SENATE FINANCE COMMITTEE February 18, 2016 9:06 a.m. 9:06:34 AM CALL TO ORDER Co-Chair MacKinnon called the Senate Finance Committee meeting to order at 9:06 a.m. MEMBERS PRESENT Senator Anna MacKinnon, Co-Chair Senator Pete Kelly, Co-Chair Senator Peter Micciche, Vice-Chair Senator Click Bishop Senator Donny Olson MEMBERS ABSENT Senator Mike Dunleavy Senator Lyman Hoffman ALSO PRESENT Miles Baker, Vice-President, Government Relations and External Affairs, Alaska Gasline Development Corporation; Bruce Tangeman, Vice-President, Finance and Administration, Alaska Gasline Development Corporation; Marty Rutherford, Deputy Commissioner, Department of Natural Resources; Jerry Burnett, Deputy Commissioner, Treasury Division, Department of Revenue. PRESENT VIA TELECONFERENCE Fritz Krusen, Vice-President, AKLNG, AGDC; Frank Richards, Vice-President, Engineering and Program Management, AGDC. SUMMARY ^AKLNG APPROPRIATION AND EXPENDITURES; ALASKA GASLINE DEVELOPMENT CORPORATION (AGDC); DEPARTMENT OF REVENUE (DOR); DEPARTMENT OF NATURAL RESOURCES (DNR); DEPARTMENT OF LAW (DOL) 9:07:26 AM AT EASE 9:07:45 AM RECONVENED 9:08:03 AM MILES BAKER, VICE-PRESIDENT, GOVERNMENT RELATIONS AND EXTERNAL AFFAIRS, ALASKA GASLINE DEVELOPMENT CORPORATION, introduced himself. He shared that the presentation would explain the history of the funding that was used to start the pipeline initiatives managed the Alaska Gasline Development Corporation (AGDC); show how the money was spent; and the projections through the end of FY 17. Mr. Baker presented the PowerPoint, "Natural Gas Project Funding and Expenditures." He remarked that the presentation would be an overview for some new legislators. He stated that the project began in 2009, when the legislature began to take steps to examine the feasibility for the state to develop a pipeline from the North Slope to commercialize the gas, primarily for an instate market. Mr. Baker looked at slide 2, "Natural Gas Pipeline Development": 2009: Legislature begins taking deliberate steps to develop an in-state pipeline, independent of other producer led North Slope commercialization efforts. 2011: Alaska Stand Alone Pipeline (ASAP) plan developed and delivered to the Legislature. Plan further optimized during 2012. 2013: Alaska Gasline Development Corporation (AGDC) established as an independent, public corporation - $355+ million investment towards ASAP (HB 4). 2014: State participation in Alaska LNG project authorized (SB 138), Joint Venture Agreement executed and Pre-Front End Engineering and Design (Pre-FEED) begins 2015-2016: AGDC progressing two North Slope natural gas pipeline project options: Alaska LNG primary and ASAP backup Mr. Baker discussed slide 3, "In-State Pipeline Fund: Cash Flows." 2014 $330,000: Original Capitalization of Fund (FY14) $25,000: Additional Capitalization for HB4 Fiscal Note Agency Work (FY14) ($65,925): FY14 ASAP Project Expenditures ($6,874): FY14 AGDC Corporate Operating Costs$2,304Interest, Investment & Retirement Income 2015 ($157,000): Appropriation to Public Education Fund ($9,000): Appropriation to fund DNR FY16 Gas Commercialization Group ($65,909):FY15 ASAP Project Expenditures ($9,503): FY15 AGDC Corporate Operating Costs $1,437: Interest, Investment & Retirement Income 2016 $1,300: Approp 2015 Gasline Special Session SB3001 In-State Receipt Authority ($19,231): FY16 ASAP Project /In-State Gas Work (Projected to Year End) ($10,448): FY16 AGDC Corporate Operating Costs (Projected to Year End) $84: Interest, Investment Income as of 1/31/20162017 ($5,000): FY17 In-State Gas Work (Forecasted) ($4,310): FY17 ASAP Project, SEIS Completion (Forecasted) ($10,150): FY17 AGDC Corporate Operating Costs (GovFY17 Budget) Projected Balance June 30, 2017: $14,019 9:16:59 AM Co-Chair MacKinnon queried specific details on the $5 million spending. Mr. Baker replied that it was an estimate, and deferred to Mr. Krusen or Mr. Richards for more details. He furthered that a subsidiary was recently established, and there had been work on delivering gas to the state at reasonably affordable rates. He stated that there was language that outlined the communities that had direct access to the pipeline. He stressed that there was a focus on commercial analysis and pre-engineering to provide the project with the information necessary to complete the design and FEED. 9:19:30 AM FRITZ KRUSEN, VICE-PRESIDENT, AKLNG, AGDC (via teleconference), deferred to Mr. Richards. 