Legislature(2015 - 2016)BUTROVICH 205
10/29/2015 09:00 AM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| SB3001 | |
| Presentation: Transcanada | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB3001 | TELECONFERENCED | |
SENATE BILL NO. 3001
"An Act making supplemental appropriations; making
appropriations to capitalize funds; making
appropriations to the general fund from the budget
reserve fund (art. IX, sec. 17, Constitution of the
State of Alaska) in accordance with sec. 12(c), Ch. 1,
SSSLA 2015; and providing for an effective date."
9:08:30 AM
Co-Chair MacKinnon made opening comments.
^PRESENTATION: TRANSCANADA
9:09:43 AM
VINCENT LEE, DIRECTOR, MAJOR PROJECTS DEVELOPMENT,
TRANSCANADA, explained that he served as TransCanada's (TC)
commercial lead for the AKLNG project and represented TC on
the project's management committee. He related that in late
2013 a Memorandum of Understanding (MOU) was developed
between TC and the state that established the material
terms for TransCanada holding equity participation interest
in AKLNG and to provide gas treatment and transportation
services for the state's share of gas. He furthered that
subsequent to the passage of SB 138 [GAS PIPELINE; AGDC;
OIL & GAS PROD. TAX - Enacted 09/19/2014] TransCanada
entered into a Precedent Agreement (PA) with the state in
June, 2014 that formalized the material terms that were
agreed upon in the MOU. The PA allowed either party to
terminate the agreement. He relayed the governor's current
recommendation to terminate the agreement with TransCanada.
He declared that TC agreed with the recommendation,
asserting that it was "no longer commercially reasonable…
to remain in the AKLNG project." He informed the committee
that TC was working diligently with the administration to
formulate an exit plan that did not interfere with the
project's momentum. TransCanada had been involved in
advancing a natural gas pipeline in Alaska for over four
decades and the decision to exit the AKLNG project was
difficult. He held that it suited all of the parties'
interest to terminate the agreement. He wished the state
and all of the project partners great success.
Senator Dunleavy referred to Mr. Lee's comments regarding
the project as no longer commercially viable for
TransCanada and asked for an explanation. Mr. Lee answered
that TC had to manage the risk with any project; the
administration's desire to terminate the agreement created
a misalignment that made it difficult for TC to positively
move forward with the project.
Senator Dunleavy requested clarification that Mr. Lee was
not suggesting that the project itself was not commercially
viable. Mr. Lee affirmed that the project "had a lot of
potential." He trusted that TransCanada's orderly exit
would not negatively impact the project's progress.
9:14:53 AM
Senator Hoffman further clarified that Mr. Lee stated that
"it was no longer reasonable to continue to participate" in
AKLNG. He referred to the administration's premise that a
TransCanada buyout would be more economically viable and
offer better financial terms for the state than continuing
in the partnership. He asked whether any "financing
differentials" between the amounts of the state's financing
for midstream operations opposed to TransCanada's financing
options factored into TransCanada's decision to exit the
project. Mr. Lee answered in the negative, and explained
that he was not privy to the administrations project
financing analysis, and felt he could not offer comments.
Senator Hoffman considered that TC had been an excellent
partner and furthered the project more under the current
administration than "under the last five governors" due to
the credibility and hard work performed by TransCanada.
Co-Chair MacKinnon asked Mr. Lee to speak to the auditing
terms and elucidate TransCanada's process of submitting
expenses to the project "to arrive at the approximately $70
million" cost to buyout TransCanada's share in the project.
Mr. Lee responded that the figure consists of three major
categories of costs: the cash call from AKLNG;
TransCanada's actual internal costs for managing the
investment, participating in the project's governance
bodies, and advancing all of the future agreements; and
finally the 7.1 percent interest payment. He detailed that
TransCanada provided quarterly cost reports to the state
and that there had been ongoing cumulative cost reporting.
TransCanada will perform a "post-closing adjustment"
subsequent to termination, receipt of the costs and
interest payment from the state, and TransCanada's
investment entity transfer to the state, when a final cost
report will be presented to the administration. The state
may audit and examine the expenses and any final cost
adjustments would be made to either the state or
TransCanada.
Senator Dunleavy asked whether any seconded employees from
TransCanada could remain with the state to retain their
expertise. Mr. Lee stated that 15 seconded employees would
remain with the state via an agreement with the
administration to continue through May of next year. He
listed that the secondees included the pipeline lead and
the engineering manager as well as other individuals with
project, design, management, and engineering expertise.
