Legislature(2013 - 2014)SENATE FINANCE 532
02/21/2014 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| Fiscal Analysis: the Heads of Agreement and the Memorandum of Understanding, Black and Veatch Management Consulting | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| += | SB 119 | TELECONFERENCED | |
SENATE FINANCE COMMITTEE
February 21, 2014
9:09 a.m.
9:09:46 AM
CALL TO ORDER
Vice-Chair Fairclough called the Senate Finance Committee
meeting to order at 9:09 a.m.
MEMBERS PRESENT
Senator Kevin Meyer, Co-Chair
Senator Anna Fairclough, Vice-Chair
Senator Click Bishop
Senator Mike Dunleavy
Senator Lyman Hoffman
Senator Donny Olson
MEMBERS ABSENT
Senator Pete Kelly, Co-Chair
ALSO PRESENT
Deepa Poduval, Principal, Black and Veatch Management
Consulting Division; Michael Pawlowski, Deputy
Commissioner, Strategic Finance, Department of Revenue.
SUMMARY
SB 119 BUDGET: CAPITAL
SB 119 was POSTPONED
Fiscal Analysis: The Heads of Agreement and the Memorandum
of Understanding, Black and Veatch Management Consulting
^FISCAL ANALYSIS: THE HEADS OF AGREEMENT AND THE MEMORANDUM
OF UNDERSTANDING, BLACK AND VEATCH MANAGEMENT CONSULTING
9:10:07 AM
Vice-Chair Fairclough introduced the speaker and
presentation: "TransCanada Participation in Alaska
Liquefied Natural Gas (LNG) Project Presentation to Senate
Finance committee (copy on file)."
DEEPA PODUVAL, PRINCIPAL, BLACK AND VEATCH MANAGEMENT
CONSULTING DIVISION stated that she supported the state
administration with economic analysis for oil and gas
issues; providing analysis and commercial support for eight
years.
Senator Bishop joined the committee.
9:12:13 AM
Ms. Poduval introduced slide 3: "Memorandum of
Understanding Highlights of the Deal on the Table." She
discussed the various options available to the state
regarding TransCanada partnership with Alaska. She
mentioned the Heads of Agreement between the producers,
TransCanada, Alaska Gasline Development Corporation (AGDC),
and the state administration. She chose to highlight a
different option, The Memorandum of Understanding between
the state administration and TransCanada. She wished to
highlight the key elements of the agreement within the
context of the Alaska LNG project.
Ms. Poduval listed the highlights on slide 3:
· TransCanada Holds the State's Equity Share in Gas
Treatment Pipe (GTP) + Pipe
· State of Alaska (SOA) Option to Buy Back 40 percent of
TransCanada's Share at front-end engineering and
design (FEED)
· State Commits to 25 Year Transportation Agreement with
TransCanada
· Agreement Commits TransCanada to a Weighted Average
· Cost of Capital (WACC) of 6.75 percent
· Various Milestones and off Ramps for SOA and
TransCanada
9:14:31 AM
Ms. Poduval continued with slide 4: "Options Identified by
State for Equity Participation." She explained the first
option in which the state holds its share of the equity in
the Alaska LNG project; with an assumption of a 25 percent
stake for the state. The second option involved TransCanada
without exercise of a buyback. She explained that
TransCanada would hold 25 percent of the GTP and pipeline
and the state would hold 25 percent of the LNG plant. She
studied the final option in which the state would exercise
a buyback option with TransCanada. She stated that the
option, with the beginning of pre-FEED, the state would
assign 25 percent of the GTP and pipeline share to
TransCanada. Following the completion of pre-FEED, the
state had the option of buying back 10 percent of the
share. The result would be TransCanada holding 15 percent
of the GTP and pipeline and the state holding 10 percent of
the GTP and pipeline.
9:16:18 AM
Senator Dunleavy asked about the entity within the state
that would hold the share.
Ms. Poduval responded that the Alaska Gasline Development
Corporation (AGDC) subsidiary would hold the share.
9:16:38 AM
Vice-Chair Fairclough clarified that additional Black and
Veatch testifiers were available online for Ms. Poduval.
