Legislature(2017 - 2018)SENATE FINANCE 532

01/25/2018 09:00 AM RESOURCES

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Audio Topic
09:01:13 AM Start
09:02:27 AM Update: Alaska Lng Project
11:05:11 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
- Joint with the Senate Finance Committee -
+ Update on the Alaska LNG Project: TELECONFERENCED
- Alaska Gasline Development Corporation
-- Testimony <Invitation Only> --
                    ALASKA STATE LEGISLATURE                                                                                  
                         JOINT MEETING                                                                                        
              SENATE RESOURCES STANDING COMMITTEE                                                                             
                    SENATE FINANCE COMMITTEE                                                                                  
                                                                                                                              
                        January 25, 2018                                                                                        
                           9:01 a.m.                                                                                            
                                                                                                                                
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
SENATE RESOURCES                                                                                                                
                                                                                                                                
 Senator Cathy Giessel, Chair                                                                                                   
 Senator John Coghill, Vice Chair                                                                                               
 Senator Natasha Von Imhof                                                                                                      
 Senator Bill Wielechowski                                                                                                      
 Senator Click Bishop                                                                                                           
                                                                                                                                
SENATE FINANCE                                                                                                                  
                                                                                                                                
 Senator Anna MacKinnon, Co-Chair                                                                                               
 Senator Click Bishop, Vice Chair                                                                                               
 Senator Peter Micciche                                                                                                         
 Senator Natasha Von Imhof                                                                                                      
 Senator Donald Olson                                                                                                           
 Senator Gary Stevens                                                                                                           
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
SENATE RESOURCES                                                                                                                
                                                                                                                                
 Senator Bert Stedman                                                                                                           
 Senator Kevin Meyer                                                                                                            
                                                                                                                                
SENATE FINANCE                                                                                                                  
                                                                                                                                
 Senator Lyman Hoffman, Co-Chair                                                                                                
                                                                                                                                
OTHER LEGISLATORS PRESENT                                                                                                     
                                                                                                                                
Senator Shelley Hughes                                                                                                          
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
UPDATE: ALASKA LNG PROJECT                                                                                                      
                                                                                                                                
     - HEARD                                                                                                                    
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
No previous action to record                                                                                                    
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
KEITH MEYER, President                                                                                                          
Alaska Gas Development Corporation (AGDC)                                                                                       
POSITION STATEMENT: Provided Update on AKLNG Project.                                                                         
                                                                                                                                
FRANK RICHARDS, Senior Vice President                                                                                           
Project Management                                                                                                              
Alaska Gasline Development Corporation (AGDC)                                                                                   
POSITION STATEMENT: Provided Update on AKLNG Project.                                                                         
                                                                                                                                
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
9:01:13 AM                                                                                                                    
CHAIR  CATHY  GIESSEL called  the  joint  meeting of  the  Senate                                                             
Resources Standing Committee and  the Senate Finance Committee to                                                               
order at 9:01 a.m.  Present at  the call to order from the Senate                                                               
Resources Committee  were: Senators  Bishop, Coghill,  Von Imhof,                                                               
Wielechowski,  and   Chair  Giessel;  from  the   Senate  Finance                                                               
Committee: Senators Bishop, Micciche,  Olson, Von Imhof, Stevens,                                                               
and Co-Chair Mackinnon.                                                                                                         
                                                                                                                                
^Update: Alaska LNG Project                                                                                                     
                   Update: Alaska LNG Project                                                                               
                                                                                                                              
9:02:27 AM                                                                                                                    
CHAIR  GIESSEL invited  members from  the Alaska  Gas Development                                                               
Corporation  (AGDC) to  the table  to  provide an  update on  the                                                               
AKLNG Project.                                                                                                                  
                                                                                                                                
9:02:59 AM                                                                                                                    
CO-CHAIR  MACKINNON said  that the  legislature  and the  Finance                                                               
Committee  play a  very  important role  in  development of  this                                                               
project and the  Senate Finance Committee is  tasked with looking                                                               
at the finances of the state  including any debt the state has or                                                               
is   considering  with   regard  to   infrastructure  and   other                                                               
investments. Collaboration with the  legislature is necessary for                                                               
a successful project, she stated.                                                                                               
                                                                                                                                
KEITH  MEYER,  President,   Alaska  Gas  Development  Corporation                                                               
(AGDC), said they would start  the presentation with the numbers;                                                               
they  would also  talk about  the budget,  the project  cost, the                                                               
economics of the  overall system, and provide a  commercial and a                                                               
regulatory technical update.                                                                                                    
                                                                                                                                
9:04:05 AM                                                                                                                    
Capital  Budget: (slide  3) Throughout  2017, AGDC  implemented a                                                               
significant austerity  program trying  to extend  allocated funds                                                               
as long  as possible. As a  result, the spend is  $24 million for                                                               
the  year versus  a  budget of  $55 million.  There  was a  total                                                               
expenditure for the year of $33.6  million versus a budget of $65                                                               
million  including  the   operating  component,  allocated  60/40                                                               
ASAP/AKLNG.                                                                                                                     
                                                                                                                                
9:05:19 AM                                                                                                                    
In FY18, (slide 4) AGDC  will spend about $5 million/month, which                                                               
will bring  total expenditures for  January through June  2018 to                                                               
$67 million. They started the year  with $72 million and will end                                                               
up at  the end of  June with $41  million. Their intention  is to                                                               
have a lean burn rate and extend that through the end of FY19.                                                                  
                                                                                                                                
9:06:07 AM                                                                                                                    
CO-CHAIR MACKINNON said  she wants to be clear:  is AGDC spending                                                               
half their budget because only half  the year is done or spending                                                               
50 percent less in the January through December period.                                                                         
                                                                                                                                
MR. MEYER  replied that they  underspent last year as  the result                                                               
of  a significant  austerity program  and they  are underspending                                                               
this year's budget, as well.  The savings comes mostly from doing                                                               
in-house contracting instead of outside contracting.                                                                            
                                                                                                                                
CO-CHAIR MACKINNON asked if it  is 50 percent under, because that                                                               
is  what he  is showing,  but  only six  months of  his year  has                                                               
lapsed.                                                                                                                         
                                                                                                                                
MR.  MEYER answered  that January  through December,  2017, their                                                               
year-to-date actuals were $24.7  million for capital expenditures                                                               
versus a budget of $55 million.                                                                                                 
                                                                                                                                
9:08:07 AM                                                                                                                    
CHAIR GIESSEL  remarked that AGDC's capital  expenditure for 2017                                                               
was $33.5  million and that is  what was spent for  two months of                                                               
work  with   three  large  company  partners   in  pre-Front  End                                                               
Engineering and Design  (FEED), but at that time  the project was                                                               
moving  forward. It  was hard  for her  to believes  that he  was                                                               
spending so little and accomplishing so much.                                                                                   
                                                                                                                                
9:08:47 AM                                                                                                                    
MR.  MEYER responded  that to  him  that recognizes  a number  of                                                               
things:  a significant  amount of  work was  already done  by the                                                               
prior project team,  and the biggest expenditure  was funding it.                                                               
When AGDC took over the project,  a lot of the activities started                                                               
to be  done in-house.  Their team  had just  come off  the Alaska                                                               
Stand Alone  Project (ASAP)  and were very  capable. They  took a                                                               
36,000-page brief and  made it into a 100,000-page  filing to the                                                               
Federal  Energy  Regulatory  Commission  (FERC).  A  lot  of  the                                                               
engineering work was  done previously ($600 million  was spent on                                                               
engineering  and optimization).  So,  the work  that  was left  -                                                               
commercialization and  funding activities  - is  different. Their                                                               
intention is to move this project  forward and de-risk it with as                                                               
little use  of outside  contracting as they  can and  live within                                                               
the allocated funding. Additional FEED  work is still needed, and                                                               
they  could use  more funding,  but the  project can  be kept  on                                                               
track  with their  current schedule,  which  is to  have a  final                                                               
investment  decision (FID)  at the  front end  of 2019  and begin                                                               
construction at the  back half of 2019 for an  in-service date of                                                               
2024/25.                                                                                                                        
                                                                                                                                
