Legislature(2013 - 2014)BARNES 124
01/29/2014 01:00 PM House RESOURCES
| Audio | Topic |
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| Start | |
| Overview(s): Alaska Lng Project - Memorandum of Understanding | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
ALASKA STATE LEGISLATURE
HOUSE RESOURCES STANDING COMMITTEE
January 29, 2014
1:22 p.m.
MEMBERS PRESENT
Representative Eric Feige, Co-Chair
Representative Dan Saddler, Co-Chair
Representative Peggy Wilson, Vice Chair
Representative Mike Hawker
Representative Craig Johnson
Representative Kurt Olson
Representative Paul Seaton
Representative Scott Kawasaki
Representative Geran Tarr
MEMBERS ABSENT
All members present
OTHER LEGISLATORS PRESENT
Representative Andrew Josephson
COMMITTEE CALENDAR
OVERVIEW(S): ALASKA LNG PROJECT - MEMORANDUM OF UNDERSTANDING
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
JOE BALASH, Commissioner
Department of Natural Resources (DNR)
Anchorage, Alaska
POSITION STATEMENT: Provided a PowerPoint overview of the
memorandum of understanding (MOU) between the State of Alaska
and TransCanada for the Alaska Liquefied Natural Gas Project.
ANGELA RODELL, Commissioner
Department of Revenue (DOR)
Anchorage, Alaska
POSITION STATEMENT: Assisted Commissioner Balash with his
PowerPoint overview of the MOU between the State of Alaska and
TransCanada for the Alaska Liquefied Natural Gas Project.
ACTION NARRATIVE
1:22:14 PM
CO-CHAIR ERIC FEIGE called the House Resources Standing
Committee meeting to order at 1:22 p.m. Representatives Hawker,
Kawasaki, Tarr, P. Wilson, Saddler, and Feige were present at
the call to order. Representatives Olson, Seaton, and Johnson
arrived as the meeting was in progress. Also present was
Representative Josephson.
^OVERVIEW(S): Alaska LNG Project - Memorandum of Understanding
OVERVIEW(S): Alaska LNG Project - Memorandum of Understanding
1:22:45 PM
CO-CHAIR FEIGE announced that the only order of business is an
overview of the memorandum of understanding (MOU) between the
State of Alaska and TransCanada [for the Alaska Liquefied
Natural Gas (LNG) Project].
1:23:07 PM
JOE BALASH, Commissioner, Department of Natural Resources (DNR),
began his PowerPoint overview by stating that on December 13,
2013, he and Commissioner Rodell of the Department of Revenue
signed a memorandum of understanding with TransCanada [Alaska
Company, LLC (TransCanada)] for the Alaska LNG Project. The MOU
was posted online and made public at the same time, about two
weeks ago, as was the Heads of Agreement (HOA). How the MOU
fits into the larger construct of the HOA will be explained, as
well as why he and Commissioner Rodell find pursuit of being a
part of this overall project to be in the state's interest.
COMMISSIONER BALASH, to put the MOU into context, first turned
to the Heads of Agreement [slide 2]. He said the project being
contemplated includes a gas treatment plant (GTP), a pipeline,
and a liquefaction plant, and the HOA describes how all of the
parties intend to work together to advance this project through
development and ultimately into construction. [The parties are
State of Alaska, ExxonMobil Alaska Production, Inc.,
ConocoPhillips Alaska, Inc., and BP Exploration (Alaska) Inc.]
COMMISSIONER BALASH specified that the overall structure of the
HOA contemplates an alignment of the state's production tax and
royalty interests in the gas with a corresponding stake in each
of the aforementioned project components [slide 3]. Each party
will hold a position in each component commensurate with the
party's respective interest, he explained, and each party will
be free to set up its financing and partnerships as it sees fit,
which is one of the challenges that the state has had
historically with these companies and which was experienced
under the Trans-Alaska Pipeline System (TAPS). This will
preclude interfering with and complicating the business needs of
the other parties, he noted.
1:26:01 PM
COMMISSIONER BALASH explained that the MOU with TransCanada
covers the state's portion of the gas treatment plant and
pipeline [slide 4]. Under this agreement, TransCanada will
provide transportation services on the gas treatment plant and
pipeline. The state's interest in the LNG plant will be held by
the Alaska Gasline Development Corporation (AGDC) subsidiary
contemplated in the HOA and enabling legislation [HB 277]. A
reason for this is that the core competencies of TransCanada do
not lend themselves to liquefaction, given that liquefaction is
not a business that TransCanada is in. "It is also something
that we think is going to be important for us to preserve either
for ourselves or as part of our ultimate marketing efforts," he
added. Continuing, he noted that the pipeline will have five
offtake points that will be identified by the administration in
consultation with AGDC.
1:27:32 PM
COMMISSIONER BALASH outlined the reasons for involving
TransCanada [slide 5]. First, TransCanada is a preeminent
pipeline company in North America with a stellar reputation for
delivering projects on time and on budget. Second, the state
has an aligned interested with TransCanada to have an
independent pipeline operating in the state and expanding on
terms that are in Alaska's interest. Third, the commercial
terms underlying this arrangement provide economic benefits [to
Alaska], and fouth, TransCanada has experience building in
discontinuous permafrost and mountainous areas like that found
between the North Slope and Nikiski. Additionally, he said, the
data generated and the information gathered under the Alaska
Gasline Inducement Act (AGIA) will be contributed to the Alaska
LNG effort. Fifth, TransCanada's involvement will provide a
seamless transition out of the AGIA license and into this new
commercial arrangement with all of the parties so that there is
no impact on the overall timeline. The momentum from the
current year will continue, allowing for a full summer field
season in 2014 and completion of the Pre-Front-End Engineering
and Design ("Pre-FEED") phase in 2015.
1:30:02 PM
REPRESENTATIVE TARR inquired whether working with TransCanada is
necessary because it has the expertise or because the AGIA
license with TransCanada is still in place and the State of
Alaska would be exposed to a lawsuit over damages.
