Legislature(2017 - 2018)SENATE FINANCE 532
02/14/2017 09:00 AM Senate FINANCE
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| Presentation: Agdc Financials | |
| Adjourn |
* first hearing in first committee of referral
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SENATE FINANCE COMMITTEE
February 14, 2017
9:06 a.m.
9:06:58 AM
CALL TO ORDER
Co-Chair MacKinnon called the Senate Finance Committee
meeting to order at 9:06 a.m.
MEMBERS PRESENT
Senator Lyman Hoffman, Co-Chair
Senator Anna MacKinnon, Co-Chair
Senator Click Bishop, Vice-Chair
Senator Mike Dunleavy
Senator Peter Micciche
Senator Donny Olson
Senator Natasha von Imhof
MEMBERS ABSENT
None
ALSO PRESENT
Senator Cathy Giessel; Keith Meyer, President, Alaska
Gasline Development Corporation; Frank Richards, Vice
President, Program Management, Alaska Gasline Development
Corporation.
PRESENT VIA TELECONFERENCE
SUMMARY
PRESENTATION: AGDC FINANCIALS
^PRESENTATION: AGDC FINANCIALS
9:07:31 AM
Co-Chair MacKinnon indicated that Senator Cathy Giessel was
invited to join the committee at the table.
9:08:31 AM
KEITH MEYER, PRESIDENT, ALASKA GASLINE DEVELOPMENT
CORPORATION, discussed the presentation "Alaska Moving
Forward: AGDC Update" (copy on file). He felt that the
dialogue between the legislature and AGDC had been
fruitful. He spoke to the request from the legislature for
greater transparency from the corporation, and relayed that
a letter had been sent to the Senate President and to
Senator Geissel pledging greater clarity and frequency of
information. He related that his communications group would
prepare a semi-monthly report detailing the corporation's
activities and that corporate vice presidents had been
informed that they would be interviewed by the
communications department, which would result in the
electronic report that would be distributed to the senators
and representatives that signed a confidentiality
agreement. He hoped that there could be a feedback loop
between legislators and the corporation that would provide
the opportunity for legislators to comment on the report
and offer constructive criticism. He thought that in 2017
the corporation had more latitude to be more transparent
and communicative, now that the state was the project lead.
He spoke of the transition agreements signed in 2016 that
allowed the state to take the lead on the project. He said
that there would be three main areas of focus for 2017:
regulatory, commercial, and financial structuring and the
introduction and engagement of the global finance
community.
9:12:19 AM
Mr. Meyer discussed Slide 27, "AGDC PROJECT FUND STATUTES":
AS 31.25.100. In-state natural gas pipeline fund was
created in HB4 for the corporation's use in planning,
financing, development, acquisition, maintenance,
construction, and operation of the in-state natural
gas pipeline described in AS 31.25.005(4) and for
purposes in AS 31.25.005 (4), (6), and (7).
AS 31.25.110. Alaska liquefied natural gas project
fund was created in SB 138 for the corporation's use
in purposes related to an Alaska liquefied natural gas
project and for the purpose of transferring net
revenue received by the corporation related to equity
interests, contracts, and other activities to the
appropriate fund of the state as determined by the
commissioner of revenue in consultation with the
commissioner of natural resources.
9:12:43 AM
Mr. Meyer looked at Slide 28, "AFE'S, OPERATING BUDGETS, &
FUND BALANCES":
EXPENDITURE AUTHORIZATIONS
Composite AFE total (capital budget): $ 86.4mm
Remaining FY2017 Operating Budget (Feb-Jun): $ 5.2mm
FY2018 Operating Budget: $ 10.4mm
Total: $102.0mm
AGDC FUND BALANCES
In-State (incl Alaska USA account) Fund 1229: $26.0mm
Alaska LNG Fund 1235: $76.0mm
Total: $102.0mm
Mr. Meyer emphasized that his goal was for AGDC to operate
within the funds that had been allocated to it by the
state. He felt that the corporation had done sufficient
work on engineering and optimization of the project and had
narrowed the capital cost from a range of $45 to $65
billion, down to a range of $40 to $45 billion. He stressed
that AGDC would not be coming to the legislature for
additional funding until a customer commitment or a
strategic financing partner was secured. He spoke to the
numbers for expenditure authorizations and AGDC fund
balances illustrated on the slide.
9:15:54 AM
Senator Dunleavy asked about HB 4 [passed in 2013] and SB
[passed in 2014] 138, and asked whether the funds under
each piece of legislation were accounted for separately.
