the Shareholders Agreement, to increase debt or consummate one ownership readjustment. (97.3)

: 3. Pinancing of Project

The SEADOCK financing plan does not differ from LOOP'S in any material respect. Just as is the case in LOOP, it is convenient to view the financing plan as encompassing three distinct stages: design, construction, and operation. SEADOCK's plans in each of these areas are explored more fully below.

a. Design Stage

As with LOOP, shareholder contributions "cash calls" have underwritten the expenses associated with design, preparation of the license application, and a multitude of miscellaneous expenses. As of the end of 1975, total SEADOCK expenditures for the year amounted to $3,041,000, and total liabilities plus shareholder investment at that time were in excess of $8 million. (416) From the inception of LOOP until July 1, 1975, cash advances required by SEADOCK were divided equally among all shareholders. With the amendment of section 4 of the Shareholders Agreement on that date, subsequent cash advances are to be in proportion to May 1975 shareholder volume estimates. (14.1, 4.5, Shareholders Agreement) The resulting shareholder percentages, expressed as a fraction of all shareholder nominations, are as follows: Exxon 21.743, Gulf 15.318, Phillips 13.81%, Shell 13.39%, Cities Service 6.898, Dow 5.66%, Continental 4.06%, Crown 3.833.

(Ap

As has been noted above, SEADOCK construction will be broken into two distinct phases. Investment in Phase I facilities is expected to total $659 million, and Phase II $5 million, for a total capital expenditure of $855 million. plication at E-2, E-8) SEADOCK plans to finance approximately 90% of the construction costs by issuing debt securities with 20-30 year terms. Some interim or construction financing may derive from the proceeds of commercial bank loans or SEADOCK commercial paper. The Shareholders Agreement provides for the issuance of up to $80 million worth of SEADOCK common stock, which will provide most of the requisite 10% equity financing.

As with LOOF, the key element in such a highly-leveraged financing plan is its acceptability to the financial community. SEADOCK's financial advisor, Morgan Stanley & Co., reached essentially the same conclusions as did First Boston for LOOP:

(i)

It is our experience that the financial capability of a corporation such as SEADOCK, formed for the purpose of constructing, owning and operating a single project, is determined by three principal considerations: assurance that funds for completion of the project will be available; (ii) the economic viability of the project upon completion; and (iii) assurance that funds will be available to make payments of interest and principal on debt as they become due, even in the event that the project itself might not have generated sufficient revenues at the times needed for those purposes.

It is our understanding that promptly upon receipt of the necessary permits, SEADOCK will undertake to commence and use its best efforts to complete the project and that SEADOCK's owners or their parents agree to provide such funds as may be required, in addition to SEADOCK's borrowings, to achieve completion.

The economic viability of SEADOCK rests on the substantial cost savings which we understand will be realized as a result of bringforeign crude oil directly to the United States Gulf Coast by very large crude carriers rather than by relying on more expensive, smaller ships or transshipment systems. We believe the economic case for SEADOCK is sufficiently strong and well documented that it need not be summarized or repeated here in detail.

As for assurance of funds availability for debt service in the event of insufficient funds generation by the project after completion, the SEADOCK shareholders, in the Shareholders' Agreement, have agreed to execute throughput and deficiency, or other financing agreements, in forms reasonably required by SEADOCK and its lenders, for debts to be incurred by SEADOCK. Such agreements will be assigned to a trustee for the benefit of lenders to the Company. Pipeline projects have traditionally used throughput and deficiency agreements which state that the owners or their parents will ship or cause to be shipped through the pipeline their respective percentages of

the amount of petroleum which will provide the
pipeline with an amount of cash revenue at least
-sufficient, with other available cash resources
of the pipeline, to pay and discharge all of
the pipeline's obligations. If, for any rea-
son, the pipeline has a cash deficiency on the
due date of any payment, each owner or parent
company will provide to the pipeline, as ad-
vance payment for transportation, its share of
the amount in cash by which the pipeline's
available cash is insufficient to pay and dis-
charge all its obligations. The effect of the
throughput and deficiency agreement is to put
the creditworthiness of the owners or parents
behind the pipeline's obligations. This form
of arrangement has been used for many years to
finance jointly-owned projects. It is well un-
derstood and accepted by the investment commu-
nity.

We have been advised that at least 80% of
the stock of SEADOCK will be owned by companies
whose parents have ratings of Aa/AA or better.
Based on this high percentage of the top two
rating categories, we believe it likely that
the debt of SEADOCK will be rated Aa/AA.
It can be seen that the quality of the credits
above would classify SEADOCK's debt as being
of investment grade, suitable for purchase by
a broad group of investors.