COMMISSIONER BALASH replied it is a combination of things. If
the state were to go out cold looking for a partner to
participate in the pipeline, TransCanada would be at the top of
the list due to the aforementioned reasons. That is not to say
that TransCanada would be a shoe-in, but TransCanada has been a
partner with the state for the last six years, is familiar with
the environmental and commercial conditions in Alaska, and is
well acquainted with the state's interests. Thus, TransCanada
does not have the same learning curve that another pipeline
company might have. The existing commercial contractual
relationship under the AGIA license remains in place and will
wind down later this year if the legislature adopts enabling
legislation. It will provide an orderly transition where the
state does not face a potentially "messy divorce." Under the
AGIA statute there are two paths to winding up the license, and
this is the amicable one.
1:32:17 PM
CO-CHAIR FEIGE presumed the MOU is an amicable split from the
AGIA process. He asked what risks would be involved if the
state were to divorce TransCanada and have a bidding process to
provide more competition in the selection of who would build the
pipeline.
COMMISSIONER BALASH responded that this is, in many ways, a
continuation or evolution of the course the state has been on.
Preserving the AGIA license framework was considered and
ultimately set aside, but not because of dissatisfaction with
the partnership. Many of the terms contained in this MOU and
attached Exhibit C are similar to the terms in the AGIA
application filed by TransCanada and improved over time in the
course of competition with the Denali Project. While not a
direct parallel, a footing was established in 2010 as to what an
appropriate split on the debt and equity might be, as well as
the returns on that equity. However, the nature of an LNG
project is different and the risks associated to all the parties
are different in an LNG project. Engaging in a new round of
competitive bidding would require the legislature's engagement
on what that framework would look like, which would take several
months. Then there would be the course of going through the
solicitation process, the review process, and the award process,
each of which takes time. While all of that could be done, it
was found during negotiation with TransCanada this past fall to
be an unnecessary step because the present arrangement achieves
the needed things.
1:35:26 PM
CO-CHAIR FEIGE asked how long the aforementioned process would
take.
COMMISSIONER BALASH answered by citing the AGIA process: the
legislature passed the statute in May 2007; the request for
applications went out in July 2007; the original deadline for
the applications was end of October 2007, but was pushed back to
end of November 2007; and by the time the review was done and
the license awarded and adopted by the legislature it was August
2008, an 18 month process. When the effective dates and the
actual signing of the license in December 2008 are considered,
it took nearly 24 months.
1:36:34 PM
REPRESENTATIVE KAWASAKI understood about $300 million has been
spent under the AGIA license.
COMMISSIONER BALASH said it is a little more than that.
REPRESENTATIVE KAWASAKI inquired when the legislature will see a
product from the AGIA process.
COMMISSIONER BALASH responded that a number of things were done
with the funds spent by TransCanada and its partners in the
Alaska Pipeline Project (APP). The information gathered and
generated was fed into a series of draft resource reports that
were filed in 2012 with the Federal Energy Regulatory Commission
(FERC), which were then sent to agencies for initial review and
comment. Under the terms of the statute, the state has the
option to buy out all of the data and information generated
under that process at a cost of approximately $130 million.
However, at this time, it is not being recommended that the
state exercise this option, in part because TransCanada and its
partners in the APP are expected to be partners in the Alaska
LNG Project. They are going to contribute to the Alaska LNG
Project the information gathered and avoid a duplication of
effort and cost for the project being talked about today.
1:38:27 PM
COMMISSIONER BALASH turned back to his presentation, drawing
attention to the definition of a typical MOU according to
Investopedia.com [slide 6]:
A legal document outlining the terms and details of an
agreement between parties, including each parties'
requirements and responsibilities. The MOU is often the
first stage in the formation of a formal contract. An MOU
is far more formal than a handshake and is given weight in
a court of law should one party fail to meet the
obligations of the memorandum.
COMMISSIONER BALASH said the MOU for the Alaska LNG Project
outlines the terms of the state's relationship with TransCanada
in the midstream components of the project, which are the
transmission lines coming into the gas treatment plant, the
plant, and the pipeline. However, he and Commissioner Rodell
cannot enter into the terms identified in the MOU and the
exhibits with any force of law or binding commitment. It is
specifically and explicitly spelled out that the MOU is not
binding until the legislature enacts the enabling legislation.
As the legislature's permission and authority are sought to
enter into the various contracts associated with this project,
the intent with both the MOU and the HOA is to provide a window
into what the agreements will look like when they come out
before 2015. This way, the public and legislators will know the
intent of the parties so there can be a measure against which to
evaluate the product in the fall of 2015.
1:40:34 PM
REPRESENTATIVE SEATON understood that the enabling legislation
would make the terms in the MOU legally enforceable and, [if
passed], would go into place this legislative session.
COMMISSIONER BALASH said that is correct.
REPRESENTATIVE SEATON said he further understood that when the
MOU terms became legally binding, the state would have
liabilities should things fall apart.
COMMISSIONER BALASH answered "the MOU is an agreement to agree."
The term sheets in exhibits B and C are for agreements that will
be struck later this year if the enabling legislation passes,
and those agreements will contain the terms in these two
exhibits. Under those terms, the State of Alaska will be
potentially exposed to development costs incurred on the part of
TransCanada during the Pre-FEED phase. The state would not be
required to meet the cash calls of the project during this
initial/development phase; TransCanada will be incurring those
cash calls and obligations. In a success case, the state will
start paying TransCanada when the pipeline goes into service.
That is one of the benefits of having a partnership in the
midstream as outlined with TransCanada. Also, potentially, the
state may see additional partnership opportunities on the
liquefaction but does not have specific partners contemplated at
this time.
1:43:02 PM
REPRESENTATIVE KAWASAKI understood that if [HB 277] is not
passed, the MOU will expire midsummer 2014.
COMMISSIONER BALASH responded that the authority to enter into
the agreements contemplated in the MOU is the request that is
being made in HB 277. If HB 277 does not pass, then this MOU
[will expire].
