Legislature(2015 - 2016)HOUSE FINANCE 519
10/24/2015 01:00 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| HB3001 | |
| Presentation: Transcanada's Aklng Participation: Financing Issues | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB3001 | TELECONFERENCED | |
HOUSE FINANCE COMMITTEE
THIRD SPECIAL SESSION
October 24, 2015
1:01 p.m.
1:01:06 PM
CALL TO ORDER
Co-Chair Neuman called the House Finance Committee meeting
to order at 1:02 p.m.
MEMBERS PRESENT
Representative Mark Neuman, Co-Chair
Representative Steve Thompson, Co-Chair
Representative Dan Saddler, Vice-Chair
Representative Bryce Edgmon
Representative Les Gara
Representative Lynn Gattis
Representative David Guttenberg
Representative Scott Kawasaki
Representative Cathy Munoz
Representative Tammie Wilson
MEMBERS ABSENT
Representative Lance Pruitt
ALSO PRESENT
Pat Pitney, Director, Office of Management and Budget,
Office of the Governor; Radislov Shipkoff, Director,
Greengate LLC; Steven Kantor, Managing Director, First
Southwest Company; Justin Palfreyman, Director, Lazard;
Representative Lora Reinbold; Representative Shelley
Hughes; Representative Liz Vazquez; Representative Cathy
Tilton; Senator Peter Micciche; Representative Andy
Josephson; Representative Chris Tuck; Representative Jim
Colver; Representative Dan Ortiz; Representative Geran
Tarr; Representative Sam Kito III; Representative Dave
Talerico; Representative Louise Stutes; Representative
Gabriel LeDoux; Representative Mike Chenault;
Representative Paul Seaton; Representative Neil Foster;
Representative Bob Lynn.
SUMMARY
HB 3001 APPROP: LNG PROJECT & FUND/AGDC/SUPP.
HB 3001 was HEARD and HELD in committee for
further consideration.
PRESENTATION: TRANSCANADA'S AKLNG PARTICIPATION: FINANCING
ISSUES
Co-Chair Neuman reviewed the agenda for the day.
1:02:23 PM
AT EASE
1:04:01 PM
RECONVENED
House 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.
1:04:35 PM
PAT PITNEY, DIRECTOR, OFFICE OF MANAGEMENT AND BUDGET,
OFFICE OF THE GOVERNOR, stated that the bill was only two
pages in length. Section 1 contained three components,
beginning with $144,045,000 to capitalize the Alaska Liquid
Natural Gas (AKLNG) project fund. The appropriation would
fund the state's equity participation in the AKLNG portion
and pay for the TransCanada contract when the state bought
the partner out. Approximately $68 million would go to the
TransCanada buyout and the remainder would go to cash calls
for the remainder of the pre-FEED [Front End Engineering
and Design] stage of the gas pipeline project. The previous
number had been $108 million; the difference related to an
increase in the overall FEED project cost from $511 million
for all partners to $694 million. The cost increase had
come out recently when review of the work plan and budget
for November 15 [2015] had begun. Second, $13.6 million
would be appropriated from the General Fund (GF) to AKLNG
project fund; the funds would then be appropriated to
agencies supporting the project. The Department of Natural
Resources (DNR) would receive $2 million. She noted that
the governor's FY 16 budget request for the component for
DNR had been $13 million, but only $9 million had been
funded. She remarked that with the $2 million
appropriation, the increment for DNR was still below the
governor's initial request the prior session. The
Department of Law (DOL) would receive $10 million for legal
contracts. She detailed that the state was taking a much
more active role in driving the project. The funds would
help the state move more aggressively on the
commercialization aspects and completion of contracts. The
Department of Revenue (DOR) would receive just under $1.4
million for personnel and contractual services for the
bankability studies.
Ms. Pitney addressed Section 2, which provided the ability
for Alaska Gasline Development Corporation (AGDC) to
collect and deposit reimbursements for use towards the
project. She elaborated that AGDC had done work on behalf
of all of the AKLNG partners; the provision would allow the
funds to go back into the project. Section 3 specified that
the capitalization into the AKLNG project fund would not
lapse. Section 4 was a reminder that the appropriations
bill passed the prior session included a factor recognizing
there would be supplemental appropriations that could be
used from the Constitutional Budget Reserve (CBR).
1:09:07 PM
AT EASE
1:09:27 PM
RECONVENED
RADISLOV SHIPKOFF, DIRECTOR, GREENGATE LLC, shared that
Greengate was an independent financial advisory firm
specializing in project finance for energy projects (i.e.
oil and gas, LNG, pipelines, and downstream industries such
as refineries or petrochemicals, power plants,
transportation sectors such as toll roads, and other). He
relayed that within the LNG sector the company's experience
covered a wide range of large scale projects around the
world. He detailed that going back more than ten years the
company had worked on a number of the Qatari LNG deals
including Qatargas 2, which at the time had been the
largest project financing worldwide; Qatargas 3, which was
the third expansion of the Qatargas project; RasGas 2,
which was another Qatari project implemented by a different
company; Peru LNG; the PNG LNG project in Papua New Guinea,
which consisted of an upstream development for associated
and non-associated gas, a pipeline, and a multi-train LNG
facility; and Australia Pacific LNG, an Australian project
developed by ConocoPhillips, which used an upstream gas
supply provided by the nonconventional gas supply source
coal-bed methane. He relayed that most recently Greengate
had been advising lenders on the Russian Arctic gas
development Yamal LNG until the U.S. government imposed
sanctions on Russia.
1:11:55 PM
STEVEN KANTOR, MANAGING DIRECTOR, FIRST SOUTHWEST COMPANY,
communicated that First Southwest was a financial advisor
to DOR. He detailed that he had been involved in municipal
finance for over 40 years and had worked in Alaska for over
20 years. The company served as a financial advisor to many
of Alaska's state agencies such as the Alaska Housing
Finance Corporation, the Alaska Student Loan Corporation,
the Municipality of Anchorage, the University of Alaska,
and more.
JUSTIN PALFREYMAN, DIRECTOR, LAZARD, relayed that Lazard
was the largest independent investment bank in the world.
The company advised governments and corporations on a
variety of strategic and financial matters. The company was
advising the State of Alaska, pursuant to SB 138
[legislation passed in 2014 related to a gas pipeline,
AGDC, and oil and gas production tax], on the state's
financing alternatives with respect to the AKLNG project.
1:13:15 PM
^PRESENTATION: TRANSCANADA'S AKLNG PARTICIPATION: FINANCING
ISSUES
Mr. Shipkoff introduced the PowerPoint presentation titled
"TransCanada's AKLNG Participation: Financing Issues" dated
October 24, 2015 (copy on file). He explained that the
presentation would focus on how the termination of the
contractual relationship with TransCanada would financially
impact the state. He noted that Marty Rutherford, Deputy
Commissioner, Department of Natural Resources would address
the strategic reasons the state was making the
recommendation. He addressed slide 2 and discussed the
immediate financial obligation for the state to fund the
reimbursement of TransCanada's development costs with
interest as required under the Precedent Agreement (PA) with
TransCanada. Additionally, the state would be responsible
for funding the midstream project costs, which would have
been funded by TransCanada. He listed three questions from
slide 2 pertaining to TransCanada's exit from the project:
· What will be the impact on the State's credit rating
and borrowing capacity?