9:19:58 AM FRANK RICHARDS, VICE-PRESIDENT, ENGINEERING AND PROGRAM MANAGEMENT, AGDC (via teleconference), stated that there had been preliminary work on the offtake kit. He shared that there was work with the producers to examine the interconnection points along the pipeline route. He shared that there was not much technical work downstream of the offtake kit, which would include lines to communities for distribution lines within the individual communities. He felt that there needed to be technical analysis downstream of the offtake kit. He remarked that there should be an examination of the commercial realm, with communications with the utilities for aggregation opportunities to develop an outline of the actual demands of the communities. He shared that there had been some instate examinations of potential demand, but wanted to expand that work to meet the actual demands. He stressed that it was a combination of technical analysis; engineering studies; commercial work with the utilities; and working with the sister agencies such as the Alaska Energy Authority (AEA) to determine the direct access to the gas. Co-Chair MacKinnon queried the FY 16 spend on the ASAP line, and the $4.3 million FY 17. Mr. Richards replied that the FY 16 spending for ASAP was because of a request from the board. He shared that SB 138 determined that the AKLNG project be the priority for the state. 9:22:56 AM AT EASE 9:26:35 AM RECONVENED 9:26:52 AM Mr. Richards discussed the cost of the ASAP project. Co-Chair MacKinnon wondered if the proposal for the right- of-way had been changed from the original plan, specifically whether it would run through Denali. Mr. Richards replied that there had been a slight modification to the right-of-way, but neither pipeline would run through Denali. Co-Chair Kelly wondered if the route in Denali was worth it. Mr. Richards replied that the current routing for both projects were not in Denali Park. The pipe only went slightly through the park, in the alternative alignment. Co-Chair Kelly expressed caution about going through the park. Mr. Baker agreed with Mr. Richards. He stressed that the challenge for the project. He stated that the Denali Borough, and Friends of the Park would prefer for the pipe to go through the park. He stated that the alternative alignment was shorter, and was the preferred path. The community in Denali felt that there would be an increased potential to get gas from the project, if it ran through the park. 9:36:27 AM Co-Chair Kelly stressed that the federal government had not supportive. Vice-Chair Micciche wondered if the subsidiary referred to the aggregator. Mr. Baker replied in the affirmative. He stated that the board had authorized the formation of two subsidiaries. One would manage the TransCanada assets, and one would be the instate aggregator. Vice-Chair Micciche queried the purpose of the subsidiary. Mr. Baker replied that, at the time, there was a hope to take over the TransCanada assets. The relationship was between the Department of Natural Resources (DNR) and TransCanada, so AGDC was not privy to the legal structure. The board wanted the maximum flexibility, so AGDC could hold the assets in a separate LLC. The transfer occurred successfully, and the most recent board meeting dissolved the subsidiary. Vice-Chair Micciche queried the flexibility of the organization, should there be a delay on the AKLNG schedule. BRUCE TANGEMAN, VICE-PRESIDENT, FINANCE AND ADMINISTRATION, ALASKA GASLINE DEVELOPMENT CORPORATION, replied that AGDC's purpose was to finish what they had been tasked. He stressed that the FY 17 intention was to complete Pre-FEED, and prepare the organization for the FEED. Senator Bishop queried the length of the possible permits. Mr. Richards replied that the life of the permits were approximately three to five years, and at that time the federal government would reexamine the environmental impacts of the projects. 9:43:08 AM Mr. Baker displayed slide 4, "Alaska LNG Fund: Cash Flows": 2014 $69,835: SB 138 Passed; Original Capitalization of Fund (FY14 Supplemental) ($1,052): FY14 AGDC Corporate Operating Costs$39Interest, Investment & Retirement Income 2015 ($16,312): FY15 Alaska LNG Project Cash Calls ($6,805): FY15 AGDC Corporate Operating & Contractual$253Interest, Investment & Retirement Income 2016 $64,590: Approp 2015 Gasline Special Session SB3001 TC Acquisition $75,600: Approp 2015 Gasline Special Session SB3001 Pre-FEED $2,900: Approp 2015 Gasline Special Session SB3001 AKLNG Receipt Authority ($64,590): FY16 AGDC Expenditure (TC Mid-Stream Acquisition) ($59,102): FY16 Alaska LNG Project Cash Calls ($6,672): FY16 AGDC Corporate Operating & Contractual (Projected to Year End) $30: Interest, Investment & Retirement Income (thru Jan 31, 2016) 2017 ($48,850): FY17 Alaska LNG Project Cash Calls ($2,800): FY17 AGDC Corporate Operating Costs (GovFY17 Budget) ($4,730): FY17 AGDC Contractual Expenditures (Forecast) $2,334: Projected Balance June 30, 2017 Senator Bishop wondered if "SME" referred to "Subject Matter Experts." Mr. Baker replied in the affirmative. Co-Chair MacKinnon queried the breakdown of the applied corporate expense. Mr. Tangeman responded that that AGDC had a cost allocation method. He stated that AGDC originally had one fund source. He stated that external auditors worked with AGDC to establish the cost allocation method. The cash calls were significant, because they were not included in the cost allocation method. Co-Chair MacKinnon surmised that the cost allocation was specifically for the corporate overhead. Mr. Tangeman agreed. 