REPRESENTATIVE KAWASAKI asked what happens if amendments are
made to HB 227 that the parties have not yet agreed to.
COMMISSIONER BALASH replied by reading Article 2.1(d) on page 6
of the MOU, which states:
The Parties agree to support the approval of the
Operative Terms in the Enabling Legislation, but
acknowledge that the Enabling Legislation may include
authorizations or conditions that vary from or
conflict with the Operative Terms. In such event, and
if Parties agree to accept the Enabling Legislation,
then the Transition Agreements will reflect the
Enabling Legislation terms and conditions
notwithstanding the Parties' acknowledgement in
Article 2.1(c) above.
1:45:04 PM
REPRESENTATIVE SEATON queried whether Article 2.1(d) means that
passage of HB 277 would give the ability to modify the terms,
and the legislature is agreeing to those terms even though it
does not know what those terms will be and that those terms
could be in conflict with the terms of the MOU passed by the
legislature.
COMMISSIONER BALASH replied that, speaking generally to the
bill, the authority being asked for is not specific to these
terms; it is asking for general authority and general
applicability. The intention with that authority is to enter
into agreements that reflect the terms contained in this MOU and
the exhibits. If that requested authority is somehow limited or
conditioned by the bodies, then this section is saying that "if
we are both prepared to continue to move forward under those
limitations or conditions, then we will do so." He expected
that all of the parties will be engaged in the legislative
process and, if changes are made to the bill, each party will
provide testimony reflecting its appetite to accept those
conditions or further limitations. He said the parties are not
the legislature, but the administration, TransCanada, and [BP,
ExxonMobil, and ConocoPhillips].
1:47:41 PM
COMMISSIONER BALASH reviewed the "success case" timeline
contemplated in the MOU and that fits in with the Heads of
Agreement [slide 7]: enabling legislation would be passed in
April 2014 and the Precedent Agreement (PA) and Equity Option
Agreement in Exhibit B would be executed 90 days later [July
2014]. The Precedent Agreement would govern the Pre-FEED period
with regard to development costs and associated activities. A
more specific and more binding Firm Transportation Services
Agreement (FTSA) would be developed, which would come back for
public review and legislative approval in 2015. The expectation
is that the FTSA would be a part of the larger body of other
contracts necessary to enable the project to move forward and
move into the Front-End Engineering and Design (FEED) stage.
Until December 31, 2015, or the entry into FEED, whichever
occurs first, [the state] has an option to call back a portion
of its equity in the midstream.
1:49:45 PM
CO-CHAIR SADDLER inquired as to what is included in a FTSA.
COMMISSIONER BALASH said that the Firm Transportation Services
Agreement is the binding contract between a transporter and a
shipper for service on the pipeline. It gives the shipper a
contractual right to capacity in the pipe to move gas under the
terms in the contract, including the tolling structure, the
capital structure for rate making, and the conditions around
interruptions or delays in service. The terms are not
necessarily standard. Certain features of such agreements vary
from place to place or between regulatory regimes.
1:51:18 PM
COMMISSIONER BALASH, continuing his presentation, addressed
Exhibit B in the MOU [slide 8], which lays out an equity
callback option that has been negotiated as part of this. If
the state's overall position in the project is 25 percent,
TransCanada would be at 25 percent in the GTP and the pipeline,
and the AGDC subsidiary would be in the LNG plant at 25 percent.
However, if the state wished to exercise its option it could
call back 40 percent of that midstream interest. The state
would rely on the AGDC subsidiary that was established in the
legislation to hold that equity interest, so then there would be
a split between AGDC subsidiary and TransCanada. Using the 25
percent example, TransCanada would be at 15 percent and AGDC
subsidiary would be at 10 percent. A reason for having this
option is the potential revenue opportunity associated with it.
That revenue opportunity, however, while real and substantial,
comes at a cost of capital that the state very likely would have
to bear. So, it is not a foregone conclusion that the state
will want to do this; it will be part of the considerations that
will be undertaken in the next 18-24 months.
1:53:35 PM
REPRESENTATIVE KAWASAKI asked what amount of cash would that 40
percent represent.
COMMISSIONER BALASH replied that the total estimate for the GTP
and pipeline together is about $22 billion. If the state was at
25 percent in the project, then the state would be looking at a
total share that is about $5.75 billion. If the state was to
then take responsibility for 40 percent of that, it would be a
little more than $2 billion.
1:54:57 PM
COMMISSIONER BALASH addressed Exhibit C [slide 9], which is the
term sheet for the midstream transportation services. He noted
that these are the typical terms seen in a Precedent Agreement
and ultimately a Firm Transportation Services Agreement. He
reviewed some of the key terms and benefits that accrue to the
state from this particular structure. The first key term is the
state's very favorable debt to equity ratio. On the second
anniversary of in-service, the tariffs charged to the state
would be calculated on a 75/25 basis. The amount of leverage in
the capital structure has tremendous power in driving down the
tariff. Keeping tariffs low is important to the state because
it results in a higher wellhead value and also lowers the hurdle
to additional parties to bring in gas from beyond Prudhoe Bay
and Point Thomson. It is in the state's interest to keep those
terms low even if the state is one of the owners of this
pipeline. Those lower tariffs improve the state's cash flows
overall and that shows up on the royalty side as well as the
production tax side. The second key term, said Commissioner
Balash, relates to the state's exposure to cash calls during the
development period. TransCanada, under its equity position,
will be responsible for meeting cash calls and obligations
during the development period. The state, unless it exercises
its equity option, will not be responsible until gas flows. The
third key term, he said, is where the Department of Revenue
(DOR) becomes a much more important player in the calculus.