· At what cost is the State expected to finance its
share of Midstream costs, and how does such cost
compare with the cost of financing provided by TC
under the PA?
· How can the State fund its share of Midstream
project costs?
Mr. Shipkoff turned to slide 3 and listed four potential
concerns that needed to be addressed in relation to the
first question:
· Will the State's requirement to fund Midstream costs
result in increased State funding commitments?
· Will TC's exit erode the State's borrowing capacity?
· Will the State's credit rating be adversely affected
by TC's exit?
· Will the long-term impact of the TC buyout be viewed
as credit positive?
Mr. Shipkoff addressed the first potential concern on slide
4:
Will the State's direct funding of Midstream costs
result in increased State commitments?
Under the arrangement with TC, the State is already
committed to pay the costs associated with the
Midstream components:
· If the Project fails to complete Pre-FEED: State
obligated to reimburse TC, with interest
· If the Project fails to complete FEED: Under the
expected terms of the Firm Transportation Services
Agreement (FTSA) with TC, the State would be
obligated to reimburse TC, with interest
1:17:08 PM
Mr. Shipkoff continued to address slide 4:
· If the Project fails to complete construction:
Under the expected terms of the FTSA with TC, the
State would be obligated to reimburse TC, with
interest
State assumes Midstream development and construction
risks
· If the Project achieves operations: Under the
expected terms of the FTSA with TC, the State
would be obligated to pay TC fixed capacity
reservation charge, including repayment of TC
capital through annual depreciation charge, and
pass-through of Midstream costs, regardless of
throughput volumes
· State assumes Midstream cost-overrun and
throughput risks
Mr. Shipkoff elaborated that unsuccessful completion of
construction would be a very bad outcome for the project. He
continued that under the firm transportation services
agreement (FTSA) the state would also be obligated to
reimburse TransCanada with interest under the scenario. He
noted that in each of the scenarios the state would be
obligated to reimburse TransCanada. In other words, the
state would be taking on the risk of the development and
construction stages of the project. He relayed that if the
project was not successful, the development capital invested
into the project by the other partners (ExxonMobil, BP, and
ConocoPhillips) during the pre-FEED, FEED, or construction
stages would be lost. He noted the situation was similar to
how the state's capital would be at risk for the midstream
component funded by TransCanada. He discussed that
TransCanada's role was more akin to a lender, given that the
state was the one retaining the risks typically taken on by
an equity investor.
Mr. Shipkoff addressed what would happen if the project was
successful in advancing past the development and
construction stages and successfully entered into
operations. Under the expected terms of the FTSA the state
would be obligated to repay TransCanada's capital invested
during the development and construction periods over time
through a transportation tariff. The tariff would include a
capacity reservation charge, which would include a repayment
of TransCanada's capital invested with return. He likened
the repayment of capital to repaying principal on a loan.
The repayment of TransCanada's capital through the capacity
reservation charge would occur as an annual depreciation
charge, which was similar to the periodic principal
installment of a loan (with the return on TransCanada's
capital being the interest). As part of the tariff the state
would be obligated to pay TransCanada's operating cost of
the midstream segment; if the state owned the segment it
would pay directly on its own. He reiterated that under the
development, construction, and operational period, the state
was obligated to repay the capital invested into the
midstream; there was no incremental commitment by the state
to fund the midstream capital that would result from the
decision to terminate the relationship with TransCanada. He
explained that a direct form of financing would be
substituted with an indirect form; in each case the state
ultimately bore all of the risk and had all of the
obligations for repaying and funding the segment.
1:21:33 PM
Mr. Kantor advanced to slide 5: "State Borrowing Capacity
effectively the same with or without TC":
Will TC's exit erode the State's borrowing capacity?
TC's exit will not create incremental State debt
obligations; the State is already obligated to pay the
Midstream costs.
· Under the PA and the anticipated terms of the
FTSA, the State's payment obligations to TC
require payments to TC to be "supported with the
full faith and credit of the State" or a dedicated
funding source acceptable to TC
· TC would be relying on the State's credit for
reimbursement of its funding of Midstream costs
· First Southwest has noted that the credit ratings
agencies will, in all likelihood, consider the
State's long-term fixed payment obligations to TC
under the FTSA as analogous to a State debt
obligation for purposes of analyzing State debt
capacity
Mr. Kantor elaborated that all three ratings agencies had
rated Alaska's credit as AAA. He expounded that there would
be no difference in terms of analyzing for the state's
capacity because the state would either owe TransCanada or
finance it directly.
1:22:51 PM
Mr. Kantor turned to slide 6: Example: "Credit Rating Agency
Treatment of "Take-or-Pay" PPAs." He detailed that Moody's
Investor Service was one of the three major rating agencies
that rated the state AAA; however, Moody's had raised
questions about how the state would handle its financial
challenges. He explained that a power purchase agreement
(PPA) was very similar to a FTSA; the ratings agencies would
view the commitment under the PA and TransCanada as the same
as virtual debt. Subsequently, there would be no difference
in the analysis whether TransCanada was involved or not.
Mr. Kantor pointed to slide 7 titled "State Credit Rating
not Adversely Affected by TC Exit":
Will the State's credit rating be adversely affected by
TC's exit?
FirstSouthwest advises that a decision to terminate the
TC's participation will not, in and of itself, result
in a downgrade of the State's credit rating:
· No incremental commitments by the State
· As the State's overall costs related to the
Project are projected to be reduced without TC
(B&V estimates a reduction of up to $400 million
per year), the termination should be viewed by the
credit ratings agencies as a net positive for the
State
· With or without TC, the State should anticipate a
reduction in the State's credit rating during the
construction period (when no gas sale revenues are
being generated) absent a significant increase in
revenue generated from existing sources
· Credit rating should recover once gas sale
revenues become established
· TC's exit, by itself, should not result in a
credit downgrade during the construction period
that is greater than any downgrade if TC remained
in AKLNG. The State's credit could instead be
improved by the lower costs to the State as a
result of TC's exit
Mr. Kantor elaborated that the state's credit rating would
undergo credit rating pressure with or without TransCanada
because the state would have to finance a tremendous amount
of money in a period where there would not be corresponding
revenues.
1:25:03 PM
Mr. Kantor discussed slide 8: "Financial Risks to the State
of Maintaining TC Funding." In addition to anticipated
savings, there was also a risk to maintaining the
TransCanada agreement. He detailed that TransCanada was
acting as a lender to the financing under the current
agreement; should anything happen, TransCanada had the right
to end the arrangement. He elaborated that if TransCanada
chose to end the arrangement, the state would owe the
company all of the money TransCanada had expended in
addition to all of the fees and costs. Subsequently, the
state would have to borrow the money to pay for TransCanada
under a quick timeframe because it was unlikely the state
would have the cash in reserves. He continued that it could
be very expensive to borrow money in the event of a failed
partner and potentially a failed project. He discussed that
the situation should be avoided for the state and was
another advantage to the termination of the arrangement with
TransCanada.
1:26:11 PM
Mr. Shipkoff advanced to slide 9:
At what cost is the State expected to finance its share
of Midstream costs?
How does such cost compare with the cost of the
financing provided by TC?
Mr. Shipkoff pointed out that in order to address the first
question it was helpful to do an overview of capital costs
under the existing arrangement.