9:16:55 AM
Ms. Poduval continued with slide 5: "Implication of Options
and Potential Off Ramps." She explained that the slide
depicted the project's development prior to becoming
operational. She noted that the first two years would
encompass the pre-Feed, while the subsequent three years
(2016 - 2018) would be identified as the FEED stage. The
final five year period (2019 - 2023) would be considered
the construction stage. She noted the final step between
2018 and 2019, which was the final investment decision when
95 percent of the project's costs were committed to the
project.
Ms. Poduval reviewed the three alternative options listed
on slide 4. The investment required by the state was
depicted at different stages. The first stage involved a
$108 million state investment. She noted the increase to
$450 million in state investment for the FEED portion of
the process. For construction, the state investment would
equal $13 billion. The state investment using this option
was naturally the most expensive.
9:18:35 AM
Vice-Chair Fairclough asked if the figures presented were
cumulative. She asked if the $108 million was a standalone
number or was it included in the $450 million.
Ms. Poduval replied that the numbers were not cumulative.
9:19:08 AM
Ms. Poduval continued with the next option, which included
TransCanada without exercising a buyback. TransCanada would
pay for the GTP and pipeline. The option reduced the
upfront investment made by the state across all three
stages.
Ms. Poduval discussed the third option. She noted that the
TransCanada with the 40 percent buyback option elicited the
same initial investment as the second option. The $43
million for pre-FEED remained the same because the state
would not yet exercise the option to buy back 10 percent
from TransCanada. Beginning with the next phase, FEED, the
option to buy back 10 percent allowed the state's
investment to increase to $360 million. Construction
investment increased further to $9.3 billion.
Ms. Poduval pointed out that the red boxes on the slide
indicated off-ramps where the state could choose to remove
TransCanada from the picture by paying them for the
development cost invested up to that stage of the project.
She noted that the payment to TransCanada would be (first
red box) $70 million including an Allowance for Funds Used
During Construction (AFUDC) of $5 million. The state would
repay TransCanada for its expenses during the first two
years of the project with interest. She clarified that $65
million was the investment during the initial two years,
with an additional $5 million of interest paid to
TransCanada at the off-ramp.
Ms. Poduval envisioned that $65 million of the expenses
would have been paid by the state anyway if the investments
were made by Alaska during the pre-Feed stage of the
project. The additional cost of having TransCanada make the
initial investment was the interest payment of $5 million.
If an off-ramp was exercised at the end of the FEED stage,
the state would pay TransCanada's development cost of $390
million. She clarified that $340 million would have been
spent by the state alone, if TransCanada was not included
in the picture. The state would provide TransCanada $50
million with an interest rate of approximately 7 percent.
The interest was the cost of having TransCanada front the
expense for the state through the FEED stage of the
process.
9:23:10 AM
Vice-Chair Fairclough asked about potential interest earned
if the money was retained in the bank. She understood the
opportunity cost of the $65 million investment. She hoped
that the Department of Revenue would provide additional
information.
9:23:59 AM
Ms. Poduval continued with slide 6: "Key Questions in
Looking at Value of TransCanada's Participation."
· Economic impact to the state from TransCanada?
· Can the state go it alone?
· Is TransCanada a good partner?
· Does TransCanada bear any financial risk?
9:24:55 AM
Ms. Poduval discussed slide 7: "What is the Economic Impact
to State from TransCanada's Participation?" She detailed
the schematic detailing the involvement of TransCanada in
the project's investment. The project development and
construction timeframe was depicted on the left side of the
slide. The deal permitted TransCanada to pay between 60
percent and 100 percent of the state's upfront capital cost
for the GTP and pipeline. In exchange, over 25 percent of
the project's initial operation, the state would pay
TransCanada a negotiated tariff for 60 to 100 percent of
GTP and pipeline capacity used to move the state's gas. The
economic analysis would examine the net impact of reduced
upfront payments and tariff expenses for a 25 period of
operation.
9:26:27 AM
Ms. Poduval discussed slide 8: "TransCanada's Participation
Impacts SOA up Front Cash Calls and Revenues from Project."
