Legislature(2013 - 2014)SENATE FINANCE 532
02/13/2014 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| Alaska Public Debt Report: Department of Revenue | |
| Interior Energy Projects and Sets Programs Update: Alaska Industrial Development and Export Authority | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SENATE FINANCE COMMITTEE
February 13, 2014
9:07 a.m.
9:07:50 AM
CALL TO ORDER
Co-Chair Meyer called the Senate Finance Committee meeting
to order at 9:07 a.m.
MEMBERS PRESENT
Senator Pete Kelly, Co-Chair
Senator Kevin Meyer, Co-Chair
Senator Click Bishop
Senator Mike Dunleavy
Senator Lyman Hoffman
Senator Donny Olson
MEMBERS ABSENT
Senator Anna Fairclough, Vice-Chair
ALSO PRESENT
Deven Mitchell, State Investment Officer, Debt Management,
Department of Revenue; Michael Pawlowski, Deputy
Commissioner, Strategic Finance, Department of Revenue;
Mark Davis, Deputy Director-Infrastructure Development,
Alaska Industrial Development Export Authority (AIDEA);
Gene Therriault, Deputy Director, Energy Policy
Development, Department of Commerce, Community and Economic
Development.
SUMMARY
ALASKA PUBLIC DEBT REPORT: DEPARTMENT OF REVENUE
INTERIOR ENERGY PROJECTS AND SETS PROGRAMS UPDATE: ALASKA
INDUSTRIAL DEVELOPMENT AND EXPORT AUTHORITY
^ALASKA PUBLIC DEBT REPORT: DEPARTMENT OF REVENUE
9:09:23 AM
DEVEN MITCHELL, STATE INVESTMENT OFFICER, DEBT MANAGEMENT,
DEPARTMENT OF REVENUE, spoke to a presentation titled
"Alaska Public Debt Report: A Presentation to the Senate
Finance Committee" dated February 13, 2014 (copy on file).
Mr. Mitchell cited slide 4 titled, "$6.6 to 8.1 Billion in
Outstanding State Debt 1999-2014 Summarized by category in
millions." He related that the slide depicted the state's
historical progression of obligations over the last 15
years. In 1999 the state's outstanding general obligation
debt was 2.4 million. Prior to 1999, the state issued
general obligation debt in 1987 and 1981. The total
outstanding debt in 2014 was $840.2 million with debt
authorizations in 2002, 2008, 2010, and 2012 primarily for
transportation and education needs (an additional $303
million was authorized but remained unissued).
Senator Dunleavy inquired whether the $840.2 million was
the total amount of outstanding general obligation debt.
Mr. Mitchell replied that the $840.2 million was the amount
currently outstanding; however $453 million was authorized
in 2012 and $303 million of the amount was unissued.
Senator Dunleavy inquired what the total amount with the
future "encumbrance" was.
Mr. Mitchell replied that if the remainder was issued
tomorrow the total amount of outstanding debt was
approximately $1.1 billion.
Mr. Mitchell continued to speak to slide 4. He noted that
the State Supported category of debt included leases and
school debt reimbursement. School debt reimbursement was
the largest component of the category, which grew from
approximately $400 million in 1999 to approximately $900
million in 2014[category total in 1999 was 459.1 million
and in 2014 was $1.195 billion]. He reminded the committee
that school debt reimbursement was the portion of municipal
debt that was issued through a municipal general obligation
bond, which obligated the state to pay back. In 1999 and
several subsequent years, the state issued debt through
Alaska Housing Finance Corporation (AHFC), and
municipalities, i.e., Anchorage and the Matanuska Susitna
Borough. In addition, the state's certificate of
participation program was diminished; therefore the debt
was not directly controlled by the state.
Mr. Mitchell spoke to the State Guaranteed debt category
that reflected the Veteran's Mortgage Program. He expounded
that the program was flat due to the competitive nature of
the mortgage market. [Category total in 1999 was $391
million and in 2014 was 383.9 million.] He referenced the
State Moral Obligation debt category that included the
Alaska Municipal Bond Bank Authority (AMBBA), Alaska Energy
Authority (AEA) and the Alaska Student Loan Corporation
(ASLC). [The total in 1999 was $763.1 million and in 2014
was $1,200.7 billion.] The growth in the category was
primarily due to AMBBA. He turned to the State Revenue debt
category that was $210 million in 1999 and $595.7 million
in 2014. He reported that the category included the
Anchorage Airport terminal "C" reconstruction, Fairbanks
terminal project, and sport fishing hatchery bonds. The
University debt category grew from $85.7 million in 1999 to
$190.5 million in 2014.