· If the PA is terminated:
o TC's costs reimbursed with interest at rate of
7.1%
o higher rate applies if payment is not made
within the required period under the PA
· If the Project proceeds to operations:
o the State would pay a return on TC's rate base
calculated on the basis of deemed weighted
average cost of debt and cost of equity
o cost of debt and return on equity adjusted for
changes in the yield on 30-year Treasury bonds
over time
o debt to equity ratio: different during the
construction and operating periods
ƒ 70:30 through the second anniversary of
the in-service date and in respect of
expansions and maintenance capital
additions
ƒ 75:25 after the second anniversary of the
in-service date on capital other than
capital additions for expansions and
maintenance
Mr. Shipkoff elaborated that the weighted average cost of
capital (WACC) was calculated by applying the 75 percent
debt to the deemed cost of debt (which had been set at the
time of the execution of the Memorandum of Understanding
(MOU) with TransCanada in 2013 at a rate of 5 percent) and
applying the 25 percent to the 12 percent equity component.
1:29:05 PM
Mr. Shipkoff turned to an illustration of the WACC on slide
11: "Sample TC Deemed Weighted Average Cost of Capital under
the PA." The table showed two snapshots in time of
TransCanada's cost of capital under the arrangement. He
stressed that the cost of capital under the arrangement was
not fixed; it changed with variations in the yield of the
30-year Treasury bond. On December 12, 2013 (the date of the
MOU) the 30-year Treasury yield was 3.91 percent, which
resulted in a WACC during the construction period and the
first two operating years of 7.10 percent; once the debt to
equity ratio switched from 70/30 to 75/25 the WACC reduced
to 6.75 percent. He relayed that Treasury rates had declined
and had ranged from 2.90 to 3.00 percent in recent months.
Assuming a 2.95 percent 30-year Treasury yield resulted in a
WACC of 6.15 percent during the construction period and the
first two operating years of 6.15 percent; once the debt to
equity ratio switched from 70/30 to 75/25 the WACC reduced
to 5.80 percent. He summarized that the WACC had declined
under the TransCanada arrangement because it was linked to
Treasury rates that had declined.
Mr. Kantor discussed slide 12: "TC Cost of Capital vs. State
Debt Interest Rate." He restated Mr. Shipkoff's statement
that the financing rates changed daily with the yield on the
30-year Treasury. The table on slide 12 compared the
TransCanada WACC under the PA (as of September 11, 2015)
with the interest rates on taxable State general obligation
bonds (estimated by First Southwest as of September 11,
2015). The red lines on the table represented the
construction and operating periods; the gray lines
represented estimated costs to the state to assume the same
obligations with its own financing. He discussed that the
state's credit rating may decline as it issued so much debt
without any corresponding revenues; therefore, the table
illustrated different scenarios at different ratings. The
state was currently rated AAA by the three major rating
agencies, but the table showed that even if the rating
declined to A-/A3, the interest rates on the state's
borrowing would still be less than those under the PA. He
reminded the committee that the state had not received such
a low rating since 1974 (right before Trans-Alaska Pipeline
System (TAPS) began). Given the state's more sophisticated
financial position, it was unlikely the rating would fall
to a level that low. The purpose of the table was to
demonstrate the resiliency of the state in terms of
obtaining financing. He reiterated that under all of the
credit rating scenarios the cost would be less than what it
would be under the PA agreement with TransCanada.
1:32:59 PM
Mr. Kantor asked "How will the State fund its share of
Midstream project costs?" on slide 13. First, it was
important to understand the costs, which had been divided in
three stages shown on slide 14. The pre-FEED stage from 2014
to 2016 would cost approximately $144 million, the FEED
stage from 2016 to 2018 would cost approximately $675
million, and the construction phase from 2019 to 2026 would
cost approximately $13 billion.
Mr. Kantor discussed four funding options the state could
consider listed in slide 15: "State Funding Options":
· The Legislature could appropriate from existing
State funds, e.g., the Constitutional Budget Reserve
Fund (CBRF), Earnings Reserve Fund
· The Legislature could authorize the issuance of
State debt
· The Legislature could authorize pursuit of project
financing
· The Legislature could authorize the pursuit of
funding from other sources: LNG buyers and other
potential equity investors
Mr. Kantor addressed the state funding option on slide 16.
The firm estimated that if the legislature elected to use
the CBR, the fund would be depleted in 2018 or 2019 given
the current funding requirements. He detailed that utilizing
the CBR to finance the TransCanada reimbursement and
midstream financing would accelerate the depletion of the
CBR by approximately 3 to 5 months. Given that the CBR was
dependent on the price of oil, some oil price scenarios had
been generated by the firm. The analysis concluded that the
CBR could be used to fund pre-FEED and at least a portion of
FEED costs, but not construction costs. Ultimately, it was
anticipated that as the short-term funding for pre-FEED and
FEED was taken out, the CBR would be reimbursed for the
expenditures.
1:35:40 PM
Mr. Kantor advanced to slide 17: "Potential Funding Sources:
State Debt." He discussed that the legislature could
authorize the issuance of state debt in many different forms
including a general obligation bond or an appropriation-
backed bond. He detailed that bonds could be used to finance
FEED and construction costs. There was generally a long-term
repayment consistent with the life of the project; the firm
recommended a 20 to 30-year cost amortization period. There
were timing implications associated with issuing state debt;
authorization to issue general obligation bonds would
require a vote of the people, whereas the issuance of
appropriation bond would not.
Mr. Palfreyman addressed project finance as a third
potential funding source (slide 18):
The Legislature could authorize the pursuit of project
financing:
· Lenders would look primarily to the Project-level
cash flows and assets as security for repayment,
rather than State funds
· Common form of debt for LNG projects
· Requires the Project commercial structure to be in
place:
o All key project agreements must be
executed
o Commercial structure must be "bankable"
· Requires that FID is reached; not available to
fund FEED costs
· May require constitutional amendment to allow the
pledging of LNG sales proceeds as lender
collateral as the Lenders will demand that funds
will be dedicated to repayment, which is currently
not permitted by the State's Constitution
As the Project's commercial structure has not yet been
agreed, it is premature to evaluate the extent to which
project finance could be a viable source of funding
Mr. Palfreyman elaborated that all key agreements with
producers, LNG buyers, contractors, and others, had to be
executed in order for project financing to be implemented.
Additionally, project lenders would need visibility on
project cash flows and clarity on the security package.
Mr. Palfreyman discussed LNG buyers and other equity
investors (such as infrastructure investors) on slide 19:
The Legislature could authorize pursuit of investment
from LNG buyers or other equity investors:
· Offtakers have often acquired equity in LNG
projects
· Approach by the State would need to be made in
coordination with marketing plan
· New equity investors could share Project
development risk
· Could provide sources of funding in the event a
Producer withdraws
At this stage of the Project's development, it is
premature to evaluate the extent to which LNG buyers or
other equity investors could be viable sources of
funding
1:39:22 PM
Mr. Palfreyman slide 20: "Example Funding Scenario (For
Illustrative Purposes Only)." The scenario demonstrated that
the ultimate financing plan would likely include a
combination of funding sources and would need to be
sequenced appropriately based on the phase of the project.
For example, the state could use short-term funding sources
such as the CBR to fund the state's share of the project
through FEED and could arrange its long-term financing such
as general obligation debt or project financing or a
combination of the two. He continued that if the state
utilized the CBR through FEED it could use the proceeds from
the long-term financing to repay funds to the CBR.