9:11:29 AM                                                                                                                    
CHAIR  GIESSEL thanked  him for  his lengthy  comments and  noted                                                               
that competence  is expressed when expenditures  are commensurate                                                               
with that competence.                                                                                                           
                                                                                                                                
SENATOR  WIELECHOWSKI asked  how much  the state  is spending  v.                                                               
partners,   meaning  the   Chinese  government,   the  Vietnamese                                                               
government, etc.                                                                                                                
                                                                                                                                
MR. MEYER answered that AGDC is  100 percent owner of the project                                                               
and doesn't  currently have partners.  However, later  this year,                                                               
they may engage with partners both financial and strategic.                                                                     
                                                                                                                                
SENATOR WIELECHOWSKI  asked what those "partners"  are called and                                                               
if they  are spending any money  on this project or  if the State                                                               
of Alaska is spending everything.                                                                                               
                                                                                                                                
MR.  MEYER replied  that those  governments  are "customers"  and                                                               
typically  customers don't  fund  a project.  Funding comes  with                                                               
ownership  and they  haven't engaged  in  that relationship  yet.                                                               
However, funds are being expended  by the customers as they spend                                                               
thousands of hours in traveling  here, in meetings, and in AGDC's                                                               
data room.                                                                                                                      
                                                                                                                                
He said that currently AGDC does  not have the ability to receive                                                               
funds from  third parties.  That is  one of  the things  they are                                                               
asking from the legislature this session.                                                                                       
                                                                                                                                
SENATOR VON IMHOF said she looked  ahead at slide 54 and it looks                                                               
like  the  AKLNG  Project  is entering  into  FEED  shortly.  The                                                               
previous FEED was  going to require $2 billion/year  from each of                                                               
the   four  partners   and   she  was   worried   that  AGDC   is                                                               
underestimating  the  amount of  funding  needed  to get  through                                                               
2019, especially with  an incredibly reduced staff.  How are they                                                               
doing that?                                                                                                                     
                                                                                                                                
MR. MEYER  corrected that  the estimate for  FEED for  the entire                                                               
project was  $2 billion  in total  not per  partner. And  at some                                                               
point  in time  the project  will have  to spend  that. They  are                                                               
looking  at a  reduced expenditure  to get  a lump-sum,  turn-key                                                               
rollover into  FEED, but that  funding has  yet to be  raised and                                                               
the  expectation  is that  it  will  happen this  calendar  year.                                                               
AGDC's  inability to  raise and  receive those  funds will  cause                                                               
delay in the project's schedule.                                                                                                
                                                                                                                                
9:16:58 AM                                                                                                                    
SENATOR VON IMHOF asked if a  finance director had been hired and                                                               
if he will be in charge of raising money.                                                                                       
                                                                                                                                
MR. MEYER replied  that they are days away from  engaging a large                                                               
investment banker who  would help with the funding. It  is a firm                                                               
not a staff person.                                                                                                             
                                                                                                                                
SENATOR  MICCICHE  said  legislators   had  been  following  this                                                               
project for  so many years that  they are getting hung  up in the                                                               
old  arrangement, but  they are  catching up.  Did he  understand                                                               
correctly that  AGDC will  not ask the  legislature for  any more                                                               
funding  but is  hoping  to  bring along  a  partner  that has  a                                                               
funding package with them at the next gate.                                                                                     
                                                                                                                                
MR.  MEYER said  that was  correct  but reiterated  that AGDC  is                                                               
asking for receipt authority to receive those funds.                                                                            
                                                                                                                                
CO-CHAIR MACKINNON  asked if they  are asking to move  money over                                                               
from ASAP so AGDC can use it for the AKLNG Project.                                                                             
                                                                                                                                
MR.  MEYER  replied he  is  asking  for  a re-allocation  of  $12                                                               
million in  ASAP funding  to the  AGDC, because  those activities                                                               
are winding down.                                                                                                               
                                                                                                                                
CO-CHAIR MACKINNON said that would  be a conversation for another                                                               
day.                                                                                                                            
                                                                                                                                
9:20:02 AM                                                                                                                    
MR. MEYER  said slide  5 indicates that  no additional  funds are                                                               
requested for  FY19 budget and  again, he was asking  for program                                                               
receipt  authority to  receive money  from third  parties and  to                                                               
transfer funds from the ASAP to the AKLNG fund.                                                                                 
                                                                                                                                
SENATOR MICCICHE  said the  legislature wants  to be  partners in                                                               
this project  in whatever form  it takes  and asked how  he would                                                               
feel if  that receipt authority was  compartmentalized as opposed                                                               
to a  blanket receipt  authority, so  that the  legislature would                                                               
have a vote in each phase of development.                                                                                       
                                                                                                                                
MR. MEYER  answered that it  would be very detrimental.  Before a                                                               
third-party funding  source will  invest hundreds of  millions of                                                               
dollars,  it  will  want  to   make  sure  the  project  will  be                                                               
completed. They  will resist  investing in  a project  that could                                                               
get held up for a political reason or some other reason.                                                                        
                                                                                                                                
SENATOR  MICCICHE said  passing  a blanket  receipt authority  to                                                               
AGDC removes the legislature from  any further approval and hands                                                               
full authority to  the administration for this  project and asked                                                               
if he saw a way for that  review to occur other than the one-time                                                               
passage  of  a  bill that  essentially  relinquishes  legislative                                                               
authority to  support or not  support the  project if they  see a                                                               
level of risk that is unacceptable for the state.                                                                               
                                                                                                                                
MR.  MEYER  replied  that  those   risks  can  be  addressed.  He                                                               
envisions a  structure in  which the state  will always  have the                                                               
first  option to  invest,  but if  it didn't  want  to fund  this                                                               
project those  partners that have  invested hundreds  of millions                                                               
at that  point would  have the  ability to  go forward  not using                                                               
state  funding. This  project will  have to  be approved  anyway,                                                               
before that is finalized, and that would be a final check.                                                                      
                                                                                                                                
9:24:00 AM                                                                                                                    
SENATOR  MICCICHE  asked  for a  document  explaining  the  stage                                                               
gates, because for this project  to be successful the legislature                                                               
would  have to  be involved,  and they  want to  understand where                                                               
they have a formal say in that process.                                                                                         
                                                                                                                                
CHAIR  GIESSEL  said  the  legislature  actually  had  off  ramps                                                               
between each  phase of the  development in the  previous project,                                                               
and that  was the  project that this  legislature agreed  to. The                                                               
legislature, as  the board of  directors for the State  of Alaska                                                               
and as  the ones  with the  appropriating authority,  wants those                                                               
off ramps for this project.                                                                                                     
                                                                                                                                
CO-CHAIR  MACKINNON  explained  that  the  reason  for  having  a                                                               
separate fund for the ASAP was  to backstop a big project failure                                                               
and to  be able  to provide  off-takes and gas  to Alaskans  at a                                                               
particular price.  Her concern with reallocating  the $12 million                                                               
is that they are foregoing  a backstop project. That last project                                                               
also  included an  opportunity for  Alaskans to  partake in  this                                                               
project  and she  has  seen  nothing now  that  will allow  that.                                                               
Alaskans  should have  some way  to participate  in the  project,                                                               
like a check-off box on the Permanent Fund application.                                                                         
                                                                                                                                
MR. MEYER responded that work on  the ASAP is concluding. That is                                                               
the backup plan and  it is alive and well. It  is their intent to                                                               
have  a structure  whereby Alaskans,  municipalities, and  Native                                                               
corporations can invest in the project.                                                                                         
                                                                                                                                
CHAIR  GIESSEL  followed up  saying  that  Lazard, a  legislative                                                               
consultant,   was   engaged   to  comment   on   the   investment                                                               
possibility, but that  was contingent on reports  coming from the                                                               
Department of  Revenue (DOR) and Department  of Natural Resources                                                               
(DNR), whom they hadn't heard from in quite a while.                                                                            
                                                                                                                                
