Legislature(2015 - 2016)BUTROVICH 205
10/27/2015 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 27, 2015
9:05 a.m.
9:05:18 AM
CALL TO ORDER
Co-Chair MacKinnon called the Senate Finance Committee
meeting to order at 9:05 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
Stephanie Alexander, Special Assistant to the Commissioner,
Department of Revenue; Senator Mia Costello; Senator Cathy
Giessel; Senator Gary Stevens; Senator Kevin Meyer;
Representative Shelley Hughes; Senator John Coghill;
Representative Lora Reinbold; Representative Andy
Josephson.
PRESENT VIA TELECONFERENCE
Radislov Shipkoff, Director, Greengate LLC; Steven Kantor,
Managing Director, First Southwest; Justin Palfreyman,
Director, Lazard.
SUMMARY
SB3001 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."
9:07:33 AM
STEPHANIE ALEXANDER, SPECIAL ASSISTANT TO THE COMMISSIONER,
DEPARTMENT OF REVENUE, introduced herself.
RADISLOV SHIPKOFF, DIRECTOR, GREENGATE LLC (via
teleconference), thanked the co-chairs and members of the
committee. He shared that he would provide some
introductory information before continuing with the
presentation.
Co-Chair MacKinnon noted some legislators in the audience.
Mr. Shipkoff relayed that Greengate was an independent
financial advisor company, specializing in finance for
energy project. He stated that Greengate focused on
projects in the oil and gas sector; LNG pipelines;
downstream industries; and power structure infrastructure.
He continued that they had advised on Papua New Guinea LNG,
Australia Pacific LNG in Queensland, Australia, and most
recently a Russian Arctic gas development before economic
sanctions were imposed.
9:10:59 AM
STEVEN KANTOR, MANAGING DIRECTOR, FIRST SOUTHWEST (via
teleconference), explained that his company was the
independent registered municipal advisors to Department of
Revenue (DOR). He shared his history as a financial
advisor, including for Alaska Housing Finance Corporation
(AHFC), Fairbanks Hospital, University of Alaska, and
Municipality of Anchorage.
JUSTIN PALFREYMAN, DIRECTOR, LAZARD (via teleconference),
introduced himself and furthered that he worked in the
power energy infrastructure group. He announced that Lazard
was the largest independent investment bank in the world
advising governments and corporations on a variety of
strategic and financial matters. He stated that Lazard's
advisory assignments included advising sovereign
governments, state governments, city governments, and
corporations.
Mr. Shipkoff drew attention to the presentation
"TransCanada's AKLNG Participation: Financing Issues" (copy
on file). He looked at slide 2, "Introduction":
An exit by TransCanada (TC) from the AKLNG project has
financial implications to the State
of Alaska:
Immediate impact: The State will be responsible
for funding the reimbursement of TC's Midstream
development costs, as required under the
Precedent Agreement (PA)
Going forward: The State will be responsible for
funding its share of the Midstream project costs,
which would have been funded by TC
This presentation addresses the following
issues/questions related to the impact of TC's exit on
the State's financial position, credit rating and
borrowing capacity:
What will be the impact on the State's credit
rating and borrowing capacity?
At what cost is the State expected to finance its
share of Midstream costs, and how does such cost
compare with the cost of financing provided by TC
under the PA?
How can the State fund its share of Midstream
project costs?
9:16:49 AM
Mr. Shipkoff addressed slide 3, "What will be the impact of
TC's exit on the State's credit rating and borrowing
capacity?"
What will be the impact of TC's exit on the State's
credit rating and borrowing capacity?
Will the State's requirement to fund Midstream costs
result in increased State funding commitments?
Will TC's exit erode the State's borrowing capacity?
Will the State's credit rating be adversely affected
by TC's exit?
Will the long-term impact of the TC buyout be viewed
as credit positive?
Mr. Shipkoff addressed slide 4, "State Commitments Not
Increased with TC Exit":
Will the State's direct funding of Midstream costs
result in increased State commitments?
