Legislature(2015 - 2016)BUTROVICH 205
10/26/2015 09:00 AM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| SB3001 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB3001 | TELECONFERENCED | |
SENATE FINANCE COMMITTEE
THIRD SPECIAL SESSION
October 26, 2015
9:03 a.m.
9:03:07 AM
CALL TO ORDER
Co-Chair MacKinnon called the Senate Finance Committee
meeting to order at 9:03 a.m.
MEMBERS PRESENT
Senator Anna MacKinnon, Co-Chair
Senator Pete Kelly, Co-Chair
Senator Peter Micciche, Vice-Chair
Senator Click Bishop
Senator Mike Dunleavy
Senator Lyman Hoffman
Senator Donny Olson
MEMBERS ABSENT
None
ALSO PRESENT
Marty Rutherford, Deputy Commissioner, Department of
Natural Resources; Deepa Poduval, Director, Black and
Veatch; Senator Cathy Giessel; Senator Kevin Meyer; Senator
Gary Stevens; Representative Andy Josephson; Representative
Geran Tarr; Senator Mia Costello; Senator John Coghill;
Representative Sam Kito III; Senator Charlie Huggins;
Representative Liz Vasquez.
SUMMARY
SB 3001 APPROP: LNG PROJECT and FUND/AGDC/SUPP.
SB 3001 was HEARD and HELD in committee for
further consideration.
SENATE BILL NO. 3001
"An Act making supplemental appropriations; making
appropriations to capitalize funds; making
appropriations to the general fund from the budget
reserve fund (art. IX, sec. 17, Constitution of the
State of Alaska) in accordance with sec. 12(c), ch. 1,
SSSLA 2015; and providing for an effective date."
9:04:14 AM
Co-Chair MacKinnon discussed the meeting agenda. She
relayed that SB 3001 was an appropriation bill that would
buy out Alaska's partner TransCanada and commit funds to
complete pre-FEED [Front End Engineering and Design] for
the Alaska Liquid Natural Gas pipeline project [AKLNG]. She
asked presenters to address why the administration believed
the state should buy out TransCanada.
MARTY RUTHERFORD, DEPUTY COMMISSIONER, DEPARTMENT OF
NATURAL RESOURCES, introduced herself.
DEEPA PODUVAL, DIRECTOR, BLACK AND VEATCH, introduced
herself. She relayed that the company had worked with the
State of Alaska for the past 10 years. She detailed that
Black and Veatch worked on large infrastructure projects
worldwide.
Ms. Rutherford explained the items included in the day's
packets. She discussed the presentation titled
"TransCanada's AKLNG Participation" dated October 24, 2015
(copy on file). She explained that in June 2014, the state
and TransCanada-Alaska had entered into a key agreement
authorizing TransCanada to pay the upfront capital costs
and hold the state's 25 percent equity share of ownership
in the midstream components.
9:07:29 AM
AT EASE
9:09:20 AM
RECONVENED
Co-Chair MacKinnon reiterated that the committee was
addressing a presentation from Department of Natural
Resources (DNR) and Black and Veatch titled "TransCanada's
AKLNG Participation."
Ms. Rutherford restated that the presentation addressed
whether or not to terminate TransCanada's Precedent
Agreement (PA) with the State of Alaska. She addressed
slide 2, "Executive Summary":
Background:
In June 2014, the State of Alaska (SOA) and
TransCanada Alaska Midstream LP (TransCanada)
entered into a key agreement authorizing
TransCanada to pay the upfront capital costs and
hold the State's 25 percent share of ownership in
the midstream components of the Alaska LNG
(AKLNG) Project. These midstream components are
the Gas Treatment Plant (GTP) and pipeline
portions of the overall project.
The agreement, called the Precedent Agreement
(PA), was based on terms of a Memorandum of
Understanding (MOU) between the State and
TransCanada signed in December 2013. While the
Alaska Legislature was not a party to the PA, it
reviewed and debated the terms of the MOU during
the 2014 legislative session.
Decision at hand:
The State is now faced with a December 31, 2015
deadline to make a decision on whether to take
back TransCanada's share and have direct equity
participation in the AKLNG midstream. To do so
would require termination of the PA.
Under the PA's terms, by December 31, 2015, the
State is obligated to either enter into a Firm
Transportation Services Agreement (FTSA) with
TransCanada or TC will be able to terminate the
PA. Alternatively, if agreeable to TransCanada,
the State can negotiate to extend the date for
entering into an FTSA beyond December 2015.
Recommendation
The State administration recommends termination
of the TransCanada relationship by December 2015
and replacing it with the State's direct
participation in the AKLNG midstream.
The State administration expects this path to
allow the State to better manage the obligation
the State has for AKLNG midstream costs whether
or not the project proceeds, increase the overall
economics of the project to the State, and allow
the State to have more direct voting rights on
key AKLNG issues in return for its investment.
9:12:50 AM
Ms. Rutherford highlighted slide 4: "Context for State's
2014 decision to enter into a Precedent Agreement (PA) with
TransCanada (TC)":
AGIA [Alaska Gasline Inducement Act] framework:
· TransCanada was the State's licensee under AGIA
· AGIA work product could not be transferred to
AKLNG until after resolution of AGIA abandonment
issues (including cost of the work product)
· AGIA also contained a treble damages provision
· It was in this context that the prior
Administration negotiated an MOU with TC in 2013,
and the AGIA Termination Agreement in 2014, to
exit AGIA, transition to AKLNG, and sign the PA
with TC
Entering into the PA with TC:
· Gave the State a clean off-ramp from the TC
relationship, now, which it did not have when it
entered into the PA for all the reasons discussed
above
· Gave the State time during pre-FEED to begin to
develop its in-house capabilities in order to
fully consider the option of participating
directly in midstream at appropriate off-ramps
· TC's work on AGIA and APP allowed smooth
transition into pre-FEED
· Entering into the PA with TC for pre-FEED also
gave the State time to assess its ability to
finance its share of investment in AKLNG without
TC
However, there was an expectation that project
enabling agreements would be defined before Dec 2015
and enable SOA to evaluate TC role going forward
9:15:18 AM
Ms. Rutherford moved to slide 5 titled "Key terms of the
Precedent Agreement between State of Alaska and
TransCanada":
TC Owns the State's 25 percent Entitlement to GTP plus
Pipeline
Funds up front midstream cash calls
Technical lead for pipeline during pre-FEED
State to Commit to 20-25 Year Transportation Agreement
with TC by Dec 2015 to Pay for Using GTP plus Pipe
SOA Ultimately pays TC for all its Costs (including a
cost of capital of 7 percent)
Both SOA and TC have Milestones and Off-ramps: SOA
Responsible for TC Costs, Regardless of Off-ramps
Co-Chair MacKinnon queried the value of the technical
expertise TransCanada had brought to the table thus far.
Ms. Rutherford replied that the presentation would address
the question in detail later on.
Co-Chair MacKinnon wondered if the cost in the delay in the
off-ramp had been considered. She asked if there were
models showing how waiting until a later date would impact
the project from a financial and technical perspective. Ms.
Rutherford affirmed that the presentation would address the
topics.
9:17:25 AM
Ms. Rutherford discussed slide 6, "The Precedent Agreement
has agreed upon off-ramps that allows the State to
terminate before December 31, 2015." She elaborated that
the project was currently in the pre-FEED stage and the
first of the off-ramps was the termination by the end of
2015. She detailed that at that time the state would be
responsible for paying TransCanada's total development
costs including internal costs and 7 percent interest. The
second off-ramp would occur at the end of FEED (estimated
to by December 31, 2018), but prior to making a final
investment decision (FID); the state would be responsible
for paying all of TransCanada's costs, which were currently
estimated at about $490 million (including internal costs
and 7 percent interest).
Co-Chair MacKinnon asked if the presentation would address
a footnote related to a $4 million credit on slide 6. Ms.
Poduval explained that the $70 million estimate
incorporated a $4 million credit for a payment the state
had made to TransCanada for AGIA reimbursement.
Co-Chair MacKinnon had been concerned that the state may
lose the credit in the future if it was not taken at
present. She surmised that it was a credit that was owed to
the State of Alaska. Ms. Poduval replied in the
affirmative.
Ms. Rutherford highlighted slide 8, "The SOA is faced with
the strategically important decision of whether to
terminate the Precedent Agreement with TransCanada":
The State has two main options:
1. Terminate the PA by December 31, 2015
State would have to reimburse TransCanada for its
costs incurred to date (plus approximately 7
percent interest) - SOA increases overall equity
and voting rights to 25 percent, which equals the
SOA's share of gas
2. Or, assuming TC is willing, Execute an FTSA with
TransCanada by December 31, 2015
TransCanada would continue to incur costs on
behalf of the SOA unless there is a termination
at a later date, at which point the SOA will have
to reimburse TransCanada's costs (plus
approximately 7 percent interest)
9:20:54 AM
Vice-Chair Micciche referenced footnote 3 on slide 6 and
asked for an additional explanation on TransCanada's
internal costs. He specifically wondered what portion of
the $490 million was included in the internal costs. Ms.
Rutherford agreed to provide the information. Ms. Poduval
explained that of the $70 million pre-FEED costs, about $50
million was associated with the AKLNG work plan and budget,
$15 million was for TransCanada's internal costs, and $3
million was associated with the interest cost.
Vice-Chair Micciche surmised that approximately 25 percent
of the total was associated with TransCanada's internal
costs. Ms. Poduval stated that of the approximate $500
million at the end of FEED, about $100 million would be
associated with TransCanada's internal cost plus interest.
Co-Chair MacKinnon requested the information in writing for
dissemination to other legislators.
Senator Bishop wondered whether the costs were reasonable
and how the analysis compared to other pipeline companies.
Ms. Rutherford agreed to include the information as part of
the written response to the committee.
9:23:28 AM
Co-Chair MacKinnon looked at slide 8, and wondered who
would be in charge of Alaska's voting shares. She noted
that TransCanada was currently voting on behalf of the
state.
Ms. Rutherford replied that the discussion would address
the issue of moving forward in the commercial negotiations
on the governance. She explained that the question on who
would have the state vote remained if there was a split
between the Alaska Gasline Development Corporation (AGDC),
which holds the liquefaction; and TransCanada, which holds
the pipeline and gas treatment plant [GTP]. She questioned
whether the vote would come from AGDC if it only pertained
to liquefaction; whether a vote would come from TransCanada
if it was specific to the pipeline or GTP; or who the vote
would come from if it pertained to the entire project. She
stated that the issue was confusing. She relayed that AGDC
would become the holder of the state's full equity position
in the project and would be responsible for voting on the
state's behalf if the state chose to terminate the PA with
TransCanada.
Co-Chair MacKinnon wondered if the administration had
designated a party within AGDC who would be responsible for
casting the state's vote. Ms. Rutherford replied that Joe
Dubler [Vice President and Chief Financial Officer, AGDC]
had been identified by Daniel Fauske [President, AGDC] as
the person responsible for carrying the state's vote for
AKLNG.
Co-Chair MacKinnon remarked that the administration had
named Rigdon Boykin as the person responsible for voting on
the state's behalf at a meeting in Wasilla. She wondered if
the switch to Mr. Dubler was a recent development.