Mr. Meyer replied in the affirmative.
Senator Dunleavy queried the coding of the funds on the
three documents entitled, "FY 16 Contractors," which listed
expenditures.
FRANK RICHARDS, VICE PRESIDENT, PROGRAM MANAGEMENT, ALASKA
GASLINE DEVELOPMENT CORPORATION (AGDC), elaborated that the
documents pertained to contractor that AGDC had secured for
FY 16, FY 17, and reimbursable service agreements for those
same years. He said that AGDC had identified the
contractors and their scope of work, as well as the
authorized contracted "not to exceed" amount. He stated
that the figures had not be identified by specific fund
source.
Co-Chair MacKinnon requested that the contracts be
delineated by fund source, which had been the goal of
reviewing the records.
9:17:45 AM
Co-Chair MacKinnon recalled that she had heard AGDC was
requesting a reappropriation of over $10 million.
Mr. Meyer replied that the request was for $14 million. He
relayed that most of the $86.4 in composite AFE total,
under expenditure authorizations on Slide 28, was devoted
to the AKLNG project and not the ASAP project.
9:18:46 AM
Vice-Chair Bishop requested that the presenter explain any
acronyms he used.
Senator Dunleavy asked whether there was a way to identify
if the listed contractors were from in-state or out of
state. He thought it would be helpful to know fund sources
and where the contractors were located.
Mr. Richards explained that AFE was authorization for
expenditure, which was a process mandated by the board in
which authorizations for amounts greater than what was
provided to the president be presented to the board. He
stated that the authorization for expenditures currently
under discussion had been presented to the board last week,
and had received board approval to move forward.
9:20:16 AM
Mr. Meyer showed Slide 29, "AGDC EXPEDITURES AND FORECAST,"
which showed a table that separated the operating budget,
AGDC capital (AKLNG/ASAP), the Huston office, and the Japan
office, and presented the numbers for FY 16, 17, and 18.
He noted that the expenditures were detailed in the
previous slides.
Mr. Meyer discussed the fourth component on Slide 29,
"Japan Office." He relayed that the space was small. He
said that Japan was an epicenter for liquefied natural gas.
He shared that Masatoshi "Nick" Shiratori was the new state
representative focusing on marketing the AKLNG project and
other trade issues. He stated that Mr. Shiratori was
facilitating important meetings and was an asset to the
state.
9:25:20 AM
Senator Micciche wondered whether further detail concerning
the Huston contractors could be made available.
Mr. Meyer relayed that AGDC had five contractors in
Houston, largely with commercial roles, and who had been
involved in senior LNG activities. He described the
employees as a "core team," most of whom worked on a part-
time basis. He expected that once AGDC began commercial
engagement those contractors would be tasked with executing
a commercial agreement.
Senator Micciche asked whether the contract cost in the
Tokyo office was solely for Mr. Shiratori.
Mr. Meyer replied in the affirmative.
9:27:05 AM
Co-Chair MacKinnon asked whether the contractors incurred
Public Employees' Retirement System (PERS) liability.
Mr. Richards answered that there was no PERS liability
associated with the contractors.
Co-Chair MacKinnon asked about the aforementioned reduced
rate that was negotiated on the Huston office space.
Mr. Meyer replied that the lease had not gone into service
until February 2017, and the cost reductions would be seen
further into 2018.
Co-Chair MacKinnon understood that the reduced cost was
reflected on the slide.
Mr. Meyer replied in the affirmative.
9:28:35 AM
Mr. Meyer turned to Slide 30, "AGDC EXPEDITURES and
FORECAST," which showed two tables that detailed the
Operating and Capital FY 17 and FY 18 budgets. He explained
that the slide showed the consistency between the years for
each budget.
9:29:23 AM
Mr. Meyer spoke to Slide 31, "SATELLITE OFFICE COSTS":
• Tokyo
- 135 sq. ft. office (9'x15')
- Shared conference rooms
- Ability for Japan representative to have meetings
and work space
- Japan represents 32% of global LNG purchases
• Houston
- Occupying a portion of existing AKLNG project space.
- 6,500 sq. ft., $2.43/sq ft until July 31 (existing
lease), then reduced to
$1.94/sq. ft.
- Fully furnished space with all desks, conference
rooms, and video projection capability.
- Important asset for the project to be connected to
the US energy hub that hosts most LNG commercial and
legal expertise.
Mr. Meyer pointed out to the committee that the slide
provided more detail on the Tokyo and Houston offices.