Mr. Shipkoff summarized the findings provided in the
presentation (slide 21). First, the exit of TransCanada
would require the state to fund the reimbursement to
TransCanada's midstream development costs plus interest in a
relatively short timeframe. However, TransCanada's exit
would not result in any incremental financial commitments by
the state because the state was already committed to paying
the midstream costs indirectly. He noted the arrangement was
not dissimilar to a situation where TransCanada was the
lender (as opposed to the state going directly to the
lending market). There would be no incremental impact on the
state's long-term credit rating and borrowing capacity
because the financial community and rating agencies would
perceive the obligations as essentially equivalent to
already having borrowed the funds from TransCanada. He
stated that cost at which the state could fund its share of
the midstream costs directly should be no greater and
potentially better than borrowing indirectly through
TransCanada. He pointed to First Southwest's projection that
the interest rate would be lower if the state were to borrow
directly rather than indirectly. Lastly, the state had a
range of financing options available to fund its share of
the midstream project costs directly. He remarked that the
state was still in negotiations with the producers on what
the commercial structure would look like. Any financing plan
would have to be carefully tailored to the commercial
structure; therefore, it was currently premature to craft a
specific financing plan. He continued that when the state
was ready to create a detailed financing plan, the plan
would have to be carefully considered, appropriately
sequenced (short-term funding was implemented and utilized
before long-term funding was available), and the appropriate
risk allocation and the state's preferences were taken into
consideration.
1:43:58 PM
Vice-Chair Saddler asked how long the companies had been on
contract with the State of Alaska.
Mr. Shipkoff responded that Greengate LLC had been under
contract regarding LNG since July 2015.
Mr. Kantor replied that the First Southwest Company was
retained through a request for proposal (RFP) process
through the Department of Revenue in October 2014.
Mr. Palfreyman answered that Lazard had been retained by
the state as of September 2014.
Vice-Chair Saddler asked how much time had been spent on
the TransCanada buyout provisions and the resulting
financial decisions.
Mr. Shipkoff responded that he did not have a precise
figure, but estimated Greengate had spent the past few
weeks looking at the issue and financing implications.
Mr. Kantor responded that the arrangement with TransCanada
had offered certain off-ramps that were logical points in
the time schedule for the state to end the agreement. One
of the off-ramps was approaching; therefore, the companies
had focused on the opportunity and had provided an analysis
of how much it would take for the state to take the off-
ramp.
1:46:06 PM
Vice-Chair Saddler asked how much time the companies had
been focusing on the off-ramps. Mr. Kantor responded that
there had been focus on the off-ramps for the past 12
weeks.
Mr. Shipkoff added that the recommendation for the state to
make a choice on whether or not to terminate its agreement
with TransCanada had been considered and evaluated by the
state team over time. However, the financing implications
was a narrower topic that the companies had reviewed
relatively recently. He explained that the companies were
not focusing on the strategic considerations on whether it
was a good idea to terminate the agreement with TransCanada
and when.
Vice-Chair Saddler wanted to know how much of the
companies' expertise had been focused on the off-ramps and
the financing and implications of the buyouts versus a
success case on how to make the agreement work. He
referenced prior statements about a few weeks and 12 weeks.
Mr. Palfreyman replied that the companies had spent the
majority of the past couple of months on the issue. Lazard
had been engaged in the process for slightly over one year;
most of its focus had been more broadly on the financing
alternatives for the state (long-term financing in
particular).
Mr. Shipkoff replied that the recommendation to terminate
the relationship with TransCanada, which would be explained
from a strategic perspective by DNR, was entirely
consistent with a successful project outcome. Additionally,
it was consistent with the view that the state would be in
a more cost advantageous position if it pursued direct
ownership of the midstream component. He stated that it was
a matter of cost of financing rather than success or lack
of success.
Vice-Chair Saddler asked if the companies were relying on a
recommendation or an actual decision that had been made.
Mr. Shipkoff responded that the companies had been asked to
provide advice on what the potential implications to the
state could be if the agreement with TransCanada was
terminated.
Vice-Chair Saddler asked for verification that the decision
had not yet been solidified. Mr. Shipkoff replied in the
affirmative.
1:49:32 PM
Co-Chair Thompson asked if it was prudent for the state to
address its risk exposure in the short-term, mid-term, or
long-term, given the current oil prices.
Mr. Kantor answered that the state had a number of
financing needs. There was a substantial risk in the state
budget due to oil prices. The company believed that it was
one small component of the decisions facing the legislature
in terms of how to allocate its resources.
Representative Wilson asked if the companies had considered
whether the project would qualify for Alaska Permanent Fund
Corporation financing. She noted that the corporation
looked at commercial buildings and other investments. She
detailed that the money was a resource of the state and a
certain percentage would go back into the Permanent Fund.
She wondered how it would impact the state's credit rating
if the funds came from the Permanent Fund versus the CBR.
Mr. Kantor affirmed that the Permanent Fund could be used
as a source of financing and its use would reduce the cost
of financing to the state. Additionally, the Permanent Fund
would be provided with capital. The analysis fell under the
broader category of "state funds."
Representative Wilson asked for verification that a
reduction to the state's credit rating would impact any of
the state's projects financed with variable rates.
Mr. Kantor agreed that a reduction to the state's credit
rating would affect all of the projects the state had
borrowed money to fund. He affirmed that if the Permanent
Fund financed the entire project there would be no impact
on the state's credit rating.
Representative Wilson asked why the project would or would
not be considered for financing by the Permanent Fund. She
believed one of the largest complaints was that the
Permanent Fund invested its funds outside of Alaska. She
reasoned that the Permanent Fund would want to be a part of
the project if it was a good one.
1:52:24 PM
Co-Chair Neuman requested copies of any reports the
companies had provided to the administration. Additionally,
he requested information on the baseline the companies had
used for their financial assumptions.
Representative Guttenberg commented that the state was
approaching a milestone on the contract. He remarked that
the due diligence was necessary to determine the best
course of action for the project. He observed that based on
the information presented to the committee it appeared that
under every option it was beneficial for the state to
buyout TransCanada. He believed that could be seen as
raising a flag. He questioned whether it was permissible
for TransCanada to charge interest on money the company was
borrowing on. He remarked that the state was paying double
interest and it was still financially in the state's best
interest to buyout TransCanada. He wondered what would have
to change to make the buyout a less advantageous option.
Mr. Shipkoff thought it would be beneficial for the
committee to consider the broader picture rather than the
narrowly focused financial aspects. He believed DNR Deputy
Commissioner Marty Rutherford's presentation on the broader
aspects would be helpful. The presentation would consider
from a strategic standpoint why it was a good idea to
terminate the relationship with TransCanada. He remarked
that there were pros and cons to the arrangement with
TransCanada and the evaluation needed to take them all into
account.
1:55:50 PM
Representative Guttenberg asked whether the situation was
as black and white as the presenters had depicted when
considering the financial position on its own.
Mr. Shipkoff replied that there were many strong arguments
to confirm that exiting the agreement with TransCanada
would be beneficial to the state in terms of costs the
state would incur by funding indirectly through TransCanada
or directly on its own credit. He hesitated to classify
something as a black and white question; however, the
arguments that could be made in favor of a termination of
the TransCanada arrangement from a financing perspective
were very strong.
Co-Chair Neuman asked about the contract with TransCanada
was or was not standard. Mr. Shipkoff answered that the
type of tariff that would be paid by the state to
TransCanada was consistent with other similar arrangements.