Co-Chair Kelly inquired whether all of the university debt
was in revenue bonds.
Mr. Mitchell responded that revenue bonds reflected the
majority of the debt with a portion of the debt for lease
obligations.
Mr. Mitchell addressed the State Agency Debt category,
which was $767.5 million in 1999 and $543.3 million in
2014. He noted that state agency debt was primarily
comprised of AHFC, and Northern Tobacco Securitization
Corporation (NTSC) and had decreased. He moved to the State
Agency Collateralized debt category that amounted to
$1.983.8 billion in 1999 and $2.312.2 billion in 2014,
which was comprised of debt from AHFC and Alaska Industrial
Development and Export Authority (AIDEA). He qualified that
the portion of AIDEA debt was relatively small. He
highlighted that the Municipal debt category was $2.303.4
billion in 1999 and $3.150.6 billion in 2014. He reiterated
that the growth in municipal debt corresponded to the
growth in AMBBA [Bond Bank] debt, which was the same debt.
The bond bank borrowed on behalf of municipalities.
Mr. Mitchell moved to slide 5:
Financial Management and Debt Metrics
Current Debt service costs remain below 5% of General
Fund unrestricted revenues
In 2013, a $35 million Certificate of
Participation authorization to fund a residential
housing facility colocated with the Alaska Native
Medical Hospital
The State is expected to benefit from higher use
of the ANMC and reduced Medicare copayments
The School Debt Reimbursement Program continues
to grow with open ended authorization
Mr. Mitchell directed the committee's attention to the
slide's graphs related to debt service. He pointed to the
graph in the lower left titled, "Historical Total State
Debt Service (G.O. and State Supported) as a Percentage of
Unrestricted Revenues" that depicted a high of
approximately 2 percent in 2005 to a low of .5 percent in
2008. He observed that the fluctuations correlated to
differentiation in the state's revenues. He turned to the
graph in the upper right titled, " Projected State Debt
Service (G.O. Plus State Supported compared to G.O., State
Supported, & School Debt Reimbursement) as a Percentage of
Unrestricted Revenues FY20142023." He noted that the level
of debt was projected at almost 5 percent in 2016 as a
percentage of unrestricted revenues. The projections did
not include increases in school debt borrowing or
additional authorizations for general obligation bonds.
Co-Chair Kelly wondered what a healthy level of debt was.
Mr. Mitchell replied that 8 percent was the plausible
"upper threshold" in order for the state to maintain its
rating category.
9:18:15 AM
Mr. Mitchell continued to speak to slide 5 and directed the
committee's attention to the lower right hand portion of
the slide titled, "Projected Total State Debt Service
(G.O., State Supported, and School Debt Reimbursement)and
Unrestricted Revenues FY20132022 ($ millions)." He detailed
that the green line depicted general obligation and state
supported debt service in actual dollars, which was $230
million annually, remained flat and decreased through 2023.
A blue line depicted the debt as unrestricted general fund
revenue forecasted from the "Revenue Sources Book."
Mr. Mitchell discussed slide 6:
Financial Management and Debt Metrics
G.O. debt service is low, especially when compared to
unrestricted revenues
On November 6, 2012, the 2012 $453 million
Transportation G.O. bond authorization was
passed by voters
$149.6 million of Bond anticipation Notes
sold in March 2013
Balance of Authorization is projected to be
sold over the next 18 months
Mr. Mitchell related that he recently received updated cash
flow information and that the balance of the authorization
was projected to be sold over the next 36 months as opposed
to the next 18 months. The figure reflected debt for road
projects, which were long lasting projects. He pointed to
the graph on the lower left titled, " General Obligation
Outstanding Debt Service before Anticipated Issuance of
2012 Authorization ($ millions) and stated that the slide
revealed that the debt service was at its peak in 2014 at
approximately $80 million and decreased through 2034. The
decrease reflected "the maturity of the debt program."