9:30:42 AM
Mr. Meyer spoke to Slide 32, "CY17 to FY18 QUARTERLY PLAN
BY FUND," which detailed the allocation between the two
plans. He deferred further discussion to Frank Richards.
Mr. Richards explained that the table identified spending
by individual funds. He said that the top of the table
identified the indirect cost allocation, or corporate
split, the funding allocation by individual fund sources to
cover the operating expenses within AGDC: personal
services, travel cost, utilities, and other service lines.
He stated that the current FY 17 Operating budget
authorization was split 40 percent AKLNG, and 60 percent
ASAP. He expounded that now that AGDC was solely
responsible for filing with Federal Energy Regulatory
Commission (FERC), the spending would predominately be out
of the Alaska AKLNG project fund. He said that AGDC would
be looking to have a new indirect cost allocation plan that
would be 90 percent AKLNG project fund and 10 percent ASAP.
He believed the plan was within the legislative intent for
the allocated funds. He continued that the overall
operating budget for the remainder of FY 17 was
approximately $5.2 million. He furthered that FY 18, by
quarter, represented approximately $10.4 million. He spoke
of the capital spend illustrated on the bottom table, and
was listed in allocation by the individual fund sources. He
relayed that through the remainder of FY 17, and the full
FY 18, a spend rate out of the AKLNG fund of approximately
$78.9 million had been identified, $7.5 million out of
ASAP. He related that the capital and operating spending
combined totaled $102 million. He noted that the last two
lines of the table identified the amounts that were
anticipated to be taken out of the individual funds.
9:34:15 AM
Senator Micciche asked why the capital spending reflected
80 percent of the spending for that specific time period of
the permitting stage.
Mr. Richards relayed that when the joint venture agreement
was terminated at the end of 2016, AGDC had been tasked
with the responsibility of advancing the AKLNG project,
both commercially and financially, and the regulatory
aspects of FERC filing. He said that the regulatory expense
over the next year and a half would include the completion
of the resource reports, assembly of complete FERC
application, and filing the application with FERC. He
continued that the National Environmental Policy Act (NEPA)
would follow, where the review of the project was conducted
with FERC as the lead federal agency. He summarized that
AGDC would have the responsibility to provide the
environmental, the land, engineering, and program
management efforts to be able to advance the project.
9:36:04 AM
Senator Micciche surmised that the operating costs were
essentially AGDC labor costs.
Mr. Richards stated that AGDC had a small number of PCNs
allocated by the legislature, and that the operating costs
represented the cost only those employees. He said that the
contractor costs were paid for out of the capital budget
because those positions were project related.
Senator Micciche understood that federal tax status would
be important tot eh project moving forward. He referred to
the document, "FY16-FY18 RSAs and Agreements (copy on
file)," and specifically cited the Nixon-Peabody RSA, which
was $100,000 versus the Millbank RSA for $1 million. He
asked whether Millbank was assisting with the tax status
work, or were they specifically dedicated to commercial and
permitting work.
Mr. Meyer replied that Millbank was largely involved in the
structuring, the papering of the financial transactions and
the commercial agreements. He said that the Nixon-Peabody
work would be related to the Internal Revenue Service (IRS)
interface and tax matters. He stressed that the tax
treatment of the project was not a binary criticality,
meaning that it would not make or break the project. He
asserted that the third party finance was more important
than anything on the project, with respect to lowering
costs. He said that a structure would be developed that
would allow for tax efficiency, as well as third party, but
if a choice had to be made between the two, third party
finance would take precedent.
Senator Micciche asked whether the Greenberg Traurig
contract was commercial.
Mr. Meyer noted that the Greenberg Traurig contract handled
commercial work, had been instrumental in transition
agreements, and they had been engaged in the FERC process.
He noted that the group had different billing rates than
that of Millbank.
9:39:44 AM
Co-Chair MacKinnon referred to Slides 32 and 28, and the
difference of $2.9 million between the two spending totals.
9:40:29 AM
AT EASE
9:40:42 AM
RECONVENED
Mr. Richards responded that the fund balance for the In-
State (including Alaska USA account) Fund 1229 was $26
million, and the AKLNG fund was $76 million. He said that
the capital portion on Slide 32 showed a spend rate of
approximately $78.9 million; the difference was the need
for a reappropriation between the funds, to be able to
appropriately spend for the work that needed to be
accomplished.
