
(TAG), although there are other triggers for a
TAG election.
? Under current AGDC-led project structure, if
DNR elects RIK, State could sell royalty gas and
Tax-as-Gas to AGDC
? DNR is actively engaged with AGDC on
discussions regarding Gas Sales Agreement
? Contract for sale of State's royalty and TAG
gas by DNR will require royalty board
recommendation and legislative approval
? If DNR elects RIK and the producers elect TAG,
then DOR will establish regulations to support a
TAG election.
Commissioner Fisher highlighted slide 11, "Anticipated
Timeline for DOR Deliverables":
Final Report(s) to legislature on:
? Financing options for State of Alaska ownership
in Alaska LNG project (as noted above, DOR/AGDC
working on interim reports regarding whether
State invests and options to do so)
? Plan for Municipalities, Regional Corporations,
and residents to participate in ownership of
project
Anticipated timeline: SB 138 requires these
to be submitted at time DNR submits
agreements, e.g. RIK gas sales agreement,
for legislative approval under AS
38.05.020(b)(11)
Property tax proposal, allocation and disbursement:
Payment-in-lieu-of-Tax (PILT) is under
consideration for construction period (C-PILT)
and once project is operational (O-PILT)
Anticipated timeline: must be resolved
before equity fund raising for bulk of
construction costs.
Commissioner Fisher looked at slide 12, "DOR Interaction
with AGDC":
DOR has one full-time RSA/staff position (Maria Tsu),
reporting to Commissioner Fisher, assigned to work
with AGDC. Ms. Tsu splits time between Atwood (20
percent) and AGDC's office (80 percent).
? Embedded into AGDC financial modeling group
? Fully integrated into team
? Participates in meetings with other AGDC teams
(commercial, technical)
? Interacts with other Anchorage-based DNR and
DOR staff
Ms. Tsu works closely with Commissioner Fisher and
Deputy Commissioner
Barnhill in coordinated effort to address issues.
As project ramps up, DOR may need to add resources to
ensure expertise and work-load demands are satisfied.
10:54:03 AM
Senator Micciche shared that he had been seconded in the
private sector. He requested that there be alliance to DOR.
Ms. Tsu replied that she worked for the commissioner.
Commissioner Fisher discussed slide 13, "DOR Consultants":
DOR has two consultants (Greengate LLC and Hilltop
Securities) under contract.
Greengate LLC is tasked with the following:
? Provide high-level review of AGDC financial
model and suggest improvements
? Validate final AGDC financial model, which
serves as basis for equity investor and DOR
models
? Assist/provide input on DOR model to consider
benefits to Alaska more broadly (royalties,
taxes, jobs, economic growth, fiscal stability,
etc.)
? Review/validate DOR model
Hilltop Securities is tasked with the following
? Provide expertise and advice on project finance
and underwriting
DOR may engage additional consultants or advisors as
project develops to provide independent expert advice
in other areas.
ADJOURNMENT
11:00:27 AM
The meeting was adjourned at 11:00 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 032218 Greengate_LNG Experience_Jun2016AK.pdf |
SFIN 3/22/2018 9:00:00 AM |
AKLNG |
| 032218 SFC DOR Presentation AKLNG.pdf |
SFIN 3/22/2018 9:00:00 AM |
AKLNG |
| 032218 DOR Org Chart for Alaska LNG (1).pdf |
SFIN 3/22/2018 9:00:00 AM |
AKLNG |
| 032218 DOR Response to S FIN 4-12-18.pdf |
SFIN 3/22/2018 9:00:00 AM |
AKLNG |
| 032218 PILT letter to governor legislators.pdf |
SFIN 3/22/2018 9:00:00 AM |
AKLNG |