Co-Chair Kelly inquired whether the graph depicted the
"amortization path" if the state did not issue any more
bonds.
Mr. Mitchell replied in the affirmative. He qualified that
the state had "federally enhanced obligations" due in 2038
called, "Qualified School Bonds" that were structured as
tax credits. The department placed the debt far down on the
yield curve because the state was paying zero interest on
the debt due to receipt of the tax credits and were not
included in the graph.
Mr. Mitchell moved to the graph in the upper right corner
titled, "Total General Obligation Debt Currently
Outstanding or Authorized ($ millions)" that peaked in 2015
to approximately $1 billion and decreased each year through
2036. He turned to the lower right graph titled," General
Obligation Outstanding Debt Service after Projected Series
2014A and 2015A Issuances ($ millions)" that showed "the
potential structure of layered level debt service on top of
the existing amortization of debt." He reported that the
state was projected to pay approximately $95 million in
annual debt service with issuances.
Co-Chair Kelly inquired why the lower left graph was
different from the upper right hand graph.
Mr. Mitchell responded that the lower left graph reflected
the actual dollars spent on debt service. The upper right
reflected outstanding balances in the particular point in
time on the graph.
Co-Chair Kelly requested further clarification.
Mr. Mitchell explained that one graph reflected an annual
payment amount and the other reflected an outstanding
balance.
Mr. Mitchell moved to slide 7:
Financial Management and Debt Metrics
The State has a long track record of conservative debt
practices
G.O. bonds carry pledge of full faith, credit and
resources of the State
- State policy limits debt service to less
than 8% of General Fund unrestricted revenue
- Debt service as a percentage of
unrestricted General Fund revenues has
remained low for 15 years
FY2013 was 1.7% (3.3% including school debt
reimbursements)
Use of executive power to control expenses
Historical Preference for utilizing paygo funding
versus debt
Future borrowing:
- 2012 G.O. Authorization for State
transportation projects (up to $453 million)
- Issued $149.6 million Bond Anticipation
Note in March 2013
- Anticipate issuing up to $230 million Bond
Anticipation Note in March 2014 and $35
million
Certificate of Participation in April 2014
State financial support has been discussed for a
number of strategic capital initiatives
Every $100 million borrowed costs $7 to 9 million
in debt service over 20 years (36% range)
Mr. Mitchell pointed out that the rating agencies favored
the state's prudent borrowing approach of "belt tightening"
when Alaska's "volatile" revenue stream had declined. He
offered that the $149.6 million bond issuance in 2013 had
an interest rate of 9 basis points or .09 percent and was
"extraordinarily low."
Co-Chair Kelly directed the committee's attention back to
slide 6 and noted that the debt service for capital
projects was reflected in the operating budget. He believed
that the debt service should be reflected in the capital
budget every year or else money was being spent on new
projects in the capital budget that could be utilized to
pay off bonds. He felt that "headroom was being created in
the capital budget" that otherwise would not exist if the
bond indebtedness from past capital expenditures was
reflected in the capital budget. He added that the capital
budget was larger than it appeared because the debt service
on previously bonded capital projects was not included.
9:30:22 AM
Senator Bishop inquired whether the Department of Revenue
(DOR) had looked at the impacts on the state's credit
rating regarding having an equity share in the AK LNG
project.
MICHAEL PAWLOWSKI, DEPUTY COMMISSIONER, STRATEGIC FINANCE,
DEPARTMENT OF REVENUE, replied that in relation to the
state's credit rating, the potential for financing a major
gas pipeline was very far into the future and currently
"unsettled." He stated that DOR had examined issues
regarding the debt capacity of the state. He voiced that
the obligation of the state, assuming a 20 to 25 percent
share of a $45 billion to $65 billion project exerted
pressure on the state's debt capacity, which affected the
capacity for other state needs. He relayed that the
commissioner was concerned about the level of commitment
the state could make in the out years.
Senator Olson inquired what the difference was between the
percentage of interest the state was earning from money in
the bank versus the debt service on bonding to finance
projects.