When the opportunity cost on the state's capital is taken into
consideration, the state's net present value (NPV) is improved
overall by relying on TransCanada to use its cash and balance
sheet. The cash requirements of the state are going to become
very important over the next 10 years. Commissioner Balash
related that the fourth key term continues the issues and
priorities identified in the AGIA structure in that it provides
a favorable expansion policy to govern the project. TransCanada
has committed to structuring future expansions on a 70/30 basis,
thereby providing low tariffs for expansion to shippers. Under
the fifth key term, gas will be provided to Alaskans with at
least five offtake points and will provide distance sensitive
rates in three zones - Nenana, Big Lake, and at the LNG plant
itself. This means that the largest communities in Southcentral
will not pay the same tariff to get the gas connected into the
ENSTAR system as the export volumes that go all the way to the
plant, and the offtakes at Nenana and above will pay less in
transportation cost for gas coming off the main line in that
part of the state.
2:00:13 PM
REPRESENTATIVE SEATON offered his understanding that there would
be no royalty or production tax impacts because the state would
be taking gas in kind and that that split would be be determined
up front. Asking whether he is misunderstanding this, he
inquired how the tariff will influence the royalty and
production tax.
COMMISSIONER BALASH stated that there is confusion, and he
answered by using oil as an example. When the state takes in-
kind for oil on the North Slope, he explained, it does so with a
price that is pegged to the Alaska North Slope (ANS) West Coast;
a transportation differential is then subtracted to get to a
wellhead value for that oil. The same is true for gas. A price
will be achieved for the sale of the LNG, and then calculations
will be worked back through the chain of infrastructure to
arrive at a wellhead value for that royalty and production tax.
2:01:47 PM
REPRESENTATIVE SEATON said his understanding of the structure is
that the state would take both its royalty and its tax liability
in kind, thereby taking it as a percentage of gas, not a
percentage of value. He asked how the tariff is going to reduce
the amount of the state's gas in kind.
COMMISSIONER BALASH responded that it will not reduce the amount
of gas the state gets; rather, it will impact the value the
state ultimately receives for its share of the gas when the gas
is sold in market. The state will take its gas at the North
Slope and will be responsible for moving that gas through the
infrastructure. The state will therefore need capacity in the
gas treatment plant, the pipeline, and the liquefaction plant,
and all of those costs will have to be accounted for. The
benefit of this structure is that the state will be in control
of the decisions affecting those tolls. The state will be
making the decisions about the relative debt to equity ratios
and the associated financing costs, rather than relying on the
decisions made by the other three parties.
2:03:25 PM
REPRESENTATIVE SEATON pointed out that a big problem and dispute
with oil has been the producers shifting costs to the midstream
or downstream, thereby lowering the value and causing a loss in
production tax to the state. He reiterated his understanding
that the state will take both its royalty and its production tax
in kind as a split of the actual raw product in order to avoid a
shifting of where to take the profit. He requested a flow chart
showing how all of the aforementioned will work.
COMMISSIONER BALASH agreed to provide such a flow chart.
REPRESENTATIVE SEATON maintained it is a critical element if the
state is not avoiding that same dispute.
2:04:44 PM
COMMISSIONER BALASH turned to slide 10, saying that it will help
explain the aforementioned point but that it needs to be thought
about in the context of the overall structure. He said the
chart on slide 12 illustrates how a favorable debt-to-equity
ratio affects the tariff. Each bar on the left side of the
chart depicts a different debt-to-equity scenario for the same
project cost, and the bars on the right show the changes in the
return of equity (ROE). The chart shows that the same project
cost, financed in different ways, results in higher or lower
tariffs. The state would prefer to see a higher percentage of
debt because that drives the overall tariff down. However, the
state's partners are injecting and using their own equity for
their portion of the project and are less concerned about the
tariff, and this is where there have been tussles in the past
over the TAPS tariffs, among other things. Part of the struggle
over gas is how to finance this infrastructure and what the
resulting tariffs will be. The four holders of gas - the state,
Conoco, BP, and Exxon - all have somewhat different views as to
the appropriate financing structure that will be employed in
this project. The Heads of Agreement allows for each party to
pursue its financing separately and independently. For example,
BP can go for a split of 55 percent debt to 45 percent equity,
with a resultant tariff of $4.64 [per million British Thermal
Units (MMBTUs)], if that is what works for BP. The state, on
the other hand, can drop its tariff by more than 60 cents [to
$4.03] by going to a split of 75 percent debt to 25 percent
equity. The freedom of this structure allows the state to
pursue that higher leverage for the components that the state is
invested in and shipping on.
2:07:59 PM
CO-CHAIR FEIGE understood that would be the debt-to-equity ratio
on the state's share with a combined state/TransCanada share of
the pipe. He further understood that the state will not have
any control on the debt-to-equity ratios that the partners are
going to use, yet that will contribute into calculation of the
tariff. He asked how much predictability is had here by the
state.
COMMISSIONER BALASH answered that each party will be responsible
for its own capacity and will have its own tariff. The tariff
charged by Exxon for Exxon gas will not affect the state in tax
and royalty terms. By aligning the state's interest in the
infrastructure with the state's interest in the gas, the state
is free to set up financing on terms that the state wants or
with partners that are prepared to do it on terms that serve the
state's interest.
2:09:11 PM
CO-CHAIR SADDLER, observing the chart on slide 10, inquired why
the state would choose a 75 percent debt to 25 percent equity
[and a resultant tariff of $4.03 per MMBTU] when a 95 percent
debt to 5 percent equity would provide an even lower tariff [of
$3.46].
COMMISSIONER BALASH replied that the "amount of skin" a party
has in a major undertaking like this project really matters to
the people who are lending the billions of dollars. In further
response, he confirmed that this is not a "zero down" situation.
2:09:57 PM
REPRESENTATIVE SEATON, in regard to the initial spare capacity
and the share each party will have of that spare capacity, asked
how the tariff will be assessed and who will get that tariff.
COMMISSIONER BALASH responded that the scenario is not in any of
today's forthcoming slides, but he would be happy to show the
mechanics. Continuing, he said that the Heads of Agreement,
Article 6 and Appendix A, contemplates that any one of the
parties can expand any component in the project so long as the
party does so at its sole risk. For example, if BP wants to
expand but nobody else does, then BP can expand but BP must pay
for the cost of the compressor station involved. The state
would be unaffected - its tariff would neither go up nor down.