9:28:40 AM                                                                                                                    
SENATOR WIELECHOWSKI said  the way he sees it, AGDC  is asking to                                                               
receive funds from  potential partners and he  wondered what they                                                               
are expecting  in return, and  would the legislature be  privy to                                                               
the terms  for receiving  those funds  and will  that potentially                                                               
expose the state to some future liability?                                                                                      
                                                                                                                                
MR. MEYER answered the legislature  will be privy to those terms.                                                               
He explained that  the state would be giving up  some of its 100-                                                               
percent   ownership  of   the   project,  and   it   is  a   good                                                               
infrastructure investment  that links one of  the world's largest                                                               
stranded gas resources  with the world's largest LNG  market on a                                                               
very long  term stable  basis. It will  have a  reasonable return                                                               
that  will be  attractive  to  infrastructure investors  (pension                                                               
funds, insurance  companies, pipeline  companies, etc.).  It will                                                               
not be attractive to large oil  majors, because it will not clear                                                               
their hurdle rate.                                                                                                              
                                                                                                                                
SENATOR  WIELECHOWSKI said  he knows  the Finance  Committee will                                                               
look at  this much more closely,  but he wants to  make sure they                                                               
aren't giving up too much ownership for small amounts of money.                                                                 
                                                                                                                                
CO-CHAIR  MACKINNON  said  the   state  isn't  really  giving  up                                                               
ownership or  the project will  not receive a  federal tax-exempt                                                               
status of the same magnitude.                                                                                                   
                                                                                                                                
MR. MEYER  responded to the  extent the state sells  ownership in                                                               
the system, that share would lose  the ability to have tax exempt                                                               
financing, but  the sale would  bring in  funds to the  owners of                                                               
the project.  AGDC's tax-exempt  status will  largely be  used to                                                               
raise  funding for  its  investment in  the  project, which  they                                                               
expect  to be  substantial at  some  point (their  target is  $11                                                               
billion of  equity), and it  has the ability to  issue tax-exempt                                                               
bonds  to raise  that  funding. They  do  not anticipate  selling                                                               
shares  of AGDC.  A  project company  would  be established  that                                                               
would hold the pipeline and the  LNG facility, and shares of that                                                               
entity is what would be sold. Today AGDC owns 100 percent.                                                                      
                                                                                                                                
9:33:03 AM                                                                                                                    
CO-CHAIR MACKINNON asked  if the tax-exempt bond  authority has a                                                               
cap.                                                                                                                            
                                                                                                                                
MR. MEYER answered no.                                                                                                          
                                                                                                                                
CO-CHAIR MACKINNON asked  for a legal opinion on how  and in what                                                               
quantity  AGDC has  for issuing  bonds, because  she assumed  the                                                               
financing market would look at what is backing the bonds.                                                                       
                                                                                                                                
MR. MEYER  replied that he  would use  ownership in the  system -                                                               
the gas  pipeline, the LNG  plant, and the  underlying commercial                                                               
agreements that provide  revenue for the services  of that system                                                               
- as backing.                                                                                                                   
                                                                                                                                
CO-CHAIR  MACKINNON  added  that financing  would  be  ultimately                                                               
backed by whoever purchases the gas supply.                                                                                     
                                                                                                                                
MR. MEYER said that was correct.                                                                                                
                                                                                                                                
9:34:16 AM                                                                                                                    
At ease                                                                                                                         
                                                                                                                                
9:39:06 AM                                                                                                                    
CHAIR GIESSEL called the meeting back to order at 9:34.                                                                         
                                                                                                                                
MR. MEYER  said slide 6  looks at  2018/19 funding needs  of $700                                                               
million for  class 3  work. That  is what  they would  be seeking                                                               
from  third-party  sources.  To  be clear,  they  need  the  work                                                               
product  more than  the funding,  and some  of that  work product                                                               
could  come  from in-kind  contributions.  If  any of  that  gets                                                               
delayed, they risk slipping the schedule.                                                                                       
                                                                                                                                
CHAIR GIESSEL asked  him to explain a bit more  about the in-kind                                                               
contributions.                                                                                                                  
                                                                                                                                
MR.  MEYER replied  that a  funder  that is  also an  engineering                                                               
company might do  that work product. However,  they are currently                                                               
looking for  funding in the  form of  cash to pay  an engineering                                                               
company to do the work.                                                                                                         
                                                                                                                                
CHAIR GIESSEL  asked if China  has expressed an interest  as they                                                               
had  indicated   they  have   engineering  capabilities   in  the                                                               
Memorandum  of Development  (MOD). Is  that what  he is  thinking                                                               
about?                                                                                                                          
                                                                                                                                
MR.  MEYER  replied  that  is  one  potential,  but  other  large                                                               
engineering  companies take  ownership  interest  in projects  in                                                               
exchange for  work, depending  on the  project's ability  to fund                                                               
and their degree of confidence in the project.                                                                                  
                                                                                                                                
CHAIR GIESSEL  related that when the  TransAlaska Pipeline System                                                               
(TAPS) was built,  Alaskans "were pretty riled up"  about all the                                                               
Lower "48ers"  who came to work  on it, and she  couldn't imagine                                                               
how they would feel about engineers from China.                                                                                 
                                                                                                                                
9:42:52 AM                                                                                                                    
CO-CHAIR MACKINNON said the  previous partners contributed around                                                               
$600  million to  the project  and asked  if Alaska  owes them  a                                                               
repayment. Do  they still  have some form  of equity  interest or                                                               
in-kind  interest  going  forward with  those  expenditures  they                                                               
made?                                                                                                                           
                                                                                                                                
MR. MEYER replied  that the state doesn't owe  them anything. The                                                               
state's  obligation was  to take  over  the project  and move  it                                                               
forward  using its  funding capabilities  and general  ability to                                                               
develop a project.  Everyone will get a  significant benefit from                                                               
this project.  They could, for  instance, book reserves  that are                                                               
currently not called reserves. "And  so, we have their support in                                                               
developing this project down to a  company, but no; we do not owe                                                               
them for the work done."                                                                                                        
                                                                                                                                
CO-CHAIR MACKINNON asked  if AGDC would not have  to purchase any                                                               
assets from those past partners.                                                                                                
                                                                                                                                
MR. MEYER  answered no,  but AGDC  has not  acquired the  land at                                                               
Nikiski  that  is  owned  by   an  LLC  formed  by  the  producer                                                               
companies.  That purchase  would  require funding,  but they  are                                                               
considering  a  purchase  option.  So, it  wouldn't  be  required                                                               
immediately but rather once they took FID on the project.                                                                       
                                                                                                                                
CO-CHAIR MACKINNON asked  if the land acquisition  is included in                                                               
his presentation figures.                                                                                                       
                                                                                                                                
MR. MEYER answered yes.                                                                                                         
                                                                                                                                
SENATOR VON IMHOF asked if  they will approach the Permanent Fund                                                               
(PF) at any point for investment or a financial contribution.                                                                   
                                                                                                                                
MR. MEYER replied he does not  anticipate that. The state has the                                                               
first  option to  invest  and  he didn't  know  where that  would                                                               
necessarily come from. He views  this as an attractive investment                                                               
and the Permanent Fund would  have the same opportunity to invest                                                               
as anyone else.  In fact, he would encourage them  to look at it,                                                               
but  he has  no expectation  that  funding would  come from  that                                                               
source in particular.                                                                                                           
                                                                                                                                
SENATOR VON  IMHOF said in  other words he won't  actively pursue                                                               
PF funding but will wait for its board to come to AGDC.                                                                         
                                                                                                                                
MR. MEYER replied that AGDC  will actively pursue all third-party                                                               
investors.  To him  the  Permanent Fund  would  be a  third-party                                                               
investor.  He  didn't envision  pursuing  them  in isolation  nor                                                               
potentially at all. They know  enough about the project and ought                                                               
to be  interested enough  to look  at it.  They are  not thinking                                                               
internally that is where the funding will come from.                                                                            
                                                                                                                                
9:47:31 AM                                                                                                                    
SENATOR  STEVENS asked  him to  clarify that  the state  owns all                                                               
engineering work and efforts of  the past partners except for the                                                               
land.                                                                                                                           
                                                                                                                                