9:41:29 AM
Mr. Richards spoke to Slide 33, "FUND BALANCE RE-
APPROPRIATION":
AGDC FUND BALANCES
In-State (incl Alaska USA account) Fund 1229: $ 26.0mm
Alaska LNG Fund 1235: $ 76.0mm
Total: $102.0mm
ANTICIPATED EXPENDITURE BY FUND
In-state Natural Gas Pipeline Fund (ISNGP) $ 11.7mm
Alaska LNG Project Fund (AKLNG) $ 90.3mm
Total: $102.0mm
Capital budget re-appropriation of ~$14.3mm from ISNGP
(Fund 1229) to AKLNG (Fund 1235) will be requested
Mr. Richards said that the $26 million for ASAP, and $76
million for AKLNG represented the remaining funds available
for AGDC to advance its legislative charges. He added that
the bottom of the slide showed the anticipated
expenditures. The anticipated expenditures would require a
reappropriation from the In-State Natural Gas Pipeline Fund
of $14.3 million to the AKLNG fund.
9:42:38 AM
Mr. Richards displayed Slide 34, "HISTORICAL AKLNG FUND
APPROPRIATIONS, EXPENDITURES and CASH CALLS." The slide
identified the initial appropriation from the passage of SB
138, and showed historical appropriations, cash calls,
balance and uses of the AKLNG Project Fund (1235).
9:44:20 AM
Co-Chair Hoffman asked whether additional authorization by
the legislature would be required for the project.
Mr. Richards replied that the corporation would be able to
live within the means already provided for the work program
that AGDC hoped to accomplish over the next year and a
half.
Co-Chair Hoffman repeated his question.
Mr. Meyer interjected that the corporation did not intend
to request additional authorization until a
commercialization event had been demonstrated, either the
signing of a viable customer contract, or the engagement of
a strategic funding partner. He stated that the capital
budget reappropriation would be the exception.
Co-Chair Hoffman clarified the reappropriation mentioned
was the $2.9 million.
Mr. Meyer corrected that the reappropriation request was
for $14.3 million.
9:45:54 AM
Co-Chair MacKinnon asked whether AGDC needed the
reappropriation was necessary, or could funds be
transferred internally.
Mr. Richards explained that when AGDC had been created and
provided responsibilities under HB 4 and SB 138,
respectively, that the intent of the legislature was that
the funds should be clearly demarcated. He said that the
legislative requirement was that authority to move between
the funds should not be granted to AGDC.
Co-Chair MacKinnon stated that the legislature passed a
bill in 2016 that requested access to the internal workings
of the corporation. She felt that transparency had become
worse since the transfer of the funds. She asked whether a
bill that allowed a representative from both bodies to
participate in closed door AGDC meetings would help with
transparency issues.
Mr. Meyer responded that financial information about the
corporation was presented at every board meeting. He
reiterated his pledge for more openness and transparency
going forward. He said that the previous confidentiality
agreement had been restrictive and believed that the latest
version would open up the doorway to a more transparent
commitment. He asserted that there was nothing in the
agreements with producers that was commercially
proprietary, which was the only information he believed
should be confidential.
9:49:16 AM
Co-Chair MacKinnon said that action on the senate's request
for transparency had been two years coming, and expressed
appreciation that the relationship between the legislature
and AGDC was going to be more open. She relayed that the
committee wanted to understand whether AKLNG and ASAP were
independent of each other, or if the funds were being cross
pollinated. She lamented that the legislature had not had
access to records in order to audit how the corporation had
handled the funds, which was why questions were being asked
regarding the fund balances; the legislature was trying to
determine how the money had been spent and whether it had
been spent consistent with the law.
Mr. Meyer stated that there had been segregation of funds
and activities. He assured the committee that he would
provide the information in detail.
9:50:47 AM
Senator Dunleavy spoke of additional fund requests by the
corporation. He wondered whether AGDC would ask the
legislature for additional funding before committing to
commercial agreements, or after contacts had been signed.
Mr. Meyer responded that he intended to inform the body of
activities as they developed, with the caveat that the
corporation had to be careful about the disclosure of
individual entities the corporation was negotiating with.
He reiterated that he had instructed his communications
group to produce a semi-monthly report in order to
facilitate transparency and feedback. He expounded that the
state being in the lead represented a "new day" with three
main areas of focus for 2017: regulatory, financial
structuring and engagement with the financial community,
and the commercial sales of LNG into the broader market
with a focus on Asia and securing tolling customers. He
said that any requests brought before the legislature would
be very detailed.
9:54:43 AM
Senator Dunleavy expressed concern that AGDC could request
additional funds without fully informing the legislature of
all of the project details.
Mr. Meyer replied that the corporation would provide full
and transparent project details before requesting
additional funding.