Under the arrangement with TC, the State is already
committed to pay the costs associated with the
Midstream components:
If the Project fails to complete Pre-FEED: State
obligated to reimburse TC, with interest
If the Project fails to complete FEED: Under the
expected terms of the Firm Transportation
Services Agreement (FTSA) with TC, the State
would be obligated to reimburse TC, with interest
If the Project fails to complete construction:
Under the expected terms of the FTSA with TC, the
State would be obligated to reimburse TC, with
interest
State assumes Midstream development and
construction risks
If the Project achieves operations: Under the expected
terms of the FTSA with TC, the State would be
obligated to pay TC fixed capacity reservation charge,
including repayment of TC capital through annual
depreciation charge, and pass-through of Midstream
costs, regardless of throughput volumes
State assumes Midstream cost-overrun and
throughput risks
Mr. Shipkoff considered the three project stages and
accompanying hypothetical scenarios, and pointed out that
the state was taking the risk for the development, risks
which equity investors would typically assume. He
emphasized that the state would be assuming the financial
risks within development and construction. He remarked that
TransCanada would not be acting in a role dissimilar to a
lender in that scenario.
9:22:31 AM
Mr. Shipkoff discussed the scenario under which the state
assumed the midstream development and construction risks.
He noted that, regardless of what the gas volume and price
became, the payment commitment that the state incurred were
not dissimilar to that of a loan. In addition, the state
would be obligated to reimburse TC for operating costs. He
summarized that if one considered all three scenarios, the
state ultimately carried all the risk
Mr. Shipkoff continued to discuss slide 4, addressing how a
direct payment scenario would impact the state's borrowing
capacity. He stated that the impact of the scenario was
reflected in slide 5.
9:26:40 AM
Senator Bishop wondered if the terms under the last bullet
on slide 4 were "reasonable and customary" of any lender.
Mr. Shipkoff stated that the terms were probably consistent
with one could expect to see of a lender. He reiterated
that the FTSA obligation was analogous to a lending
relationship.
Co-Chair MacKinnon referred to slide 3, and asked about the
state's credit rating. She surmised that the state's credit
rating would not be affected by the transfer, even though
it was taking on the majority of the financial risk. She
wondered if TransCanada's credit rating would be affected
by the transfer. Mr. Shipkoff replied that Mr. Kantor would
address the state's credit rating later in the
presentation. He shared that, under the existing
relationship with TransCanada, the state's credit must
support the state's payment obligation to TransCanada in
reimbursement and tariff payment. He restated that
TransCanada relied on the state's credit anticipating
repayment of their capital. He remarked that the
relationship between TransCanada and the state looked
similar to a loan arrangement.
9:31:05 AM
Co-Chair MacKinnon wondered if there would be an
improvement on TransCanada balance sheets, because they
were not part of the project and carrying the financing for
up to 20 years. Mr. Shipkoff replied that it was difficult
to assess the specific impact on TransCanada's credit
rating in isolation. He stressed that there must be
research into all of the aspects of determining the
entity's credit rating. He furthered that the state was not
affected directly by the terms on which TransCanada might
be able to borrow to fund its payment of capital for the
midstream project costs.
Co-Chair MacKinnon felt that TransCanada's credit rating
would improve if TransCanada was carrying the state's debt,
and then the state took back that debt. Mr. Shipkoff
discussed the development and construction period of the
project. He thought the state's credit rating may
deteriorate during the construction period. He stated that
TransCanada was not obligated to bear any of the risk for
the development.
9:38:13 AM
Vice-Chair Micciche felt that the presentation was
portraying a net-neutral credit and borrowing situation.
He wondered if a dramatic reduction in interest rate would
be an improvement to the state's credit rating. Mr.
Shipkoff agreed with the premise of the question. He
thought it was likely that the state would see an
improvement in its credit rating, but there were a wide
range of scenarios that influenced credit rating
determinations.
Vice-Chair Micciche appreciated the conservativism of Mr.
Shipkoff's statements.
Co-Chair MacKinnon asked if Mr. Shipkoff had real-world
examples to share in which projects had changed and did not
adversely affect the credit rating of the business in
question. Mr. Shipkoff deferred to Mr. Kantor.
Mr. Kantor addressed slide 5, "State Borrowing Capacity
Effectively the Same with or without TC":
Will TC's exit erode the State's borrowing capacity?
TC's exit will not create incremental State debt
obligations; the State is already obligated to pay the
Midstream costs.