Mr. Mitchell inquired whether he was referring to "the
opportunity costs over time of spending the state's money
for projects instead of borrowing other people's money."
Senator Olson answered in the affirmative.
Mr. Mitchell stated that the long-term cost of issuing 20-
year debt was close to 3 percent on a tax exempt bond
issue.
Senator Olson wondered what the state was earning through
savings.
Mr. Mitchell responded that it depended on what fund
accounts he was referring to. He relayed that the
Constitutional Budget Reserve Fund (CBRF) earned 7 percent
last year.
Co-Chair Kelly clarified that currently, when the state
bonded it paid approximately 3 percent and the interest
earned on the CBRF was about 7 percent.
Mr. Mitchell responded in the affirmative.
Senator Olson discerned that it made more sense for the
state to bond even though it increased public debt since
the state was earning 4 percent more in interest on its
savings. He asked whether his hypothesis was correct.
Mr. Pawlowski replied that the question was a good opening
for discussions on the issue and "the degree to which that
[conclusion] made sense." He would provide information to
the committee on the exact earnings and indebtedness costs
following the meeting.
Co-Chair Kelly drew a parallel to his previous comments.
He recalled that in 2002, the state had bonded for about
$226 million in capital budget projects. The state was
still currently repaying for the 2002 bonds. However, the
bond indebtedness expense was not accounted for in
subsequent capital budgets. He maintained that subsequent
capital budgets grew or shrunk irrespective of previous
bonding for projects because the payments for bonded
indebtedness were not recognized in the capital budgets. He
reiterated that the situation resulted in the capital
budget having "headroom that wasn't legitimate." He noted
that when the state bonded for less than interest rates
earned for savings it made sense, however, if the
indebtedness expense was never recognized the budget
continued to grow. He summarized that when you bond in the
capital budget the expense was accounted for in the
operating budget but the mounting debt was inescapable. He
wanted discussions about moving the debt into that capital
budget.
Co-Chair Meyer surmised that bonding made sense when there
was a huge surplus in the CBR or Statutory Budget Reserve
(SBR) that was earning 6 percent and it was possible to
bond at 3 percent. He expressed concern that the state was
in deficit spending and the state's savings were going to
be spent to fund general operating expenses. He questioned
whether the state should take on additional debt. He
cautioned that the state was in a situation where it had to
watch its indebtedness because it did not know what
revenues would be in the future. He expressed additional
concerns regarding school construction debt and noted that
the state did not have control over the process. The
municipalities voted for school bonds and the state was
responsible for 70 percent of the debt.
Mr. Pawlowski replied that discussions focused on who was
issuing the debt was important. He relayed that if the
local government had a lower credit rating then the state
"there might be inefficiencies in actual issuing of the
school bond debt as opposed to the issuance coming through
the state."
9:41:00 AM
Mr. Mitchell added that he had conversations with
Commissioner Rodell about school debt reimbursement. He
shared that the program limited the ability of the state to
control its obligation on school debt. The bond structuring
on school municipal bonds were determined by the local
municipalities and did not necessarily conform to the
state's best interest.
Co-Chair Meyer observed that some concerns were raised by
the rating agencies regarding the state's bond rating due
to the amount of the state's unfunded liability at $12
billion. He noted that the state included medical costs in
its unfunded liability. He wondered whether the state
received any credit from rating agencies for ending its
defined benefit program, which would eventually solve the
unfunded liability problem.
Mr. Mitchell replied that historically rating analysts did
not consider unfunded liabilities but was no longer the
case. Rating analysts consider unfunded liabilities in its
rating criteria and expected the state to pay to its "arc."
He related that the state did get credit for adjusting the
retirement system away from defined benefits. He commented
that there were no hard and fast rules regarding rating
discussions because Alaska was much different than other
states that operated from a "relatively stable revenue
stream." The state relied on a volatile revenue stream from
resource extraction. The state garnered the highest rating
category because of the conservative spending nature of the
legislature and the reserve position of the state. He noted
that Alaska was a conservative state and even though the
state was now experiencing deficit spending it was still
building reserves, which was why Alaska was an AAA rated
state. He revealed that although the AAA rating was a great
accomplishment, the state could still access capital
markets if it took action that caused a credit adjustment
in order to accomplish a goal the state deemed important or
in the long term best interest of the state.