The graph depicted the three different options. The light
blue option showed the state investing alone. The grey line
showed the involvement of TransCanada in the transaction
with the buyback option. The green line depicted the
involvement of TransCanada without buyback options. She
noted that larger dips in the initial years resulted in
higher cash flow in the out years. TransCanada's
participation would reduce the state's upfront cash calls
by $1.4 billion to $2.2 billion assuming 70/30
debt/equality. TransCanada's participation would reduce the
annual revenues to the state by $200 million to $360
million.
9:27:53 AM
Ms. Poduval discussed slide 9: "What is the Economic Impact
to State from TransCanada's Participation." The green bars
on the left displayed the cumulative cash flows over the
time period of 25 years. She stated that TransCanada's
participation came at a cost of 4 percent to the state. She
pointed out the blue bars on the right of the slide
depicting the Net Present Value (NPV). She highlighted that
TransCanada's NPV was anticipated to be $150 million to
$200 million over the initial 25 year period.
9:30:16 AM
Ms. Poduval discussed slide 10: "Can the State go it
Alone?"
· What are the capital cost and investment implications
of going it alone?
· What are the debt implications of going it alone?
9:30:59 AM
Ms. Poduval discussed slide 10: "SOA Up Front Capital Cost
Exposure is Reduced Through TransCanada Participation."
· Highest risk exposure is prior to project start when
cash calls are not supported by project revenues
· TransCanada participation allows the state to retain
20 percent - 25 percent of gas share while being
responsible for only 13 percent - 18 percent of the
upfront costs
· This is especially important if cost overruns occur on
projects
9:32:19 AM
Ms. Poduval discussed slide 12: "SOA Upfront Capital Cost
Exposures is Reduced Through TransCanada Participation."
The blue lines represented the state's required investment
without TransCanada. The left side of the slide depicted a
reference case capital cost estimate of $45 billion. The
right side of the slide depicted a case with cost overruns
extending to $54 billion. Having TransCanada's
participation would reduce the state's investment
obligation by $4 billion under the base capital cost
estimate and would reduce by $5 billion with a cost
overrun.
9:33:26 AM
Senator Dunleavy asked for further explanation of slide 12.
He pointed out the phrase, "assumes state exercises 30
percent - 40 percent equity buy back with TransCanada."
Ms. Poduval referred to slide 4 in her answer. She noted
that every mention of the term "no-buyback" represented the
second option depicted on the slide. With the second
option, TransCanada would hold 25 percent of GTP and
pipeline for the life of the project. She stated that the
buyback option referred to the third option, where
TransCanada held 15 percent of GTP and pipeline until the
second stage (FEED) when the state would have the option
buy back from TransCanada. She noted that 40 percent of 25
percent was depicted in the 10 percent shown on slide 4's
third option.
9:34:53 AM
Ms. Poduval moved to slide 13: "SOA Upfront Capital Cost
Exposure is Reduced Through TransCanada Participation." The
graph depicted the annual investment requirement needed for
the state to support its equity share in the project. She
pointed out the peak of construction in 2021 where the
investment required for the project was at its highest. The
three options demonstrated that TransCanada's participation
would reduce the state's investment by approximately $1.5
and $2 billion.
9:36:18 AM
Senator Bishop asked if the chart assumed a range of $45
billion to $54 billion.
Ms. Poduval responded that the chart utilized a $45 billion
baseline cost.
9:36:46 AM
Ms. Poduval continued with slide 14: "Can the State go it
Alone? -State's Debt Capacity." She clarified a key
question regarding the state financing the LNG project
alone. She recommended comparing the cost of the debt to
the commitment by TransCanada to a WACC of 6.75 percent.
She queried how much Alaska unrestricted general fund
revenue would be allocated to serve as the debt associated
with the Alaska LNG project. She pointed out the state's
additional obligations including supporting infrastructure
for the Alaska LNG the project, K-12 education and
transportation needs statewide.