However, the financing aspects of the existing arrangement
where TransCanada was funding the state's share of the
midstream, was somewhat uniquely tailored to the project.
Co-Chair Neuman was interested in measuring risk. He
believed it was necessary to consider the issue further
given that a portion of the funding arrangement was not
standard. He wondered if the risk was proportionate for all
parties involved.
Mr. Shipkoff answered that the risk allocation under the
existing arrangement with TransCanada was such that the
state was committed to paying the cost of the midstream
project under practically every scenario about success or
failure of the project throughout its stages of
development, construction, and operation. In that sense,
the risk allocation was very one-sided (the state was
taking almost all of the risks).
1:59:45 PM
Co-Chair Neuman asked the companies to follow up with
information on the risks and how to measure them. He
wondered why the state was taking on more risk than its
other partners and how it could be managed.
Mr. Kantor clarified that the state was taking all of the
risk under the TransCanada agreement. The other partners
(BP, ConocoPhillips, and ExxonMobil) were also taking the
same risks as the state.
Representative Gara wanted to quantify the value of buying
out TransCanada. He asked for verification that the state
was taking a risk if it did not buyout TransCanada because
the state would owe the company all of its money plus a 7
percent profit if the project failed. Mr. Shipkoff
responded in the affirmative.
Representative Gara asked how to quantify the difference
between buying out TransCanada and financing at a favorable
rate compared to leaving TransCanada in the project and
paying the company through the tariff charge. Based on past
pipeline hearings, he understood that a pipeline owner
received a 12 to 14 percent rate of return. He did not know
if the same was true under the current project.
Mr. Shipkoff answered that the rate of return the state
would pay to TransCanada via the tariff was a function of
the WACC specified in the contractual arrangement with the
company. He confirmed that the equity component of the
WACC, which was typically around 12 percent, was set as of
December 2013 at 12 percent. He detailed that the rate
varied with the yield on 30-year Treasury bonds (currently
it was about 11 percent). However, the equity component
could not be viewed in isolation. There was a weighted
average debt and equity component; the debt component was
weighted between 70 and 75 percent and the equity component
was weighted between 25 and 30 percent. As of December
2013, the WACC was 7.10 percent in the construction period
and 6.75 percent during the operating period. As a result
of the lower Treasury yields at present the rates were 6.15
and 5.80 respectively. He pointed out that an increase or
decrease in Treasury rates would impact the return the
state was committing to pay TransCanada and the state's
cost of capital.
2:03:38 PM
Mr. Kantor added that the companies had estimated that the
annual savings would be up to approximately $400 million
per year. He noted that Black and Veatch and Ms. Rutherford
would speak to the issue during their presentations.
Representative Gara discussed that under the current
contract with TransCanada, the state would owe the partner
7 percent plus everything the partner paid if the project
failed after pre-FEED and FEED. He elaborated that the
state would avoid the penalty if it bought TransCanada out.
He wondered about how much the state would save under the
two scenarios.
Mr. Kantor answered that he would follow up with the
number.
Mr. Shipkoff pointed out that the magnitude of the
obligation and savings depended on the timing of the
potential reimbursement; the later in the development or
construction stage that a buyout occurred, the greater the
magnitude of the reimbursement and accompanying interest.
Consequently the savings associated with the interest
component of the reimbursement would be greater. Therefore,
it was necessary to consider a range of timing scenarios.
2:06:29 PM
Representative Gara spoke to working to understand the
difference in the cost implications for the two scenarios.
Assuming the estimated timeframes were accurate, he
wondered whether the 7 percent payment would be on the
rough estimate of $820 million over the four-year period.
Mr. Shipkoff responded that several factors had to be taken
into account in the scenario outlined by Representative
Gara. The first factor was the differential interest cost
the state would pay on the interest portion of the
reimbursement versus what the state would have paid if it
had financed the same costs directly. The second factor was
that if the termination occurred at a sufficiently late
stage, borrowing to fund a one-time, lump sum, large
payment may have to be incurred by the state at a time of
adverse credit conditions to the state because at that
point in time the lending community would be aware of a
potentially failed project; therefore the costs to the
state of borrowing to fund the reimbursement were currently
unknown (it was not possible to know the underlying cause
of a project failure and circumstances in the future). He
relayed that the state's credit could be impacted quite
negatively. He summarized that it was difficult to predict
what the credit conditions would be under a range of
failure scenarios in the future; however, the credit
environment would not be as positive as it was at present
where there was an expectation that the project would
hopefully succeed.
Mr. Kantor added that the amount at any one time would be
based on many factors and the nature of the cash flow. The
state may be spending a larger amount earlier or later in
the FEED process. TransCanada would advance the funds and
the state would reimburse the company. He relayed that they
[the consultants] could provide an analysis and detail the
assumptions, but he hesitated without going through all of
the assumptions to ensure he was responding to
Representative Gara's question.
2:09:43 PM
Representative Kawasaki recalled that during discussion on
SB 138 the consideration to involve TransCanada was that it
brought something materially to the table being a $40
billion company and having credit backing. He surmised that
the consultants were currently testifying that the state's
credit rating would not be impacted. He noted that the
information was different than what had been provided by
the preceding administration.
Mr. Kantor replied that they [Greengate, First Southwest,
and Lazard] only addressed finances. He suggested taking up
the issue with Black and Veatch and Deputy Commissioner
Rutherford. From a financial perspective, the companies
strongly believed that the state could finance obligation
at a lower cost on its own.
Representative Kawasaki stated that part of the purpose of
the partnership with TransCanada was that it would take up
any cost overruns. He asked if a credit agency would have
difficulty saying that cost overruns would be borne
directly by the state.
Mr. Shipkoff answered that the cost overruns were borne by
the state with or without TransCanada. The state was
obligated to reimburse TransCanada in the event of a
project failure for all of the company's capital invested
(even in the event of cost overruns) or if the project
successfully entered into the operational stage the tariff
the state would pay to TransCanada would adjust upwards to
account for the actual cost spent. Therefore, the state was
bearing the risk of cost overruns.
2:11:54 PM
Representative Kawasaki reasoned that one of the scenarios
was more immediate versus a long-term pipeline contract. He
surmised a credit agency would take into consideration that
cash would be out sooner rather than later.
Mr. Kantor agreed; however, the state had very little
control about whether TransCanada would decide to
participate in the project and at any time the company
could decide to exit. Meaning that the state would be
forced to come up with a tremendous amount of money over
time. One of the underlying items under the original
agreement was that TransCanada would fund the early parts
of the project and the state would repay the funding over
time, making a more level stream. However, there was a cost
associated and the state would take all of the risk paying
the cost to TransCanada as a lender. From a purely
financial standpoint, it was more expensive than having the
state acquire direct financing.
Mr. Shipkoff referenced Mr. Kantor's overview of the
potential funding options the legislature could authorize
going forwards. A key element of the analysis was that if
existing funds such as the CBR were used, the CBR could not
be used necessarily for the long-term investment throughout
the construction period because the funds were not there.
Therefore, the state would have to borrow the funds through
state debt or project financing in order to fund its share
of the project costs. However, the state was already
borrowing from TransCanada under the existing arrangement,
so the net effect to the state was very similar. He
detailed that if the state was borrowing directly on its
own credit, the lenders were providing the funds to the
state; therefore, not affecting the state's cash position.