Ms. Rutherford replied that Mr. Dubler would carry the
state's vote with the AKLNG project. Mr. Boykin had been
the lead negotiator for the commercial negotiations, which
were handled primarily by the executive branch. She
detailed that Mr. Boykin was currently under contract with
AGDC. She elaborated that AGDC had roles in the commercial
negotiations, but not throughout the entire set of
commercial negotiations. For example, AGDC would not be
involved in the decision on the recommendations the
administration would bring to the legislature on fiscal
terms and were not as involved in the upstream gas
balancing and supply.
Co-Chair MacKinnon wondered how long it would take to
obtain an organizational chart for the project. Ms.
Rutherford stated that the department could provide an
organizational chart by the end of the day. She added that
the House Finance Committee had also requested an
organizational chart the previous day.
Co-Chair MacKinnon noted that the Senate Resources
Committee had made a request for an organizational chart
six months earlier. She asked if the committee should take
a break to wait for the chart, or if it should continue on.
Ms. Rutherford recommended continuing on and committed to
providing an organizational chart by the end of the day.
9:27:32 AM
AT EASE
9:28:39 AM
RECONVENED
Co-Chair MacKinnon relayed that the committee had been
waiting for some time to understand the organization of the
management team, which had been a sticking point for the
committee. She emphasized that the committee wanted an
Alaska gas pipeline, but it also wanted to understand the
organization moving the project forward. She explained that
the organizational chart would be foundational for the
committee to decide on whether to fund the buyout or not.
She asked for verification that Mr. Boykin had been hired
from out of state as the lead negotiator on establishing
commercial agreements for the project. She surmised that
Mr. Boykin was working with a team and the administration
had selected a member of team to cast the state's vote.
Ms. Rutherford explained that AGDC was responsible the
infrastructure only. The agency was also responsible for
supplying domestic gas, which would include some of the
infrastructure associated with offtakes. She explained DNR
and AGDC had a responsibility to provide the legislature
with a report on domestic gas supply and offtakes. She
stated that in AGDC's role as infrastructure owner of the
liquefaction it had named Mr. Dubler as its management team
voting representative for the AKLNG project. She detailed
that Mr. Dubler and other AGDC representatives had been
part of the overall gas team dealing with commercial
issues. She elaborated that AGDC's role in the commercial
discussion was very limited to the areas that included
infrastructure decisions. She affirmed that Mr. Boykin had
been leading the commercial negotiations. Additionally,
there were a few representatives from AGDC, DNR, the
Department of Law, and the Department of Revenue (DOR).
Many of the representatives were subject matter experts,
including David De Gruyter for pipelines, Steve Wright for
project management and upstream issues, and Deepa Poduval
for fiscal issues. The team tried to assist the lead at the
negotiating table. The contract was currently held by AGDC,
but Mr. Boykin's responsibilities were broader than the
infrastructure piece.
Co-Chair MacKinnon believed the organizational chart would
outline something the legislature could count on for a
structure.
9:31:53 AM
Senator Dunleavy wondered if Mr. Boykin was replacing Mr.
Fauske in terms of roles and decision making capability. He
asked what role Mr. Fauske currently had. Ms. Rutherford
replied that Mr. Fauske was still the CEO of AGDC and
answerable to the board; whereas Mr. Boykin was currently a
contractor with AGDC working solely on the commercial
aspects of the project. She relayed that Mr. Boykin had not
replaced Mr. Fauske in the role of leading AGDC's efforts.
Co-Chair MacKinnon remarked that the state hired
contractors from around the world in order to work to make
the best decisions possible. She asked if the
administration had provided the legislature an opportunity
to review the PA. Ms. Rutherford replied that the
department had received approval the previous day to
provide a slightly redacted version of the PA, which was a
confidential document between the state and TransCanada.
She relayed that the committee would receive the document
shortly.
Co-Chair MacKinnon asked if the legislature would sign a
confidential agreement to view the document or if the
document would become open. Ms. Rutherford replied that it
would become a public document with a couple of slight
redactions.
9:33:49 AM
Senator Olson opined that the state focused on hiring the
most experienced individuals. He did not believe Mr. Dubler
and Mr. Fauske had any extensive experience in dealing with
megaprojects such as AKLNG. He hoped to see that Mr. Dubler
did have experience, given his role in voting on behalf of
the state. He asked Ms. Rutherford to comment on the issue.
Ms. Rutherford answered that she did not know what Mr.
Dubler's and Mr. Fauske's resumes looked like. She believed
that TransCanada was an outstanding northern pipeline
company; for that reason the project chose the company as
the pipeline lead on the pre-FEED stage. However, there was
a large difference between holding the state's equity
interest and being a lead on any particular segment of the
project. She elaborated that AGDC already held the state's
equity position in the liquefaction project. The
administration was proposing that AGDC would also hold the
state's equity position in the pipeline and GTP if
TransCanada's role in the project was terminated. She
furthered that who would handle the pipeline component for
the AKLNG project would be decided by the project and not
the state or producers. The management committee would be
making recommendations for approval by the entire structure
of AKLNG on who would continue to be the lead for the
remainder of pre-FEED and continuing forward; none of the
decisions had yet been made. TransCanada had agreed to
allow the AKLNG project to hire any of its top employees
during the process of closing out pre-FEED, which was
currently in its final stages. The project would then
decide if it would include another third-party or one of
the current companies with pipeline experience.
9:36:45 AM
Senator Olson expressed concern that there would be exposed
people as AGDC took on more and more responsibility. He did
not believe some of the personnel had all of the needed
experience. Additionally, he recalled that in the past Mr.
Boykin had remarked that he tended to get his way at the
negotiating table. He stated that the forcefulness of the
comment almost reminded him of Donald Trump. He asked for
comment on Mr. Boykin's expertise related to getting fair
representation for the state's 25 percent share of the
project.
Ms. Rutherford replied that Mr. Boykin was a very
experienced attorney. He did not have LNG experience, but
had energy project experience. She believed the experience
had primarily been in the financing aspect of projects. She
noted that her comments reflected what she had heard at a
September meeting. She did not have further knowledge
regarding Mr. Boykin's experience.
Co-Chair MacKinnon relayed that she had made a note that
the committee may want to hear from Mr. Boykin.
Senator Olson asked if there were reservations about Mr.
Boykin's lack of LNG experience. He opined that LNG
experience was very different than being a financier. Ms.
Rutherford replied that given the complexity of the project
no one had the breadth of experience to fill all of the
gaps, which made it important to have a fully functional
team with broad experience. She relayed that there were
some vastly knowledgeable people involved. She believed
that good decisions would be made if the team used the
knowledge of the various participants to its advantage.
9:39:24 AM
Vice-Chair Micciche believed most of those involved
understood the benefits and liabilities of buying out
TransCanada. He observed that there may be a relatively
sophisticated team, but he believed there was a lack of an
institutional process. He noted that the state would be
making the decisions that TransCanada was currently helping
with at present. He believed it was the only gap in the
deal. He referred to the organizational chart and remarked
that the organization had changed substantially over the
months. He stressed that there should be stability in the
organization. Additionally, he wanted to know that the
administration understood the positions that were necessary
to manage the decision making process and he wanted to see
names associated with positions. He felt that there should
be a set of qualifications for individuals who may fill the
positions. He believed the request was reasonable. He
believed the process was stalled until the information was
made available. He added that he was largely in support of
the deal.
Ms. Rutherford agreed to provide the information.
Senator Dunleavy agreed that the organizational chart was
essential to the decision. He believed a meeting in Mat-Su
made it harder to understand who was in charge of what. He
remarked that alignment with the administration should lead
to alignment with the legislature. He wanted to ensure that
there was some concurrence within the administration on
what to do. He hoped there was consensus within the
administration that there was a particular course of action
DNR would recommend at meetings with the legislature. Ms.
Rutherford agreed.
9:42:58 AM
Ms. Rutherford addressed slide 9 titled "The administration
recommends Termination of the Precedent Agreement":
Alignment: Currently, the SOA is estimated to receive
25 percent of the gas from Project; however, with
TransCanada's equity participation in the midstream
portion of the Project, the SOA only retains
approximately 12.5 percent equity in the project
Ms. Rutherford elaborated that with the termination of the
PA, the state would have an equal share of the gas and
project infrastructure. She continued to address slide 9:
Voting Rights: Terminating the agreement and
increasing the State's voting rights would allow the
State to have a more direct say in the decision making
process of the project
Ms. Rutherford expounded that a termination of the PA would
allow the state to have a much more clear say in the
project decision making process during the completion of
pre-FEED and moving into the FEED stage. She remarked that
having a portion of the project held by TransCanada and
another portion held by AGDC made things complicated. She
finished addressing slide 9:
Economic Benefit: The SOA could realize up to $400
million of additional annual net cash flows from the
Project, based on DOR's expectations of State being
able to finance cheaper than TC by financing the
midstream portion of the Project directly
Ms. Rutherford added that DOR finance staff would speak to
the economic benefits at a later time.
Senator Bishop referred to voting rights on slide 9. He
wanted to ensure that votes would be made in the state's
best economic interest, and not on politics.
9:45:47 AM
Senator Dunleavy believed the first two items on slide 9
were clear, but asked for verification that the third point
was a guesstimate. Ms. Rutherford replied that the estimate
was based on the best analysis the state's outside
financial advisors (Lazard, FirstSouthwest, and Greengate)
could provide.
Senator Dunleavy observed that "up to" $400 million was the
best case scenario. Ms. Rutherford agreed. Senator Dunleavy
surmised that the figure could be anywhere from zero to
$400 million. Ms. Rutherford agreed that the figure could
be as low as zero. Senator Dunleavy asked for verification
that the number represented a net figure. Ms. Rutherford
confirmed that the $400 million was a net figure.
Senator Olson wondered what would happen if the gas market
crashed. He asked if there was a chance the state would
lose money. Ms. Rutherford replied that there was a chance
the state could go negative once it took an equity position
in a complex LNG project, which was market and cost-driven.
She detailed that the long-term contracts the state would
need to negotiate to underpin the project financing would
be indexed. Often times financing was indexed to oil
prices, which were currently very low. She agreed that
inherently the state could go negative by taking an equity
position in the project, which was a very different
situation than the one at present with royalties and gas
and no equity positions because production tax and
royalties could go to zero, but could not go negative.
However, once the elements were turned into gas ownership
positions, it was possible to go negative, hopefully only
for short periods of time. She relayed that it was part of
the analysis the administration would bring to the
legislature as part of the final commercial proposal.
9:48:19 AM
Senator Olson clarified that he was not asking whether the
state would lose or win; he understood that the issue was
market driven. He wondered if a market upset would change
the state's financial liability under a scenario that
included partnership with TransCanada versus a scenario
without TransCanada. Ms. Rutherford replied in the
negative. She added that the issue would be discussed
further.
Vice-Chair Micciche referred to voting rights on slide 9.
He queried the details of the consultation currently taking
place between the state and TransCanada before a vote
occurred. He wondered what kind of a quantifiable voice the
state currently had when voting occurred. Ms. Poduval
replied that the presentation would address the issue in
more detail later on.
Vice-Chair Micciche surmised that the $400 million on slide
9 was related to the difference in the cost of capital. Ms.
Rutherford replied in the affirmative.
Vice-Chair Micciche remarked that there were only three
times in the state's history where it had paid an interest
rate higher than the one in the deal with TransCanada. He
asked for verification that the $400 million was around
just over 3 percent for the cost of capital. Ms. Poduval
agreed. She noted that it was 3.5 percent.