9:48:01 AM Co-Chair MacKinnon shared that she did not watch the governor's recent press conference on AKLNG. She wondered if there were any comments from the administrative team to understand the governor's comments. Mr. Krusen responded that the current budget was for completing pre-FEED; and ramping up ASAP. He stated that there were no details as described at the press conference. He stressed that it was too soon to make any adjustments, because it was unknown what would occur after the completion of Pre-FEED. Mr. Baker highlighted slide 5, "AGDC Annual Expenditures Breakout." He stated that the slide was a recap of what had been discussed. He stressed that the corporate operating costs were highlighted in blue. Those costs would be in the AGDC operating budget. He stressed that those costs were the overhead for the corporation. He stated that the fund request was identical to the prior year. 9:51:45 AM AT EASE 9:52:06 AM RECONVENED 9:52:15 AM MARTY RUTHERFORD, DEPUTY COMMISSIONER, DEPARTMENT OF NATURAL RESOURCES, discussed the PowerPoint, "FY2016 and FY2017 AKLNG Project Budget" (copy on file). She was speaking on behalf of DOL, DOR, and DNR. She shared that she would discuss the make-up of the agency structures within AGDC and the budget requests for FY 16 and FY 17. Ms. Rutherford looked at slide 2, "State Gas Team." She stated that there had been some confusion over the year, so DNR had done work to coordinate among the agencies and AGDC to ensure a fully integrated team. She explained that the slide indicated that the commissioners of the agencies and AGDC were used for major policy guidance. Ms. Rutherford highlighted slide 3, "Agency Roles in AKLNG": Department of Natural Resources (DNR) -North Slope Gas Commercialization Office (NSG) •Upstream [AS 38.05.180(hh), (ii)], in consult with DOR [AS 38.05.020(b)(10),(11),(12)] •Royalty In-Kind/Royalty In-Value decision (AS 38.05.182) •Marketing, in consult with DOR [AS 38.05.020(b)(10),(11),(12)] •In-state Gas coordination, in consult with AGDC (SB 138, Section 73) •Midstream Agreements, in consult with AGDC [AS 38.05.020(b)(13)] Department of Revenue (DOR) •Identify and recommend financing options (SB 138, Section 76) •Recommend statutory changes to property taxes under AS 43.56 and AS 29.45.080 (SB 138, Section 74) •Develop Impact Fees and Flow Rated Property Tax Proposals (SB 138, Section 74, AO 269 MAGPR Board) •Allows producers to pay tax as gas (TAG) (AS 43.55.014) •Consult with DNR on contracts negotiation [AS 43.05.010(16)] Department of Law (DOL) •Legal support to agencies and AGDC Alaska Gasline Development Corporation (AGDC) •State's ownership of project infrastructure (AS 31.25.080) •Assist DNR/DOR in maximizing the value of the State's gas [AS 31.25.005(3)] •Provide project services to the State at cost (i.e. without profit) [AS 31.25.005(5)] •Deliver domestic gas to in-state customers at commercially reasonable rates [31.25.005(6)] 9:57:12 AM Vice-Chair Micciche looked at DNR, and remarked that the governor had wanted to explore other options. He stated that there had been rumors of a delay of the constitutional amendment and other agreements. He queried the flexibility of DNR to delay some of the marketing spending. Ms. Rutherford responded that the commercial agreements had not progressed as quickly as anticipated, but they would not be available in time for a special session. She stressed that there had been progress, regardless of the delay in the commercial agreements. She shared that the financial environment had put the legislature in a difficult position to fund FEED. She stressed that the producers had begun conversations about the options to ensure the progression of FEED. She stressed that no one had backed out of the project, but were concerned about the FEED decision on 2017. She stressed that the budget was a document that reflected the project moving forward. She remarked that there could be changes, but she hoped that the commercial agreements would be in place to make timely decisions. She recognized the difficult financial situation and the delay in the commercial agreements, therefore there were some reductions in the governor's original request. 