Under the PA and the anticipated terms of the
FTSA, the State's payment obligations to TC
require payments to TC to be "supported with the
full faith and credit of the State" or a
dedicated funding source acceptable to TC
TC would be relying on the State's credit for
reimbursement of its funding of Midstream costs
FirstSouthwest has noted that the credit ratings
agencies will, in all likelihood, consider the
State's long-term fixed payment obligations to TC
under the FTSA as analogous to a State debt
obligation for purposes of analyzing State debt
capacity
9:44:16 AM
Mr. Kantor discussed slide 6, "Example: Credit Rating
Agency Treatment of 'Take-or-Pay' PPAs":
"Take-or-pay" power purchase agreements (PPAs) are
similar to FTSAs as they typically obligate the buyer
to make capacity charge payments regardless of output.
Such agreements are scrutinized by credit rating
agencies.
In prior financings, credit rating agencies have
taken into account FTSA-like contracts of much
lower value when assessing the credit of local
governments
The rating agencies would almost certainly
scrutinize the FTSA payment commitments when
assessing the State's credit. Such scrutiny would
be heightened due to the FTSA "full faith and
credit" or "dedicated fund reserve" requirement
Mr. Kantor discussed slide 7, "State Credit Rating not
Adversely Affected by TC Exit":
Will the State's credit rating be adversely affected
by TC's exit?
FirstSouthwest advises that a decision to terminate
the TC's participation will not, in and of itself,
result in a downgrade of the State's credit rating:
No incremental commitments by the State
As the State's overall costs related to the
Project are projected to be reduced without TC
(BandV estimates a reduction of up to $400
million per year), the termination should be
viewed by the credit ratings agencies as a net
positive for the State
With or without TC, the State should anticipate a
reduction in the State's credit rating during the
construction period (when no gas sale revenues
are being generated) absent a significant
increase in revenue generated from existing
sources
Credit rating should recover once gas sale
revenues become established
TC's exit, by itself, should not result in a
credit downgrade during the construction period
that is greater than any downgrade if TC remained
in AKLNG. The State's credit could instead be
improved by the lower costs to the State as a
result of TC's exit
Mr. Kantor addressed slide 8, "Financial Risks to the State
of Maintaining TC Funding":
Failure to reach Project FID:
The State would be obligated to pay TC's prior
Midstream development costs and TC's internal
costs, plus interest
A potentially substantial appropriation would
need to be authorized quickly
The State's reimbursement obligation could arise at a
time of adverse credit impact on the State:
Lender community would be aware that the Project
would not reach FID
The gasline Project revenues would no longer be
expected to materialize
Consequently, the credit of the State would
likely deteriorate
Therefore, the State could be forced, in a short
timeframe, to repay TC for prior Midstream development
costs in adverse credit conditions
9:49:37 AM
Senator Dunleavy remarked that the state was in a financial
crisis. He stressed that the state could receive a lower
credit rating, even with the buyout of TransCanada. Mr.
Kantor replied that many factors affected credit rating,
and the state could see a lower credit rating. He stressed
that an important factor in determining a credit rating was
the ability for the entity to balance its budget while
providing services to its citizens. He had a narrow point,
in than he only focused on the TransCanada agreement.
Vice-Chair Micciche noted that the absence of TransCanada
would be inconsequential to Alaska's credit rating. He felt
that the credit rating would be reduced as a result of the
amount of debt, regardless of the source of the debt
payment. Mr. Kantor agreed, and stated that the issue
would be addressed later in the presentation.
9:52:10 AM
Co-Chair MacKinnon wondered if the interests were currently
favorable. Mr. Kantor replied in the affirmative, resulting
in a positive outcome.
Co-Chair MacKinnon thought the federal government had
indicated that interest rates would see an "uptick" in the
near future. Mr. Kantor replied that prognosticating the
movement of interest rates was a hazardous opportunity.
Although, he agreed that there was a consensus that
interest rates would be positive.
Co-Chair MacKinnon noted that there were many
"advantageous" assumptions. She wondered if the state
should continue to "not get its fiscal house in order", and
utilizing the savings accounts. Mr. Kantor responded that
there would be a slide later in the presentation to address
that concern.
Co-Chair MacKinnon wondered if the committee was being
shown an optimistic or worst-case scenario with regard to
the effect on the state's credit rating.
9:54:16 AM
Senator Hoffman asked about the loan term. He remarked that
the loan would be paid back over 20 to 25 years. He felt
that, at 25 years, there would be a savings of $10 billion.