Ultimately the state would be obligated to repay the
lenders just like the state was effectively borrowing funds
from TransCanada and committing to repaying them.
Representative Kawasaki referenced examples of large LNG
projects in the back of the Lazard report. For example, the
Gorgon project was comprised of 47 percent Chevron, 25
percent Exxon, 25 percent Royal Dutch Shell, and a handful
of Japanese gas companies. He observed that the project
profiles were all similar. Similarly, he wondered if the
state would have to negotiate with a couple of large
players and numerous small players to get LNG buyers and
equity investors.
Mr. Palfreyman responded that it was too early to tell
exactly how the financing would play out. The reason the
presentation had included LNG buyers as a potential funding
source was due to their participation in other LNG projects
globally. He referenced Representative Kawasaki's question
related to the participation of other producers or
strategic partners in the projects and relayed that
everything addressed in the presentation was related to the
state's roughly 25 percent interest in the overall project.
The presentation assumed the three other producers
partnered with the state would fund their portion of the
project.
2:15:57 PM
Representative Munoz asked the presenters to speak to the
cash flow on the project if the state moved forward with
TransCanada. She observed that the state's cash flow was
much greater under the scenario in the presentation
compared to its cash flow under the current agreement with
TransCanada. She asked for a breakdown of percentage of
potential cash flow between the partners.
Mr. Shipkoff recommended taking the presentation that would
be provided by Black and Veatch into consideration. He
elaborated that Black and Veatch had performed modelling on
the topic.
Representative Munoz stated that in relation to the Black
and Veatch presentation, she understood that the potential
cash flow to TransCanada was relatively small compared to
its investment of $7 billion to $8 billion. She asked if
Mr. Shipkoff agreed with the assumption.
Mr. Shipkoff asked for clarification on the question.
Representative Munoz restated her question. Relative to the
$8 billion in upfront cost (25 percent of the pipeline and
25 percent of the gas treatment plant), the cash flow
percentage was between 1 and 7 percent. She asked if the
deal was fair for the state and TransCanada. She wondered
if the structure was overly favorable to TransCanada.
Mr. Shipkoff responded that the cash flow paid to
TransCanada depended on the scenario. He elaborated that if
the project was successful in reaching operations the state
would pay TransCanada a tariff in exchange for
transportation services provided on the midstream
component; the tariff would be set by a number of items
including the amount of capital spent, the cost of capital
to TransCanada, the operating costs of the pipeline,
etcetera. The net effect on the state's cash flow position
of the state's revenue receipts from selling the share of
its gas, net of all of the state's costs including the cost
of funding and paying the tariff payment to TransCanada
under the existing agreement or paying the state's debt
service if the state were to directly finance its share,
had been estimated by Black and Veatch as up to $400
million per year.
2:19:15 PM
Representative Munoz asked about what portion of the $400
million was associated with transportation cost. Mr.
Shipkoff deferred the question to Black and Veatch.
Representative Munoz asked about TransCanada's reputation
as a pipeline builder. She wondered if there were examples
where TransCanada had pulled back on a project at a
relatively developed stage. Mr. Shipkoff answered that
TransCanada was a well-known pipeline company with
significant experience. The role of the construction
contractor for the pipeline segment had not yet been
determined and would not necessarily be TransCanada. He
detailed that TransCanada's role was to essentially provide
a financing vehicle to the state. He noted that the
presentation by Ms. Rutherford and Black and Veatch would
elaborate on the strategic aspects of TransCanada's
presence or absence from the project.
Representative Edgmon surmised that from a financing
perspective the three presenters recommended terminating
the TransCanada contract. He asked for verification that
his understanding was accurate.
Mr. Kantor agreed that from a financial standpoint the
companies would recommend the termination of the agreement
with TransCanada to the administration.
2:21:41 PM
Representative Edgmon referred to slide 12. He referred to
earlier testimony that a worst case scenario would take the
state back to 1974 when the TAPS pipeline was under
construction and the state's bond rating was A-/A3. He
spoke to a hypothetical time in the distant future where
the state's financial position deteriorated given its long-
term deficits and other. He wondered what probability the
consultants would assign to the cost of the state's
capital. He stated that in his limited view of all things
global and the natural gas industry, there was a pretty
good scenario that the pipeline would not get built
(especially in the immediate future). He spoke to the
state's deficit situation and that two of the three credit
rating agencies had put the state on watch. He observed
that there would be some dire consequences if certain
actions were not taken by the state. He thought the bottom
line on slide 12 could extend farther out if it was
assigned certain assumptions.
Mr. Kantor replied in the affirmative. The companies' set
of likely scenarios did not encompass all possibilities.
The spread between the ratings and the cost were a function
of a number of factors including the overall interest rate
at the time and the spread that the market perceived in
terms of credit quality. The spread widened and narrowed
over time depending on the market interest rate and a
variety of financial factors. He believed that as interest
rates went up and down and if credit spreads remained the
same, the same relationship would hold true and the state
would be able to finance at a less expensive cost on its
own rather than through TransCanada.
Mr. Shipkoff added that while there were a number of
factors that went into the determination of the state's
credit position, it was conceivable that the state's credit
position may be worse than as contemplated by the chart on
slide 12 due to a variety of factors (e.g. the absence of a
project due to precipitous oil revenue declines). However,
the impact on the state of such a scenario would be the
same with or without TransCanada's participation. He
detailed that in such an adverse scenario, whether the
state had chosen to fund the midstream portion of the
project directly or indirectly, would still leave the state
in the same position. The state would not be adversely
effected solely as a result of going forward with or
without TransCanada.
2:25:51 PM
Representative Edgmon wondered if the companies could put a
scenario together with assumptions that may put the state
in a situation where the 7.1 percent cost of capital by
TransCanada may be attractive. Mr. Kantor did not want to
prejudice the analysis, but he could try additional
scenarios at the committee's direction.
Vice-Chair Saddler wanted to better understand Mr.
Shipkoff's "careful conditioning" of his prior answer to
Representative Edgmon. He was concerned that the
presentation only focused on the cost of TransCanada's
participation in the project as currently envisioned, the
cost to the state with or without TransCanada's
participation in the future, and by implication the
benefits of a higher State of Alaska equity position. He
believed a full assessment of the implications of the
TransCanada buyout demanded a full analysis of the state's
increased risk as an expanded equity partner. He queried
the risks involved if the state took a larger piece of the
project. Additionally, he wondered if there had every been
a discussion by any of the parties (i.e. the
administration, legislators, departments, or consultants)
about using a portion of the Permanent Fund corpus or using
the fund in any way to finance the project. He pointed to
the first bullet on slide 5 "a dedicated funding source
acceptable to TC."
Mr. Kantor believed that given the magnitude of the project
and the financial situation of the state, it would be fool-
hearty to reject any possible solution. Therefore, the
consultants had tried to provide a broad outline of ways
for the state to finance the termination payment for
TransCanada and the state's continuing participation in the
project. There were a number of different alternatives
within the broad categories and the Permanent Fund could be
one of them, but the consultants had not specifically
offered it as a solution to anyone. He relayed that at the
legislature's direction the consultants could do more
research on the option.
Co-Chair Neuman relayed that he would pass the question to
DNR and the administration to get an answer as soon as
possible.