Co-Chair MacKinnon asked if DNR had made a determination
that the state would take gas as tax. Ms. Rutherford
replied that the determination had not yet been made, but
DNR was following SB 138 [legislation passed in 2014
related to a gas pipeline, AGDC, and oil and gas production
tax]. The commercial agreements were a necessary element,
which had been recognized by the legislature in its Heads
of Agreement (HOA) discussed in 2013. An informed decision
could be made once the commercial agreements were in place
that would affect things like the disposal of carbon
dioxide, the upstream cost allowance on the various fields,
what rate would flatten the Point Thomson net profit share
leases, supply agreements for receiving gas, and surety the
gas could be delivered to the state's buyers.
Senator Bishop addressed economic benefit and noted the
importance of ensuring the state maintained its credit
rating. He wondered if the state would run up against a
limit on future borrowing if it bonded for the full amount
on the project. Ms. Poduval answered that the finance team
was prepared to provide detailed information.
9:52:08 AM
Senator Dunleavy queried the goal of the pipeline from the
administration's perspective. He wondered if the goal was
to maximize revenue for the state or to provide the lowest
cost energy for Alaskan's. He asked which option was the
priority.
Ms. Rutherford replied that DNR's role and responsibility
was to maximize the revenue value to the state. The project
was a transportation system and the intent was to keep
those costs to a minimum in order to maximize the upstream
values. She stated that the legislature would get to make a
decision on whether it wanted to subsidize particular
energy projects in the state. She furthered that AGDC's
role was to provide gas for domestic use. She believed the
agency was anxious to speak to the legislature about how
domestic gas could provide a way to lower energy costs to
local communities; however, it was not something DNR was
allowed to do. She referred to a legal decision that it was
DNR's constitutional responsibility to maximize the
upstream values for the Permanent Fund and General Fund.
Co-Chair MacKinnon queried if Senator Dunleavy was
interested in hearing from the Alaska Energy Authority
(AEA), which had been charged with the responsibility of
looking at instate gas under SB 138.
Senator Dunleavy replied in the affirmative. He remarked
that his question pertained to alignment. He believed that
if the state's goal was to maximize revenue the pipeline
should be as big as possible with as few offtakes as
possible and gas would be taken directly from the slope to
a ship in a route as direct as possible in order to lower
costs. Alternatively, some people believed the purpose of
the gasline was to lower the cost of energy for Alaskans,
which had been the reason for discussions on a 36-inch
pipeline with offtakes and the impetus for HB 4
[legislation passed in 2013 related to AGDC and the
Regulatory Commission of Alaska]; however, these items
increased the project cost. He wanted to better understand
the goal of the state and reasoned that various departments
may have differing views on the subject.
Ms. Rutherford replied that DNR's responsibilities were
constitutionally based as directed by the courts. She
relayed that the situation was very similar to what
occurred with oil under Trans-Alaska Pipeline System
(TAPS); values were maximized and the legislature
determined how those revenues were utilized for Power Cost
Equalization or other methods to provide lower energy costs
to the state's citizens and communities. There would be
opportunities to include offtakes to try to keep the cost
of domestic supplies as low as possible, but DNR's
responsibility to maximize the resource value was fairly
clear. She concluded that it was up to the legislature to
decide how to use the revenues and how to use revenues to
lower costs. For example, the legislature could look at
subsidizing some of the offtake kits that AGDC was looking
at or at other methods.
Co-Chair MacKinnon recognized Senator Charlie Huggins and
Representative Liz Vasquez in the committee room.
9:57:43 AM
Senator Olson believed that one of the main goals of a 48-
inch line was to allow other gas fields to tap into the
line. Ms. Rutherford agreed. She furthered that the state
was working to ensure that there were adequate offtakes and
intakes along the entire route. She provided the Nenana
Basin as an example, where there would be the opportunity
to put additional gas into the pipe. Additionally, the goal
was to ensure that the pipeline was expandable to the
maximum degree possible at the lowest possible cost in
order for third-party, new found gas to access the line.
She explained that the situation was very different than
subsidizing the offtake value of the gas. She confirmed
that the state wanted to encourage new exploration, new
found gas, and to facilitate gas developed somewhere along
the route of the pipeline such as the Nenana Basin. She
elaborated that the state was very involved in commercial
discussions about trying to ensure expansion and third-
party access provisions that made good sense for the state
as a sovereign.
Senator Olson queried the difference between the 42-inch
and the 48-inch pipeline options. He wondered if each
option could accept extra capacity or if one would require
more compressors.
Ms. Rutherford replied that the state believed that the
value of increasing the pipe size from 42 inches to 48
inches was in the state's best interest. She explained that
the larger pipe could be expanded much more cheaply, that
it would not be as "pipe constrained" from bringing in
third-party gas somewhere along the routes, and would
require less compressor stations for the initial and
additional throughput. She stressed that with a larger pipe
the capital costs could probably be repaid within 12 years,
because fewer fuel and compressor stations would be
required. However, the project had only developed the 42-
inch pipe to the current pre-FEED level. Therefore, as part
of the state's efforts and in response to SB 138
requirements that asked for the consideration of a 48-inch
pipe, the state had asked the project to bring a 48-inch
analysis up to the same stage of pre-FEED as the 42-inch
pipe. The analysis would enable the legislature to make
comparable decision on whether the state's assumptions on a
48-inch pipe were correct and what the costs would be for
capital investment and operations.
Co-Chair MacKinnon stressed that SB 138 specifically asked
DNR (not the project) to develop the criteria. She wondered
if there was information the legislature could be privy to
from the state's perspective to evaluate on its assertion
and to ask the state's partners for the expansion. She
asked if a legislative resource committee should have a
meeting on a 42-inch versus a 48-inch pipe. She reasoned
that it seemed to be a resource issue related to maximizing
the resource and a criteria that had been asked for of DNR
by SB 138.
Ms. Rutherford agreed to provide that information.
10:02:30 AM
Senator Dunleavy believed that Ms. Rutherford had indicated
that going from a 42-inch pipe to a 48-inch pipe would be
advantageous to Alaska. He wondered if there were any pipe
sizes exceeding 48 inches. He reasoned that the state would
increase the pipe size even more if it believed a larger
pipe would be more beneficial.
Ms. Rutherford replied that generally, 42-inch and 48-inch
pipes were the most traditional and pipeline companies had
the most experience with those sizes. She stated that a 44-
inch pipe had been under consideration but the state had
heard that all of the replacement parts and compressors
would have to be newly created, which would have greatly
increased the cost. She believed that a 48-inch pipe was
the most traditional and largest pipe available.
Co-Chair MacKinnon asked if DNR would share with the
resources committee how the weight on the pipe would
physically handle the selected corridor. She had heard that
the weight on the pipe caused some technical difficulties
for the project that would increase costs exponentially.
Ms. Rutherford agreed that the weight would be greater and
there would be an associated reduction in the number of
pipes that could be trucked (from 4 down to 3). She
confirmed that there would be an additional cost, which
would be part of the full analysis the project had agreed
to undertake on the difference between a 42-inch and 48-
inch pipeline. She explained that DNR had made some
assumptions that it would discuss with the legislature.
10:05:06 AM
AT EASE
10:18:20 AM
RECONVENED
10:19:17 AM
Senator Dunleavy wondered whether it would be a reason to
keep TransCanada for its expertise if the state was
considering a 48-inch pipe. Alternatively, he wondered if
the state could locate the expertise on its own. Ms.
Rutherford replied that the administration believed the
project could replace the capacity that TransCanada brought
to the project. She detailed that the project could utilize
the expertise of the producers or could bring in another
third-party into the project (not into the state's equity
position). She explained that the state was replacing
TransCanada as its agent, not as the project piece. She
elaborated that because of TransCanada's pipeline expertise
the project had elected to put the company in charge of the
pipeline for pre-FEED.
Senator Hoffman wondered if the project would automatically
go from a 42-inch pipe to a 48-inch pipe if it was
determined that the larger pipe was more economically
beneficial. He asked about the process and timeline
associated with making the decision.
Ms. Rutherford replied that given that the project had
agreed to bring the analysis of a 48-inch pipe up to the
same level of information as the 42-inch pipe, the analysis
would be completed at the same time as the remainder of the
pre-FEED product completion. She relayed that there had
been some slippage in the timing; the project had hoped to
have all of the pre-FEED products completed by the first
part of 2016. However, the project had identified product
areas that would require additional effort. She noted that
the topic would be addressed further during the budget
discussion. Assuming pre-FEED would be completed by the end
of 2016, the 48-inch analysis would be done at the same
time. She believed that if the 48-inch pipe was shown to be
more economic there would be some impetus by the project to
agree to the change. She stressed that all parties would
have to agree to make the change as part of the project
agreement. She added that hopefully the state would have
the ability to influence the decision, given the importance
of some of the values it brought to the project (such as
fiscal certainty).
10:23:41 AM
Senator Hoffman surmised that each member had veto power in
determining the size of the pipe. Ms. Rutherford replied
that she was getting into some confidential areas.
Co-Chair MacKinnon remarked that the size of the pipe may
be a conversation more appropriate for the resources
committee. She added that certainly the committee wanted to
understand the associated costs from a financial
perspective.
Co-Chair Kelly remarked on the importance of keeping in
mind that the purpose of the special session was for the TC
buyout. He noted that the session had initially included
discussion on a tax reserves tax. He remarked that he had
voted to include TransCanada in the project two years
earlier based on testimony by the department. He wanted to
understand why Black and Veatch believed the state should
buy out TransCanada from the project. He opined that two
years earlier many legislators put significant value on the
consultant's reasoning as to why TransCanada should be
included in the project.
Ms. Poduval appreciated the remarks.
Senator Dunleavy asked for verification that Ms. Rutherford
had been part of the AGIA process. Ms. Rutherford responded
in the affirmative. Senator Dunleavy asked for confirmation
that TransCanada had been brought into a state conversation
at that time. Ms. Rutherford replied in the affirmative.
Co-Chair MacKinnon encouraged the presenters to identify
themselves.
10:26:29 AM
Ms. Poduval responded to an earlier question from Co-Chair
Kelly about what had changed in the time since she had
presented on why bringing TransCanada into the AKLNG
project was a good idea. She spoke to the importance of the
background of when the decision was made, which was at the
time of the AGIA termination. She elaborated that the work
product TransCanada had access had been instrumental for
the state's transition to the AKLNG process and the AGIA
treble damages provision had created some concerns. She
furthered that it had also been the very beginning of the
state's participation as an equity investor in the project.
She explained that there were various things that had not
yet been understood at the time of the decision. For
example, whether the state would be able to finance its
full share of the project, which had been a very important
concern at the time. She relayed that the pre-FEED time had
given the state the opportunity to study the question and
to get more comfortable with what it could and could not
do. The finance team had determined that terminating the
TransCanada relationship would bring more value for the
state. Additionally, the pre-FEED period with TransCanada
was always recognized as a sort of courtship. By design,
several off-ramps had been built into the PA that had
enabled the current discussion. She stated that the
legislature had made the current off-ramp a clean and
advantageous option for the state. She relayed that the
presentation would address the reasoning for terminating
the agreement at present versus at a later date. She saw
the option as a part of the plan and not a deviation; the
PA included the decision points. She stated that based on
the current information, the recommendation was for the
state to continue forward on its own.
10:29:40 AM
Co-Chair Kelly believed that government tended to not be
efficient. He stated that there had been a private sector
personality embedded in the project through TransCanada. He
wondered how private sector thinking would be
institutionalized in the project going forward without
TransCanada. He did not need an answer to the question at
present but he believed the issue was important.