He recalled that a chart on the previous day showed a rate
of 4.5 percent, with an annual savings of $200 million-
resulting in a savings of $5 billion over 25 years. He
wondered if that chart reflected an accurate estimate. Mr.
Kantor stated that the current day's presentation numbers
were taken from the Black and Veatch report. He stressed
that the estimate number would function with many factors,
including the overall interest rate incurred at the time of
financing. He stressed that the loan terms would not cost
the state more money under the TransCanada agreement.
Senator Hoffman surmised that the maximum estimate of $400
million, and noted that financing of up to 25 years would
result in a savings of up to $10 billion in capital costs.
Mr. Kantor agreed.
Co-Chair MacKinnon queried the interest necessary to
achieve the savings. Mr. Kantor stated that under the
agreement with TransCanada the interest cost to the state
would "float" with the current market interest rate.
Co-Chair MacKinnon surmised that the assumption was that
the interest rate would increase.
Mr. Shipkoff discussed slide 9:
At what cost is the State expected to finance its
share of Midstream costs?
How does such cost compare with the cost of the
financing provided by TC?
9:59:14 AM
Mr. Shipkoff discussed slide 10, "Cost to the State of TC
Financing":
Under the TC financing arrangement, the State will pay
to TC the cost of capital as follows:
If the PA is terminated:
TC's costs reimbursed with interest at rate
of 7.1 percent
higher rate applies if payment is not made
within the required period under the PA
If the Project proceeds to operations:
the State would pay a return on TC's rate
base calculated on the basis of deemed
weighted average cost of debt and cost of
equity
cost of debt and return on equity adjusted
for changes in the yield on 30-year Treasury
bonds over time
debt to equity ratio: different during the
construction and operating periods
-70:30 through the second anniversary
of the in-service date and in respect
of expansions and maintenance capital
additions
-75:25 after the second anniversary of
the in-service date on capital other
than capital additions for expansions
and maintenance
10:03:23 AM
Mr. Shipkoff discussed slide 11, "Sample TC Deemed Weighted
Average Cost of Capital under the PA." He stressed that TCs
return on cost of capital changed with the treasury rate.
He noted that since the creation of the graph, treasury
rates had declined. He noted that it was difficult to
predict ongoing treasury rates. He pointed out the one to
one relationship to the states borrowing cost (affected by
treasury rates). He noted that changes in interest rate may
result in an increase, it would equally affect the cost of
capital financing. He emphasized that there was a
significant risk that if the project did not proceed, the
state would be obligated to reimburse TransCanada. He
discussed prospects of borrowing funds in an adverse credit
environment brought about by project failure. Whereas if
the state were able to fund its share of the project,
possible project failure would not adversely affect
borrowing conditions.
10:11:31 AM
Co-Chair Kelly asserted that if the state was unable to
decrease spending, it would suffer a downgrade in credit
rating. He wondered if those scenarios all occurred, would
it be possible to pay a higher interest rate than the
current 7 percent to TransCanada. Mr. Shipkoff affirmed
that it was hypothetically possible for the state to be
subject to an interest rate as much or greater than the
current 7.1 percent.
Co-Chair MacKinnon wondered if Mr. Shipkoff was involved in
recommending TransCanada's involvement in the project. Mr.
Shipkoff answered in the negative.
Co-Chair MacKinnon remarked that there were recommendations
at the first phase of the project to include TransCanada in
the project. Mr. Kantor stated that part of the provision
in the agreement with TransCanada had "off ramps" under
which the state could re-evaluate its relationship with
TransCanada.
10:16:35 AM
Co-Chair MacKinnon wondered if there was anything that had
changed financially that would cause the state to consider
ending the agreement with TransCanada. She specifically
queried the difference between the current suggestion and
Southwest's recommendation. Mr. Kantor asserted that
nothing had changed. He explained that the financing
arrangement under the TransCanada agreement would be more
expensive to the state than it would be without
TransCanada. He shared that the state had just begun to
expend money on the project, and a very small percent of
the funds had been expended by both TransCanada and the
state.
Co-Chair MacKinnon asserted that the legislature may have
desired a partnership with TransCanada, so TransCanada
could carry the debt. Mr. Kantor agreed. He remarked that
TransCanada would fund the cash calls in the partnership,
but the benefit would occur at a later date.