9:56:04 AM
Senator von Imhof thought that it would be helpful to have
regular progress reports on the five "big deliverables":
the FERC and pre-feed, tolling customers, tax exempt
status, LNG buyers, and the funding structure. She queried
how much the corporation had donated to become an Iditarod
Sled Dog Race sponsor. She wondered how sponsoring the
race's ceremonial start would help the corporation to reach
its business goals.
Mr. Meyer responded that the corporation was hosting an
Alaska LNG Summit, which would host Asian companies and was
timed around the race. He said that the sponsorship was
related to commercial efforts and was also in recognition
of the corporation's in-state obligation and increased
local presence. He asserted that the race was an iconic
Alaskan event that would offer wide exposure for the
corporation across a broad geography. He revealed that the
sponsorship was for $50,000.
10:00:06 AM
Co-Chair MacKinnon understood that AGDC spent $50,000 to
sponsor the Iditarod Sled Dog Race.
Mr. Meyer responded in the affirmative. He added that the
sponsorship would afford AGDC event seating, which would be
enjoyed by the visitors from Asia.
Co-Chair MacKinnon wondered who was paying for the
attendees of the planned summit and the total cost.
Mr. Meyer stated that there would be a fee to attend; there
were sponsors secured and pending, and AGDC was funding
some of the event. He was not able to provide exact detail
as to the cost to the corporation.
Co-Chair MacKinnon asked for a report on the conference and
breakdown of expenditures. She acknowledged that at times
it was necessary to spend money to make money, but that the
current financial climate in the state warranted prudence
over frivolity.
10:03:10 AM
Senator Micciche highlighted that the legislature had
reduced its spending by 44.6 percent over the past four
years, but still faced public scrutiny about its spending
habits. He lamented that there had been a lack of
transparency between AGDC and the legislature. He
threatened that without transparency and knowledge the
legislature would fight the corporation "every step of the
way" moving forward with the project. He warned that it
would be in Mr. Meyer's best interest to keep the
legislature informed.
Mr. Meyer acknowledged Senator Micciche's comments. He
pointed out to the committee that the corporation had
public support for the project. He furthered that once the
pipeline was in service people would be able to take gas
right off of the line and use it, which would result in a
liberation of the north and mining projects launched in the
interior of the state, as well of a security of supply in
placed like Anchorage and Fairbanks.
10:07:37 AM
Senator Micciche emphasized the project's importance to his
district and to the state. He feared the "lifelong quest to
build it at all cost." He hoped that the project would be
built on sound economics.
Vice-Chair Bishop pointed out that the AGDC Board of
Trustees was equally responsible for providing project
transparency.
Mr. Meyer agreed. He said that the commitment for
transparency and greater frequency of reporting was strong
with the board.
10:10:02 AM
Vice-Chair Bishop commented on the tradition of dog-mushing
in the state. He wondered about RSAs, and whether the other
project partners had RSA agreements with state agencies.
Mr. Richards stated that what would be reported would be
the RSAs that solely AGDC had been funding with other state
departments.
Senator Dunleavy asserted that the project was important to
his district. He asked about a rumor that there had been a
second look taken at a Valdez route for the project.
Mr. Meyer said that a second look was not being taken at
the Valdez route. He relayed that there had been an
intervention filed by a group in Valdez, suggesting that
Valdez would be a better site. He said that there had been
so much work done on the current route to Nikiski, the
Nikiski site was acceptable, and many alternatives had been
discussed. He thought that Valdez was a fine enough
location, but Nikiski would be the site; 33,700 pages of
resource reports had been filed using the Nikiski location.
He mentioned that an inner connect could be established for
Valdez, but that there was no intent to switch sites.
10:14:03 AM
Co-Chair MacKinnon said that the committee was still in
need of information about the profitability of moving the
project forward. She expressed concern that the state would
buy from producers. She asserted that the state would take
all of the risk by taking lead of the project, some of
which could be mitigated by bringing in other partners. She
wondered what the actual profit would be for the state, and
whether the project would result in energy security for
Alaska.
Co-Chair MacKinnon discussed payment in lieu of taxes
(PILT) payments. She referred to a working group formed by
the administration, Municipal Advisory Group (MAG), and was
gathering information on how to divide up the profit from a
project that had economic challenges. She spoke of the
issue of access to low cost energy. She restated that the
concern of the committee was that the project was not
economically feasible. She mentioned the idea of allowing
Alaskans to donate their permanent funds, and for state
departments to contribute funds, to help finance the
project. She wondered when the legislature could expect to
see real numbers related to how much the gas would be sold
for and what real opportunities were available in actual
dollars and cents.