2:29:15 PM
Co-Chair Neuman referred back to slide 6 related to take-
or-pay and power purchase agreements (similar to firm
transportation agreements) to obligate the buyer to make
the capacity charge payments regardless of output. He
remarked that the agreements were scrutinized by the credit
agencies. He expressed his concern about the issue. He
believed that some of the 20 to 30-year contracts for the
purchase of gas, particularly in the Asian market, were
starting to decline. He detailed that buyers were
purchasing out of spot market prices and negotiating out of
long-term contracts. He wondered how the state would
measure out on the issue. He asked how rating agencies
would analyze the state's project that looked at a 30-year
financing plan. However, the state did not know the price
of its gas, how it would sell it, or who would purchase it.
He wondered how to analyze the purchasing agreements or the
credit ratings of the buyers; he believed that information
was the basis of what the state was leaning on. He observed
that the state was put at risk if the items were not proper
or in place. He added that the state had to cover the cost
even if it could not sell the gas.
Mr. Kantor responded to what the rating agencies would do
and how they would examine the buyers. The rating agencies
would carefully examine whatever the agreements were to
repay the bonds. They would also analyze the credit nature
and financial position of the purchasers. He detailed that
findings and the particular nature of the contract would
all be factors in the rating. The more financially secure
the buyer, the less risk there would be for the state. He
stated that part of the issue was that it would be a
negotiation process, which would take time. He believed it
was a bit too early to analyze exactly what would happen
because the process was in the beginning stages. However,
the consultants were focused on the issue and would
continue to examine it as the project continued to move
forward.
Co-Chair Neuman asked for possible alternatives the state
could face. He referenced Mr. Kantor's statement that
several options could be available. He requested
information on the potential implications for the state in
the future. Mr. Kantor replied in the affirmative.
Co-Chair Neuman asked about the market in the future. He
wondered if the Asian market was moving away from long-term
[gas] contracts.
Mr. Shipkoff replied that based on expert opinions and the
consultants' own observations, for the most part LNG
projects continued to be implemented and financed on the
basis of long-term sales and purchase agreements; however,
there was the perception that there was pressure on the
model and that a greater portion of sales contracts in the
future may be shorter-term. Additionally, the buyers may
become more fragmented and their credit ratings may be
different than the rating historically associated with LNG
buyers (typically strong, large Asian utility purchasers).
He reported that there was a perception that the market was
moving in that direction, but the shift had not yet
materialized. He relayed that the state and its partners
would monitor and assess the issue as the project continued
to determine the appropriate steps to manage the situation.
Co-Chair Neuman asked if the shift would increase the
state's risk. Mr. Shipkoff replied in the affirmative, to
the extent the state's buyers had a lower credit rating
than alternative buyers with a higher rating. However,
simply because the LNG market may look different in the
future did not necessarily mean that the state would
automatically have the worst buyers or those with the
lowest credit rating. He explained that it was a matter of
carefully managing the marketing strategy, which was
something the state and its partners would focus on in the
years to come.
2:34:57 PM
Vice-Chair Saddler understood that SB 138 established a
clear process towards the sanctioning of an AKLNG project.
He believed credit rating agencies had considered that the
state had the process in place. He continued that the
process he had expected to see towards a firm
transportation services agreement in the past 1.5 years. He
asked if the failure to pursue the process and hit
benchmarks had any implications for the state's credit
rating and project financing. He wondered if the project
appeared less reliable at present and would convert into a
higher demand for a higher return on investment and higher
financing interest rates.
Mr. Kantor stated that the rating agencies were concerned
with many prospects, which included the state's overall
financial health. He affirmed that there were some
challenges the rating agencies had recognized in terms of
what was going forward and how the state would handle its
finances. To the extent that AKLNG had been offered as a
possible solution to the finances, he believed the rating
agencies recognized that the increase in revenue from the
project was in the distant future. There was not an
immediate impact on the state's current financial
situation. He believed the state was frustrated with the
progress that had been made; however, slower progress meant
a slower outlay of cash. One of the issues raised in the
presentation was that the state had been able to finance
the expenditure of funds through existing funds of the
state. He detailed that as the CBR became depleted (and the
state may have other uses for the CBR outside of the
project) the issue would have to be monitored. He relayed
that rating agencies would really become involved when the
state went to the bond market.
2:37:37 PM
Co-Chair Neuman asked members to phrase their questions
clearly.
Representative Gara commented that many of the committee
members had been through years of pipeline discussions. He
discussed that the state would be a shipper of gas and
would ship through TransCanada's portion of the pipeline if
the company remained a part of the project. He addressed
that a shipper promised to send a certain amount of gas
through the pipe and if they sent less gas they still had
to pay for the portion of the pipe they were supposed to
send the gas through. He provided an example. He asked if
the issue remained a risk to the state.
Mr. Shipkoff replied that the commercial arrangements in
the AKLNG project and the nature of the relationship
between a participant's share of the gas and capacity of
the project would be addressed by the Black and Veatch and
DNR presentations. The concept of alignment in the AKLNG
project was such that the share of the gas the participant
had was supposed to be reflected into the share of the
capacity. In a scenario without TransCanada's involvement,
the state would own its share of capacity throughout all of
the project components; therefore, there would be no one to
pay the tariff to. In a scenario with TransCanada
involvement, the state would be committed to paying a
tariff to TransCanada to move the state's gas through the
midstream components (i.e. the transmission lines from the
fields, the gas treatment plant on the North Slope, and the
main pipeline from the North Slope). He relayed that the
state's obligation to pay the tariff to TransCanada was
fixed (regardless of price, throughput, and generated
revenue). Consequently, the consultants equated the
obligation as a debt commitment because the fixed payment
would have to be made no matter what, which was the reason
they had concluded that the state's credit would not be
affected solely by whether TransCanada was involved or not.
He reiterated his earlier testimony that if the state
financed directly on its own credit it would carry a debt
service obligation, while under the current agreement the
state would be committed to paying the fixed payment no
matter what.
2:41:32 PM
Representative Gara asked for verification the current
partnership with TransCanada would include the risk that
the state would have to pay for gas that was not available,
whereas, the state's risk would be lower if the state moved
forward without TransCanada.
Mr. Shipkoff responded that if the state directly financed
its share of the midstream with debt, it would incur a debt
service obligation that would be similar to the one under
the TransCanada arrangement. The question became about
which one of the options carried a higher payment
obligation. Based on the analysis performed by First
Southwest, the level of obligation for the state would be
lower if the state financed its debt directly, given the
estimated borrowing costs of the state; therefore, the risk
to the state would be lower. He elaborated that in the
event of lower revenues (from which the costs to the state
had to be paid) if the costs were less the risk to the
state of being in a net negative position was lower. The
Black and Veatch presentation would address that the state
was potentially exposed to a greater risk that the costs to
the state would exceed the revenues received from the sale
of the state's gas. He furthered that if the analysis
concluded that the potential cost to the state of
maintaining the agreement with TransCanada was greater than
the cost to the state if it was to directly finance its
share (which was the conclusion by the consultants), the
risk to the state would be greater from an economic
perspective.
Co-Chair Neuman addressed potential risk to the state's
bond ratings. He referenced the consultants' testimony that
the buyout with TransCanada put the state at more risk. He
wondered if the risk was sufficient to change the credit
agencies' assessment of Alaska.