Based on the facts set forth above and our
experience in marketing securities, and based
on present market conditions, we are of the o-
pinion that SEADOCK can be assured of obtaining
the necessary debt financing from a variety of
financial sources on terms reflecting the high
quality of its credit. (Application Exh. E-4
at 1-3)

There was much inter-shareholder debate about whether or not it was necessary or desirable to submit a final or draft throughput agreement with the application. In the end, since no final version was agreed upon prior to application, no draft agreement was submitted. The latest version, however, is quite similar to LOOP's in its handling of financing guarantees. As with LOOP, all shareholders are obligated to ad

vance their pro rata shares of the amount of any cash deficiency, but the actual payments are made by the deficient shareholders. ( 43 and 44.3) In the financial community, this somewhat roundabout method is preferred over direct cash calls on the deficient shareholders because it supposedly "ainimizes the extent of the cash shortfall and therefore the initial exposure of the investors." The cash deficien

cies paid to SEADOCK are treated by SEADOCK as non-interestbearing advance payments for subsequent throughput by the paying shareholders, when they so request, provided they are not further obligated with deficiency payments. (95) As with LOOP, the deficiency payments are functionally equivalent to short-term loans to SEADOCK.

The question of tax-exempt financing was even more of a problem for SEADOCK than it was for LOOP. Unlike the situation in Louisiana, the State of Texas was very active in considering the possibility of an independent terminal off the Texas coast. After much study of the cost savings associated with deepwater ports, the Texas Offshore Terminal Commission (TOTC) issued its report in January, 1974, favoring financing and ownership of such a facility by the State of Texas. The TOTC report noted that its proposal "would have to be extremely unacceptable to the oil companies to forego such [transportation (i.e., 20 cents - 30 cents/bbl.)] savings. Indeed it was. At every opportunity SEA DOCK personnel attempted to discourage any TOTC plan involving state ownership and operation of the facility, or seeking oil company financing without a concomitant degree of oil company control over design, construction and operation. In the end it was very clear that SEADOCK shareholders generally felt that oil company participation in financing guarantees was not possible without ownership.

As SEADOCK's representative put it in testimony before the TOTC:

We wish to be very clear on one point we
believe the participating companies in SEADOCK
will absolutely not commit their credit as en-
visioned under Alternative B of the staff re-
port [TOTC recommendation to use tax-exempt fi-
nancing secured by oil company throughput agree-
ments) without being able to aspire to a return
for the capital that they have placed at risk.
Testimonry of 12/27/73)

Even before this, SEADOCK had clearly rejected by 12 to 1
-- the tax-exempt financing option for its own plans, out of
aversion to government control of design, construction and op-
erations. Arco had been the sole dissenter, citing the loss

of 1 1/28 2% in interest savings (about $8 million/year) and predicting that government control would not be averted anyway. An Arco request for reconsideration of this issue resulted in a memorandum listing no fewer than eight reasons for rejecting tax-exempt (revenue bond) financing.

c. Operating Stage

As with LOOP, all aspects of SEADOCK operations, depreciation, labor, taxes, interest, and the like will be financed out of the operating revenues generated by tariffs. Since the tariff will be constructed in such a way as to provide a 7% surplus after expenses and taxes, no cash shortfall is expected, providing throughput volumes hold up. Otherwise,

the throughput agreement will provide the mechanism for cash advances from the shareholders to cover intermittent cash deficiencies.

4. Port and Onshore Storage

11

Capacity and Operations

a.

Tanker Limitations

The application does not indicate a minimum tanker size for use of SEADOCK. It states that SEADOCK will accept tankers of any size provided the vessels can lift the floating hoses and are otherwise capable of using the designed facilities. (Application at E-4) But proposed design criteria circulated among the owners suggest that smaller tankers will not be able to use SEADOCK. For example, it was suggested by SEADOCK that the minimum size tanker be 80 MDWT. sideration had been given to handling vessels in the 50-100 MDWT class, but the 80 MDWT limit has apparentl" prevailed, and discussions with SEADOCK officers confirm that a minimum size in this range will probably be established. This limitation will not affect any owner, since their projections indicate deliveries in vessels of 80 MDWT or larger.

Con

The application is silent on the diameter of the floating tail hose which must be lifted out of the water and connected to the tank rs. */ Drawings in the Draft Operations Manual

*/ It says only that the diameter of tail hose sections "will be varied in accordance with handling capabilities of tankers which will be using the berth." (Application at M-1)