MR. MEYER said that was correct,  except for the Nikiski land and                                                               
a Department  of Energy export license  that is also held  by the                                                               
same LLC that owns the land.                                                                                                    
                                                                                                                                
9:47:58 AM                                                                                                                    
MR. MEYER said the project's top  priority is gas to Alaskans and                                                               
slides 7  and 8 broke  down the  economics. The pipeline  in this                                                               
project is more  than twice the current demand of  all of Alaska,                                                               
500 mcf/day, with pricing in  the mid-single digits ($5-6 mmbtu).                                                               
One  benefit of  a gas  pipeline, unlike  a crude  line, is  that                                                               
natural gas  can be used right  off the pipe to  feed a community                                                               
or a mining project. It could  yield a potential savings of about                                                               
$1,000  per  household  in  the  greater  gas-consuming  area  of                                                               
Alaska. That  number is even  greater in Fairbanks that  would be                                                               
displacing oil, but  it does not reflect  remote communities that                                                               
might have to get LNG by truck, barge, or ISO container.                                                                        
                                                                                                                                
9:50:00 AM                                                                                                                    
CO-CHAIR MACKINNON remarked  that the cost of a  feeder line will                                                               
not reduce the cost of  rural generation for anchor tenants, like                                                               
schools,  that  are  funded  by  the  state,  and  asked  how  he                                                               
calculated the $1000 for Southcentral households.                                                                               
                                                                                                                                
MR. MEYER replied that the  estimate took natural gas consumption                                                               
and estimated  savings per mmbtu  and divided that by  the number                                                               
of households. It's  not necessarily the homeowner  gas bill, but                                                               
rather the homeowner's energy bill.                                                                                             
                                                                                                                                
CHAIR  GIESSEL  asked   if  the  number  of   takeoff  points  to                                                               
communities  in SB  138 -  she  thought it  was four  - had  been                                                               
increased.                                                                                                                      
                                                                                                                                
MR. MEYER  said when he  stepped into the project,  language said                                                               
"up to  five offtakes." Once AGDC  stepped in, it said  "at least                                                               
five." He believes  the more offtakes the better -  unlike an oil                                                               
line  - and  that this  gas pipeline  will be  a trunk  line from                                                               
which branches will grow. It might be  a bit of a struggle to get                                                               
to  five, but  once  the gasline  comes in  and  people start  to                                                               
realize how close it is, all  of a sudden projects (for instance,                                                               
mining) will  start to factor  that into their numbers  and there                                                               
will be  an interconnect. He  said before the project  was looked                                                               
at as an LNG  project with a pipeline and he is  looking at it as                                                               
a pipeline project with an LNG plant.                                                                                           
                                                                                                                                
CHAIR GIESSEL  said small communities  can't support the  cost of                                                               
an offtake and asked who would pay for these offtake points.                                                                    
                                                                                                                                
MR. MEYER replied  that should be a rolled-in cost  to the system                                                               
because  it's  much cheaper  to  do  it that  way,  and  it is  a                                                               
relatively minor cost in the scheme  of the project. It's a valve                                                               
and  a  meter station.  It  wouldn't  be  fair  to have  a  small                                                               
community  bare the  entire  cost when  spreading  it across  the                                                               
entire system would be a relatively small burden.                                                                               
                                                                                                                                
CHAIR  GIESSEL said  the conversion  of  households from  heating                                                               
fuel to  gas is another  expense and  asked if AGDC  had included                                                               
that in their calculations and if AGDC would fund that, as well.                                                                
                                                                                                                                
MR.  MEYER answered  no;  they  are a  wholesale  supplier not  a                                                               
distributer and  as such, they  would supply  the interconnection                                                               
and laterals. Distribution companies will do the conversions.                                                                   
                                                                                                                                
9:55:46 AM                                                                                                                    
SENATOR BISHOP asked if parts of SB 138 are still in effect.                                                                    
                                                                                                                                
MR. MEYER replied yes; the entire thing is in effect.                                                                           
                                                                                                                                
SENATOR  BISHOP  said that  SB  138  has  a provision  saying  20                                                               
percent  of the  gross revenues  from  the project  goes into  an                                                               
energy fund to help finance some of the rural gas hookups.                                                                      
                                                                                                                                
MR. MEYER said he is correct.                                                                                                   
                                                                                                                                
9:57:25 AM                                                                                                                    
SENATOR VON IMHOF  said wrapping these offtakes  into the project                                                               
costs might make the outside  investors pause if their capital is                                                               
going towards  a good-will  cause and  won't necessarily  yield a                                                               
return, especially in this time of razor-thin margins.                                                                          
                                                                                                                                
MR. MEYER  said no; why the  state is doing this  project will be                                                               
an  accepted  part  of  the  system. That's  what  he  tells  the                                                               
potential partners: that's just the deal.                                                                                       
                                                                                                                                
SENATOR VON IMHOF  said she gets that but  hopes enough investors                                                               
accept  that as  part of  the deal.  Any sophisticated  investors                                                               
will want to  see a line item accounting of  how their money will                                                               
be spent: commercial gas versus the communities' gas.                                                                           
                                                                                                                                
MR.  MEYER responded  that  the  cost of  an  interconnect is  $1                                                               
million if it  is done while the line is  under construction. So,                                                               
even 10  of those is  not a  backbreaking number given  the total                                                               
cost of  the system. A city  like Fairbanks have very  little gas                                                               
now; it is a growth market. That has to be accepted.                                                                            
                                                                                                                                
9:59:53 AM                                                                                                                    
SENATOR MICCICHE asked  how one sells 20  percent excess capacity                                                               
for which there is currently no market  and if that is a point of                                                               
contention for investors at this point.                                                                                         
                                                                                                                                
MR.  MEYER  replied  that  how  it gets  paid  for  is  a  future                                                               
discussion. Right now,  they are looking at the  economics of the                                                               
system being  underpinned by the  export market, and  the instate                                                               
market will  be a  future benefit  that one  could assign  with a                                                               
probability  factor. If  it has  zero probability,  then it  is a                                                               
leaner return  project, but  if one believes  there will  be some                                                               
instate growth, that is additional upside.                                                                                      
                                                                                                                                
SENATOR MICCICHE asked if expansion  is typical for future excess                                                               
potential as opposed to existing excess capacity.                                                                               
                                                                                                                                
MR.  MEYER  answered yes,  adding  that  this pipeline  will  use                                                               
looping as a future upside.                                                                                                     
                                                                                                                                
10:02:39 AM                                                                                                                   
He said  slide 9 compares  the old  cost structure with  the new.                                                               
The old structure had three  producer partners and the state that                                                               
was expected  to contribute 25  percent of the capital.  It would                                                               
also  get 25  percent capacity  and be  25 percent  owner of  the                                                               
system. Under the new structure, the  state has 25 percent of the                                                               
equity (75 percent  of that is debt), the  capacity allocation is                                                               
25 percent, and the ownership is 100 percent.                                                                                   
                                                                                                                                
MR. MEYER  said slide 10  broke down  the cost estimates  for the                                                               
project: $600  million was spent  collectively over the  last two                                                               
and   half  years   on  engineering   optimization  and   project                                                               
management. The  resulting procurement and  construction estimate                                                               
for the entire system (GTP,  pipeline, and LNG facility) is $27.9                                                               
billion. Owner's  costs are  on top  of that,  the top  one being                                                               
paying the project team that  oversees the large contractors that                                                               
are actually  building it. The  number used was $3.4  billion ($1                                                               
million/day for 9.5  years). In addition to that,  FEED will cost                                                               
$764 million;  insurance, staffing-up the  operating organization                                                               
and  getting them  all trained  and  ready to  operate, start  up                                                               
costs,  and  others  cost  will  cost a  total  of  $2.1  billion                                                               
resulting  in a  total  cost  of $6.2  billion  (for the  owner).                                                               
Together, construction and owner's costs total $34.1 billion.                                                                   
                                                                                                                                