Vice-Chair Micciche opined that the legislature should be
very proud of the deal made in SB 138. He stated that for
roughly the price of 7 percent of the work effort put
forward by TransCanada, SB 138 brought TransCanada's work
product to state ownership and relieved the state from the
$500 million liability and potential treble damages. He
believed it had been a bargain. He stated that it had been
clearly the right thing to do in order to relieve the state
from the liability and potential liability associated with
AGIA. He queried how to replace the value. He did not want
the state to take all of the advantages of an efficient
partnership and turn its 25 percent of the project into
something inefficient. He wondered whether the state had
realized the full value of the relief of liability and
whether it was or was not time to go on independently. He
disputed the idea that the state was moving outside of the
SB 138 framework. He believed it was quite clear that it
had been the correct decision to involve TransCanada in the
project thus far and that perhaps the full value of the
agreement had been reached.
Co-Chair MacKinnon asked for verification that key
TransCanada employees would be kept through pre-FEED in
order to maintain the technical expertise needed to finish
out the current stage of the project. Ms. Rutherford
replied in the affirmative.
10:33:36 AM
Co-Chair MacKinnon queried the number of individuals that
would be retained. Ms. Rutherford replied that there were
approximately 15 TransCanada employees involved in the
AKLNG project. She did not know how many the project would
want to retain to finish off the pre-FEED stage. She
believed it was probably a subset of the 15 employees.
Co-Chair MacKinnon communicated that the committee was
interested in continuity and seeing an organizational
chart. She wanted to know how many individuals the project
would retain and if the state would need to go out to
contract, which would be a financial implication and loss
of continuity depending on how the team leadership made
recommendations. Ms. Rutherford answered that she would try
to get the information for the committee. She qualified
that the determination would be made by the project. She
detailed that the state would have people involved in the
discussion. Additionally, AGDC and the project would
discuss what capacities could be provided in-house and
deltas that needed to be provided externally such as from
TransCanada.
Co-Chair MacKinnon asked if Mr. Dubler would be voting on
the state's behalf. Ms. Rutherford replied in the
affirmative. She elaborated that the project management
team (comprised of each party's representative) made the
ultimate decisions on the best interests of the project.
TransCanada was the project lead for pre-FEED on the
pipeline because it was a good pipeline company and not
intrinsically because it was the state's agent. She
continued that TC may have become the lead if it was
retained as the state's agent and may or may not have been
the lead going into FEED, construction, and operations. She
discussed that the project was primarily a private sector
project (the state would have a 25 percent equity stake)
and the structure of governance would be decided by the
project. The state would have one vote or possibly a split
vote depending upon TransCanada's continuation as the
state's agent.
10:37:14 AM
Senator Dunleavy asked for verification that 25 percent was
the upper limit of the state's risk. He referred to talk
about state ownership of 51 percent. Ms. Rutherford replied
in the affirmative, assuming that no other parties withdrew
from the project. She detailed that currently there were no
withdrawal agreements in place, so she could not describe
what one would look like. One of the fears the
administration had discussed was that it would not want to
see the project halted by the withdrawal of one party; it
wanted some withdrawal agreements in place that would
provide the opportunity for someone committed to the
project to continue the project forward.
Senator Dunleavy surmised that the door remained open for
the state to assume a greater involvement in the project
[if a party withdrew]. Ms. Rutherford replied that
increased ownership was not part of the state's plan. She
believed the plan would be to make provision for the
project to continue forward and to make room for another
party to fill the vacancy. For example, if one producer
withdrew and wanted to sell its gas, another party could
step into the equity position. She stressed that there had
been no discussion specifying that it had to be the State
of Alaska. The state wanted the project to move forward and
did not want to see a delay in the event that a party
decided to withdraw its participation.
Senator Dunleavy wondered if the presenters were convinced
that the benefits [of the termination of the agreement with
TransCanada] outweighed the risks for the state. Ms.
Poduval replied that the benefits outweighed the risks. She
would elaborate during her portion of the presentation. Ms.
Rutherford stated that she also believed the buyout was in
the state's best interest. She stressed that the additional
value (between zero and $400 million per year) was a good
cushion, should the price of oil continue to decline.
Senator Bishop asked if TransCanada provided value in the
HOA in ensuring expansion principles and offtake options
for the state. Ms. Poduval replied that TransCanada helped
in the commercial negotiations related to expansion issues
and access for third parties. The negotiations had been led
by the state's gas team supported by legal and subject
matter experts that brought significant regulatory and
pipeline expansion experience.
10:42:17 AM
Senator Bishop wanted to feel comfortable that he was
making the right decision. He remarked that the legislature
had followed Black and Veatch recommendations two years
earlier and he did not want to change decisions every two
or three years. He believed continuity was important. He
observed that there were some milestones that were
supposedly needed to have been met in order to make the
decision at hand, which had not been met. He specified the
firm transportation services agreement (FTSA) and the RIK
[royalty in kind] decision as examples. He believed it was
difficult to make a decision and emphasized that he would
need to be convinced going forward.
Senator Dunleavy wondered if there was a benefit to waiting
to exit the deal with TransCanada until a later off-ramp.
Ms. Poduval replied that Black and Veatch believed it was
appropriate to take the current off-ramp. One reason was
due to the back-in rights, which the legislature had built
into the PA that allowed the state to take the option at
the current point in time.
Ms. Poduval discussed slide 11 titled "State does not have
direct voting rights for GTP or pipeline." The slide showed
the project structure as currently envisioned. She pointed
out that each of the three producer parties (ExxonMobil,
BP, and ConocoPhillips) have a certain share of gas (shown
in boxes at the top of the slide) and their equity
ownership in the project was set up to be equal to their
gas share. She explained that the producers had a straight
path through the infrastructure to get their gas to market.
Additionally, the producers' voting rights were aligned
with their share of gas. The state was expected to have
about 25 percent of the gas from the project (shown on the
right side of the slide) and its 25 percent equity was only
in the LNG plant. Currently the state's 25 percent share in
the GTP and pipeline was held by TransCanada. She explained
that the state effectively held 12.5 percent equity in the
project (which also translated into voting rights) compared
to its 25 percent of the gas because the GTP and pipeline
accounted for roughly half of the project's size.
10:45:21 AM
Ms. Poduval highlighted slide 12: "Alignment through direct
participation will facilitate State influence equivalent to
its investment." She explained that the state effectively
shared voting rights with TransCanada and TransCanada's
decisions were driven by maximizing its shareholder value.
She detailed that the TransCanada's decisions were
sometimes aligned with the state's interests, but not
always. She elaborated that TransCanada's perspective was
that of a pipeline company and the state's perspective was
that of a resource owner with the goal of maximizing the
resource value for all Alaskans. Fundamentally, the two
perspectives created differences in opinion on what
constituted the best decision. She relayed that pre-FEED
experience had shown that TransCanada was not simply an
agent of the state. The PA specified that the state could
direct TransCanada's vote related to the work plan and
budget only; the company could vote independently of the
state in all other areas. She expounded that TransCanada
was essentially another commercial party the state had to
negotiate with on any given issue and that it hoped to
achieve alignment with.
Ms. Poduval remarked that it had become clear that it may
be much better for the state to have a direct seat at the
table where it could control its own vote. She relayed that
the current structure also created complexity. For example,
she questioned whether TransCanada would vote on all issues
pertaining to the GTP and pipeline, while AGDC would vote
on issues pertaining to the LNG plant. She asked how the
vote would get made when an issue pertained to the entire
project. Additionally, she questioned who would represent
and speak for the state in the AKLNG project. She explained
that all of the implementation issues were lessons the
state had learned during the pre-FEED process. She
elaborated that there were various upcoming key decisions
where the state's interest would be better protected with a
seat directly at the table. She discussed the importance of
decisions related to byproduct handling, which would be
influenced by whomever was watching over the GTP on behalf
of the state.
Ms. Poduval communicated that due to the high percentage of
carbon dioxide that would be extracted from the Prudhoe Bay
gas, the plan was to reinject the carbon dioxide in the
Prudhoe Bay unit. She explained that the negotiation and
the related costs could happen in one of two ways: there
could be bilateral negotiations between each of the parties
liable for the byproduct with the Prudhoe Bay unit owners;
or the negotiation could occur on behalf of the AKLNG
project and it could be added as a service provided by the
GTP. She relayed that there were billions of dollars at
stake in the decision. For example, from TransCanada's
perspective it would be a pass-through cost that would
ultimately be paid for with the state's tariffs related to
the GTP. However, for the state, it would be actual money
leaving the state's pockets. Another challenge had been
access to information. She explained that there was
significant information passing through the AKLNG project
and the state's ability to obtain the quality and quantity
of information it desired in a timely manner was diluted
given that it had to pass through TransCanada.
10:50:14 AM
Vice-Chair Micciche remarked that the state had handicapped
itself on access to information due to its unwillingness to
require AGDC professionals to sign confidentiality
agreements. He wondered if the state would acknowledge that
it was unable to have conversations with key vendors (that
had no commercial interest in the project) without signing
confidentiality agreements. He wondered if the state would
accept and acknowledge that transparency of a project and
basic commercial professionalism were two different things.
He believed the state could be as transparent as possible
yet privy to key information.
Ms. Rutherford replied that the AGDC staff involved in
AKLNG had signed the AKLNG confidentiality agreement;
however, the AGDC board had not. She believed the
administration had worked to find the balance between the
necessary commercial confidential information and a
transparent representative government. She understood that
the balance was not easy to find and could be very specific
to the particulars of the agreement or documents at hand.
She reiterated that AGDC's personnel working on AKLNG had
signed the confidentiality agreement, with the exception of
staff who had been assigned to the instate Alaska Stand
Alone Pipeline project.
Vice-Chair Micciche disagreed with the summation by Ms.
Rutherford. He wanted to make certain that the state was
not creating its own handicap related to access of
information. He asked if the partnership voting process
required a simple majority vote. Ms. Poduval replied that
the information was confidential because it was part of the
governance terms still under negotiation.
Vice-Chair Micciche reasoned that there was only one
company (ExxonMobil) needing to bring in another entity if
the voting requirement was a simple majority, while every
other party had to bring in two votes. He wondered if that
was the focus on future commercial agreements. Ms.
Rutherford replied that voting prerogatives for the state
were critically important as it negotiated the governance
terms of the project. She remarked that a simple majority
was one thing, but if all parties were required to agree
the situation would be more difficult on many votes. She
relayed that the state was working to maximize its position
on the issue.
10:54:47 AM
Co-Chair MacKinnon wondered if the negotiations were
different (a consensus versus a majority vote) in pre-FEED
versus the construction stage. Ms. Poduval replied in the
affirmative. She detailed that the negotiations were also
likely to be different based on different issues; certain
issues would require unanimous votes, others would require
a simple majority, and others would need a super majority.
Co-Chair MacKinnon noted that in past presentations looking
at AGIA and SB 138 there had been a Memorandum of
Understanding and agreements with partners. She asked for
verification that it was public information that the state
was working on consensus that all parties had off-ramps
until the FEED decision was reached. Ms. Poduval replied in
the affirmative.
Co-Chair MacKinnon asked for confirmation that the new
terms currently under negotiations would apply once the
final investment decision (FID) was reached or sooner if
the partners agreed to a structure. Ms. Poduval stated that
the current structure would take the project through pre-
FEED. Anything past pre-FEED (FEED, construction, and
operation) was yet to be developed.