Ms. Poduval noted the three scenarios depicted in slide 14
that were indicative assumptions based on input from the
Department of Revenue. The first scenario showed the lowest
interest. The third scenario depicted a higher interest
rate and cost. The assumed cost of debt for each scenario
tied into the current market. The lower cost debt was 4.6
percent in scenario one. The second scenario predicted 4.9
percent and the third anticipated 5.6 percent. The concept
of debt service regarding the dedication of unrestricted
general fund revenue was related to the quality of debt
available. The lower the portion of unrestricted general
fund revenue required, the more comfort a lender would have
issuing the debt to the state.
Ms. Poduval continued to explain that the first scenario
depicted debt service limited to 3 percent. The first
scenario allowed for the lowest interest rate. The higher
the percentage of required unrestricted general fund
revenue, the greater the interest charged. As general good
debt policy, the state endeavored to limit its entire debt
servicing to less than 8 percent of the unrestricted
general fund revenue. She pointed out that scenario 3
required up to 6 percent of unrestricted general fund
revenue to pay back the debt associated with the Alaska LNG
project leaving the state 2 percent to serve as state debt.
9:41:54 AM
Senator Dunleavy asked how Alaska's 8 percent limit
compared to other states.
Ms. Poduval deferred the question to the Division of
Treasury. She pointed out that the state operated well
below the 8 percent limit during the last few years.
Vice-Chair Fairclough requested information about the
state's policy regarding the 8 percent limit. She asked if
the limit was established in statute or regulation. She
asked for comparisons between Alaska and other states
regarding debt service. She was interested in other
entities in the resource business and how they established
a debt service limit.
Co-Chair Meyer asked about the state's current debt ratio.
Ms. Poduval responded that Alaska's debt ratio was between
4 and 5 percent. She requested that the Division of
Treasury confirm the information.
9:43:36 AM
Vice-Chair Fairclough requested a projection of state debt
for the next 10 to 25 year time period. She recalled debt
projections predicting that 100 percent of the state budget
would be utilized by the Department of Education and Early
Development and the Department of Health and Social
Services in only 10 years. She believed that the finance
committee would benefit from knowing the projected debt
ratio.
9:44:20 AM
Ms. Poduval continued with slide 15: "The Amount of Cheap
Debt Available to the State could be Limited." The slide
explored the question about how much debt the state could
borrow without violating the debt service limit constraint.
The slide assumed the three scenarios discussed to source
debt with their associated interest expenses and debt
service obligations. The first scenario discussed the
option of the state investing alone with a total investment
obligation of approximately $11.5 billion. The second
scenario depicted an investment of $7 billion. The third
scenario showed a total investment need of approximately $6
billion. She explained that the green portion of the bars
depicted the debt available to the state. The initial
option (without TransCanada) showed clearly the
restrictions to financing for the project. She stated that
borrowing at 5.6 percent interest would allow 50 percent of
the investment needed in financing without violating the
debt service limit as a percentage of the state's general
fund unrestricted revenue. She noted that the standalone
option could be financed, but the debt capacity must be
considered.
9:48:19 AM
Senator Hoffman asked for a comparison of slide 5 and 15
related to the total construction costs.
Ms. Poduval responded that slide 5 displayed the break up
over each stage of the project, while slide 15 provided
totals. She noted that slide 15 depicted a state investment
of 20 percent, while slide 5 showed a 25 percent state
investment in the project. The smallest investment possible
was displayed to help answer questions.
9:51:27 AM
AT EASE
9:52:44 AM
RECONVENED
Vice-Chair Fairclough asked for any further questions about
slide 15. Conversation would continue during the following
week's committee meeting.
Co-Chair Meyer stated that the conversation would include
additional consultants during the afternoon Senate Finance
Committee Meeting. He discussed the schedule.
MICHAEL PAWLOWSKI, DEPUTY COMMISSIONER, STRATEGIC FINANCE,
DEPARTMENT OF REVENUE added that the Department of Revenue
would work to arrange a further change of schedule.
Vice-chair Fairclough discussed the schedule further.
ADJOURNMENT
9:54:52 AM
The meeting was adjourned at 9:54 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 022114 BV Presentation to Senate Finance Committee-TC.pdf |
SFIN 2/21/2014 9:00:00 AM |
Alaska Natural Gas |