9:20:59 AM
Co-Chair MacKinnon wondered where the secondees were placed
within the project team and what expertise they provided in
order to advance the project. Mr. Lee related that in
addition to the 15 secondees, TC had "a number" of staff
outside of the project team working on various agreements
between the state and the other entities in AKLNG,
participating on the finance team, and were involved in
"upstream matters." He described that over the last year,
TC had made progress on the various agreements, yet
differences existed. He illuminated that as the commercial
lead, he sat on the governance team and was also involved
in all of the commercial negotiations including the "firm
transportation services agreement." He felt that overall
very good progress had been made but more work was needed
to advance the project to the next stage.
Co-Chair MacKinnon wondered whether there were two TC
secondees working on the project that were part of the
management team. Mr. Lee affirmed that there were two
TransCanada secondees on the leadership team: one employee
was the pipeline lead and the other was the facilities
engineering manager. Co-Chair MacKinnon asked whether the
individuals had signed confidentiality agreements. Mr. Lee
responded in the affirmative.
Co-Chair MacKinnon asked about the "expansion terms" being
negotiated and who was part of the expansion team. Mr. Lee
answered that the expansion component had involved all
parties, including AGDC and the administration. He felt
that the negotiations had progressed well and recognized
that the issue was critically important to the state.
9:25:45 AM
AT EASE
9:26:44 AM
RECONVENED
Co-Chair MacKinnon asked whether the attorney general (AG)
was involved in any of the conversations with individuals
that were required to sign confidentiality agreements. Mr.
Lee affirmed that the AG had attended "some of those
meetings." Co-Chair MacKinnon asked whether the attorney
general had signed a confidentiality agreement. Mr. Lee
replied in the negative. Co-Chair MacKinnon asked if his
participation was considered typical business practice. Mr.
Lee relayed that it was his understanding that meeting
attendees were required to sign a confidentiality
agreement.
Co-Chair MacKinnon asked Mr. Lee to discuss the timing and
importance of the upcoming meeting on December 4th [2015],
and wondered if he could provide insight as to why the
administration wanted the legislature to "move
expeditiously" regarding the TransCanada buyout and the
"expanded work program." Mr. Lee stated that December 4th
was the deadline for parties to vote for the 2016 work plan
and budget. He stressed the importance of individuals
voting on that date in order to maintain the projects
momentum and funding. He informed the committee that TC
could not vote affirmatively for the work plan and budget
because it was contractually considered acting in bad
faith.
9:30:25 AM
Senator Hoffman asked whether TC had officially, in
writing, made a request or statement that TransCanada was
terminating its agreement with the state. Mr. Lee responded
that the termination was initiated by the state. Senator
Hoffman thought it was apparent in Mr. Lee's presentation
that TransCanada also wanted to leave the project and had
the option to do so. He repeated his initial question
whether TransCanada would make an official request for
termination. Mr. Lee reiterated that the administration
initiated its right to terminate the PA with TransCanada
and it was within the right of TC to terminate the PA as
well. He agreed that it was the "best path forward" in
light of the administrations wishes. He was concerned that
the buyout could not be completed by the December 4th
meeting. Senator Hoffman asked for clarification regarding
Mr. Lee's concern. Mr. Lee was concerned that if
TransCanada exercised its right of termination, a
termination plan with the administration was not currently
in place. He thought there was a risk that the buy-out
transaction would not be completed by December 4th, which
would put the work plan and budget at risk.
Senator Hoffman asked if it was fair to say that TC was
interested in terminating and was waiting to submit a
formal request for termination after the legislature took
action. Mr. Lee thought TC's focus had always been to work
in cooperation with the administration on moving forward on
the current path and that termination offered the best
scenario for all parties.
Vice-Chair Micciche referred to Mr. Lee's opening remarks
and his words "commercially reasonable" and believed that
he meant "philosophically comfortable" and asked whether
that was a "fair statement." Mr. Lee responded in the
affirmative.
Vice-Chair Micciche presumed that issues regarding "the
arrangement of the 25 percent, the state's voting and
interactions with TransCanada was an unusual piece" and
were "uncomfortable terms" for TransCanada. He queried
whether his statement was a "fair" assessment. Mr. Lee
referred to the philosophy and focus of the current
administration which included applying "as much influence
on the current project as possible" and the ability of the
state to finance its 25 percent interest at a lower cost
that would result in the state's long term economic
benefits. He summarized that the philosophical issues were
related to the priorities of the administration.