Co-Chair MacKinnon asked when the voting decision would be
finalized. Ms. Rutherford replied that once the joint
venture agreement on the pre-FEED was complete, everything
subsequent to that would be decided. She detailed that it
was not yet clear whether there would be a joint venture
agreement that went all the way to governance on a project
or to FEED and FID. She stated that there could be multiple
agreements.
Co-Chair MacKinnon queried a specific calendar date for the
agreements (summer or winter 2016). Ms. Poduval replied
that there were two specific points in time when layers of
clarity would be added: 1) before the parties would make a
FEED decision (pre-FEED was expected to end mid-2017); 2)
remaining details would occur prior to FID.
10:58:34 AM
Vice-Chair Micciche passed around a document prepared by
DNR and DOR on April 3, 2014 (copy not on file). He asked
the department to update the document with current
information on what had been executed, what had yet to be
executed, dates that would be adjusted, a list of all
services and contracts including dollar amounts, and a
brief summary of the work product. Ms. Rutherford agreed.
Ms. Poduval looked at slide 14 titled "Criteria for
evaluating economic impact of TC Participation on SOA."
There were three criteria to evaluate the economic benefit
for the state. The first was cash flows, which included
upfront cash calls the state would be obligated to make and
the operational cash flows the state would achieve once the
project was completed. The second and third criteria were
related to net present value (NPV) and risk.
Ms. Poduval discussed slide 15 titled "What are the State's
upfront cash calls required in the project for the State if
the agreement is terminated?" She detailed that the
immediate cash call obligations came from the TransCanada
termination amount (the estimated $70 million the state
would pay back to TransCanada for its development and
internal costs plus interest) and the cost for AGDC to
continue and complete the pre-FEED work in the AKLNG
midstream (approximately $60 million). She added that as
the state went through pre-FEED and construction it would
pick up an additional 12.5 percent of the project of
associated costs.
Senator Bishop pointed to footnote 3 on slide 15 and asked
the "higher of" was the 20 percent estimate for cost
overrun. Ms. Poduval replied in the affirmative.
11:02:06 AM
Co-Chair MacKinnon wondered if the administration had done
an evaluation of the cash calls, given the state's current
fiscal information. Ms. Poduval replied in the affirmative.
She relayed that the finance team would share the
information with the committee.
Ms. Poduval highlighted slide 16, which included an
illustration demonstrating the fundamental tradeoff between
higher upfront investment and higher operational cash flows
or lower upfront investment with lower operational cash
flows. She noted that the tradeoff had also been discussed
during the legislative session of 2014 when Black and
Veatch had recommended the TransCanada decision. She
explained that the fundamental question had not changed.
Ms. Poduval discussed slide 17 and detailed that the
additional upfront cash call the state would have without
TC was between $6.9 billion and $8.3 billion. The $6.9
billion figure related to the base capital cost estimate of
approximately $45 billion; whereas the $8.3 billion was
based on a 20 percent capital overrun scenario, which would
increase project costs up to $55 billion.
Vice-Chair Micciche did not believe most people agreed that
the state was on the hook for the cost either way. He
addressed that the conversation was about the difference in
the cost of capital, which was the benefit of the deal
under discussion. He asked to hear Ms. Poduval's take on
the issue.
Ms. Poduval replied with slide 24, "Per prior agreements,
SOA is always obligated to repay TC's costs." She agreed
with Vice-Chair Micciche's statement. She detailed that the
state was always obligated to repay TransCanada's cost;
therefore, the question was not whether the state should or
should not pay TransCanada, but whether the state should
pay TransCanada a lower amount at present or a higher
amount later. She looked at the development side of the
project (through pre-FEED, FEED, and construction) and
relayed that the state would be obligated to pay back
TransCanada's costs plus 7 percent interest under a project
failure scenario; all of the development risks were borne
by the state in that relationship. She explained that under
a successful project scenario the state was obligated to
pay back all of TransCanada's costs plus 7 percent interest
in the form of tariffs.
11:06:11 AM
Co-Chair MacKinnon pointed to slide 24 and reasoned that
the state could have chosen to exercise an off-ramp in a
different way by buying back 40 percent, which had
originally been part of the deal. Under the scenario the
state would have maintained a risk level and opportunity
equal to approximately 12.5 percent. She wondered what kind
of comparative analysis the state had done between the two
choices. Ms. Poduval agreed. She elaborated that the state
had an equity option with TransCanada to purchase a 40
percent stake in the TransCanada entity participating in
the AKLNG project. There was an associated analysis that
was part of the Black and Veatch package pertaining to
TransCanada. She stated that it was effectively "splitting
the baby." She concluded that the decision appeared clear
in terms of whether to lose or keep TransCanada as part of
the project and she believed the finance team's information
would help the legislature understand it better. She
relayed that the option to buy back 40 percent did not make
as much sense, given that there would be voting rights
issues and lost value to the state through the 7 percent
interest rate.
Co-Chair MacKinnon stressed that there were some Alaskans
that believed the government had no business owning any
portion of the pipeline.
Co-Chair MacKinnon looked at slide 17, and wondered if the
upfront costs included cash calls for construction or only
for the pipe itself. Ms. Poduval replied that the upfront
cost shown was primarily for project construction; the
figures on slide 17 represented the state's 25 percent
share in the GTP and pipeline.
Co-Chair MacKinnon remarked that the analysis (on slide 17)
represented the best case scenario and the first numbers
the state had received at $45 billion. She noted that the
discussion had always been about a case ranging from $45
billion to $65 billion. She thought a 20 percent cost
overrun seemed to be probable and possibly highly probable.
She wondered if the slide was a low-ball figure. She noted
that the project cost estimate had increased and the state
had been asked for additional money. She wondered why the
slide used only a 20 percent capital cost overrun and the
low base of $45 billion. She asked if it was possible to
see a range between the $45 billion and the $65 billion.
Ms. Poduval replied that the $45 billion to $65 billion
range included the investment that was needed in the Point
Thomson unit. She explained that the range reflected how
the producers were thinking about their entire investment
in the project. The cost estimate for the GTP, pipe, and
LNG was closer to $40 billion and $55 billion. She
clarified that $45 billion was the mid-estimate (and not
the low estimate) used on slide 17. The $54 billion on
slide 17 corresponded to the $65 billion overall project
range. She summarized that the slide showed a mid to high
range.
11:11:23 AM
Co-Chair Kelly believed that the project cost had been
arrived at during a time of "estimation madness." He
recalled working for the University of Alaska at the time
and relayed that the cost of large maintenance projects and
other had kept increasing due to high petroleum costs. He
wondered if there was hope that there were a lot of
contingencies built into the estimate. Ms. Poduval replied
that there had been a very inflationary environment
(especially for LNG projects), which had caused various
projects to exceed their capital cost estimates.
Additionally, the cost for personnel and materials had been
very high. She remarked that there had been a slowdown in
the market and the availability of some scarce resources
was expected to increase. She believed there was a
likelihood that the project could benefit from more
rationalization of the costs. She stressed that the
estimates were extremely preliminary; it was necessary to
get through pre-FEED and a large portion of the FEED stage
in order to really scope the project.
11:13:37 AM
AT EASE
11:16:13 AM
RECONVENED
Senator Bishop remarked on the percentage of capital cost
overrun. He explained that the committee had requested a
slide during the debate on SB 138 (two years earlier). He
recalled requesting a list of the top 20 LNG projects
worldwide in order to show Alaskans the potential of cost
overrun, which ranged from 20 to 45 percent.
Co-Chair MacKinnon asked if the cost overrun range
mentioned by Senator Bishop was a risk. She wondered if it
was beneficial for equity owners to take a 25 to 30-year
look at a project and recovering the costs over a much
longer period of time.
Ms. Poduval replied in the affirmative. She agreed that LNG
projects were capital intensive upfront and acted as "cash
cows" over a very long period of time, which was how
investors earned back their significant upfront investment.
Co-Chair MacKinnon noted that she did not mean to diminish
Senator Bishop's comments. She elaborated that the
committee was very cognizant of huge cost overruns. She
wanted to confirm that the $45 billion base capital cost
included the GTP on the North Slope, the pipeline from the
North Slope to tidewater (Nikiski), and the LNG plant in
the Nikiski area.
Ms. Poduval replied in the affirmative.
Co-Chair MacKinnon referenced the $65 billion and concluded
that the portion related to Point Thomson and the state's
partners was $20 billion. Ms. Poduval responded that there
was no fixed Point Thomson number to add to the low, mid,
and high cost scenarios (the number varied). For example,
the Point Thomson figure could range from $5 billion to $10
billion (added to the low, mid, and high numbers in order
to capture the $45 billion to $65 billion range).
Ms. Rutherford furthered that an incremental inflation was
added to the base, which was how one got from the $45
billion up to the potential $65 billion. She explained that
each had a spread that went from a base price to an
inflated price; the figures were then added together to
obtain the $45 billion to $65 billion.
11:20:01 AM
Co-Chair MacKinnon asked if the Point Thomson development
would be part of the project and all project owners would
share. Alternatively, she asked if a portion of the
incremental cost (referred to in the $45 billion to $65
billion span) was held at a greater degree by the lease
owner at Point Thomson. Ms. Poduval responded that the
Point Thomson costs would be borne by the owner of the
leases in Point Thomson. She explained that the figures
discussed included the project "kit" [GTP, pipe, and LNG]
and the anticipated upstream costs.
Ms. Poduval highlighted slide 18, "SOA's annual upfront
cash calls in the AKLNG project are expected to nearly
double without TC." For example, at the peak of
construction, the state's cash call obligation would have
been about $1.5 billion with TransCanada and $2.5 billion
without TransCanada. She explained that pre-FEED and FEED
were typically equity financed (each of the project
participants provided direct funding); however, the bulk of
the funds associated with the project would be spent at
FID. She elaborated that 1 percent of the total project
costs were spent during pre-FEED, 5 percent of the project
costs were spent during FEED, and 95 percent of the funds
were spent during construction. She furthered that before a
significant portion of the funds were spent on the project,
the boards of all participants took a final investment
decision. She noted that the legislature would act as the
state's board at that time.
Ms. Poduval explained that several things had to line up to
get to FID. First, FEED estimates including detailed
engineering and cost estimates would be completed, which
provided significant clarity on the project from a
technical and cost perspective. Second, firm long-term
(over a 20 to 25-year period) commitments from buyers and
an associated price structure would be required. Third, the
financing for the project had to come together. She
detailed that each of the parties would choose its optimal
way to finance the project and the state would have lined
up the debt it needed for financing. She elaborated that
determining how to come up with the cost would occur on an
annual basis; the financing plan had to be made before the
state took FID in the project and before a commitment was
made to spending 95 percent of the costs.
11:24:31 AM
Ms. Poduval addressed slide 19, "Once operational, SOA is
expected to receive annual cash flows of up to $400 million
higher without TC." The analysis on slide 19 illustrated
that terminating TransCanada's participation could increase
the state's revenues by up to $400 million per year. She
noted that the bulk of that value would come from the
expected lower cost of debt the state would incur (as
opposed to the 7 percent interest on TransCanada's cost of
capital). The state would also save some money because it
was not a taxable entity like TransCanada. She elaborated
that TransCanada would pass its tax obligation on to the
state in any tariff the state paid.
Co-Chair MacKinnon remarked that the administration
currently had a very good advocate representing financing.
Additionally, the legislature's advisor enalytica had
conducted a review and analysis of the information
currently under discussion. She furthered that enalytica
asked whether the administration's analysis had considered
the implication to local municipalities if the state took
over full ownership and a loss of taxable income to
communities occurred (i.e. through property tax, income
tax, and corporate income tax). She believed the effect
could be around $800 million over the life of the project.