It is expected that the state and its portion of the project are
going to be providing service for third parties who show up and
want to pay for service. TransCanada is prepared to undertake
those expansions on a 70/30 basis, the structure of which is
outlined in Exhibit C.
REPRESENTATIVE SEATON offered his understanding that if there
was expansion, everybody would benefit if rates were going down.
However, he is hearing Commissioner Balash say that rates will
not go down because whoever expands is solely responsible, so
there would not be a general lowering of tariffs among all the
parties.
COMMISSIONER BALASH answered that Appendix A contemplates
scenarios where capital costs, as well as equity ownership, are
reallocated.
REPRESENTATIVE SEATON urged further investigation of this point
because the committee's general impression was that as expansion
took place the parties' tariffs would go down or, if costs were
more, then only the new players would pay.
COMMISSIONER BALASH pointed out that the fight over incremental
versus rolled-in pricing caused much befuddlement and was a
challenge to breaking through on an overall deal. Taking the
road that allows each party to set its financing and associated
tariffs as it sees fit, and that allows expansions to happen on
a sole-risk basis, provides an ability to maneuver around that
struggle in a way that [the parties] are satisfied with.
2:14:22 PM
COMMISSIONER BALASH returned to his presentation and continued
to address the favorable debt-to-equity ratio. He noted that
slide 11 is another way to illustrate the benefits for Alaska
and the state's tax and royalty revenues. When DNR considered
the debt-to-equity ratio and the ROE during negotiations with
TransCanada, the department looked at the 12 percent ROE and
determined that that should be pushed down a bit. During the
tug and pull of negotiation - moving down the ROE, revisiting
the debt-to-equity structure - it was found that the debt-to-
equity structure is far more powerful in reducing the state's
tariffs and increasing the state's value, which is what is
reflected in slide 11.
2:15:41 PM
CO-CHAIR SADDLER inquired whether the return on equity is
determined by regulation or by market conditions.
COMMISSIONER BALASH replied that the ROE is a component of the
contract and sometimes those contracts are purely commercial,
purely civil, and agreed to by the two parties. But sometimes,
depending on the regulatory regime, that ROE is reviewed and
approved by a rate-making body. Responding further, he said the
lower the return on equity, the higher the netback, the higher
the associated NPV. He confirmed that [debt-to-equity and ROE]
are two different levers and [slide 11] shows the magnitude of
the move with each of those levers. He further confirmed that
while the chart on slide 11 shows bars for debt-to-equity and
bars for ROE, there is no interplay between those two factors.
2:16:59 PM
COMMISSIONER BALASH commenced his presentation, moving to
discussion of the capital that will be needed for the project's
three components of gas treatment plant, pipeline, and
liquefaction (slide 12). That capital will be a combination of
equity, cash, and debt. He explained that each of the three
scenarios depicted on slide 12 have a 20 percent equity
alternative and a 25 percent equity alternative because those
are the boundaries agreed to in the HOA. Under a scenario with
no TransCanada participation, the State of Alaska would need to
come up with about $9.1 billion for a 20 percent equity option
[$2.7 billion in equity, $6.4 billion in debt], or $11.4 billion
for a 25 percent equity option [$3.4 billion in equity, $8.0
billion in debt]. Under a scenario in which TransCanada owns
the gas treatment plant and the pipeline in the state's shoes,
the state's capital would be invested solely in the liquefaction
plant. In this scenario, the state would provide $4.6 billion
for a 20 percent equity option [$1.4 billion in equity, $3.2
billion in debt], or $5.8 billion for a 25 percent equity option
[$1.7 billion in equity, $4.1 billion in debt]. Under a
scenario in which the state exercises its 40 percent buyback,
the state's capital expenditure requirements during project
development would go up [$6.9 billion for a 20 percent equity
option, with $2.1 billion in equity and $4.8 billion in debt;
$8.6 billion for a 25 percent equity option, with $2.6 billion
in equity and $6.0 billion debt].
2:19:31 PM
REPRESENTATIVE JOHNSON queried whether an analysis has been done
for bonding at an [interest] rate of 2 percent or 3 percent.
ANGELA RODELL, Commissioner, Department of Revenue (DOR),
answered that she does not think it is a good starting point to
assume that the state can sell $11 billion of debt at a 3
percent rate. This project is not going to qualify for tax
exemption, she pointed out, and the aforementioned is assuming a
tax exempt rate. She further said she does not want to promise
that the state can raise $11 billion today in this market,
especially at those levels.
REPRESENTATIVE JOHNSON pointed out that, in theory, the state
could write that check and thereby take bonding off the table.
He asked whether an analysis has been done over the life of the
project at a return of 12 percent.
COMMISSIONER RODELL responded that some analysis has been done
and will be presented in a forthcoming slide. Having the state
write a check today to get a potential for 12 percent ROE was an
option looked at. Under this option that money is not then
available to do other things within the state, plus the pipeline
is not expected to actually start delivering revenue until 2022.
Thus, it would be a 10-year tie-up of that money. An analysis
was done regarding whether there is a way that the state can
account for those cash calls today, keep that money invested for
the state, and use it for the state's purposes, and basically
leverage the state's balance sheet. That analysis will be seen
in a few slides.
2:22:26 PM
REPRESENTATIVE JOHNSON said he is trying to determine who the
state should partner with and what is best for the state. Once
this pipeline is built, the state is going to be "on the hook"
for 20 or 25 percent of the volume should there be a failure of
the pipeline for a period of time. Noting TransCanada would
have bankruptcy protection, but the state would not, he inquired
whether the state can contractually say that TransCanada is on
the hook for its portion.