Co-Chair Kelly noted that was the first time he had heard
that point of view regarding the state's bond rating. He
voiced that if an action was being considered that might
affect the state's bond rating it was automatically off the
table. He suggested that the state could undertake a cost
benefit analysis.
Co-Chair Meyer inquired whether Mr. Mitchell was
referencing the Permanent Fund when he spoke to the state
saving money even during deficit spending.
Mr. Mitchell replied in the affirmative.
Co-Chair Meyer asked whether the state got credit from
credit raters for the Permanent Fund reserves even though
the legislature cannot spend the funds.
Mr. Mitchell answered in the affirmative.
Senator Dunleavy believed that the credit raters do not
consider the limit on Permanent Fund expenditures because
it was self-imposed.
Mr. Mitchell agreed with the statement.
Senator Dunleavy indicated that the state had a small tax
base to generate revenue from and did not have a diverse
industry to generate potential tax revenue and relied on
the oil revenue savings to pay for government until the
state could expand its tax base. He thought that if the
state spent at a higher rate and saved at a lower rate the
state's credit worthiness was in a tenuous situation in the
future.
9:49:44 AM
Mr. Pawlowski spoke to slide 7 and related that in addition
to the Permanent Fund, the CBR was an asset that did not
show up on the balance sheet as a traditional revenue
source but that the rating agencies considered the broader
view of state assets which included assets like the CBR.
Mr. Mitchell moved to slide 20:
Summary
The State has the Highest Credit Rating
While Strongly Positioned the State Faces Fiscal
Challenges
The State has Capacity to Consider Additional
Borrowing at the AAA level
Holistic Approach Should be used for New Debt
Estimate $1 to $1.5 billion in Total Additional
Capacity at Current Credit Rating
Interest Rates Remain Low
Mr. Mitchell related that the state had the capacity to
access capital. He stated that interest rates for the
short-term market were less than a tenth of a percent,
while the long-term market rates were approximately 3
percent.
9:52:12 AM
AT EASE
9:57:24 AM
RECONVENED
^INTERIOR ENERGY PROJECTS AND SETS PROGRAMS UPDATE: ALASKA
INDUSTRIAL DEVELOPMENT AND EXPORT AUTHORITY
9:57:44 AM
GENE THERRIAULT, DEPUTY DIRECTOR, STATEWIDE ENERGY POLICY
DEVELOPMENT, ALASKA ENERGY AUTHORITY, DEPARTMENT OF COMMERCE,
COMMUNITY AND ECONOMIC DEVELOPMENT, discussed the intent of
the presentation. He noted that the presentation provided
an overview of the project to date.
MARK DAVIS, DEPUTY DIRECTOR, ALASKA INDUSTRIAL DEVELOPMENT
AND EXPORT AUTHORITY, presented the PowerPoint presentation
titled "Interior Energy Project Legislative Update -
Interior Energy Project Bringing North Slope Natural Gas to
Alaskans" (copy on file). He spoke to slide 2:
AGENDA
IEP Goals, Financing and Project Overview
Project Location
Project Milestones
Schedule & Permitting
Gas Distribution and Demand
Mr. Davis commented that the project was a joint effort
between Alaska Energy Authority (AEA) and Alaska Industrial
Development and Export Authority (AIDEA).
Mr. Davis spoke to slide 3 titled, "IEP Project Overview"
that depicted a general overview of the project. He
elaborated that the project would build a North Slope LNG
(liquefied natural gas) plant in Prudhoe Bay. He shared
that AIDEA would not have an equity position in the plant,
but would provide project financing. The board arrived at
the financing agreement with MWH Global on January 14,
2014. Trucking the LNG would be carried out via private
contracts between the utilities and the trucking companies.
On January 14, 2014 the AIDEA board approved a loan between
AIDEA and a consortium headed by Northrim Bank and
Fairbanks Natural Gas to build storage facilities for 5.5
million gallons of LNG storage in Fairbanks. The loan
package financing was a private sector investment and not
utilizing any SB 23>AIDEA: LNG PROJECT; DIVIDENDS;
FINANCING - Enacted 5/30/13] funds. He indicated that
discussions were still being held regarding the
distribution system.