SENATOR VON  IMHOF asked  how slide 10  arrives at  $27.9 billion                                                               
for construction  costs and he will  break that down in  terms of                                                               
labor,  materials, LNG  plant, and  offshoots. Does  this include                                                               
the  local  bridges and  culverts  that  will  have to  be  built                                                               
throughout the system and who provided the estimate?                                                                            
                                                                                                                                
MR. MEYER  answered this number is  a result of the  $600 million                                                               
work product  performed by the  previous team  under ExxonMobil's                                                               
leadership. It  includes everything,  even bridges  and culverts.                                                               
Some  of  the  information  drifts into  confidentiality  and  he                                                               
wasn't showing that slide.                                                                                                      
                                                                                                                                
CHAIR GIESSEL  asked him  to provide  that slide  to her  and she                                                               
would distribute it to members.                                                                                                 
                                                                                                                                
SENATOR VON  IMHOF said she  hopes this committee could  also see                                                               
the  updated  2019/20  figures  that   will  be  blessed  by  the                                                               
construction company that he selects.                                                                                           
                                                                                                                                
MR. MEYER said yes.                                                                                                             
                                                                                                                                
SENATOR BISHOP asked if the $6.2  billion on page 11 was just the                                                               
cost  to  manage the  project  or  did  he envision  including  a                                                               
company like Alyeska Pipeline in this number.                                                                                   
                                                                                                                                
MR.  MEYER  replied  that  this  cost  includes  staffing-up  the                                                               
operating  organization and  training them  and goes  through the                                                               
construction phase.                                                                                                             
                                                                                                                                
CO-CHAIR  MACKINNON  said the  state's  partners  were paying  75                                                               
percent of  the $600  million on the  previous project  and asked                                                               
for the  date that accumulated  through and the total-in  for the                                                               
state up to now.                                                                                                                
                                                                                                                                
MR. MEYER  replied that the  $600 million  was spent by  the team                                                               
essentially through 2017.                                                                                                       
                                                                                                                                
CO-CHAIR MACKINNON  said that explains  some of her  confusion on                                                               
the first slide;  he is using a calendar year  (CY) to talk about                                                               
things and  she was  used to  looking at  fiscal years  (FY). She                                                               
asked  if he  was using  FY  or CY  for  the 2017  spend of  $600                                                               
million.                                                                                                                        
                                                                                                                                
10:10:39 AM                                                                                                                   
FRANK  RICHARDS,  Senior   Vice  President,  Project  Management,                                                               
Alaska  Gasline  Development  Corporation (AGDC),  answered  AGDC                                                               
made  its final  payment of  their portion  - approximately  one-                                                               
quarter of that $600 million - in January of 2017.                                                                              
                                                                                                                                
CO-CHAIR  MACKINNON noted  that AGDC's  portion amounted  to $150                                                               
million and  asked if  that includes  the TransCanada  buyout and                                                               
other iterations of this project and other small project costs.                                                                 
                                                                                                                                
MR. RICHARDS  replied the $600  million was the dollar  amount to                                                               
advance  the  AKLNG Project  under  the  Joint Venture  Agreement                                                               
(JVA). The  cost of  the instate natural  gas pipeline  (ASAP) is                                                               
separate from  that. The  cost of the  payout to  TransCanada was                                                               
also separate.                                                                                                                  
                                                                                                                                
CO-CHAIR MACKINNON wanted an all-in number.                                                                                     
                                                                                                                                
MR.  RICHARDS  said he  will  provide  the  total spend  for  the                                                               
committee.                                                                                                                      
                                                                                                                                
10:12:59 AM                                                                                                                   
SENATOR  COGHILL said  slide 11  assumes  that the  state is  the                                                               
owner and asked  if that $6.2 billion is a  bargained figure with                                                               
potential  buyers and  if the  state  is supposed  to carry  that                                                               
entirely.                                                                                                                       
                                                                                                                                
MR. MEYER  clarified that this  estimate was developed  under the                                                               
previous structure  and much of  it would  have been paid  to the                                                               
project manager. AGDC anticipates  a new project manager (through                                                               
the construction  phase) and the  to the  extent the state  is an                                                               
owner, it  would have to  come up with  its share. At  this point                                                               
the state's  share is 25  percent with  75 percent of  that being                                                               
debt.                                                                                                                           
                                                                                                                                
SENATOR COGHILL asked  if that would be true  of the construction                                                               
and the owner's costs.                                                                                                          
                                                                                                                                
MR. MEYER said yes.                                                                                                             
                                                                                                                                
SENATOR  COGHILL asked  if  the  75 percent  debt  figure is  $34                                                               
billion.                                                                                                                        
                                                                                                                                
MR. MEYER said yes but wait; we're not to the end, yet.                                                                         
                                                                                                                                
SENATOR COGHILL commented  that there comes a point  at which the                                                               
state serves the lender and he  wanted to know where that tipping                                                               
point is.                                                                                                                       
                                                                                                                                
10:15:32 AM                                                                                                                   
MR. MEYER said slide 12  explained that the major cost components                                                               
were  subject to  a probabilistic  simulation of  potential risks                                                               
that resulted  in a potential  downside exposure to the  state of                                                               
$7.7  billion  (specific  variability by  item  is  confidential)                                                               
above  the $34  billion. With  all  that stuff  going wrong,  the                                                               
project management team  and owner's costs also  increase by $1.6                                                               
billion for  a total contingency  of $9.3 billion over  and above                                                               
the construction cost estimate.                                                                                                 
                                                                                                                                
SENATOR  BISHOP   said  he   was  glad   he  provided   the  risk                                                               
contingency.                                                                                                                    
                                                                                                                                
CO-CHAIR  MACKINNON  asked  if the  contingency  costs  would  be                                                               
financed ahead of time.                                                                                                         
                                                                                                                                
MR. MEYER  answered that  $43.4 billion is  the total  number and                                                               
equity and  debt sources for the  entire amount will be  lined up                                                               
with   the  understanding   that   the   contingency  might   not                                                               
materialize. They  are really looking  at commitments to  fund an                                                               
anticipated construction draw schedule and  may find that all the                                                               
contingency isn't needed.                                                                                                       
                                                                                                                                
CO-CHAIR  MACKINNON  asked if  he  is  running into  any  federal                                                               
arbitrage  problems  borrowing that  much  debt  as a  non-profit                                                               
entity on  a portion  of the financing  - because  the borrower's                                                               
money is going to be tied up and  he will expect a rate of return                                                               
on that $9 billion that they hope won't be needed.                                                                              
                                                                                                                                
MR.  MEYER responded  that this  will be  a for-profit  non-taxed                                                               
entity.  If they were to  go to the current municipal bond market                                                               
it would be strained, so he  doesn't expect that it will all come                                                               
from there. They  would go to a large active  project debt market                                                               
for a  syndicated project finance  package for both the  debt and                                                               
equity  side.   Everyone expects  some contingency  to be  in the                                                               
number and it will be scrutinized.                                                                                              
                                                                                                                                
10:20:59 AM                                                                                                                   
CO-CHAIR  MACKINNON  said  she  misspoke  on  nonprofit;  it's  a                                                               
government  entity  that  is  borrowing  money  and  when  Senate                                                               
Finance works  with debt  managers there is  a rule  of arbitrage                                                               
for bonding.  They are audited  and if  they are making  money on                                                               
money they  are borrowing, there  is a problem on  the government                                                               
side of the  house. She assumed the state is  proposing to borrow                                                               
a  large amount  of  money including  the  contingency, which  is                                                               
sitting on  the borrower's side  of the account.  The contingency                                                               
is a lot  of money to be  sitting on the sidelines  and the state                                                               
is  getting  charged interest  if  it  is  sitting there  on  its                                                               
behalf.                                                                                                                         
                                                                                                                                
MR. MEYER agreed  that the contingency number  is substantial and                                                               
part  of  why  he  thinks  the total  number  is  a  "comfortable                                                               
number."  With  respect  to  the arbitrage  rules,  he  does  not                                                               
anticipate borrowing money  at a municipal bond rate  and lend it                                                               
to  the project  at a  higher rate,  which would  fall into  that                                                               
category.  They intend  to use  their tax-free  municipal bonding                                                               
authority  to at  least raise  AGDC's portion  of its  equity and                                                               
potentially  more  if they  want  less  leverage on  the  project                                                               
entity.  Right  now,  they  are looking  at  the  project  entity                                                               
borrowing  75 percent  of the  total cost  of the  project, which                                                               
would include this contingency,  but not necessarily borrowing it                                                               
in advance.                                                                                                                     
                                                                                                                                