Mr. Shipkoff furthered that there had been a perception of
strategic benefits to TransCanada's participation at the
onset of the project. He thought the provisions of off-
ramps were put in place in order to test the strategic and
financial benefit elements.
Co-Chair MacKinnon shared that the committee was aware of
the MOA and the contents of SB 138.
10:21:16 AM
Vice-Chair Micciche remarked that TransCanada's involvement
in SB 138 brought forward project-relevant information that
was invested by TransCanada during the Alaska Gasline
Inducement Act (AGIA) process. He announced that the state
shed $500 million of liability under the agreement. He
wondered if the state had reached the maximum benefit of
the agreement, for the mere cost of 7.1 percent interest
during the pre-FEED process.
Co-Chair MacKinnon reaffirmed that it was currently the
time to reevaluate the off ramps. She stressed that the
financing scheme had not changed, comparing capital costs
to the finance market.
Senator Dunleavy wondered if the capital costs through
TransCanada would remain the same. Mr. Shipkoff referred to
the adjustment mechanisms in the cost of capital agreement,
and stated that to the extent that there were changes in
the treasury rates.
10:25:02 AM
Mr. Kantor presented slide 12, "TC Cost of Capital vs.
State Debt Interest Rate":
The interest rate on State debt would depend on the
credit rating. The table below compares:
TC weighted average cost of capital under the PA,
calculated as of Sept 11, 2015
Interest rates on taxable State G.O. debt,
estimated by FirstSouthwest as of Sept 11, 2015
Under all scenarios of State credit rating
downgrade down to A-/A3, the State cost of debt
remains below the TC cost of capital
Note that, following a rating downgrade during
the construction period, the State credit rating
and cost of capital will likely recover once the
Project is operational; TC cost of capital is
fixed at FID for the term of the FTSA
Vice-Chair Micciche thought that the highest interest rates
that the state had occurred from April 1982 to October
1983. He asserted that the rates were general obligation
(GO) bonds and were rated AA minus. Mr. Kantor clarified
that he was referring to a time that the state had a lower
credit rating, rather than when the state had a higher
interest rate.
Co-Chair MacKinnon noted that in 1974, the state had a very
different pension obligation. She understood that states
would soon be required to bank the debt obligations to
pensions. She wondered how that change would affect the
floor of what could be expected in a downgrade. Mr. Kantor
agreed. He affirmed that states would be required to
demonstrate potential pension liabilities. He asserted that
it was only the method of recognition that would change,
and it would be uniformly applied across the United States.
10:30:56 AM
Mr. Kantor read slide 13, "How will the State fund its
share of Midstream project costs" and moved to slide 14,
"Total State Funding Requirements":
Shown below are the estimated funding requirements for
the State's share of the project going forward
Includes both the Midstream components and the
LNG plant
In other words, these are the State funding
requirements without TC
Mr. Kantor discussed slide 15, "State Funding Options":
The State will have the following options to pay the
TC Termination Amount and finance its share of the
Project during the remainder of Pre-FEED, FEED and the
construction period:
The Legislature could appropriate from existing
State funds, e.g., the Constitutional Budget
Reserve Fund (CBRF), Earnings Reserve Fund
The Legislature could authorize the issuance of
State debt
The Legislature could authorize pursuit of
project financing
The Legislature could authorize the pursuit of
funding from other sources: LNG buyers and other
potential equity investors
Mr. Kantor presented slide 16, "Potential Funding Sources:
State Funds":
The Legislature could appropriate from existing State
funds, e.g., the CBRF, Earnings Reserve Fund
Analysis by the DOR Treasury Division estimates:
CBRF could be depleted in 2018 - 2019 (exact
timing depends on oil price)
Utilizing the CBRF to fund the TC
reimbursement and the Midstream Pre-FEED and
FEED costs would accelerate CBRF depletion
by approximately 3-5 months
Therefore, the CBRF could be used to fund Pre-
FEED and at least a portion of FEED costs, but
not construction costs
CBRF utilizations could be repaid from the
proceeds of State debt, project finance debt or
other forms of State long-term funding
Mr. Kantor discussed slide 17, "Potential Funding Sources:
State Debt":
The Legislature could authorize the issuance of State
debt:
Bondholders would look to the State's credit for
repayment (annual appropriations would be
required)
Could be used to finance FEED and construction
costs
Could be used as long-term financing (repayment
periods of 20-30 years)
Timing implications: Authorization to issue GO
debt would require voter referendum approval
10:35:31 AM
Vice-Chair Micciche wondered if the comparison on slide 12
of the construction and operating rates we rerated
appropriately. Mr. Kantor replied that there was an attempt
to keep all interest rates comparable. He looked at the
second column on slide 11, which showed September through
October 2015. Those rates were 6.15 and 5.80, which were
comparable to the grey rates at the same date.
