AGDC reports progress in attracting interest to gasline

One piece at a time, the Alaska Gasline Development Corp. is putting its plan to sell the $40 billion Alaska LNG Project into action.

The state-owned group currently has a preliminary capacity solicitation for potential customers of the LNG export plan to express their interest in it open through Aug. 31. The “open house” of sorts is geared towards natural gas producers so AGDC can gauge the interest in reserving capacity on the proposed project’s gas pipeline and liquefaction tolling system, corporation officials have said.

Accordingly, AGDC has also set up a data room for potential customers to examine the technical design and environmental information on the project the state, BP, ConocoPhillips and ExxonMobil collectively spent about $600 million over three years compiling.

The companies transferred that mountain of data to AGDC at the start of the year after depressed oil and LNG markets put in question their ability to continue investing the Alaska LNG and the project’s long-term profit margin.

Gov. Bill Walker, the primary proponent of a state-led Alaska LNG Project plan, believes the state can provide benefits to the project the producers can’t that will make it financially viable. A broadly skeptical Legislature has basically given him 2017 to prove it.

While the capacity solicitation is meant to mostly gauge upstream interest in the project, AGDC Commercial Vice President Lieza Wilcox said during the corporation’s Aug. 10 board meeting that 17 confidentiality agreements have been signed with companies in six potential LNG markets.

The corporation is now meeting with those companies to further inform them about the Alaska LNG Project, she said. After signing the confidentiality agreements the companies “want to walk alongside this train to see if it’s moving,” Wilcox described.

She noted a confidentiality agreement is the first step in courting Asian LNG buyers. It is typically followed by a non-binding memorandum of understanding — which AGDC signed with the massive Korea Gas Corp. in late June — or letter of intent and then a heads of agreement, hopefully leading up to a firm contract.

AGDC is also reviewing draft letters of intent with 13 parties from multiple countries, according to Wilcox.

“I get reminded at almost every meeting what a serious step that (MOU/LOI) is for the companies,” she commented to the board.

Tax questions

AGDC notched a noteworthy victory in July when it secured an opinion from the Internal Revenue Service that it indeed is a tax-exempt political subdivision of the State of Alaska in the eyes of the federal government. But what exactly does that mean for the Alaska LNG Project?

AGDC President Keith Meyer said in response to questions from board Vice Chair Hugh Short that the tax-exempt status is indeed a significant positive for the corporation, but not the missing link that will make the planned megaproject a sure-fire go.

Short is a co-founder and CEO of the Anchorage-based and Arctic-focused investment firm Pt Capital.

Meyer first clarified that the ruling extends only to AGDC, not to the Alaska LNG Project it is sponsoring.

“If we brought a third party into that equity (investment) structure, we can’t extend the (tax) benefits to the third party but we still retain them,” he said.

A private equity investor in the Alaska LNG Project would still be subject to federal taxes on any profits that investment would return.

However, that may not extend to all Alaska LNG investments as a result of the IRS opinion, depending on how the many billions of dollars worth of financing for the project is ultimately structured.

Being a political arm of the state — and holding the IRS ruling confirming as much — also allows AGDC raise debt by selling tax-exempt bonds. As a result, the buyers of any bonds sold by the corporation to fund the project would not have to pay federal taxes on the interest revenue they generate.

AGDC estimates the Alaska LNG Project could initially generate $1 billion-plus in annual cash flow growing to more than $2 billion after about 20 years until the debt is paid off. Once debt-free in about 2045, it could produce upwards of $5 billion in cash to investors annually and be sold for up to $50 billion, Meyer said.

He has repeatedly pointed to a very high-level, prospective scenario in which construction of the roughly $40 billion project is paid for with a combination of roughly 75 percent debt and 25 percent equity investments. The equity investments would likely garner about an 8 percent return and the debt 5 percent, for a 5.8 percent average cost of capital, according to Meyer.

The State of Alaska would not be liable for any debt AGDC takes on to fund the project, Meyer has also stressed, as the bonds or other debt would be backed by the long-term “take or pay” contracts the corporation would secure from Alaska LNG customers.

AGDC is encouraging Alaska firms to invest in the project and Senate Bill 138 — the law that established the framework for the state’s participation in Alaska LNG — requires the corporation to allow individual Alaskans to buy into the project as well.

Private equity holders would have to manage their Alaska LNG investment into their overall holdings and tax position, but would have a “potential reduced return relative to AGDC for the exact same investment because of the tax impact — to the extent they have a tax impact,” Meyer acknowledged.

Short said private equity investors in the project would likely require a higher return threshold to offset the federal taxes they would have to pay on the returns.

“I think it’s a little optimistic to think taxable entities are going to invest alongside us and accept a lower rate of return and accept that’s how it’s going to be,” Short said.

He suggested offering a different class of stock, blended return rates or simply factoring higher investment returns into a slightly higher tariff to use the pipeline and LNG plant if need be to satisfy potential investors’ requirements.

Meyer responded by saying AGDC will offer benefits to different classes of investors with higher returns to some, particularly early investors in the project. He said those late to the game will probably have to accept lower rates because those investments should be subject to less risk as the project progresses, noting AGDC is considering many of these issues in drafting its financing plan.

“It’s just a benefit, but when we’re talking about competing against very competitive projects globally, every cent counts,” Short summarized.

Elwood Brehmer can be reached at [email protected].