10:02:33 AM Vice-Chair Micciche wondered whether pushing for commercial agreements in the current situation, may hinder the state. Ms. Rutherford agreed, but stated that the pace of the agreements probably would not be complete in the following six months. Senator Olson noted that there were cash calls for the state, and wondered whether the other partners had timely cash calls. Ms. Rutherford replied that DNR did not have similar cash calls to AGDC. Senator Olson queried the money that would be available to backfill related to the delay. Ms. Rutherford stated that she would address that issue in the presentation. Senator Bishop shared that he often did not have time for discussions, because of busy schedules. He stressed that the DNR budget was already in the process of reductions, before the governor's press conference. Ms. Rutherford agreed. 10:07:32 AM Ms. Rutherford addressed slide 4, "State of Alaska AKLNG Appropriations to Date": Funding FY14-FY16 -$90.5 M plus FY16 Supplemental $157,040 Date Funding FY14-FY16 -$90.5 M SB138 General Fund to LNG Fund (FY14-FY15) $69,835.0 •Capitalized the LNG Fund •AGDC, AKLNG downstream cash calls, contractual service with agencies General Fund Appropriations (FY15) $11,762.0 •AEA in-state affordable energy study •DNR North Slope Gas Commercialization •DOR Tax Division Appropriations (FY16) $8,987.0 •DNR North Slope Gas Commercialization (in- state gas line fund) Authorization from LNG Fund (FY16) •Within original $69,835.0 capitalization •AGDC, DNR, DOTPF: $3,023.0 Ms. Rutherford discussed slide 5, "FY2016 Supplemental Summary": Supplemental Request $157.0 million plus $5 million AGDC Statutorily Designated Program Receipts (SDPR): Agency Operating Budgets $12,995.0 DNR: $1,849.5 DOR: $1,045.5 DOL: $10,100.0 AGDC: Capital Budget $144,045.0 Reimburse TransCanada: $68,445.0 Fund State's remaining Pre-FEED share: $75,600.0 AGDC: Receipt Authority $5,000.0 AKLNG reimbursement for work performed 10:10:49 AM AT EASE 10:20:23 AM RECONVENED 10:20:34 AM Co-Chair MacKinnon felt that the presentation did not match the AGDC presentation. She remarked that there had been three different references to the buyout. She remarked that it may be confusing within the references. She requested the most recent information in all presentations. She specifically queried the spending proposal for the FY 17 budget. She wanted more information for the DNR spending proposal. She stressed that there was some discrepancies between Legislative Finance, governor's proposal, and the actual numbers. Ms. Rutherford displayed slide 4 (a), "FY 2016 Agency AKLNG Budget." The slide showed the FY 16 money appropriated to the three agencies: DNR, DOR, and LAW. She stated that it did not reflect any interagency funding. Ms. Rutherford addressed slide 5 (b), "FY 2017 Agency AKLNG Budget." She explained that the slide broke down the agencies for a total of $31 million. She shared that there would be distinctions between the governor's request and the decrement reflections as a result of the change in the state budget situation. Ms. Rutherford discussed slide 6, "DNR North Slope Gas (NSG) AKLNG Team." She remarked that she and the commissioner were at the top of the structure. She furthered that there was a combination of contractors and subject matter experts who were addressing AKLNG on a day- to-day basis. Ms. Rutherford highlighted slide 7, "DNR NSG FY 2016 Budget." The slide showed the FY 16 DNR budget divided between the regular session appropriation and the special session. She announced that the total projected available was a $377,000 balance. She stated that the department would spend almost exactly anticipated money. She remarked that, should the project halt, the department would cease spending causing a greater balance closer to $1.5 million to $2 million. Ms. Rutherford discussed slide 8, "DNR NSG FY 2016 Personal Services." The slide broke down the FY 16 employees. 10:25:13 AM Ms. Rutherford addressed slide 9, "DNR NSG FY 2016 Services": RSA to Department of Law for legal support in negotiation and drafting of commercial agreements: $3,000.0 RSA to Department of Revenue for services provided by commercial analyst in support of upstream activities: $187.5 Black and Veatch for support, advice, analysis, and expertise in commercial negotiations, strategy, modeling, FERC and resource report drafting and review, and marketing, estimated spend rate of $150.0/month: $1,775.0 CarbExConsulting, Steve Swaffield for commercial negotiations support and expertise, estimated spend rate of $20.0/month: $225.0 GreengateLLC, for advice, expertise, analysis and support on financing options and sources of financing, financing structures, finance considerations of commercial negotiations, and property tax support; financing and financial modeling support and analysis, estimated spend rate of $75.0/month: $750.0 Nan Thompson for