Vice-Chair Micciche asked about the footnote on slide 11,
which discussed the FID, which was the capital intensive
stage of the process. He wondered if the FID was truly
fixed or a weighted average with the treasury rate tracker.
Mr. Kantor replied that once the final construction
opportunities arrived the cost of capital for TransCanada
was fixed, because they would be issuing fixed rate date,
and therefore the state would know the final finance costs.
Vice-Chair Micciche surmised that the state would have the
same opportunity with or without TransCanada, because they
would be funding the operational period with fixed
financing. Mr. Kantor agreed that, at any time, the state
would have that opportunity.
Mr. Shipkoff clarified that the cost of capital that the
state was obligated to pay to TransCanada under the
existing terms variation was no longer applicable after
FID. The contractually defined cost of capital under the
existing terms would be fixed after that point. The state
would have similar opportunities to fix its own direct
borrowing cost of capital at that time.
Senator Dunleavy commented on slide 14, and though the
figures needed to be adjusted upwards. Mr. Kantor agreed
that they were dynamic figures, and asserted that the
figures were gleaned from a Black and Veatch.
Senator Dunleavy felt that an increase was more likely than
a decrease.
Co-Chair MacKinnon referred to a slide from the previous
day that reflected a 20 percent capital cost overrun for a
project. The total cost of pipe, gas treatment plant, and
LNG at $54 billion including the state's 20 percent.
10:40:27 AM
Senator Hoffman stated that the previous day, the
administration had provided a range of $12 billion to $16
billion as the cost of construction. He wondered if Mr.
Kantor considered those costs relevant to this project, and
why they were not included in the presentation. Mr. Kantor
looked at the footnote of slide 14, which specifically
excluded the prior pre-FEED accounts, appropriations, and
projected AGDC and agency costs.
Senator Hoffman expressed that he was trying to grasp the
total obligation by the state and the overall cost.
Co-Chair MacKinnon referred to slide 19, and asked whether
the administration believed that they needed to come back
to the legislature to authorize the implied investment. She
wondered if there was a percent of interest that was
typical for an LNG buyer, and was it in the state's
interest to have a buyer. Mr. Shipkoff addressed
legislative authorization, and explained the terms of SB
138.
10:45:20 AM
Mr. Palfreyman referred to slide 18, "Potential Funding
Sources: Project Finance":
The Legislature could authorize the pursuit of project
financing:
Lenders would look primarily to the Project-level
cash flows and assets as security for repayment,
rather than State funds
Common form of debt for LNG projects
Requires the Project commercial structure to be
in place:
All key project agreements must be executed
Commercial structure must be "bankable"
Requires that FID is reached; not available to
fund FEED costs
May require constitutional amendment to allow the
pledging of LNG sales proceeds as lender
collateral as the Lenders will demand that funds
will be dedicated to repayment, which is
currently not permitted by the State's
Constitution
As the Project's commercial structure has not yet been
agreed, it is premature to evaluate the extent to
which project finance could be a viable source of
funding
Mr. Palfreyman discussed slide 19, "Potential Funding
Sources: LNG Buyers and Other Equity Investors":
The Legislature could authorize pursuit of investment
from LNG buyers or other equity investors:
Offtakers have often acquired equity in LNG
projects
Approach by the State would need to be made in
coordination with marketing plan
New equity investors could share Project
development risk
Could provide sources of funding in the event a
Producer withdraws
At this stage of the Project's development, it is
premature to evaluate the extent to which LNG buyers
or other equity investors could be viable sources of
funding
10:49:06 AM
Senator Bishop inquired about the first bullet on slide 18,
He wondered if there was still a payment for the lending
abilities. Mr. Palfreyman stated that the interest rate on
project financing varied, according to a variety of
factors. He furthered that it also depended upon lenders
views of the project itself. He discussed the range of
project finance interest rates.