She wondered whether the issue had or had not been included
in slide 19. She asked about the impact to the PILT
[payments in lieu of taxes] process. Additionally, she
wondered how the state would work with its partners at
local communities to affect the consequences of the change
if the buyout was successful.
Ms. Poduval answered that the Black and Veatch economic
benefit analysis for the state did not break out the
different state entities. For example, the analysis did not
consider what DOR received from production tax or state
corporate income tax, royalties received by DNR, or how the
property tax was shared between the state and
municipalities. The analysis considered the economic
benefits coming to the state as a whole. She continued that
the increase of state revenues up to $400 million (slide
19) looked at the holistic state coffers; it was additional
value the state would truly receive because it was paying
less to third-parties such as lenders. She detailed that
the state was expected to have a lower cost of debt than
the 7 percent interest it would pay to TransCanada. She
acknowledged that there may be an impact on how much of the
funds were in the state's coffers versus municipal coffers,
but the analysis did not make the distinction.
11:28:44 AM
Co-Chair MacKinnon wondered if the state had calculated how
PILT would be affected. Ms. Rutherford replied that the
question may be better answered by another party. She
stated that the amounts would be fixed, both the impact
funds and the property tax driven by throughput. Whether or
not one party would or would not continue to be a taxable
entity would not negatively impact the municipalities'
income stream if TransCanada was no longer involved (the
state would not be a property tax payer). Ms. Poduval
deferred to DOR to provide a more detailed response. She
clarified that state plus municipality was $400 million
more without TransCanada than it would be with TransCanada.
There was truly additional value for the combination of all
state entities without TransCanada.
Co-Chair MacKinnon clarified that there was the potential
for the upside. Ms. Poduval agreed, assuming that the state
could finance cheaper than the 7 percent cost of debt. Co-
Chair MacKinnon asked for verification that the savings
would be on an annual basis. Ms. Poduval replied in the
affirmative.
Senator Bishop surmised that the $400 million increase was
a dollar for dollar increase and did not account for a
multiplier effect of spreading the dollars around the state
through other projects. Ms. Poduval answered in the
affirmative.
Co-Chair MacKinnon wondered if there was a scenario Black
and Veatch could run that showed where TransCanada
protected the state. She referred to Ms. Poduval's
testimony citing a zero to $400 million annual potential
upswing [without TransCanada], which was contingent on
Alaska's credit rating and its ability to acquire lower
cost credit. She noted in the current low borrowing market,
if the project was at FID at present, the state would have
a significantly lower interest rate [without TransCanada].
She wondered how the state would achieve that with
TransCanada.
Ms. Poduval replied that slide 21 addressed some of the
analysis. She addressed slide 20 first. The slide showed
the NPV for the project with three different discount
rates, recognizing that people had differing views. A 10
percent discount rate used a commercial hurdle rate for the
project recognizing the project was an investment the state
was making. A 7 percent discount rate could be viewed as a
proxy for Permanent Fund returns and a 5 percent discount
rate could be viewed as a proxy for the state's cost of
borrowing. She had heard arguments that the state's
discount rate was actually negative because the state liked
having its cash flows grow over time in contrast to
companies that liked front-ending their cash flows because
they did not want to cut the budget with a declining cash
flow. The analysis showed that without TransCanada the NPV
increase could be zero in the worst case scenario and up to
$1.2 billion in the best case scenario.
11:33:12 AM
Ms. Poduval turned to slide 21 and addressed Co-Chair
MacKinnon's prior question. The Black and Veatch analysis
made the assumption that the state could finance cheaper
than TransCanada. She addressed the idea that the scenario
was incorrect. She believed there were two pieces to the
answer. First, she considered how the projection of up to
$400 million in savings would be impacted if the state's
cost of debt was more than Black and Veatch's estimation.
Second, she questioned how high the state's cost of capital
could actually be. She relayed that the second question
would be answered by the finance team. She addressed what
the impact would be if the state's cost of debt was higher
than expected. She noted that the $400 million figure was a
rounding of the $360 million shown on the left of the chart
on slide 21. She explained that the $400 million figure
assumed a standard 70 percent debt/30 percent equity
structure, with a financing rate of approximately 5
percent. However, the chart illustrated an incremental net
cash flow benefit to the state at varying interest rates if
the state financed all of its investment (without investing
30 percent equity, which would be approximately $2
billion). She detailed that at 5.5 percent cost of debt
there was still an additional $130 million in value the
state would receive each year of the project's operation.
The finance team had looked at what would occur if the
state's credit rating was downgraded to various levels from
its current AAA rating. She noted that in the current
market the state would receive an interest rate of about
5.5 percent if its credit rating was A-, which would be a
significant credit downgrade.
11:36:29 AM
Co-Chair MacKinnon restated her interest in knowing whether
there was a scenario where TransCanada would benefit the
state. She surmised that if the interest rate was above 7
percent, the agreement with TransCanada would protect the
state. Ms. Poduval agreed. She detailed that TransCanada's
interest rate for the state was 7 percent; therefore, if
the state ended up with an interest rate above that number,
it should not terminate the agreement with TransCanada. She
explained that it was necessary to consider what would
increase the state's interest rate above 7 percent. She
noted that it was one of two factors. First, a downgrading
of the state's credit rating would impact the state alone.
She reiterated that the finance team had assumed varying
credit rating downgrades as low as A-, where the state's
cost of debt would be 5.5 percent. The consideration was
how much the state would have to be downgraded to get to an
interest rate that was higher than 7 percent. The second
driver that could increase the state's interest rate was a
general inflationary environment; under that circumstance
the agreement with TransCanada had floating rates. She
explained that if the Treasuries went up and the state's
costs increased, TransCanada's costs would go up as well.
Unless it was a credit downgrade that would increase the
state's interest rates, the advantage without TransCanada
would remain.
Vice-Chair Micciche commented that Ms. Poduval's initial
answer made it sound like TransCanada's interest rate in
the project was static; however, it was actually a floating
rate.
Senator Dunleavy asked if the concern about cost overruns
was greater than concern about the interest rate the state
could secure. Ms. Poduval replied that the state bore the
cost overrun risk, regardless of the TransCanada buyout.
She explained that the state would be responsible for
paying all of the costs back to TransCanada through a
tariff and cost overrun risk was not shared by TransCanada.
Senator Dunleavy surmised that the state should be more
concerned about cost overruns than the interest rate it
could secure on borrowed money. Ms. Poduval summarized her
understanding of the question. She believed he was asking
if the state's risk associated with the cost overrun was
higher than its risk associated with interest rates
(regardless of TransCanada's involvement).
11:40:12 AM
Senator Dunleavy provided an example to clarify his
question. He stated that a person may think they were
building a home for $250,000 at 4 percent interest, but
when change orders occurred the price could increase to
$350,000. He noted that the wide project cost estimate of
$45 billion to $65 billion was kind of low. He reasoned
that the state had to be keeping on top of all of the
components; however, he wondered if an overemphasis was
being placed on the interest rate, while it should be
keeping an eye on potential cost overruns.
Ms. Poduval agreed that the state should be considering all
of the components. She relayed that the biggest value
driver for the state would come from the price, which was
something the state should be very concerned with, given
that "price is king." She detailed that if prices did not
support the project, everything else (capital costs,
interest rates, and other) would be overwhelmed by the
impact. She explained that the reason for emphasizing the
interest rate was to highlight the incremental elements in
the TransCanada decision. The state would bear the cost
overrun obligation with or without TransCanada. She added
that the exposure did not directly affect the decision on
whether to terminate TransCanada; whereas, the expectation
that the state could finance the project at a lower
interest rate than TransCanada did have a direct impact.
She agreed that cost overruns and interest rate were risk
exposures to the state.
Senator Dunleavy believed it was one of the issues central
to the point of terminating the relationship with
TransCanada. Specifically, he questioned whether
TransCanada's expertise was of such value that it would be
able to recognize and help minimize potential cost
overruns. He wondered if the cost of retaining TransCanada
was a benefit to the state regardless of the potential
upside of $400 million per year [that may result if the
relationship with TransCanada was terminated]. Ms. Poduval
believed the question was important. She replied that her
answer would have been different if the state had different
partners in the AKLNG project. She expounded that
ExxonMobil, BP, and ConocoPhillips were some of the biggest
and most sophisticated oil and gas companies in the world,
with very well-developed project management science. The
project had communicated to Black and Veatch that it did
not have a preference one way or the other [if TransCanada
was involved or not]; they believed it was the state's
decision and the project could work either way. The lead on
the GTP was currently ExxonMobil and the "number two" for
the pipeline was also and ExxonMobil person. She
highlighted that there was significant technical and
project management expertise residing with the AKLNG
partners that should help manage the risk.
11:44:00 AM
Vice-Chair Micciche was uncertain about his agreement with
the exposure on cost overruns. He stated that TC was
essentially serving as a bank for the state. He reasoned
that if buying out TransCanada would lower the state's
interest rate that financing cost overruns would also be at
a significantly lower rate than TransCanada's pass through
rate. He believed savings to the state would be increased
overall if financing cost overruns was cheaper without
TransCanada.
Ms. Rutherford believed that TransCanada was an excellent
commercial company and was highly motivated to keep costs
down; however, in the particular situation there was no
negative effect to them unless the project cost became so
high that the project did not move forward and gas sales
were no longer economic. She explained that the state was
required to reimburse TransCanada for all of its costs plus
interest. However, the parties with the responsibility for
the gas and its ultimate sale (the three producers and the
state) were the most motivated to keep the costs down
because at the end of the day the cost would impact the
netback cost to the gas and how much money the state would
make. She noted that the transportation system was just a
means to monetize the gas.
Vice-Chair Micciche restated his question. He surmised that
savings to the state would be increased overall if
financing cost overruns was cheaper without TransCanada.
Ms. Rutherford agreed.
11:47:34 AM
Ms. Poduval addressed slide 23 titled "Why terminate the
agreement with TransCanada now?" The answer was broken into
three parts: 1) to better manage the state's risk; 2) to
avoid back-in rights; and 3) to influence project
decisions. She moved to slide 24 and addressed that per
prior agreements, the state would always be obligated to
repay TransCanada's costs. She reiterated her earlier
statements that the state had all of the development and
cost risk in the project, whether the project moved forward
or not. She explained that it would be less expensive for
the state to directly own the equity in the project and
make investments at a lower interest rate than to incur
"failure leg" costs at a higher interest rate. Ultimately,
if the project did not succeed, the loss to the state was
lowered by lowering the cost. She remarked that the project
was currently in the pre-FEED stage where a significant
portion of the money had not yet been spent. She noted that
at present the check due to TransCanada was approximately
$70 million.
Vice-Chair Micciche remarked that the repayment mechanism
during operation was the long-term tariffs to TransCanada
for its 6.85 percent. He wondered if the tariff would be
lowered where the state would not enjoy the benefits of
lower interest rates or if the tariffs were the same,
thereby creating value for the state.
Ms. Poduval replied that the state's tariffs would be lower
than a payment to TransCanada. She detailed that the
state's midstream cost basis would be lower alone because
its debt payments to a third-party would be lower than the
rate built into TransCanada's tariff. She noted that the
lower cost would result in $200 million to $400 million in
extra value to the state.
11:52:32 AM
Vice-Chair Micciche asked if the mechanics of the lower
tariff resulted in lower cost energy to in-state users. Ms.