COMMISSIONER BALASH replied that exactly how the obligations are
carried will be the product of negotiations between the state
and TransCanada, negotiations between the state and the
producers, and negotiations between the state and the buyers of
the LNG. While the terms of the sales and purchase agreements
(SPAs) for the LNG itself are not yet known, it can be expected
that the contract the state signs with TransCanada will be used
by TransCanada as a basis for financing its share of this
project. The daily reservation charges that the state is going
to be on the hook for, absent some other mitigation measure,
will be substantial and will be measured in a couple of million
dollars a day. Mitigating a risk, such as an earthquake or
other disruption, is something the state must absolutely
undertake to provide in this next period of development. In
some cases, companies/entities acquire insurance for those kinds
of things. In regard to satisfying the obligations to buyers to
continue to find and provide gas, the SPA will typically have
force majeure clauses. Those kinds of things will be part of
the marketing arrangements and marketing engagements undertaken
in the next 18 months because that is a component for which
there is not yet a firm handle. It is not yet known what the
buyers are prepared to accept in the way of liability. He
further pointed out that the state does not yet have any
partners identified for the liquefaction. It is not unusual for
buyers to want to own a piece of the liquefaction, he continued,
and if that is something that the state encounters in the market
place the state would certainly want to entertain that.
However, the state would also want to see what part of its
obligation with TransCanada would [the buyers] be prepared to
take on as well.
2:27:20 PM
COMMISSIONER BALASH continued his response to Representative
Johnson:
In thinking about this total approach to project
ownership or equity participation in this endeavor, we
did not come at this particular set of solutions with
a desire to invest state capital in a pipeline project
or an LNG project. The folks in the division of
treasury were already doing that day in day out; they
can invest in LNG projects all over the world. That
is not what we are trying to do here. What we are
trying to do is arrive at a point where we can see the
resource monetized and potentially set up arrangements
that satisfy us and our needs and result in cash flow
to the state. How much risk we want to take is
probably going to impact the amount of cash we get out
of the resource. And one of the struggles that we
have had in talking about this particular
commercialization effort over the last 15 years has
been the tension between RIK and RIV [royalty in
value]. I would love nothing more than to sit here
and stay in a position where we are at RIV, where we
do not have to take any risk, and all we do is sit
back and count the cash coming in when the project
starts up. But, that does not appear to be a viable
option for us. And as we engaged the companies in
this discussion, they were pursuing an RIK solution;
we were pursuing an RIV solution. And what we have
attempted to do is try to make RIK look a little more
like RIV so that we are in a position to leverage the
producers' expertise in marketing to get the pricing
terms that would result in an RIV-like cash flow for
the state. Ultimately, we may decide to pursue
marketing arrangements that are different, financing
arrangements that are different, and other
partnerships that reduce our risk, but would probably
have some impact on our cash. But it allows the other
parties to make their investments and business
decisions in a way that allows the project to move
forward and realize this potential that Alaskans have
been waiting on for 40 years. So, there is a number
of ways to look at these problems and I am looking
forward to solving the challenges associated with
direct participation. I like puzzles. I like solving
puzzles. And it so happens that Commissioner Rodell
is quite adept at the financial aspects of these kinds
of things. And I think we have got a great
opportunity here to engage the marketplace where some
of these solutions are going to be found.
2:31:01 PM
REPRESENTATIVE JOHNSON stated he likes solutions, not puzzles,
but wants to make sure that all of the puzzle pieces are looked
at. Recalling the statements made by Commissioner Balash that
TransCanada will be going out for financing once an agreement is
had and that the commissioner does not want to paint the picture
that the state could go out and finance this kind of money,
Representative Johnson queried whether TransCanada has a better
credit rating than does the State of Alaska. Someone is going
to be financing the project, and someone is going to reap the
benefits of that. The question needing to be asked is whether
the state is better off taking this on its own or having
partners and sharing it. The state may be better off with "the
four of us" doing a request for proposals (RFP). He submitted
that the profits over the course of this project would far
outstrip any treble damages [that the state would owe
TransCanada]. He said he would like to explore the issues of
whether the state would be better off cutting its losses, or
better off with a partner, or better off with [TransCanada], or
better off with another partner. Because this MOU is pretty
specific, he said he would like the aforementioned issues to be
addressed before jumping into an agreement. In order for this
agreement to be a long marriage, it needs to be with the right
partner. He added that he is willing to have another meeting to
discuss the aforementioned, so answers to his questions are not
needed right now.
2:33:49 PM
REPRESENTATIVE TARR inquired about the point at which the
state's good credit standing would be threatened by taking on
too much debt. She further asked whether that credit standing,
as well as how that would impact other state priorities, was
part of the consideration in recommending the 75/25 ratio.
COMMISSIONER RODELL answered that two different things are going
on here. First is to look at the different combinations to
determine what the state can do to push the tariff low. Second,
is to see the value of having a partner in this project that
helps with the cash calls and the benefit of that to the state
versus the risk. The risk on the rating is really one of
whether the state will be able to meet its day-to-day operations
as a state. If the state was to put aside $11 billion as its
equity investment into the pipeline - to make that available for
cash calls when and if they are requested - creates an inability
in the state's financial flexibility to meet its daily
operations. There is an opportunity here to let a partner come
up with the financing and to have an agreement that when the
pipeline comes into use the state will start repaying those cash
calls and repaying that debt. The value of not having to come
up with cash over the next 10 years, and what the repayment
stream looks like, is reflected in the tariff that is discussed
here. If the state wants to use some cash, there are the 40
percent equity options - [in the 20 percent equity option] the
state can step in and actually front-up $6 billion rather than
$9 billion; or, in the 25 percent equity option, front-up $8.6
billion rather than $11.4 billion. Part of it in this case was
TransCanada's willingness to give the state the option of
deciding at the end of Pre-FEED whether or not to actually put
up 40 percent at that time.
CO-CHAIR FEIGE commented that it is "never a good idea to get
over-extended on your credit card."