Mr. Davis turned to slide 4:
IEP GOALS
Supply natural gas to Interior Alaska:
1. At the lowest cost possible
2. As many Alaska customers as possible
3. As soon as possible provide propane from the
gas stream
IEP investments compliment alternative sources of gas
supply
Use private-sector mechanisms
Mr. Davis spoke to slides 5 titled, "SB 23 FINANCE PACKAGE"
and detailed that the legislature appropriated $125 million
from the Sustainable Energy Transmission and Supply
Development Fund (SETS), $57.5 million from SETS as a
capital budget appropriation, and $150 million AIDEA bond
issuance. He briefly outlined the SETS funding. He
explained that after the $57.5 million deduction $67.5
remained. The AIDEA board was examining establishing a
guarantee program providing loans for energy with $50
million of the remaining SETS funding. The guarantee
program allowed AIDEA to leverage the funds into
approximately $150 million in guarantees and allowed AIDEA
"to do the most projects with the remaining funds." The
remaining $17.5 million was committed to a "potential
loan."
Mr. Davis referenced to slides 6:
LNG AND PROPANE SALE PRIORITIES
1. Residential and commercial space heating
2. Electric utilities
3. Industrial customers
4. Other utilities
5. Open market LNG sales
Mr. Davis mentioned that all involved parties agreed to
sell LNG to non-regulated utilities. Over the long-term,
the North Slope Borough was interested in buying
infrastructure and investing in the project to provide LNG
from the liquefaction plant to its smaller communities
through utilities run by the borough and under state law
were non-regulated. AIDEA was working closely with other
potential buyers of North Slope gas.
Mr. Davis discussed slide 6:
COMPLETED PROJECT MILESTONES
North Slope Facility
Project Pre-Feasibility Analysis
North Slope Plant Plan of Development
Private Partner Due Diligence and Negotiations
Pad Build and Design Procurement
Long-lead Equipment Procurement
Distribution System
Demand and Conversion Analysis
RCA Service Area Resolution
Distribution Cost Project Estimate
FNG Storage Tank Financing (5.25MM gallon tank)
Estimated 6-year build-Out
Mr. Davis pointed out that RFP's (Request for Proposals)
were received by AIDEA for building the pad that will be
owned by AIDEA. Bids were also received for the long-lead
equipment procurement and were in process to ensure
equipment delivery in enough time to build the plant.
Delivery will begin in July, 2015. Pad building will
commence on October, 2014.
Mr. Therriault spoke to the distribution system. He
explained that AEA calculated the number of miles for the
expansion territory and both potential utility companies
agreed with the territory chosen. The Regulatory Commission
of Alaska (Regulatory Commission of Alaska) selected the
Interior Gas Utility (IGU), the local municipal utility
formed by the three local governments of the Fairbanks
North Star Borough for distribution.
Co-Chair Kelly wondered whether the IGU established a more
formal business structure.
Mr. Therriault responded that IGU had contracted with a
branch of MWH to provide technical services.
10:07:31 AM
Co-Chair Kelly inquired whether IGU had a paid executive.
Mr. Therriault responded in the negative and communicated
that MWH would provide the technical staffing.
Co-Chair Kelly asked whether [IGU board chairman] Bob
Shefchik was coordinating the effort.
Mr. Therriault replied in the affirmative and added that
[IGU board member] Steve Haagenson was also involved.
Mr. Therriault shared that IGU was moving rapidly to
establish themselves as a strong entity in the project.
Mr. Therriault reported that IGU was in discussions with
Golden Valley Utility about a possible storage facility in
the North Pole area.
Mr. Davis spoke to slide 8 titled, AIDEA Interior Energy
Project - Schedule." The slide depicted a chart that noted
the predicted project progression through 2015. He detailed
that most of the permitting was in place. The air permit
was completed and anticipated receiving the permit by
September, 2014. He mentioned that the "404 Wetlands"
permit was underway. The North Slope Borough issued the
permit for the LNG plant.
Mr. Davis spoke to slide 9 titled, "PROPOSED PROJECT
LOCATION: LNG PLANT." The slide depicted a map that
contained the proposed project location. He emphasized that
the project entities would enter into a contact with the
producer to use the fuel gas.