10:23:50 AM                                                                                                                   
SENATOR MICCICHE  said he appreciates the  30 percent contingency                                                               
as being  a wise move.  He mused  that every overrun  problem one                                                               
can  find  has  occurred  in  Australia  and  probably  the  most                                                               
significant is the  labor shortage that the Lower  48 is starting                                                               
to experience, as well, in the  oil and gas and pipeline sectors.                                                               
He expects  that could  be a  problem for  this project,  too. He                                                               
asked what it would take  for legislators to review the variables                                                               
that went into the contingency  number and to understand how much                                                               
weight was placed on a potential labor shortage.                                                                                
                                                                                                                                
MR. MEYER  replied that  he would  need a  signed confidentiality                                                               
agreement that  just focuses on  this and he  encouraged everyone                                                               
to do that.                                                                                                                     
                                                                                                                                
SENATOR MICCICHE asked  if he had a high degree  of confidence in                                                               
the labor estimate, specifically.                                                                                               
                                                                                                                                
MR. MEYER  answered yes;  part of his  confidence comes  from the                                                               
rigor that went  into the development of  the contingency diagram                                                               
of major cost items.                                                                                                            
                                                                                                                                
CHAIR GIESSEL asked who did this contingency estimate.                                                                          
                                                                                                                                
MR. MEYER  replied that it  was led by the  ExxonMobil management                                                               
team.                                                                                                                           
                                                                                                                                
MR. RICHARDS  added that  the contingency  work was  done through                                                               
the project management  team and it included inputs  from all the                                                               
partners   following   a   process    that   was   developed   by                                                               
ConocoPhillips in work efforts on  other large projects that were                                                               
going  on at  the  time.  It was  vetted  through subject  matter                                                               
experts of all those companies.                                                                                                 
                                                                                                                                
CHAIR GIESSEL asked if this kind  of information ever needs to be                                                               
updated.                                                                                                                        
                                                                                                                                
MR.  RICHARDS  answered  no;  they  go  through  a  very  similar                                                               
analysis  working  towards  defining  the  project  more  through                                                               
advanced engineering.                                                                                                           
                                                                                                                                
SENATOR MICCICHE commented that  the "save our salmon initiative"                                                               
looms before them  and the associated costs on a  project of this                                                               
size  with this  length  of interaction  with  wetlands would  be                                                               
substantial. "Is  that something  that is baked  into this  or is                                                               
that something that  has to be updated if the  initiative ends up                                                               
being successful?"                                                                                                              
                                                                                                                                
MR.  RICHARDS replied  that the  regulatory  environment and  the                                                               
processes   that  any   major  project   must  go   through  were                                                               
considerations and included in the contingency.                                                                                 
                                                                                                                                
SENATOR MICCICHE asked Mr. Richards  if he was saying the effects                                                               
of the  salmon initiative being  successful are baked into  a 30-                                                               
percent contingency when  every other project has  been around 30                                                               
percent or higher in the last several years.                                                                                    
                                                                                                                                
MR. RICHARDS  replied he  was not  saying the  salmon initiative,                                                               
specifically, was incorporated into  this contingency, but he was                                                               
identifying that the environmental  permitting risk was included.                                                               
When this estimate  was developed, the salmon  initiative was not                                                               
in effect.                                                                                                                      
                                                                                                                                
MR. MEYER added  that slide 13 is a summary  of the total project                                                               
cost of $43.4  billion, and he was  "reasonably" comfortable with                                                               
it. Risks could happen like  earthquake, war, and new regulations                                                               
that are  "tail risk events."  All their numbers with  respect to                                                               
customers,  financing,  offerings,  and  pricing  are  all  based                                                               
around this $43.4 billion figure.                                                                                               
                                                                                                                                
10:30:13 AM                                                                                                                   
SENATOR COGHILL said  he heard him say the FID  will be coming up                                                               
in a year  or so and asked  if he will use these  numbers for the                                                               
loan guarantees and project engineering description.                                                                            
                                                                                                                                
MR. MEYER  replied that  FID would  happen in  the front  half of                                                               
2019.  Before  that  decision  is  made, they  need  to  get  the                                                               
estimate, contractors  willing to provide a  reasonable degree of                                                               
risk  around the  estimate, lending  and equity  commitments, and                                                               
customer  commitments  that underpin  the  revenues  in order  to                                                               
start construction  in the second half  of 2019 and keep  on that                                                               
in-service target.                                                                                                              
                                                                                                                                
SENATOR COGHILL  said he wanted  to know the entanglement  of the                                                               
debt for the project that hasn't been fully described yet.                                                                      
                                                                                                                                
10:31:49 AM                                                                                                                   
MR.  MEYER  said AGDC  engaged  Fluor  to develop  a  "zero-based                                                               
estimate" of the project to  identify where the potential savings                                                               
may  exist  and  to  adjust  for  inflation  since  the  original                                                               
estimate.  They  identified  a  potential  savings  of  about  $2                                                               
billion.  And, AGDC  has received  informal inputs  from a  major                                                               
contractor  that they  would perform  the project  management for                                                               
significantly  less   than  $3.4   billion  (used  in   the  base                                                               
estimate). Those  reductions are  not reflected in  their capital                                                               
cost number that  they will use to get financing  and on which to                                                               
base customer pricing.                                                                                                          
                                                                                                                                
10:32:42 AM                                                                                                                   
SENATOR VON IMHOF asked how much  the Fluor contract was and what                                                               
were the  savings they  found. She  also wanted  to know  who the                                                               
major contractor was  who said they would manage  the project for                                                               
less.                                                                                                                           
                                                                                                                                
MR. MEYER  answered that the  major contractor didn't want  to be                                                               
identified and it  is an informal number; there  is no commitment                                                               
or  agreement.  The  point  of   the  bullet  was  to  give  some                                                               
recognition  that paying  someone  $3.4 billion  to manage  large                                                               
contractors  for the  project is  a number  that can  probably be                                                               
reduced. It  is a "comfortable"  number and doesn't  include $1.6                                                               
billion of contingencies  thrown into the owner's  cost. He added                                                               
that AGDC will not manage this  whole project; they will engage a                                                               
large construction management firm.                                                                                             
                                                                                                                                
CO-CHAIR MACKINNON said she wanted  greater detail on Senator Von                                                               
Imhof's  question about  a  major contractor:  was  it an  Alaska                                                               
contractor  or an  out-of-state contractor,  or an  international                                                               
contractor?                                                                                                                     
                                                                                                                                
MR. MEYER replied  that it was an  out-of-state, U.S. contractor.                                                               
Alaska does not have a contractor  that could manage a project of                                                               
this size.                                                                                                                      
                                                                                                                                
10:35:10 AM                                                                                                                   
MR. RICHARDS also addressed Senator  Von Imhof's questions saying                                                               
AGDC engaged Fluor  to conduct a zero-based  execution similar to                                                               
what other large major international  oil companies are now doing                                                               
as they  review their internal processes  of project development.                                                               
They want to make sure and  have an independent review of what he                                                               
described as a  belt, suspenders, Velcro, and  duct tape approach                                                               
to the components  of the project: the gas  treatment plant (GTP)                                                               
execution,  the pipeline  and compressor  station execution,  and                                                               
the LNG  plant and marine  terminal execution. The  third portion                                                               
of  that effort  is under  way  in Houston.  This represents  the                                                               
outcome  of  the first  two  levels  of  review  of the  GTP  and                                                               
pipeline.                                                                                                                       
                                                                                                                                