10:19:35 AM
Mr. Meyer said that he could provide the information at a
later date. He said that one of the major work efforts for
the corporation as the project transitioned to state
leadership, which he clarified did not mean that the state
would be assuming all of the risk, was that risks would be
managed and appropriately allocated to ensure a viable
project and an acceptable risk profile for investors. He
said that part of the process was structural, but another
aspect was phasing; the lowest unit cost was to build the
project all at once, but would be a massive project. He
said that the construction profile should be flexible in
order to regulate the overall cost. He said that the 42
inch pipe presented the least execution risk and was the
optimal design for the future. He lamented that the
corporation could not set the price in the LNG market, but
stressed that the state had advantages over competing
suppliers. Mr. Meyer spoke of the non-price attributes of
the state that were attractive to the market. He said that
the buyers would be taking a career risk by advocating or
recommending the state as a supply source under a 20 year
contract. He related that the pricing would depend on the
size of the project; three trains all at once was optimal,
backing up from that would result in a loss of
competitiveness.
10:23:25 AM
Mr. Meyer said that funding the project with high cost
capital would put pricing out of the market, if the majors
were required to fund the project with their hurdle rate -
the project would not be economically viable in the current
market. He said that third-party financing would put the
price in the zone of competitiveness, and removing all
taxes would make the price point even more competitive. He
believed that a PILT would be inevitable, the size of which
would be determined by the size and affordability of the
project. He thought that the project had three major
variables: the rate of return, the PILT payment, and the
price of the gas. He said that a new project could not be
built for the Japanese price of $7btu, a higher price would
be necessary, possible $70btu. He noted that the state did
not have to link the price of LNG to oil, which meant the
AGDC would not need to take the commodity risk associated
with a gas purchase. He said that the state would be the
pipeline company and the terminal company and that the gas
cost would be a pass through. He stated that the gas
producers would have a net backed type of price because the
price would need to clear the market daily. He discussed
the variables for keeping the unit cost for infrastructure
as low as possible.
10:27:31 AM
Mr. Meyer shared that the project benefits to the state
were many and should not be underestimated. He said that
the reserves in the north would far outlast the debt on the
pipeline. He noted that gasoline was not corrosive, and
that once the debt was paid off the state could reap
billions of dollars per year. He reiterated that the
project structure was a main area of focus for 2017.
10:28:42 AM
Co-Chair MacKinnon appreciated the comments. She stressed
that the committee needed to fully understand the financial
benefit to the state, the rate of the return to the state,
and how well head value negotiations would be handled. She
believed all of the scenarios presented by AGDC should be
modeled for the committee. She understood that AGDC was
currently in search of a financial advisor, and lamented
that a financial report requested by the legislature was
two years overdue. She said that the corporation should be
prepared to provide the committee with models of all of the
assumptions that AGDC had put forward. She stated that if
the producers did not have risk because they were selling
at a particular price point, the details should be
illustrated in a graph and an argument should be made as to
why this was a good deal for Alaska.
10:31:01 AM
Co-Chair MacKinnon asked whether Mr. Meyer believed that a
20 year contract with a utility could be secured.
Mr. Meyer replied in the affirmative. He thought that long
term contracts were necessary because they were currently
common in the industry. He relayed that "larger players"
were currently trying to move the market to a shorter term
timeframe, but believed that the state would be able to
make an offer attractive enough to secure long term
contracts. He thought that the demand growth and
contestable contracts limited the window of opportunity for
the project.
10:33:43 AM
Mr. Meyer asserted that the financial structuring of the
project would be made available to the committee as soon as
possible. He pointed out that municipalities and regional
corporations were covered under SB 138.
Co-Chair MacKinnon noted the 20 year contracts were in flux
and that due to surplus the market was changing. She
wondered who the corporation would be using for third-party
financing.
10:35:48 AM
Senator von Imhof thought that it made sense to model the
ranges of all of the different inputs of the project in
order to locate the "sweet spot" of what would be needed to
execute the project.
10:36:42 AM
Senator Micciche refuted the claim that there was a window
of time to consider; sound economic were sound economics.
He said that when oil was cheap there was little incentive
to convert to LNG. He thought that there would be a "reset"
to energy prices and that the long-term horizon of oil and
LNG related prices was unpredictable. He asked how the risk
of a long-term lower commodity price could be adequately
evaluated.