Mr. Davis turned to slide 10:
NORTH SLOPE FACILITY NEXT STEPS
Letter of Intent - executed week of February 3,
2014
Establishes the basic parameters of the North
Slope
LNG Plant financing between AIDEA and MWH
Project Development Agreement - March 2014
Negotiate and finalize a detailed Project
Development Agreement with MWH (Commercial
Structure)
Secure LNG purchase agreements with potential
customers - IGU, FNG and GVEA
Mr. Davis elaborated that AIDEA would loan approximately
$103 million to the project and the consortium would
provide an additional $80 million to $90 million. He added
that if a pipeline was not built to Fairbanks or the demand
increased, MWH agreed to a letter of credit for expansion
of the plant with private capital.
Mr. Davis addressed slide 11 titled, "Natural Gas Services
Areas - As Defined by the RCA." He stated that AEA created
the map on the slide that depicted the gas service areas
defined by the RCA.
Mr. Therriault furthered that the RCA decision defined the
territory the utility company would serve. (Fairbanks
Natural Gas (FNG) would serve its existing territory of
approximately 1,100 customers with a total demand of
approximately 1.1 bcf (billion cubic feet) of gas. The FNG
territory contained 70 percent to 75 percent of high and
medium density customers of "space heat demand." The
expansion territory would be served by IGU. He expounded
that the estimated cost for FNG to expand to meet customer
demand was $31 million. The cost would cover laying 130
miles of pipe underground and finish the "build out of the
distribution system for the FNG service area. The build out
was expected to be completed in two to three years. The IGU
service area was substantially larger with the estimated
need of 630 miles of pipe to serve 30 percent to 35 percent
of potential demand for medium and high density customers.
The estimated cost of the pipe construction was $156
million.
Mr. Therriault moved to slide 12:
CONVERSION ANALYSIS STUDY
LNG Distribution System Demand Analysis
Report complete January 2014
Demographics, economics, and conversion rate
forecasts
Full report posted to IEP website
Mr. Therriault elaborated that customers would not be
forced to convert to natural gas and the process would take
time. He expected the lower costs when compared to diesel
would act as an incentive to convert. He reported that as
part of the study, IGU conducted a phone survey with
potential customers to determine what the "price
sensitivity" was that would induce conversion. In addition,
AEA conducted focus groups to determine what cost drivers
would incentivize customers to convert to natural gas. The
findings were included in the study [IEP Natural Gas
Conversion Analysis} which allowed AEA to model demand at a
realistic price point.
10:18:11 AM
Senator Bishop commented that hopefully a bank would offer
a conversion loan to enable customers to convert their
heating systems to natural gas.
Co-Chair Kelly inquired whether the borough could issue a
bond for customer conversion paid for by a rate increase.
Mr. Therriault responded in the affirmative. The study
contained a white paper written by a consultant who
examined what mechanisms had been used successfully in
other states that prompted conversion. He identified a
successful mechanism called an "on bill financing
mechanism." He explained that the mechanism allowed the
homeowner to borrow money through a bank or utility to make
the conversion and make the payments to repay the loan
through their monthly gas bill. He believed that the
mechanism would work well with the transient nature of the
Fairbanks population. A customer would be able to make
payments while living in the house and if sold, the new
owners would assume the loan obligation via their gas bill.
The mechanism enabled the customer to get the conversion
without a lot of out - of - pocket expense. The conversion
would enable the customer to maintain a savings even with
the loan repayment.
Senator Olson inquired what would happen if multiple
peoples' houses were for sale due to economic downturn.
Mr. Therriault replied that the home owner was still
responsible for their heating bills until the house was
sold. The industry had found that the mechanism maintained
a very low default rate.
Senator Olson asked for details regarding FNG.
Mr. Davis answered that FNG would soon be a regulated
utility (JUNE 2014) and was owned by Pentex [Pentex Alaska
Natural Gas Company, LLC], which was owned by a series of
investment funds located in Minneapolis, Minnesota.
Senator Olson wondered whether other communities would be
able to "subscribe" to the North Slope LNG plant.