They also asked Fluor to  do a strategic country sourcing review.                                                               
ExxonMobil  and  the  project  management  team  had  a  sourcing                                                               
strategy built and AGDC wanted to  provide an update to make sure                                                               
they  could capture  what may  be  cost savings  due to  economic                                                               
conditions  with  large  oil  and  gas  production  and  offshore                                                               
developments  and focused  on four  countries: US,  Japan, Korea,                                                               
China.  The  goal  was  to  look at  sourcing  of  materials  and                                                               
equipment  that  would be  necessary  for  the project  from  raw                                                               
materials all  the way  through to  fabrication. They  found some                                                               
"good savings" available  to the project that they  would like to                                                               
incorporate as they advance through FEED.                                                                                       
                                                                                                                                
CHAIR GIESSEL reminded him that  Senator Von Imhof had a question                                                               
about the cost of the Fluor review.                                                                                             
                                                                                                                                
MR. RICHARDS replied that the Fluor review cost about $300,000.                                                                 
                                                                                                                                
SENATOR BISHOP  said that  Fluor is  a very  reputable contractor                                                               
and had  built all the  pump stations in  the TAPS, so  they have                                                               
Arctic  experience. He  would be  nervous if  someone offered  to                                                               
manage the project  for less than $3.4 billion  because the lower                                                               
bidder isn't always the best bidder.                                                                                            
                                                                                                                                
SENATOR WIELECHOWSKI  asked if AGDC  is bound by  any procurement                                                               
rules or can it sole-source work to anyone they choose.                                                                         
                                                                                                                                
MR. RICHARDS answered  that the legislation that  created AGDC as                                                               
well as  the refinements in  SB 138  granted them the  ability to                                                               
work outside of the State  of Alaska procurement code. The normal                                                               
process is to seek competitive  bids, so they followed the intent                                                               
of  getting  good  quality  for  the work  effort  by  doing  due                                                               
diligence and  as Senator  Bishop just  said, working  with those                                                               
reputable companies that  have shown they have  the experience of                                                               
developing, constructing, and working in the Arctic.                                                                            
                                                                                                                                
CHAIR GIESSEL  underscored Senator Bishop's earlier  comment that                                                               
getting  a bargain  basement project  manager is  probably not  a                                                               
good  idea when  working in  Arctic conditions  on a  green field                                                               
project.                                                                                                                        
                                                                                                                                
10:40:18 AM                                                                                                                   
MR. MEYER said  slide 15 was about their capital  structure of 75                                                               
percent debt and 25 percent  equity. Using the total project cost                                                               
of $43.4  billion, that breaks down  into a $32 billion  debt and                                                               
$11 billion equity  requirement. Slide 16 had  the operations and                                                               
maintenance (O&M)  number of $850  million, which  would increase                                                               
to about  $900-plus by the time  it goes into service.  All those                                                               
dollars stay within Alaska.                                                                                                     
                                                                                                                                
10:41:22 AM                                                                                                                   
CO-CHAIR  MACKINNON  asked where  he  got  the inflation  number,                                                               
because  it is  lower  than they  have seen  in  places like  the                                                               
Permanent Fund Corporation.                                                                                                     
                                                                                                                                
MR.  MEYER replied  it is  just a  base assumption  of 2  percent                                                               
meant to mimic labor inflation, but  it could be higher. They are                                                               
using $950 million for O&M.                                                                                                     
                                                                                                                                
CO-CHAIR   MACKINNON  pointed   out  that   the  Permanent   Fund                                                               
Corporation uses an  inflation number of 2.25  percent. She asked                                                               
who he thought would operate the pipeline.                                                                                      
                                                                                                                                
MR. MEYER  answered that they  envision potentially  an operating                                                               
company being established to operate  the system for a transition                                                               
period.  That  team  may  be augmented  by  an  outside  operator                                                               
similar to  way the TAPS is  set up. He did  not envision handing                                                               
it over to an outside company.                                                                                                  
                                                                                                                                
CO-CHAIR  MACKINNON  said  so,  the  short  answer  would  be  an                                                               
umbrella corporation or operator under AGDC.                                                                                    
                                                                                                                                
MR.  MEYER  replied not  necessarily  under  AGDC but  under  the                                                               
project company.  AGDC will  be an owner  of the  project company                                                               
and it will  not be the operator  of the system. That  would be a                                                               
separate  operating group  that would  be charged  with operating                                                               
the entire system and its components.                                                                                           
                                                                                                                                
CO-CHAIR  MACKINNON  said the  first  bullet  shows $365  million                                                               
opex/capex for the LNG facility,  but it excludes the marine tugs                                                               
and  the  carrier-related  costs  and  asked  who  he  envisioned                                                               
picking up those costs.                                                                                                         
                                                                                                                                
MR.  MEYER replied  those  are typically  a  customer cost.  AGDC                                                               
would like to  have discussions with some of  the large customers                                                               
about providing  the shipping, but  AGDC would not be  a shipping                                                               
company or own ships. They could  be involved as a charter party,                                                               
however,  but that  would be  a cost  pass-through. The  customer                                                               
picks up  those downstream costs.  This system ends at  the jetty                                                               
and the loading flange between the facility and the ship.                                                                       
                                                                                                                                
CO-CHAIR MACKINNON  said that  is an  opportunity for  an outside                                                               
investor to take on and see an equity return.                                                                                   
                                                                                                                                
MR. MEYER agreed that shipping is an opportunity.                                                                               
                                                                                                                                
10:46:13 AM                                                                                                                   
CO-CHAIR MACKINNON asked if the  slide 17 graph compares with the                                                               
timelines of the previous project.                                                                                              
                                                                                                                                
MR. MEYER  replied this  is somewhat  of an  accelerated timeline                                                               
but recognizing that some of  the later timelines of the previous                                                               
project did not  have calendar years; it used year  one, year two                                                               
and year  three that was  triggered on an  FID or FEED  date. The                                                               
current schedule uses calendar years  and schedules that have the                                                               
system in  service in  2025/26/27/28 depending  upon when  FID is                                                               
taken. So,  this profile  fits the previous  plan, but  its start                                                               
date is  a specific calendar  year now  as opposed to  a year-one                                                               
occurring after an FID event.                                                                                                   
                                                                                                                                
CO-CHAIR MACKINNON said three  trains were originally anticipated                                                               
in the  Nikiski area and asked  if all three trains  come on line                                                               
at once or have a phased  approach and is that different than the                                                               
previous project.                                                                                                               
                                                                                                                                
MR. MEYER  replied this project  assumes a simultaneous  build of                                                               
all  three  trains,  but  they  come  on  line  one  year  apart.                                                               
Train one  comes in service at  third quarter 2024, train  two in                                                               
third quarter 2025,  and train three in third  quarter 2026. That                                                               
is the original schedule, as well,  and lines up with a number of                                                               
critical path items, most notably the sealifts up North.                                                                        
                                                                                                                                
CO-CHAIR  MACKINNON  asked if  that  phasing  is built  into  the                                                               
financing  so that  Alaska starts  taking gas  when it  starts to                                                               
monetize Alaska's gas abroad.                                                                                                   
                                                                                                                                
MR. MEYER answered yes.                                                                                                         
                                                                                                                                
SENATOR VON  IMHOF said  she appreciated  slide 17  depicting the                                                               
draw level, because the next  conversation they have is they know                                                               
how much  cash outlay is needed  in each year. The  next thing to                                                               
obtain  would  be  institutional   investors  who  will  "heavily                                                               
evaluate" the risks versus reward  of this project and compare it                                                               
to other projects  they could potentially invest in  all over the                                                               
world. She wanted  to see his own risk/reward  evaluation and how                                                               
this project  compares to others and  why institutional investors                                                               
will decide  to come here in  2022/23 to the tune  of $9 billion.                                                               
The legislature  needs to  know the likelihood  of being  able to                                                               
attract  those  specific  dollars   and  what  returns  they  are                                                               
expecting.                                                                                                                      
                                                                                                                                
10:50:49 AM                                                                                                                   
CO-CHAIR MACKINNON  said Alaska  already has a  GTP on  the North                                                               
Slope; it's  just not  state owned  or operated.  Is there  a gas                                                               
treatment facility up there now for injections?                                                                                 
                                                                                                                                