10:38:34 AM
Mr. Meyer replied that when he talked about the window of
opportunity, part of that was not only demand growth, but
was the expiration of significant contracts in Japan and
Korea. He thought that it would be helpful for the
corporation to illustrate on a graph a better picture of
the contracts and their fall off dates. He reiterated that
most of the buyers would be utilities, which were
conservative entities. He said that in the Asia Pacific
most of the LNG had traded on an oil linked basis; if the
volatility of Korean and Japanese LNG were to be
superimposed over the oil volatility curve it would track
identically. He furthered that those companies were tired
of that volatility in their gas arena, and were working to
separate LNG from the oil. He expounded on the effects of
the Henry Hub price assessments on investor confidence. He
explained that AGDC was not an oil company, but an
infrastructure company, which would be able to offer a
long-term, stable price.
10:42:39 AM
Mr. Meyer believed that the corporation had an attractive
product offering to the Asian utilities through their
ability to contract for a stable price. He said that part
of his enthusiasm stemmed from the fact that LNG could be
offered at a stable price, which allowed for leverage over
the competition.
10:43:43 AM
Senator Micciche said that buying countries used to be
isolated and in competition. He shared that unanswered
supply several years ago resulted in market organization
between the countries, and heavy downward pressure on the
price of LNG. He agreed that working against volatility was
a good idea, but he feared that this would result in
substantially lower prices for the long term. He wondered
whether the lower cost would prove to be favorable only to
the buyer.
Mr. Meyer offered a brief history of oil sales and prices
in the world. He thought that current buyers had more
supplier choices than in the past. He believed that AGDCs
pricing for utility would be attractive to buyers and
sellers alike. He reiterated that a long-term, stable price
was critical to the project. He stated that large utilities
that served millions of rate payers would be attracted to
stability, rather than volatility. He thought that because
the project was a larger, capital intensive project, that
reached hard to access land in the north.
10:47:43 AM
Mr. Meyer continued that the project was also conventional.
He likened shale drilling to walking up a down escalator;
you had to keep moving just to keep the production flat. He
believed that the LNG reserve in the state was a
conventional resource that was unique and attractive.
10:49:09 AM
Co-Chair MacKinnon asked whether AGDC had submitted the tax
ruling letter to the IRS.
Mr. Meyer replied in the negative. He said that when it was
done it would be done twice. He elaborated that Millbank
and Nixon-Peabody were working together on the letter. He
thought that a significant investor would want to see a
specific letter on a specific structure. He said that a
"straw man" structure letter would be written, as well as a
final structure letter.
10:50:16 AM
Co-Chair MacKinnon expressed concern with a straw man
letter. She wondered whether it was like the email that the
Alaska Gasline Port Authority (AGPA) had received that
stated that Exxon was interested in buying gas from the
state. She said that the committee had a letter from the
IRS based on that email.
Mr. Meyer understood that only one letter currently
existed. He clarified that, if he had a letter from the IRS
today giving the go ahead, AGDC would need to compose
another letter. He expounded that lenders, equity
investors, and other interested parties would talk to
legislators, the federal government, and many parties
before making an investment. He anticipated mulitple
request letters.
10:51:53 AM
Co-Chair MacKinnon asked to view Slides 38 and 39,
pertaining to AKLNG acquisition.
Mr. Meyer showed Slide 39, "KENAI LNG PLANT ACQUISITION
BACKGROUND":
· ConocoPhillips announces Kenai LNG plant for sale in
December 2016.
· Data room open from 9 January until 3 March, 2017
· Bids due 17 March, 2017
· Acquisition of the Kenai Plant fits broader AGDC
strategy.
· Alternative LNG supply to FNG/IGU; no need to
expand liquefaction plant.
· Encourages Cook Inlet production.
· Increases waterfront access for the Alaska LNG
Project.
· Early revenue for the Alaska LNG project.
· Additional incremental LNG production capacity at
reduced cost vs greenfield.
· Enables AGDC early commercial engagement with LNG
Buyers and other Alaska LNG participants.
· Consistent with statutory responsibility "for
developing an Alaskan liquefied natural gas
project, and other transportation mechanisms to
deliver natural gas in-state".
· Future value increase under multiple scenarios.