Poduval replied in the affirmative.
Co-Chair MacKinnon wondered if the statement was contingent
on the debt to equity ratio the state used to finance the
project. She surmised that the state could drive the tariff
even lower if it used all equity for its share of the
project. Ms. Poduval answered in the affirmative; if the
state had $14 billion to contribute, there would be no
tariff to pay, given that it would have paid for the
state's share of the infrastructure upfront.
Ms. Rutherford furthered that each partner would have its
own tariff costs based on its own portion of the pipe. The
state would only pay its own tariff costs, either through
TransCanada or AGDC.
Senator Bishop stated that the goal was to lower costs of
energy to drive other forms of economic activity in the
state. Ms. Rutherford agreed. She added that the goal was
also to maximize wellhead values.
Co-Chair MacKinnon wondered if there had been discussion
about how parties that did not currently own a percentage
of the pipe would have access. She remarked that the state
wanted as much gas in the pipeline as possible, which meant
creating access to other parties. Additionally, one of
TransCanada's stated goals was that it wanted as many
molecules moving through the pipe as possible in order to
obtain a return on its equity. She asked if the state would
only be incentivizing its 25 percent share of the pipe.
Co-Chair Kelly asked Ms. Poduval to restate the question
prior to answering.
Ms. Poduval understood that the question was about whether
the state would be incentivizing third-party access to the
project by creating a lower tariff through a reduction in
the state's midstream costs as a result of direct
investment by the state.
11:56:17 AM
Co-Chair MacKinnon agreed. Ms. Poduval answered that
TransCanada, as a pipeline company, would always be
incentivized to increase the volumes transported in the
line; which naturally supported alignment for an expansion
and bringing in another third-party to transport gas in the
project. She relayed that the state had been negotiating
commercial terms under which third parties could enter the
project and under which expansions could be effectuated
within the AKLNG structure. She referred to the earlier
discussion about voting rights, which was an area that was
important to the state. The hope was that the commercial
terms would help the state create some rules about how
expansions would be considered by the AKLNG project and the
power of the different parties to veto the action or not.
From a commercial perspective, she believed it would be up
to the state whether its lower cost basis would somehow
benefit a third-party entering the project. She stated that
a third-party entering the project would have the
opportunity to negotiate with each of the project parties
to expand the project. The expectation was that the state
would probably offer the most favorable terms to bring a
competing producer into the project. She elaborated that
the state would have significant discretion that would
depend on the specifics of the value that would come from
the development of a field. For example, if the new gas
came from federal offshore lands, the state's motivations
for providing cheap service through the project may be
different than if the new gas was derived from state lands.
The commercial arrangements that were anticipated at
present, would give the state the leeway to evaluate the
benefit to the state across a range of scenarios.
11:59:29 AM
Co-Chair MacKinnon remarked that whether the project used a
42-inch or 48-inch pipe, the available space that may be
the most attractive to new producers somewhere along the
corridor would be the state's 25 percent. She stated that
what may support the administration's position was that
there would be reduced flexibility in allowing third-
parties to enter the project because the state would only
have 12.5 percent ownership (under the 40 percent buyback
option) or less if TransCanada carried everything. She
asked if her statements were accurate.
Ms. Rutherford could not speak to the difference in the
state buying back all of TransCanada's interest versus 40
percent. She relayed that the cost of third-party access
would be lower if the state had its own tariff structure.
She elaborated that the state would have significant
discretion about determining how third parties would pay to
use the pipeline. She stated that all participants would
have more capacity to provide to third parties if the
participants all agreed and paid for an expansion. She
expounded that if the state had 25 percent of the full
expansion capacity (5 billion cubic feet) there would be
more throughput available through the state's lower tariff
structure than it would under a maximum expansion capacity
of 3.5 trillion cubic feet. She relayed that the state
would provide an advantage with a lower tariff structure
regardless of the size of pipe, but there would be more
capacity to provide more molecules with a top-end expansion
capacity. Part of the discussion with producers related to
access and expansion was about who had the expansion
capacity and under what circumstances it could be provided.
She relayed that the information would eventually be shared
with the legislature, given that the legislature would
ultimately have to approve the contracts. The
administration believed that lower tariffs were better as a
sovereign. The state would receive more cash value on an
annual basis if TransCanada was out of the project. The
state would be advantaged because it could provide third-
party new gas with a lower tariff structure. Additionally,
a 48-inch pipe was superior because it would provide more
room for third-party gas even at the beginning of the
project when there would be the most gas coming out of
Point Thomson and Prudhoe Bay.
12:03:06 PM
Co-Chair MacKinnon mentioned an interplay in the buyout
agreement which affected the expansion note that was
dependent on whether the state and the legislature fully
appropriated 100 percent of the costs. She furthered that
there was an interplay between totally buying TransCanada
out and the molecules that were available for third-party
expansion. She referenced Ms. Rutherford's comments on the
difference between the 42-inch and 48-inch pipe. She stated
that no matter what, dependent on the state's debt to
equity ratio, if TransCanada were in the project the state
would see less value. She believed the maximum future
benefit from the project to the state would occur if it
went for 100 percent equity by meeting cash calls as they
came in (versus going out into the market). Under the
provided scenario, she queried how the state would be paid
back if a third-party entered in. She reasoned that the
party would be benefitting from a deal put on the table by
the state to incentivize third-party participation. She
referred to the administration's current request for $70
million and an increase to the overall budget at present.
She noted that the state was currently paying its bills as
they were accrued and if that continued, the issue would
become more relevant.
Ms. Rutherford replied that the administration would
provide the committee with information associated with a 40
percent buyout versus a 100 percent buyout and what it may
look like in terms of expansion and access provisions for
third parties. Additionally, the administration would
provide information on a 100 percent equity option versus a
70/30 debt to equity ratio and what it may look like for
third-party access and tariff structure.
Co-Chair MacKinnon clarified that she was not saying the
state had $7 billion to $11 billion it was willing to
dedicate as 100 percent equity in the project, but it did
make a difference if the state was incentivizing the lower
tariffs.
12:06:12 PM
Ms. Poduval believed slide 25 had been sufficiently
addressed. The slide indicated that the stakes increased as
the project continued forward. Additionally, it was better
for the state exit the agreement with TransCanada earlier
if TransCanada was accumulating costs on the state's behalf
at a higher rate of interest than what the state would pay
on its own.
Ms. Poduval turned to slide 26 and relayed that terminating
the PA by December 2015 was important in order to avoid
back-in rights for TransCanada. She explained that the
option had been built in to the PA. She furthered that
originally the PA was meant to include the back-in rights
that would allow TransCanada to come back into the project
even if the state terminated the PA; however, the provision
had been removed by the legislature in order to facilitate
the clean off-ramp at the end of December 2015. The back-in
right specified that if the state terminated TransCanada
and pursued a substantially similar project over the next
five years, the state would need to offer TransCanada an
option to participate in the project under similar terms.
She continued that if December 2015 passed and the state
entered into an FTSA, the state would have to give
TransCanada the right to come back into the project. She
noted that the December 2015 off-ramp was the one clean
option that had been designed into the PA by the
legislature.
Co-Chair MacKinnon asked if the back-in rights were
automatically triggered on December 31, 2015.
Alternatively, she asked if the rights were triggered only
with an FTSA. Ms. Poduval replied that the back-in rights
would be triggered if the state did not terminate the PA by
December 31, 2015 and instead entered into an FTSA with
TransCanada. The terms of the FTSA were expected to include
the back-in right.
Senator Bishop asked if Ms. Poduval had sufficiently
answered the question.
Co-Chair MacKinnon affirmed that the answer had specified
that the state had an off-ramp prior to December 31, 2015
that was provided, but the state was also supposed to have
an FTSA in effect by that date. She believed the current
off-ramp was clean. She wondered if there was a back-in
right if the state chose to make no changes or partially
fund up to 40 percent and there was no FTSA on January 1,
2016.
Ms. Poduval replied that according to the terms of the PA
one of two things had to happen by December 31, 2015: 1)
the termination of the PA; or 2) the state executed an FTSA
with TransCanada. She detailed that if the legislature did
not support terminating the PA, it would have to execute an
FTSA with TransCanada by December 31, 2015 and the terms
would include back-in rights for the company.
12:10:51 PM
Co-Chair MacKinnon wondered what would happen if the
legislature chose not to act, since it was the
administration's decision (specifically the DNR
commissioner). She asked about a scenario where the state
decided not to proceed with TransCanada. She wondered if
there would be litigation because the state had not
executed an FTSA and had not paid the bills it owed the
partner.
Ms. Poduval replied that TransCanada had the right to
terminate the PA if the state did not execute the FTSA by
December 2015. At that point it was likely that TransCanada
could deliver the termination notice, meaning the state's
obligation to pay back TransCanada for its development
costs would begin.
Co-Chair MacKinnon asked how many days' notice were
required to terminate the PA. She asked if it was 45 or 90
days. Ms. Poduval believed the number was closer to 30, but
it would be provided in writing to the committee.
Co-Chair MacKinnon believed it was 90 days. Ms. Rutherford
answered that there were distinctions between a termination
initiated by the state or by TransCanada and even under the
circumstances TransCanada opted for termination. The
department was compiling a chart outlining the distinctions
that it would provide to the committee the following day.
12:12:30 PM
Ms. Poduval turned to slide 27 and relayed that the third
factor influencing the timing of the TransCanada
termination decision was the need to influence key AKLNG
decisions. In relation to alignment and voting rights there
were some fundamental differences between the partners on
different issues. For example, the lowest cost for the
project versus the highest value for Alaskans. She
continued that as the project was going through pre-FEED,
there were key decisions slated to be made. She explained
that Black and Veatch believed it was important for the
state to have a direct say in decisions on issues such as
by-product handling, project budget, and schedule for the
midstream portion of the pipeline. She spoke to the
importance of the governance agreement currently under
negotiation. She detailed that trying to divide the voting
rights between TransCanada and AGDC that would accrue to
the state's 25 percent was adding complexity to the
negotiations and agreements. She addressed the importance
of providing clarity on the state's position in order to
bring the agreements to completion.
Ms. Poduval addressed options for the state to finance its
share of AKLNG midstream without TransCanada (slide 29).
She qualified that slides 29 and 30 were high-level summary
slides that had been extracted from the finance team's
presentation; the slides had been included for the sake of
completeness. She recommended addressing any questions on
the slides to the finance team. She read options from slide
29:
· The Legislature could appropriate from existing
State funds, e.g., the Constitutional Budget Reserve
Fund (CBRF), Earnings Reserve Fund, etc.
· 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
Ms. Poduval noted that given the magnitude of the amounts
involved there was concern that there would be an impact on
the state's credit rating, which would impact the state's
ability to borrow for other purposes.
12:16:08 PM
Ms. Poduval turned to slide 30 and relayed that
FirstSouthwest was the financial advisor responsible for
analyzing whether the termination of the agreement with
TransCanada would impact the state's credit rating. The
company had concluded that the TransCanada termination on
its own was not expected to result in a credit downgrade.
She furthered that the state's commitment to pay
TransCanada's costs regardless of project success or
failure would be seen as state debt. She explained that if
the state could finance the debt directly at a lower cost,
the overall net effect could be positive on the state's
credit rating. The company had concluded that given the
magnitude the state was expected to borrow, the state's
credit rating was likely to deteriorate, especially during
the construction phase; however, the company believed that
the state's credit rating should recover once the project
became operational and revenues began coming in.