Mr. Davis replied that the gas would be sold at the plant
FOB (Free on Board) to Fairbanks. The North Slope Borough
also wanted to be added as a potential preferred customer
when technology allowed the borough to build distribution
systems and store the gas to small communities. He noted
that relatively small LNG storage was very expensive and
made adding on more communities problematic. However, he
reminded the committee that the plant had an expansion
clause and if technology changed and demand increased the
plant would expand.
Senator Olson pondered whether additional communities
outside the service area could subscribe if they obtained
the infrastructure.
Mr. Davis replied in the affirmative and added that the
more subscribers to purchase the gas the lower the price
for gas.
Mr. Therriault turned to slide 13 titled: "North Slope
Plant Demand by Year - (GAS DISTRIBUTION ONLY)" and offered
that based on the conversion analysis, AEA modeled expected
demand and conversion over time. He noted that the expected
demand in the FNG territory was to grow rapidly. The demand
in the IGU territory was expected to begin slowly in 2016
and grow over time.
Mr. Therriault spoke to slide 14 titled, "North Slope Plant
Demand by Year - (Adjust for Peak Day). The chart depicted
that demand would be much higher in the winter and the
plant needed to be able to produce enough gas to meet
seasonal demand.
10:28:07 AM
Mr. Therriault addressed slide 15 titled, "Pipeline Gas
Demand by Customer" that graphed the expected demand
growing through 2030.
Mr. Therriault discussed slide 16 titled, "Incentive Demand
Comparison." He stated that the graph depicted the expected
demand with or without incentive programs. The graph
demonstrated that price for natural gas alone would be
enough to motivate consumers to convert. The operation was
based on volume so incentives would still help increase the
volume to lower the price for the consumer.
Mr. Therriault spoke to slide 17:
DISTRIBUTION SYSTEM NEXT STEPS
Utility discussions on distribution financing
access
Negotiate Take or Pay Contracts
RCA Approval of Contracts
Mr. Therriault added that the utility companies would be
the main customers for the plant. He reminded the committee
that the governor's vision for the project was to initially
serve the core demand in Fairbanks in order to "anchor the
plant." Once in progress, the service area could be
expanded to include many other communities able to
subscribe to the gas.
Senator Bishop inquired whether the plant would generate
10,000 gallons of propane per day and if any interest in
propane was expressed.
Mr. Davis replied that approximately 2,200 to 2,900
residents were expected to be served by propane and
interest in propane use was expressed.
Mr. Therriault interjected that the propane estimate was
based on the product stream that was produced by the plant
generating 9 bcf of gas and based on serving average
households in the Fairbanks North Star Borough.
Co-Chair Meyer related that an overall legislative goal was
to increase throughput in the oil pipeline. He asked for an
update on AIDEA projects involved in attaining that goal
and other resource development projects in progress.
Mr. Davis replied that AIDEA was assisting the small oil
company, Brooks Range, in financing the Mustang Road and
was currently working on an expansion project that would
add 15,000 more barrels of oil per day through the
pipeline. In addition, AIDEA was working with another small
oil company on a project similar to the Brooks Range
project, but details were confidential. He anticipated that
AIDEA would file the Environmental Impact Statement (EIS)
in March, 2014 for the Ambler Road. The authority had
signed a Memorandum of Understanding (MOU) with Nova
Copper. He noted that Nova Copper expressed interest in
operating the Ambler Mine with LNG from IEP.
Co-Chair Meyer offered that many of the projects were
capital intensive and AIDEA helped offset the decline in
oil production and with mining job creation. He noted that
AIDEA provided significant help with a drill rig in Cook
Inlet.
Mr. Davis shared that the drill rig was moving north and a
new capital structure for the rig was established.
Negotiations were in progress with other smaller producers
in Cook Inlet.
Mr. Therriault interjected that the relationship between
AEA and AIDEA was working very well.
10:36:46 AM
ADJOURNMENT
The meeting was adjourned at 10:37 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| IEP legislative update for week of 2 10 14 Final.pdf |
SFIN 2/13/2014 9:00:00 AM |
SB 119 |
| 021314 Debt Presentation to SenFin 2-13-2014 DOR.pdf |
SFIN 2/13/2014 9:00:00 AM |
SB 119 |