10:52:53 AM
Mr. Meyer advanced to Slide 40, which showed a diagram that
illustrated the future value uplift for the Kenai LNG plant
acquisition. Under current use the plant provided a site
for in-state LNG delivery by truck and rail, and barge
loading for coastal communities, and could export LNG
during the summer. He believed that the facility had a high
probability of future value increase under two reasonable
scenarios: with the gasline, refurbishment of the existing
LNG trains at Kenai would result in a low cost LNG
production capacity (1.5Mtpa), compared to newbuild
facilities; or, without a gasline, Alaska would eventually
face a gas crisis as Cook Inlet production became
inadequate to supply Anchorage plus Fairbanks; at this
point, the COP Kenai plant would have high value as an
import facility and the only alternative supply. He
admitted that the funds already allocated to AGDC would not
be sufficient to purchase the Kenai LNG plant.
Co-Chair MacKinnon asked whether the facility was currently
on the tax rolls in the borough.
Mr. Meyer answered in the affirmative.
Co-Chair MacKinnon surmised that if the acquisition were
successful, the state would be required to pay PILT to the
city of Kenai.
Mr. Meyer thought that it was too soon in the process to
determine whether a PILT payment would be necessary.
10:55:44 AM
Co-Chair MacKinnon understood that the Kenai facility and
gas conversion was a huge cost driver inside the overall
project. She queried how the purchase would be beneficial
to the state.
Mr. Meyer thought the purchase had value under any of the
three scenarios listed on Slide 40. He amplified that with
the gasline facility would be the cheapest source of
1.5Mtpa because it would be a brown field. He said that the
facility would not be a storage area for 20Mtpa. He
relented that the asset was not critical to the gasline,
stressed that it was important for Alaska to own and
control the facility.
10:58:38 AM
Co-Chair MacKinnon asked whether there was understanding of
operating costs when considering purchase of the facility.
Mr. Meyer explained that the site that AKLNG was
considering was down the road from the Kenai site, and that
the Kenai site could be tied into the AKLNG gasline,
because many off-take points were optimal. He stated that
the Kenai LNG plan acquisition was a stand-alone idea and
would not be included in the FERC application. He furthered
that if the plant were going to be refurbished it would
have its own application, be reiterated that he thought
that the asset would incorporate well into the overall
project. He claimed that it was existing capacity and could
reduce the execution risk of the LNG facility.
11:00:34 AM
Co-Chair MacKinnon reiterated her request for information
about costs for operating the Kenai plant.
Mr. Meyer replied that he had some confidential information
pertaining to current operating costs of the facility, but
those numbers would change under different scenarios.
Co-Chair MacKinnon reiterated that she was looking for an
estimate of what the projected operating costs would be to
the state.
Mr. Meyer reiterated that it would not be appropriate to
share the numbers in a public setting. He said that when a
case was made for additional funding, the numbers would be
included in the scenarios.
11:03:14 AM
Co-Chair MacKinnon referred to the document "FY16-FY18 RSAs
and Agreements," (copy on file) and queried the $50,000
allocation for a contract involving former Attorney General
Craig Richards.
Mr. Meyer said that the contract was no longer active.
11:04:16 AM
Senator Micciche requested information about the potential
for a tax-free status.
11:05:24 AM
AT EASE
11:05:42 AM
RECONVENED
Co-Chair MacKinnon expressed hope that the process would
continue to be transparent. She relayed that some
constituents believed that it would not be in the best
interest of the state to move forward with the gasline. She
asserted that if an executive session was necessary in
order for the committee to view the financial information
on the project, then she was willing to arrange the
meeting. She stressed that conversations were important,
but that the numbers were crucial to the committee, and to
the people of the State of Alaska.
11:08:39 AM
Mr. Meyer appreciated Senator MacKinnon' closing remarks.
He understood that the corporation needed to demonstrate to
all Alaskans the viability and economic importance of the
project to the state.
Co-Chair MacKinnon discussed housekeeping.
ADJOURNMENT
11:10:24 AM
The meeting was adjourned at 11:10 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 021417 AGDC SFC FINAL.pdf |
SFIN 2/14/2017 9:00:00 AM |
Operating Budget FY18 |
| 021417 AGDC FY17 Contractors.pdf |
SFIN 2/14/2017 9:00:00 AM |
Operating Budget FY18 |
| 021417 AGDC FY16 Contractors.pdf |
SFIN 2/14/2017 9:00:00 AM |
Operating Budget FY18 |
| 021417 AGDC FY16-FY18 RSAs.pdf |
SFIN 2/14/2017 9:00:00 AM |
Operating Budget FY18 |
| 021417 AGDC Presentation Topics.pdf |
SFIN 2/14/2017 9:00:00 AM |
Operating Budget FY18 |
| 021417 AGDC Letter - Contracts and Reimbursement Service Agreements.pdf |
SFIN 2/14/2017 9:00:00 AM |
Operating Budget FY18 |