Vice-Chair Micciche commented that it was not unusual for
customers to become investors or capacity owners in LNG
projects. Mr. Palfreyman agreed with the statement. He
stated that there was a variable degree to which they
participate in the overall equity.
Co-Chair MacKinnon remarked that there was historically a
lower percentage rate in the overall project investment.
Mr. Palfreyman disagreed in the generalization. He stressed
that it was situation specific.
Mr. Palfreyman referred to slide 20, "Example Funding
Scenario (For Illustrative Purposes Only)":
Proper sequencing of the utilization of available
sources of funds would ensure adequate timing to
implement the funding plan approved by the
Legislature:
The CBRF could be utilized initially, with CBRF
utilizations repaid from the proceeds of State
debt or other forms of State long-term funding
CBRF utilization in the near-term would provide
additional time needed for the Legislature to
consider proposing a GO debt offering, which
would require a voter referendum approval
10:55:21 AM
Co-Chair MacKinnon referred to a presentation from the
prior year, in which a final report was promised. She
wondered what may be delaying that final report. Mr.
Palfreyman explained that pursuant to SB 138, the final
report was due when the first contract was delivered from
DNR to the legislature.
Mr. Shipkoff turned to slide 21, "Conclusion," and offered
closing remarks:
TC's exit will require the State to fund the
reimbursement of TC's Midstream development costs
immediately
TC's exit will not result in incremental financial
commitments by the State
TC's exit will have no incremental impact on the
State's long-term credit rating and borrowing capacity
TC's exit will not increase the State's cost of
financing its share of Midstream costs
The State has several options to fund its share of
Midstream costs
11:01:41 AM
Vice-Chair Micciche requested a sentence be included in
slide 21 to read, "TransCanada's exit and the resulting
funding of associated debt at a lower rate will likely
lower the state's investment in the AKLNG project. Mr.
Shipkoff considered that the point had been made during the
slides, yet perhaps not as effectively as the declared
sentence. He agreed with the substance and premise of Vice-
Chair Micciche's statement, and furthered that the
financing analysis was only one consideration - there were
broader strategic considerations.
11:04:26 AM
Vice-Chair Micciche wondered if there was an assigned level
of confidence to the major investors when they evaluate
significant financial endeavors. Mr. Shipkoff assigned
levels of confidence when there was proper information and
tools to perform on an analysis that enabled him to
quantify the response in a probabilistic sense. He shared
that he had advised lenders, who may be contemplating
investing or lending significant funds into commodity price
exposed projects. His company would quantify the risk of
commodity price variations. He stated that analyses would
be run to indicate that a level of confidence number be
assigned. He furthered that the analysis was performed on a
wide range of available data to allow for a quantifiable
assessment. He felt that the committee's questions would be
less susceptible to be accurately quantified. He remarked
that there was not enough current data for a quantifiable
number assigned as a reflection of a level of confidence.
He stressed that this was the early stage of the project,
and therefore required a strategic decision in the context
of many unknowns within the project such as the commercial
structure and the risk allocation to participants.
11:07:37 AM
Co-Chair MacKinnon remarked that there were some questions
about the assumptions of protecting Alaska's credit rating,
in the concept that the state must ensure that its fiscal
house was in order with a sustainable budget. She stressed
that this was the appropriation to evaluate the value from
TransCanada and consider whether it was to the state's
advantage for them to exit the project. She noted that
there would be a potential debt of $400 million of annual
revenue, under the current assumptions. She appreciated the
committees concerns, and announced that the committee
supported the administration in advancing a good project
for all Alaskans. She shared that there would be an
examination of project financing the risks associated
thereof, as specific to the day's presentation. She
wondered if the constitution allowed the state to dedicate
a portion of a revenue stream to pay for the long term
debts. She shared the following meeting's agenda.
Senator Dunleavy asked if there would be individuals
present at future meetings that would be able to elucidate
the organizational chart (copy on file).
Co-Chair MacKinnon hoped that individuals would be prepared
to testify related to the organizational chart.
ADJOURNMENT
11:12:41 AM
The meeting was adjourned at 11:12 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 3001 102715 TransCanada Financing Presentation.pdf |
SFIN 10/27/2015 9:00:00 AM |
SB3001 |
| SB 3001102715 State of Alaska AKLNG Intergrated State Gas Team.pdf |
SFIN 10/27/2015 9:00:00 AM |
SB3001 |