2:37:00 PM
COMMISSIONER BALASH, responding to Co-Chair Saddler, confirmed
that the two bars on the far left of the chart on slide 12
reflect State of Alaska ownership of the entire project at a
cost of $45 billion. In further response, he explained that the
far left of the chart reflects no TransCanada involvement for
the entire project. The middle two bars reflect TransCanada
stepping into the state's shoes for 100 percent ownership of the
gas treatment plant and pipeline; the 20 percent and 25 percent
equity is the state's share of the liquefaction facility and is
the capital that the state would need to provide. Responding to
a third question from Co-Chair Saddler, he confirmed that
TransCanada would own 100 percent of the pipeline and treatment
facility, and the State of Alaska would own 100 percent of the
LNG plant and associated marine facilities.
CO-CHAIR SADDLER understood that the two bars on the far right
of the chart reflect ownership by TransCanada for 100 percent of
the pipeline and treatment facility, with ownership by the State
of Alaska for 100 percent of the LNG plant. He requested
clarification about the amount the state would buy back.
COMMISSIONER BALASH answered that the state would buy back 40
percent of the midstream, which is the equity callback option
that the state has under Exhibit B.
REPRESENTATIVE JOHNSON clarified that TransCanada would own 100
percent of the state's 25 percent; TransCanada would not own 100
percent of the pipeline.
COMMISSIONER BALASH concurred.
2:39:01 PM
REPRESENTATIVE OLSON inquired whether there would be adequate
information by the end of the legislative session to make a
"rational vote" on the enabling legislation.
COMMISSIONER BALASH replied he has "every confidence in this
institution."
REPRESENTATIVE OLSON pointed out that five of the current
committee members were present "at this rodeo a few years ago."
COMMISSIONER BALASH observed that, as an institution, the
committee members are far more familiar with pipeline operations
and the effect of the key terms on the state. He opined that
the state's and the legislature's higher point on the learning
curve will enable key decisions to be made "for this step." He
emphasized that it is not necessary to make a 30-year commitment
today; rather, the request is for "the ability to progress this
through to the next phase and stage and level of commitment by
respective parties."
REPRESENTATIVE HAWKER related that his desire is to delve into
the overall agreement, but said the presentation needs to be
completed. He requested that there be a chance to discuss more
details with the two commissioners in the near future.
CO-CHAIR FEIGE replied that there will be that chance.
2:41:08 PM
COMMISSIONER BALASH turned back to his presentation, directing
attention to the chart on slide 13 depicting the State of
Alaska's annual cash flows associated with the 25 percent equity
alternative. He noted the blue line represents State of Alaska
ownership and the state is solely responsible for the cash calls
between now and project start up. When project sanction occurs
in 2018, upwards of $1.3 billion annually will be required from
the state for construction. However, once start-up begins, with
full ramp-up in 2023, the state's cash flow will suddenly turn
positive. In 2043, he continued, the revenue begins to taper
downward because the chart is depicting the proven resource at
Prudhoe Bay and Point Thomson. However, the belief is that
there will be additional gas resources found, and rather than
revenue tapering off in 2043, the trajectory out will continue
for many, many years. Commissioner Balash confirmed that the
aforementioned is a highly conservative estimate and is based on
the proven resources of both fields, as well as assuming an oil
linkage for pricing the LNG at $90, which is a fair bit less
than is being seen in the market today.
COMMISSIONER RODELL interjected that it is important to
recognize that the graphic on slide 13 does not include any
additional revenues to the state that this project might
produce, such as corporate income tax or property tax.
COMMISSIONER BALASH added that this estimate is to isolate the
revenues that are affected with or without TransCanada.
2:44:00 PM
COMMISSIONER BALASH moved to slide 14, saying that it is another
way of looking at these same issues of concern, and it takes
into account the opportunity cost for the use of state capital.
He explained that the chart reflects the cumulative cash flows
for the three scenarios.
COMMISSIONER RODELL pointed out that this chart goes back to
Representative Johnson's earlier question regarding the value of
having a partner versus sole ownership. She noted the benefit
for the state of not using its cash when there is participation
by a partner.
COMMISSIONER BALASH addressed slide 15, which illustrates the
increase in annual cash flows to the State of Alaska with an
expansion of the project under the 20 and 25 percent equity
alternatives. He explained that adding a train for liquefaction
would require an additional train of treatment at the North
Slope, and this additional throughput in the pipeline would be
achieved with compression. The state's future is incredibly
bright when the opportunities for continued exploration,
development, and production of natural gas are considered. With
the pay-off of the pipeline in 2045, the state's cash flow
shoots up. Contemplated in the term sheet in Exhibit C is that
at the end of the initial contract term, the state would have
the opportunity to buy out TransCanada's interest in the
midstream at the net book value.
2:46:52 PM
COMMISSIONER BALASH directed attention to slide 16 portraying
the distance-sensitive, rate-making element for in-state
deliveries. Fairbanks deliveries would be within the Nenana
zone and would require a lateral from Nenana to Fairbanks with
an overall tariff of $3.70 [per MMBTU]. Tariff charges to
Southcentral Alaska, the Big Lake Zone, [would be $3.81], and
charges for the full haul to the LNG plant [would be $4.02]. He
pointed out that the required treatment service, depicted in
blue in the bar graph, is the same across all the delivery
zones, whereas the pipeline tariff, depicted in green, varies.
He concluded his presentation by expressing his excitement for
the opportunity to work together and maintain momentum for this
project (slide 17).
CO-CHAIR FEIGE said he is concerned about the comparative cost
of severing the Alaska Gasline Inducement Act (AGIA) ties with
TransCanada - a divorce from TransCanada - versus the cost of
the negotiated ownership percentage with TransCanada for this
project. While the reasons presented thus far seem logical, the
specific numbers and the justification for the way this deal is
currently negotiated, and its value to the state, need to be
discussed further.
2:50:36 PM
CO-CHAIR SADDLER asked why only three offtake rates were
identified when the plan is for at least five offtake points.