support in drafting RIK/RIV decision, estimated spend rate of $20.0/month: $200.0 Pingo International, Pat Anderson for expertise in arctic pipeline engineering and design to support midstream activities, estimated spend rate of $57.0/month: $680.8 Steve Wright for expertise in project management and support in upstream activities, estimated spend rate of $35.0/month: $420.0 TOTAL: $7,238.3 Ms. Rutherford discussed slide 10, "DNR NSG FY 2016 Services - Special Session Funding": RSA to Department of Natural Resources, Division of Oil and Gas for support from commercial analysts for upstream activities: $304.0 Ernstand Young for audit services for TransCanada compliance review: $50.0 Lisiecki Consultancy, Simon Lisiecki for expertise in marine facilities and transportation engineering to support midstream activities, estimated spend rate of $8.0/month: $100.0 Rick Harper for support in midstream activities, estimated spend rate of $60.0/month: $300.0 Consulting services anticipated for resource report review and drafting: $350.0 Additional commercial negotiation support services anticipated to advance commercial negotiations and activities: $300.0 Marketing contractor to support marketing negotiations to advance project until a permanent employee can be recruited and retained: $350.0 TOTAL: $1,754.0 Vice-Chair Micciche looked at slide 8, and noted that the state was considering reductions in various other agencies. He wondered if DNR was hiring for the open, valuable positions. Ms. Rutherford replied that the marketing positions were not expected to be filled until FY 17. She stated that the commercial agreements would drive the hiring of employees. She remarked that expertise was required in the drafting of commercial agreements. She stated that the marketing aspect had two phases. She stated that there could be a combination of venture market structures. There was an initial proposal that the funding include the possibility to set up three joint market ventures. She stressed that the project would compete in the world market, so the experts must be the best. 10:29:58 AM Vice-Chair Micciche felt that there were adequate individuals that would analyze different positions in various scenarios. He hoped that DNR and AGDC would consider what the organization may look like in the event of a project delay. He hoped that the dollars may shift to a critical state service. Ms. Rutherford agreed. She hoped that there would not be a delay. Ms. Rutherford highlighted slide 11, "NSG FY 2017 Budget Request." She explained that column one was the one-time increment appropriated in FY 16; column two was the additional increment request for FY 17; column three was the governor's initial total request for FY 17; column four was the proposed reductions that DNR would submit; and column five was the new totals in the governor's amended budget for FY 17. She noted that DNR reduced approximately $7 million, so the slide was a reflection of what a marketing organization would only stand one. She stated that, assuming that the state would move into FEED in FY 17, the co-ventures would begin to reach out to the market and begin to develop the Heads of Agreement. The Heads of Agreement would evolve into contracts, which would be the foundation for the financing of the project and the long- term contracts with buyers. She stressed that a first-class state marketing association was critical to moving forward with the project. Ms. Rutherford discussed slide 12, "NSG FY 2017 Personal Services." The slide was an indication of the new request, and were the most senior positions to develop the marketing of the gas. She stated that the projections were drawn from other similar entities. 10:34:57 AM Ms. Rutherford displayed slide 13, "NSG FY 2017 Services": RSA to Law for continued legal support for commercial agreements negotiation and drafting -estimated spend rate of $1,000.0/month: $12,000.0 RSA to Law for legal support for marketing negotiation and drafting of joint venture marketing agreements with Producers -estimated spend rate of $400.0/month: $5,000.0 TOTAL: $17,000.0 Continued commercial expertise and support: $600.0 Continued analysis and modeling support: $2,100.0 Engineering expertise for marine, facilities, etc: $480.0 Other professional services for expertise and support as required: $2,470.0 Other services required for operational efficiency, phones, space, etc: $350.0 TOTAL: $6,000.0 Co-Chair MacKinnon wondered if Mr. Burnett was prepared to discuss DOR's portion of the project. JERRY BURNETT, DEPUTY COMMISSIONER, TREASURY DIVISION, DEPARTMENT OF REVENUE, replied in the affirmative. 10:36:41 AM AT EASE 10:38:58 AM RECONVENED 10:39:13 AM Co-Chair MacKinnon stated that the presentation would be suspended. 10:39:35 AM ADJOURNMENT