Vice-Chair Micciche thought that the differences were
philosophical rather than commercial and understood the
situation. He believed the 25 percent split was complicated
for both parties. He supported the state's direction and HB
3001. He expressed appreciation for TCs efforts in order to
avoid obstacles, as well as their willingness to leave
crucial employees to further advance the project for
Alaska. He inquired about the nomination process for the
leadership team and wondered whether the state would be
adequately represented in the leadership structure. Mr. Lee
thought the nomination process was a good process that was
based on the principle of "the best player plays." He
elaborated that the objective was to provide fair
representation for all entities. He felt that the state's
representation depended on who the Alaska Gasline
Development Corporation (AGDC) would nominate and the
extent of the qualifications the nominee possessed.
Vice-Chair Micciche discussed the potential politicizing
influence of some elements of the nomination process, and
asked whether Mr. Lee worried that it would "dilute" the
best player plays concept. Mr. Lee hoped that it would not
be the case. He shared that the senior project manager "had
done a very good job" to create a stable environment that
shielded the project team from the politics and ensured
that the deliverables had been completed on schedule.
9:40:44 AM
Vice-Chair Micciche thanked Mr. Lee and TC for its decades
of expertise on behalf of the state, the successful
completion of the AGIA license, and its involvement in SB
138. He wondered whether TC would be available to do an
analysis of possible improvements; items that the
legislature could evaluate to ensure success of the
project. Mr. Lee offered several observations. He observed
that creating a stable environment so that work could be
completed on time and issues could be openly and frankly
discussed in order to achieve a timely resolution were
necessary. He had heard the other parties discuss alignment
extensively and noted the different opinions and priorities
of the partners, but emphasized the importance of having a
common goal in order to overcome the differences and attain
the objective.
9:43:43 AM
AT EASE
9:45:15 AM
RECONVENED
Senator Dunleavy asked if there had been an orderly
transition plan discussed with the administration, and what
it entailed. Mr. Lee stated that discussions regarding a
transition plan were in progress which currently outlined
an overall approach. He reiterated the general process of
the transition; TransCanada would transfer the investing
entity it used to invest in AKLNG to the state, the state
would pay the costs TransCanada incurred plus interest, a
post-closing adjustment process would occur, and the 15
seconded employees would remain through May of next year.
Senator Dunleavy asked whether Mr. Lee was confident that a
seamless transition plan would occur with passage of the
legislation. Mr. Lee responded in the affirmative.
Senator Olson remarked on the positive 7.1 percent interest
rate of return that was a provision from the existing
agreement between the state and TransCanada. He requested
comments. Mr. Lee commented that the rate of return was one
aspect of the investment, and another was risk. He
specified that the administration decided to assume the
entire 25 percent stake in the project and that
TransCanada's participation depended on the strong support
of its partners. He anticipated that it would be very
difficult to negotiate reasonable terms in future
agreements and without favorable agreements, TC would be at
risk by the loss of influence on the project. He agreed
that the return was reasonable but TransCanada lost its
ability to manage its own risk in the project.
Senator Olson referred to the [governor's] project
consultant Rigdon Boykin and asked for Mr. Lee's evaluation
of his objectives. Mr. Lee relayed that he also worked with
Mr. Boykin, and offered that he had "his own style" of
doing things. Senator Olson asked, hypothetically, whether
TransCanada would hire Mr. Boykin if he was available. Mr.
Lee communicated that he could not speak on behalf of TC on
the subject.
9:51:17 AM
Senator Dunleavy asked whether TransCanada had ever
experienced a similar business dissolution. Mr. Lee related
that previous partnerships had many varied reasons for not
working. He had experienced similar situations working with
other partners upon discovering that priorities had
changed.
Senator Bishop thanked Mr. Lee and expressed that it was
always a pleasure to work with TransCanada and relayed
personal experience. He expressed the advantages of
dissolving business partnerships amicably in order to keep
the door open for future collaborations on other business
opportunities. Mr. Lee concurred, and thought it was always
easiest and most sensible for all parties to find a way to
work together when beginning or ending a business
partnership.
Senator Bishop asked for an example of the transfer of hard
assets, such as engineering documents or LIDAR [Light
Detection and Ranging] work, and whether the transfer had
been addressed. Mr. Lee explained that TransCanada's
investment entity owned or had rights to the work products
from the project. Once the entity transfer to the state was
completed, the state would have access to the information.
Co-Chair MacKinnon mentioned the governor's proposition to
change the project to a 48-inch diameter pipe for the
pipeline, which was purported to be more economical and
drive down the tariff rates. She wondered where 48 inch
steel pipe could be manufactured in North America. Mr. Lee
did not believe that there was currently any steel mill in
North America that had the capacity to produce steel pipe
with the qualities required to withstand the high pressure
in the larger diameter pipeline.
9:57:27 AM
Co-Chair MacKinnon asked where Alaska could purchase 48"
pipe. Mr. Lee thought that the pipe would need to be
sourced from Japan or Europe. Co-Chair MacKinnon had hoped
the pipe could be sourced in the United States to stimulate
domestic job creation.