MR. MEYER  responded that there  is a gas  conditioning facility,                                                               
but  its main  function  is  to separate  gas  from  the oil  and                                                               
liquids  and then  push  the  gas back  into  ground  at about  8                                                               
bcf/day, more than  twice what this project needs.  He thought it                                                               
was the largest one in the world.                                                                                               
                                                                                                                                
CO-CHAIR MACKINNON  said she  wondered if  they could  lease that                                                               
plant  on the  North Slope  to defer  or extend  out some  of the                                                               
investment up front.                                                                                                            
                                                                                                                                
MR.  MEYER  responded  that   unfortunately  they  are  different                                                               
functions. The main function of  the AKLNG "AMINE" plant would be                                                               
to remove CO2  from the gas because it  solidifies when cryogenic                                                               
and clogs  up the pipe. They  will take gas off  the existing gas                                                               
conditioning facility after the oil  and liquids have been pulled                                                               
out  and  before it  gets  injected  into  the ground,  and  then                                                               
further treat that gas by removing CO2 and hydrogen sulfide.                                                                    
                                                                                                                                
CHAIR GIESSEL agreed  with Senator Von Imhof that slide  17 is an                                                               
important  slide,  but  in  a   different  way.  It  presents  an                                                               
accelerated timeline of  a 2019 FID and the  legislature has been                                                               
taught many times that "speed kills when managing megaprojects."                                                                
                                                                                                                                
Back on  slide 14,  the comment was  made that  Fluor's estimates                                                               
were not  done to  a FEED level,  and she wanted  to know  if the                                                               
project  is in  FEED  right  now and  if  so,  why weren't  those                                                               
estimates to FEED level? Some of  the key requirements for a FEED                                                               
decision, are the land in  Nikiski that hasn't yet been procured,                                                               
an export license  that we don't have, and  the financial advisor                                                               
still has not been  hired by AGDC to get a  second opinion on all                                                               
these numbers. She reminded members  that when they cross the FID                                                               
into construction,  the project  will be  spending $30  million a                                                               
day.                                                                                                                            
                                                                                                                                
SENATOR BISHOP asked if the  GTP permitting is going according to                                                               
schedule.                                                                                                                       
                                                                                                                                
MR.  RICHARDS answered  they provided  Federal Energy  Regulatory                                                               
Commission (FERC) an application for  a section 3 permit in April                                                               
2017, and they  have asked for additional data  in preparation of                                                               
a  draft Environmental  Impact Statement  (EIS) and  have yet  to                                                               
publish their schedule.  The work is being concluded  on the ASAP                                                               
that uses  the same sites  for the  GTP and the  gas conditioning                                                               
facility as the  AKLNG project. They have  done the environmental                                                               
review and  the boring analysis  and looked at the  materials for                                                               
filling. That is all going forward.                                                                                             
                                                                                                                                
10:56:05 AM                                                                                                                   
MR.  MEYER clarified  that the  GTP,  the pipeline,  and the  LNG                                                               
facility are  all in the  one application  in front of  FERC now.                                                               
and  that the  start of  the construction  schedule is  what they                                                               
consider aggressive as  opposed to the schedule  itself. Slide 17                                                               
was about the  construction draw schedule and slide  18 was about                                                               
the debt draw  schedule using an assumption of 20-year  term at 5                                                               
percent interest. That results in  a debt service payment of $3.5                                                               
billion/year.  Once  they go  into  service,  that includes  some                                                               
capitalized interest during construction.                                                                                       
                                                                                                                                
The  last bullet  is a  "debt  for capacity"  proposal where  the                                                               
customer  helps  secure the  debt  and  that  is what  they  have                                                               
proposed to  some of the larger  Asian buyers. In that  case, the                                                               
cost of the debt and the term is passed through to the customer.                                                                
                                                                                                                                
CO-CHAIR MACKINNON  asked the average  cost of debt  for projects                                                               
of similar size or similar industry worldwide.                                                                                  
                                                                                                                                
MR. MEYER  answered that 5  percent is on  the high side  of what                                                               
other  projects have  been able  to achieve;  3-5 percent  is the                                                               
range they are using.                                                                                                           
                                                                                                                                
CO-CHAIR MACKINNON asked  if the slide should be  modified to say                                                               
3-5  percent return,  so  they can  try  to anticipate  something                                                               
lower.                                                                                                                          
                                                                                                                                
MR. MEYER said what they are  trying to do now is develop numbers                                                               
for their customer proposals that  are all achievable and that is                                                               
why they are staying with the  $43.4 billion. To the extent those                                                               
numbers can be bettered, that  will improve the equity return for                                                               
the  project. Right  now, they  are trying  to balance  customer,                                                               
financial  markets, operating  a  system, and  an acceptable  net                                                               
back  to the  state. If  they  use "comfortable  numbers" on  all                                                               
those, the  eventual outcome will  be achievable  and potentially                                                               
improved upon.                                                                                                                  
                                                                                                                                
CO-CHAIR MACKINNON  said she understands being  conservative when                                                               
speaking in front of the  legislature. She has also watched China                                                               
work inside of  a market and if  we have to take 5  percent for a                                                               
variety of reasons,  that is one thing,  but to offer it  up in a                                                               
market that  is not  paying 5  percent on much  right now  is not                                                               
putting Alaska in a good bargaining position.                                                                                   
                                                                                                                                
11:00:27 AM                                                                                                                   
Her  question  is:  in  past   projects,  they  were  looking  at                                                               
financing in the  U.S. and there was some federal  backing of the                                                               
debt. Had they done a comparison  of working with U.S. bankers or                                                               
are our eyes are on the East  and that is the partnership we want                                                               
to go into -  both because they need our supply  and they want to                                                               
earn a rate of return.                                                                                                          
                                                                                                                                
11:01:24 AM                                                                                                                   
MR.  MEYER   clarified  that  the   debt  financing  will   be  a                                                               
competitive  process.  They are  going  to  engage an  investment                                                               
banker  to help  with it  and make  sure it  is very  competitive                                                               
given the risks  of the project. They are using  a number that is                                                               
achievable, but  he doesn't call it  an offer. To the  extent the                                                               
cost of  the debt can  be bettered,  that improves the  return on                                                               
the equity for the equity owner,  which the state intends to be a                                                               
significant piece of.                                                                                                           
                                                                                                                                
MR.  RICHARDS responded  that he  thought  Senator MacKinnon  was                                                               
referring to some of the loan  guarantee language that was in the                                                               
Alaska  Natural Gas  Pipeline  Act  of 2004.  At  that time,  the                                                               
envisioned project  was the overland  route that would  lead from                                                               
Prudhoe Bay into  Canada and ultimately to  the American mid-west                                                               
markets. That statute had loan  guarantees by the U.S. government                                                               
of  $18 billion.  It had  an inflation  component, as  well, that                                                               
would equate to  $23 billion now. AGDC has  been in conversations                                                               
with the  Alaska delegation about  potentially working  with them                                                               
on including  that language  in the  current project.  Right now,                                                               
that statute  prohibits, because  the project doesn't  include an                                                               
instate-only  LNG project.  They have  also had  discussions with                                                               
the  U.S.  Import/Export  Bank,   a  financing  entity  that  has                                                               
previously  provided   low-cost  funding  to   American  projects                                                               
overseas. They  are very  interested and  want more  follow-up in                                                               
terms  of the  country  (i.e. the  U.S.)  sourcing of  equipment,                                                               
materials, and  labor. That was part  of the impetus to  have the                                                               
Fluor study on best country sourcing done.                                                                                      
                                                                                                                                
11:05:11 AM                                                                                                                   
CHAIR GIESSEL said they need  to suspend this discussion on slide                                                               
18 as several  members had other meetings  pending. She adjourned                                                               
the  Joint  Senate Resources  and  Finance  Committee meeting  at                                                               
11:05 a.m.                                                                                                                      
                                                                                                                                

Document Name Date/Time Subjects
Senate Resources - Hearing Agenda - 1 - 25 - 2018.pdf SRES 1/25/2018 9:00:00 AM
AK LNG
Sen Res Sen Fin - Presentation by AGDC - 1 - 25 - 18.pdf SRES 1/25/2018 9:00:00 AM
AK LNG