Senator Dunleavy surmised that the downgrade, in
combination with another potential downgrade the state was
facing as a result of getting its fiscal house in order,
could result in an increase in the cost of borrowing money.
He wondered if any models had been run on the scenario. Ms.
Poduval replied that the finance team had looked at the
scenario and could answer the question.
Ms. Poduval addressed how TransCanada's technical role in
AKLNG could be replaced. She noted that TransCanada was
experienced in northern pipelines and had brought the
wealth of its experience to the AKLNG project. She read
from slide 32:
TC in its current role performs or has performed several
functions including the following:
· Holds State of Alaska's midstream equity in AKLNG as
signatory to the JVA
· Contributes pipeline SMEs that were seconded to the
JVA PMT
· Coordinated FERC NEPA Process
Senator Dunleavy wondered if the state was on the verge of
missing deadlines in the project. Ms. Rutherford responded
that there were some reports due, but the state was not in
danger of missing any of the deadlines. She believed the
state was completely on schedule. She stated that there had
always been a hope that the commercial agreements would be
completed more quickly, but there was not a deadline
specified by SB 138 or in any other documents. She stated
that commercial agreements evolved at their own pace
(especially with four or more parties negotiating) and an
outcome could not be forced. She noted that a couple of
reports were coming due, one was when the first commercial
agreement came to the state and another was associated with
instate domestic gas.
12:20:47 PM
Senator Dunleavy wondered if the termination of the
agreement with TransCanada would be seamless or if it would
result in a potential setback that could cause cost
overruns or delays. Ms. Rutherford replied that the AKLNG
project and TransCanada had been very helpful in trying to
ensure that no delay would occur. She detailed that
TransCanada's willingness to provide some of its staff to
complete the pre-FEED stage would ensure that the
transition was seamless.
Vice-Chair Micciche referenced slide 32 and asked for
verification that TransCanada had been involved in the
pipeline technical work and the pre-FEED stage only. He
asked if TransCanada was expected to lead the work moving
into the next stage. Ms. Poduval agreed that TransCanada
was the pipeline technical lead during pre-FEED. The lead
subsequent to pre-FEED had yet to be determined (especially
related to the construction stage).
Vice-Chair Micciche asked if the maximum value TransCanada
had to offer to the project had already been realized.
Alternatively, was it expected that TransCanada would lead
the technical pipeline design team in the FEED stage. Ms.
Rutherford replied that she did not believe enough was
known to answer the question because there had been no
finalization of the structure of the joint venture
agreement for FEED, construction, or operation; therefore,
there had been no expectation that TransCanada would
necessarily be the lead on any of those elements. She
opined that if TransCanada remained an agent for the state
in the project that it would advocate for its own role in
FEED; however, she could not foresee whether the outcome
would be sustained or what it would be.
Senator Dunleavy wondered if there were any circumstance
where the administration or consultant would advocate that
TransCanada remain in the partnership.
Co-Chair MacKinnon replied that the committee could ask
Governor Walker the question.
12:24:18 PM
Senator Dunleavy asked if there was anything the state
would lose without TransCanada's involvement in the
project. Ms. Poduval replied that there were two main
risks. The first was the financial aspect and whether the
state could finance the project without TransCanada. She
believed the finance team's assessment had determined that
the state would be better off without TransCanada because
of the state's "no conditions attached" commitment to
TransCanada. The second aspect was the technical expertise
that TransCanada brought to the project and whether there
would be inefficiency in continuing the project without the
expertise. She relayed that the AKLNG project felt
comfortable that the project could proceed. Additionally,
TransCanada's offer to allow its employees to continue in
their roles to avoid a disruption had helped to mitigate
the concern.
Ms. Rutherford communicated that she had also been
concerned about the financing aspects of the project;
however, information that had been shared with the House
Finance Committee and that would be shared with the Senate
Finance Committee had been comforting. Additionally, she
did not believe TransCanada should be taken out before pre-
FEED and that there should be adequate provision for pre-
FEED to continue smoothly. She relayed that the issue had
been worked out in discussions between the project and
TransCanada.
Co-Chair Kelly queried the role of the royalty in value
(RIV) versus RIK determination. He asked if it was all
academic if it was determined that it was not in the
state's best interest to take the gas in kind.
Ms. Rutherford did not believe it was academic. She
believed the issue was very important from various
perspectives. She detailed that SB 138 presumed that the
commissioner of DNR would provide an RIK decision and
required a full analysis on the implications in to make an
informed decision. For this reason, having the commercial
agreements that affect the value of the upstream gas was
critical prior to making an RIK decision. She relayed that
the administration's goal was to get to an RIK decision,
which was the reason for its hard work on some of the
upstream and gas-balancing supply issues. She believed that
if the state decided that its ability to take gas in kind
(which triggered the tax as gas option for producers under
SB 138) was too risky, there would be a significant
discussion about whether or not the structure laid out in
SB 138 would still work because the producers were very
interested in the state carrying its own throughput.
12:28:45 PM
Co-Chair Kelly reasoned that the issue was all academic if
there was no RIK decision. He wondered if it was all
hinging on the decision. Ms. Rutherford confirmed that the
administration would certainly want to reach an RIK
decision because it was a facilitator for the project. On
the other hand, it was critical to bear the importance of
the RIK decision to the state during negotiation on the
upstream agreements. She explained that it was necessary to
know beforehand if the cost of handling carbon dioxide and
upstream costs associated with field cost allowances at
Point Thomson and Prudhoe Bay were both so high that they
would diminish the state returns. She stressed that prior
to electing RIK, state had to ensure that it had reasonable
costs, that supply was available (the state would receive
its gas as a derivative of the producers' production and it
would never be at the table deciding that it could get
another drill in the ground in another location if gas was
unavailable), and upstream costs.
Co-Chair Kelly understood. However, he surmised that if it
was not the outcome, he agreed that the structure of SB 138
would have to be questioned. He had assumed that the
decision would have been made already. He believed it was
"almost the elephant in the room." Ms. Rutherford replied
in the negative. She detailed that in the HOA it had always
been presumed that the commercial agreements would be
completed prior to making an RIK decision. She emphasized
that just like fiscal certainty, the decision was one of
the most significant leverage points for the state. The
presumption was that the elements effecting the state's
value by taking RIK would be negotiated first. Only at that
point would it be possible to make an informed decision
about whether RIK would be in the state's best interest.
Co-Chair Kelly did not believe the RIK decision necessarily
impacted the decision on TransCanada. Ms. Poduval added
that there would be no gas to transport without
understanding the suite of commercial agreements and terms
the state would be part of and what the value would be to
support the RIK decision. She elaborated that without gas
to transport the state could not enter into an FTSA.
12:32:29 PM
Co-Chair Kelly asked Ms. Rutherford to walk through the
sequencing at a later time. Ms. Rutherford agreed to
provide the information.
Ms. Poduval addressed how will TransCanada's technical
expertise would be replaced (slide 33). She reiterated
earlier testimony that TransCanada was leading the pipeline
work for the pre-FEED portion of the project. She read from
the slide:
TransCanada is not anticipated to build the pipeline.
It will be managed through the AKLNG Project
Management Team (PMT) which leads and guides the AKLNG
project
PMT consists of Co-Venturer (CoV) employees seconded
to project based on experience and skill sets
PMT hires engineering and specialist contractors to
advance design efforts
Significant amount of work is done by contractors with
oversight by PMT
Ms. Poduval elaborated that even through pre-FEED
contractors (engineering and other experts) that had been
brought in did a significant amount of the work under
supervision by the project management team. She moved to
slide 34 and stated that the AKLNG project partners
(ExxonMobil, BP, and ConocoPhillips) brought significant
expertise and experience to the project. She elaborated
that the partners all brought worldwide experience and
resources to staff the management team with experts. She
continued to address slide 34:
In addition, AGDC brings Alaska pipeline experience
· Successfully completed Pre-FEED and FEED on ASAP
· Key subject matter experts based in Alaska
· AGDC has already taken over TC's role in
coordinating NEPA process
Ms. Poduval elaborated it was a combination of the
structure where AGDC, AKLNG producer partners, and
contractors worked on the management team that would
continue the work needed to execute the midstream in
TransCanada's absence.
12:35:37 PM
Ms. Poduval addressed conclusions and recommendations on
slide 35:
The current arrangement with TransCanada was designed
to provide the State (and TransCanada) with several
off-ramps as the AKLNG Project moved through its
different development stages, including an important
clean off-ramp for the State in December 2015
The State administration recommends termination of the
TransCanada relationship by December 2015 and
replacing it with the State's direct participation in
the AKLNG midstream
The exercise of this off-ramp is expected to
facilitate better alignment and control, lower risk
and create additional value for the State in the AKLNG
Project over the long-term
Senator Olson was convinced that TransCanada had done its
job and that the sunset had been reached. He believed that
whenever government got involved, things became murky. He
stressed that he and others wanted the state to have more
voting rights. He wondered what kind of safeguards were in
place to ensure that the bureaucrats were competent in
their voting. He remarked that with a company like
TransCanada it was clear that voting always came from its
bottom line. He did not know if the bureaucrats had the
expertise to vote on the state's behalf. He had not been
impressed with people who were going to be voting.
Ms. Rutherford replied that when the presenters had
addressed voting rights they had spoken about alignment of
the state's 25 percent interest because it was currently
complicated with multiple parties sharing one party's
voting right. She elaborated that AGDC had a role in the
liquefaction and TransCanada had a role on the pipeline and
GTP. At the end of the day, the state had world-class
private sector partners in the project that would also
bring their voting rights to the discussion. She expounded
that it was the partners' expertise that brought the state
comfort that the partners would always work for the bottom
line and to optimize the value of the product. She
explained that the state would not get more voting rights,
but it would have a more aligned and clear voting right in
the joint venture.
12:39:34 PM
Senator Bishop addressed voting rights. He remarked that
Mr. Dubler carried the voting right for AGDC. He wondered
if AGDC commissioners would make a voting decision and
communicate it to Mr. Dubler to carry out. Ms. Rutherford
replied that she did not know the exact structure for AGDC.
However, typically in corporations the CEO and director
would make decisions about what level of detail would be
taken to the board of directors for approval. She could not
speak to the AGDC bylaws, but she was certain that the
people participating in the project from AGDC had been
reporting directly to AGDC leadership and that information
would go to the board subsequent to that.
Co-Chair MacKinnon believed that the question should be
directed to AGDC.
Co-Chair MacKinnon thanked the presenters. She discussed
the agenda for the week.
SB 3001 was HEARD and HELD in committee for further
consideration.
ADJOURNMENT
12:43:09 PM
The meeting was adjourned at 12:43 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 3001 102615 TransCanada Participation Decision Presentation.pdf |
SFIN 10/26/2015 9:00:00 AM |
SB3001 |
| SB 3001 102615 TransCanada Participation Primer.pdf |
SFIN 10/26/2015 9:00:00 AM |
SB3001 |
| SB 3001 102615 TC Participation Assessment.pdf |
SFIN 10/26/2015 9:00:00 AM |
SB3001 |
| SB 3001 102615 Preliminary Agreements to be Negotiated Should Enabling Legislation Pass.pdf |
SFIN 10/26/2015 9:00:00 AM |
SB3001 |
| SB 3001 102615 Alaska PA FINAL 0614 with final confidentiality headers REDACTED.pdf |
SFIN 10/26/2015 9:00:00 AM |
SB3001 |