Co-Chair MacKinnon referred to SB 138 testimony and
discussed alignment and the administration's analysis that
"upside potential of an equity interest bringing in $400
million annually" could repay the state's debt. She shared
that TransCanada had made "cash calls" on behalf of the
state. She referred to the assertion by the administration,
that there could be "future misalignment regarding votes
and that the voting structure was complicated." She asked
whether previously there had ever been any impasse in
negotiations, misalignments, or issues when the state had
aligned with TransCanada's interest. Mr. Lee reflected that
since the signing of the PA all of the management committee
votes were "consistent" with the direction of the state and
no misalignments had occurred. He observed that there were
potential areas under which the state's view differed from
TransCanada's, but could not predict whether they would
have come to an agreement. He elaborated that structurally,
the fact that TransCanada owned the mid-stream voting
rights and AGDC owned downstream voting rights a potential
misalignment could have developed. He communicated that
thus far, TC had been "quite successful" in coming to
consensus with the state.
10:02:10 AM
Co-Chair MacKinnon cited TCs discussion of risk, and the
administration's "assertion of misalignment on voting
rights and direct access to information," which she felt
were valid concerns. She had heard the claim from the state
that TransCanada was not bearing risk in the project. She
interpreted that account to indicate that the state was
obligated to pay allowable expenses with an interest rate
of 7.1 percent until construction. She wondered whether
TC's stated risk related to "the specific management of the
project" and lacking direct voting access rights and that
TransCanada would lose corporate control over the costs of
the pipeline and subsequently the tariff. Mr. Lee stated
that the future unknowns made it difficult for TransCanada
to quantify the risk.
Co-Chair MacKinnon asked whether a more accurate reflection
of the interest rates paid to TransCanada was 7.1 percent
to FEED (Front End Engineering and Design) stage and 6.75
percent from FEED to construction. Mr. Lee recounted that
the 7.1 interest rate applied to the beginning of the
development phase to the end of the second year of
operations unless the 30 year U.S. Treasury rates changed
during that time. Subsequent to the second year of
operations the rate dropped to 6.75 percent.
10:05:17 AM
Vice-Chair Micciche complimented Mr. Lee on his mastery of
the English language, and thanked him for his transparency
and frankness. He referred to Mr. Lee's comment on the
state to endeavor to create a stable project environment,
and wondered if he was commenting on an existing issue of
instability. Further, he mentioned Mr. Lee's comments
regarding "the ability to openly and frankly discuss
issues" and presumed that was a problem he encountered. He
professed that the legislature wanted to help the
administration succeed and was "on the same team." He
requested that Mr. Lee author a letter to the committee
offering suggestions for the successful advancement of the
project. Mr. Lee communicated that his earlier comments
related to a stable environment and openness in discussions
was a general statement. He thought discussions had been
open and frank and that a stable environment was something
all entities strove for. He emphasized consistency in
approach, messaging, and priorities among all parties to
promote understanding and compromise in decision making and
unifying around a common goal.
Vice-Chair Micciche stated that companies such as
TransCanada, Exxon, ConocoPhillips, and BP engaged in
projects like AKLNG daily. He suggested that the state
"learn" to appreciate the "value" that the entities had to
offer and thought that the state lacked the appreciation
for what the parties had to offer the state in experience.
His goal was to ensure the state achieved maximum value for
its 25 percent investment. Mr. Lee thought it was difficult
to comment, as he did not have extensive knowledge
regarding the state's expertise.
10:10:31 AM
Co-Chair MacKinnon asked Mr. Lee whether he supported the
buyout of TransCanada by the state. Mr. Lee answered in the
affirmative. Co-Chair MacKinnon asked whether he supported
the approval of the new work plan proposed by the project
and the administration in SB 3001. Mr. Lee replied that as
an individual he supported the legislation but could not
comment for TransCanada. Co-Chair MacKinnon asked whether
he was "providing continuity and resources" in order to
stabilize the project under the governor's methodology. Mr.
Lee responded in the affirmative.
Co-Chair MacKinnon clarified that the "administration had
decided to change courses" and she was not clear what the
new course was. She acknowledged that the new "blueprint"
excluded TransCanada's participation. She related that she
had previously not been supportive of TransCanada's
involvement with the state but was convinced by the
previous administration that TransCanada's involvement was
necessary. She believed that politics were playing a role
in the current process but the process should be
apolitical. She described TC as an honorable player over
the last 6 months. She believed the issue boiled down to
contractual terms and appreciated TransCanada's support of
the governor's buyout proposal.
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