Mr. Kantor clarified that the consultants did not believe
the buyout of TransCanada would affect the state's credit
rating. He addressed that the pipeline was a large
undertaking. Additionally, the project was in the
preliminary stages of putting together the transaction -
the project would take many years. He relayed that it would
be the focus of the working group to examine what the risks
to the state would be over time and how to mitigate the
risk going forward. He explained that it was very difficult
to predict what the state's risk on the pipeline would be
because many agreements with shippers, producers, and
various equity partners had to be negotiated.
2:45:16 PM
Co-Chair Neuman asked what the credit rating agencies used
to evaluate the state's rating (e.g. the state's assets).
He recently had heard the governor report that the governor
had $100 billion in total assets (including the Permanent
Fund, Power Cost Equalization Fund, and others). He noted
that all of the funds would not be available should the
state be unable to make the payments. He relayed that the
committee had heard in past finance meetings that the
courts would find that the state would pay its debt with
the Permanent Fund or other sources. He furthered that the
credit agencies looked at the value of the state's assets
and its ability to make payments. He remarked that the
previous year the state's debt service was approximately
$228 million. He wondered if the rating agencies cared
about the state's politics if it had $70 billion in assets
to cover its debt and only $228 million in debt service. He
wondered why the agencies would care about the state's
politics and whether it went forward with the gas pipeline
or if their concern was strictly financial.
Mr. Kantor replied that it was difficult to boil down the
rating agencies' analysis of the state into a finite box.
First, each rating agency valued different characteristics
differently. Broadly, the rating agencies looked at two
factors: 1) the ability to pay; 2) the willingness to pay.
He relayed that there had been circumstances where people
with money had decided not to pay, which resulted in a poor
credit rating. He furthered that there were a variety of
factors that went into the financial analysis of the
ability to pay, but there were also a number of factors
that went into the willingness to pay in terms of analysis
of past commitments, future commitments, and the
willingness of the government to acknowledge the
commitments and provide for them in the future.
Co-Chair Neuman surmised that it was about the money.
Mr. Kantor replied that it was not only about the money. He
reiterated that it was an entity's ability to pay. He
remarked on the state's excellent record on its ability and
willingness to pay, which had resulted in its AAA rating.
2:48:30 PM
Co-Chair Neuman spoke to discussions on the use of the
Permanent Fund to fund state government. He noted that
legislators had heard that if it did not use the funds it
could have an impact on the state's credit rating. He
wondered if rating agencies looked at the state's ability
to pay its debt.
Mr. Kantor responded with an example. He explained that
when the federal government had budget deficits and a
government shutdown, Standard and Poor's had lowered the
government's rating from AAA to A+, not because the federal
government lacked the ability to pay, but because the
agency questioned its willingness to pay. He furthered that
when the government did not have the willingness to come to
a political solution to fund the government it had caused a
credit rating drop.
Co-Chair Neuman referred back to Mr. Kantor's testimony
that the State of Alaska had a very good record of paying
its bills. Mr. Kantor agreed.
Representative Wilson believed the consultants had stated
that TransCanada could pull out of the project at any time.
She asked for verification that the state would be
obligated to pay TransCanada for its participation in the
project up to its departure date if the company chose to
exit the agreement.
Mr. Shipkoff stated that Ms. Rutherford could address more
detailed questions related to the agreement with
TransCanada from a non-financial perspective. From a purely
financial perspective, there was a specified period of time
during which the state would be required to make the
payments upon the triggering of the reimbursement
obligation; during the period of time the applicable
interest rate was 7.1 percent (beyond the time period the
interest rate increased by several percentage points).
Representative Wilson asked what would happen if
TransCanada exited the project and the state had to borrow
money to pay the company. She surmised that it would be
much more difficult because it would raise questions about
why the state did not have the money and other.
Mr. Shipkoff answered in the affirmative. He elaborated
that the presentation included the possibility as a
significant potential risk to the state as a result of
keeping TransCanada in the project. He furthered that if
the state had to reimburse TransCanada because the project
was not advancing for any reason at a late stage in the
process, everyone in the lending community would know there
was a problem with the project. Therefore, it would be well
known that the state would not be expected to receive the
revenues that would have come from the project any time
soon. He confirmed that the state would be forced
potentially to borrow funds in adverse credit conditions
where lenders would know the state would not have a project
and its subsequent revenue. He agreed that it was a risk.
The consultants believed it was beneficial to the state to
fund the midstream costs directly before a potential
problem was known; if the state borrowed to fund the
midstream costs it would be doing so in a time where the
project was still advancing and had an expectation of
success. He stressed that if the state funded indirectly
through TransCanada, it could not escape the obligation to
pay the costs in the event of a project failure. He
emphasized that the state would not want to have to repay
the costs if failure was a known fact.
2:53:17 PM
Vice-Chair Saddler stated that the governor may or may not
make the policy decision to terminate TransCanada; if and
when the decision was made the legislature would be on the
hook to pay for the buyout. He remarked that the governor
had proposed going to Asian buyers as equity owners. He
wondered about the implications for the project finances if
the state turned to buyers who had the ability to look at
both sides of the ledger sheet (as equity owners and
customers).
Mr. Kantor replied that part of the issue would be the
nature of the agreement. One of the important factors was
the nature of the funding and the credit behind the buyer
entering into the equity agreement, in addition to the
distribution of risk under the contract. He noted that it
could run the spectrum depending on the financial
arrangements and a number of different factors. The
presentation examined all of the possible sources; a more
in depth analysis of the positives of the arrangement and
risks assumed by the state would be provided by the
consultants as the project neared. He believed it would be
pure conjecture to comment on the arrangements at present
because so much of the project needed to be fully developed
and structured over time.
Vice-Chair Saddler asked for verification that in large LNG
projects customers frequently took some equity. Mr.
Shipkoff agreed that it was customary to see LNG buyers
take equity positions in LNG projects.
2:55:38 PM
Representative Gara remarked that he had hoped that the
special session went as smoothly as possible. He asked if
the presenters would be available to respond by phone or in
person if the Legislative Budget and Audit staff disagreed
with items in their analysis. Mr. Kantor answered in the
affirmative. He relayed that the consultants were under
contract with DOR and were available to return if needed.
Co-Chair Neuman thanked the presenters. He asked committee
members to provide written questions.
Co-Chair Thompson asked that questions be given to Co-Chair
Neuman. He encouraged other legislators to submit their
questions as well.
HB 3001 was HEARD and HELD in committee for further
consideration.
Co-Chair Thompson reviewed the agenda for the following
day.
Co-Chair Neuman thanked committee members for their time
and dedication.
ADJOURNMENT
2:58:10 PM
The meeting was adjourned at 2:58 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| TransCanada Financing Presentation 10.24.15.pdf |
HFIN 10/24/2015 1:00:00 PM |
HB3001 |
| AKLNG-PROJECT-LAZARD-INTERIM-REPORT-2015.pdf |
HFIN 10/24/2015 1:00:00 PM |
HB3001 |
| HB 3001 FSW Report on Current Debt Position - 12.5.14.pdf |
HFIN 10/24/2015 1:00:00 PM |
HB3001 |
| HB 3001 AKLNG Debt Capacity Sizing - Tax-Exempt.pdf |
HFIN 10/24/2015 1:00:00 PM |
HB3001 |
| HB 3001 AKLNG Debt Capacity Sizing - Taxable.pdf |
HFIN 10/24/2015 1:00:00 PM |
HB3001 |
| HB 3001 10.24.15 House Finance - 1pm - Questions & Answers.pdf |
HFIN 10/24/2015 1:00:00 PM |
HB3001 |