COMMISSIONER BALASH responded that these three offtake points
could be specifically identified. However, the ultimate number
of offtake points could be far more than five, and work to
identify the number of offtake points will be undertaken. He
explained that pre-installation, or tapping into the line during
construction, is not very expensive or cumbersome to do, so
there may be multiple offtake points that never get used. These
three offtake points make the most sense, as they are
volumetrically weighted for the largest likely draws off the
pipeline.
2:52:04 PM
REPRESENTATIVE HAWKER pointed out that the committee has a due
diligence responsibility to determine whether this is a good
deal. "This is really kind of a take-or-leave-it deal for us,"
he said. "We don't have a lot of latitude." He noted that those
members of the committee who "have been to this rodeo for a
dozen times, have always had a lot of latitude in the process."
He continued:
Here we have this necessity for enabling legislation that
is specifically ... spelled out. And, in order to exit
AGIA, which is necessary to go forward with another project
plan here, we have to have both a trigger event and this
execution of these things called transition agreements.
Trigger event means the effective date of that enabling
legislation, and it actually says that [TransCanada Alaska
Development Inc.] finds that legislation acceptable. So,
that seems to me with all respect, it is a veto authority
on the whole if we make a change of sufficient merit and
which is probably a material change to the enabling
legislation that is pretty well clearly spelled out here in
this legislation that allows you to enter into these exact
terms and conditions that you are describing up here. Your
partner TransCanada has the ability to say no and we just
go back to square one. Which seems like ... we really are
not in a certain situation here as a legislature where we
have much say in the policy development.... As we look at
these components, and you heard questions about
debt/equity, you heard ... questions about ownership
percentages and all those sort of things. How much
latitude does the legislature have to get into being
proscriptive on such things without jeopardizing your
agreement under this [MOU] and then subsequently the flow
through to the HOA?
COMMISSIONER BALASH replied:
In terms of doing your due diligence, we are happy to play
whatever role you would like us to play in that due
diligence. Your contractors have made it to town. We are
doing everything we can to help them understand what we
looked at, how we looked at it, so that we are not talking
past each other in assumptions and models, and ... will
continue to do that. We looked all of this information in
a variety of ways - far more than has been presented here -
and we will be happy to generate whatever information we
can. I would ask that we coordinate that through the
respective chairmen of the committees, but ... we can
present this information in any number of ways and we can
look at various scenarios. With regard to the latitude of
the legislature, we fully respect the independence of this
body.... Again, I would call members' attention to [Article
2.1(d) of the Memorandum of Understanding].... The parties
in this case - Commissioner Rodell and myself, along with
TransCanada - have agreed to this set of terms and we have
agreed to agree to contracts or transition agreements that
look like this. But, depending upon the conditions or
limitations included in the enabling legislation, they may
walk. But ... that is a decision that ... they will
make.... That is something that I am confident the ...
process for developing legislation - there will be an
opportunity for them to review whatever it is that the
legislature would like them to consider and they will have
an opportunity to comment on it. That is what these
hearings are all about.
2:56:21 PM
REPRESENTATIVE HAWKER noted that Article 2.1(d) says "everybody
agrees to support everything going forward." However, he added,
the article's language also includes the word "if" and following
"if" is the capitalized word "Parties". He understood
Commissioner Balash to have said that "that applied to the other
guys might choose to walk." Representative Hawker continued:
Capital P Parties is actually both the administration and
the other guys. Is that a commitment from you that no
matter what legislation passes here, the administration
will stand behind it and put the sole onus for walking away
from this on the other guys?
COMMISSIONER BALASH responded that he would not characterize it
that way. He continued:
Whether we are talking about this document or this
document, there may be circumstances or conditions or
limitations in legislation that is passed by this body
where Commissioner Rodell and I are going to need to decide
in our respective positions whether we think that the ...
course laid out continues to be in the interest of the
state.
REPRESENTATIVE HAWKER said he appreciates hearing this because
he did not want to hear the commissioner abrogating his role.
He added:
It is entirely possible for us to pass something that you
as an administration find an inappropriate reason to go
forward with the other guys, and for whatever reason they
might love it....
COMMISSIONER BALASH concurred, saying, "That is a very real
scenario that we contemplated."
2:58:08 PM
REPRESENTATIVE HAWKER said he would also like to discuss whether
the state is really exiting AGIA in this agreement or really
just temporarily suspending it.
CO-CHAIR FEIGE responded that on February 12, 2014, another
hearing will be held on the MOU, where this issue can be
discussed. There is an opportunity in the meantime for
engagement between the commissioners and their staff and between
the companies and their staff. He concurred with Representative
Hawker, stating:
Whatever we end up deciding, either it falls within the ...
parameters and the boundaries laid out in the MOU and the
HOA or it falls outside those parameters. And if it does
fall outside the parameters I would hope that neither any
of the parties would simply walk away, but we would be
engaged in further negotiation ... as uncertain as that may
be. So, with that in mind, I ask all committee members to
... really dig down into the ... hard legal fine print on
these documents. We've got our lawyers and please converse
with the co-chairs and if you have specific information for
testifiers that you want to hear on this subject, or that
you think would bring good outside opinions to the
conversation, we will certainly work with you ... to bring
that to the fore.
REPRESENTATIVE SEATON related that a general assumption is being
made that the lowest possible tariffs are wanted for the state.
At some point in time, he noted, the tariff could be the income
stream for the state. With a low tariff the state may lose the
most significant income stream that it has, depending upon the
price, which would be the in-kind portion. He said he would
like to have the administration provide a public discussion "of
low tariff and what that gives us as future limitations on our
ability to have a revenue stream depending upon the price that
we get for royalty and taxes."
3:01:10 PM
ADJOURNMENT
There being no further business before the committee, the House
Resources Standing Committee meeting was adjourned at 3:01 P.M.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HRES Memorandum of Understanding 1.29.14.pdf |
HRES 1/29/2014 1:00:00 PM |
|
| Full MOU.pdf |
HRES 1/29/2014 1:00:00 PM |