Legislature(2015 - 2016)BUTROVICH 205

02/05/2015 01:00 PM SPECIAL CMTE ON ENERGY

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Audio Topic
01:02:38 PM Start
01:03:40 PM Overview: Interior Energy Project and Potential Purchase of Pentex Alaska Natural Gas Company, Llc
02:51:18 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Alaska Industrial Development and Export TELECONFERENCED
Authority (AIDEA): Overview of Their Gas Utility
Purchase
                    ALASKA STATE LEGISLATURE                                                                                  
               SENATE SPECIAL COMMITTEE ON ENERGY                                                                             
                        February 5, 2015                                                                                        
                           1:02 p.m.                                                                                            
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Click Bishop, Co-Chair                                                                                                  
Senator Peter Micciche, Co-Chair                                                                                                
Senator Lyman Hoffman                                                                                                           
Senator Bert Stedman                                                                                                            
Senator Dennis Egan                                                                                                             
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
All members present                                                                                                             
                                                                                                                                
OTHER LEGISLATORS PRESENT                                                                                                     
                                                                                                                                
Senator Cathy Giessel                                                                                                           
Representative Jim Colver                                                                                                       
Representative David Talerico                                                                                                   
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
OVERVIEW: ALASKA'S INDUSTRIAL DEVELOPMENT AND EXPORT AUTHORITY                                                                  
(AIDEA) - INTERIOR ENERGY PROJECT AND POTENTIAL PURCHASE OF                                                                     
PENTEX ALASKA NATURAL GAS COMPANY, LLC                                                                                          
                                                                                                                                
     - HEARD                                                                                                                    
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
No previous action to record                                                                                                    
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
GENE THERRIAULT, Director                                                                                                       
Energy Policy Outreach                                                                                                          
Alaska Energy Authority                                                                                                         
Anchorage, Alaska                                                                                                               
POSITION STATEMENT: Provided information on the Interior Energy                                                               
Project.                                                                                                                        
                                                                                                                                
TED LEONARD, Executive Director                                                                                                 
Alaska Industrial Development and Export Authority (AIDEA)                                                                      
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:  Provided an AIDEA  overview and an  update on                                                            
the potential Pentex purchase.                                                                                                  
                                                                                                                                
MARK DAVIS, Chief Officer                                                                                                       
Infrastructure Development                                                                                                      
Alaska Industrial Development and Export Authority (AIDEA)                                                                      
Anchorage, Alaska                                                                                                               
POSITION  STATEMENT:   Answered  questions  about   the  potential                                                            
Pentex purchase.                                                                                                                
                                                                                                                                
DANA PRUHS, Chairman                                                                                                            
Alaska Industrial Development and Export Authority Board (AIDEA)                                                                
Anchorage, Alaska                                                                                                               
POSITION  STATEMENT:  Was available  to  answer questions  on  the                                                            
potential Pentex purchase.                                                                                                      
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
1:02:38 PM                                                                                                                    
CO-CHAIR  PETER MICCICHE  called the Senate  Special Committee  on                                                            
Energy  meeting to  order  at 1:02  p.m. Present  at  the call  to                                                              
order  were  Senators  Egan,  Stedman,   Hoffman,  Co-Chair  Click                                                              
Bishop, and Co-Chair Micciche.                                                                                                  
                                                                                                                                
^  OVERVIEW: INTERIOR  ENERGY PROJECT  AND  POTENTIAL PURCHASE  OF                                                              
PENTEX Alaska NATURAL GAS COMPANY, LLC                                                                                          
  OVERVIEW: ALASKA INDUSTRIAL DEVELOPMENT AND EXPORT AUTHORITY                                                              
  (AIDEA) - INTERIOR ENERGY PROJECT AND POTENTIAL PURCHASE OF                                                               
             PENTEX ALASKA NATURAL GAS COMPANY, LLC                                                                         
                                                                                                                                
1:03:40 PM                                                                                                                    
CO-CHAIR  MICCICHE announced  the committee's  agenda would  be an                                                              
overview  of   the  Alaska   Industrial  Development   and  Export                                                              
Authority  (AIDEA) and  of  the Interior  Energy  Project and  the                                                              
potential purchase of Pentex Alaska Natural Gas Company, LLC.                                                                   
                                                                                                                                
CO-CHAIR MICCICHE  recognized Representative  Talerico.  He listed                                                              
today's presenters.                                                                                                             
                                                                                                                                
1:04:55 PM                                                                                                                    
CO-CHAIR  MICCICHE  announced that  the  committee  will stand  at                                                              
ease.                                                                                                                           
                                                                                                                                
1:08:21 PM                                                                                                                    
CO-CHAIR MICCICHE called the meeting back to order.                                                                             
                                                                                                                                
1:08:55 PM                                                                                                                    
GENE THERRIAULT,  Director, Energy Policy Outreach,  Alaska Energy                                                              
Authority (AEA), briefly appeared on teleconference.                                                                            
                                                                                                                                
1:09:24 PM                                                                                                                    
CO-CHAIR  MICCICHE  announced that  the  committee  will stand  at                                                              
ease.                                                                                                                           
                                                                                                                                
1:09:51 PM                                                                                                                    
CO-CHAIR   MICCICHE  stated   a  common   goal  to  do   something                                                              
substantive  to  provide reliable  energy  to  the Interior  at  a                                                              
reasonable  cost in  order  to provide  relief  to residences  and                                                              
existing  businesses, but  also  to potential  businesses, and  to                                                              
increase  development.  He  cautioned to  carefully  evaluate  new                                                              
options.  He  said  today's  hearing  would  look  at  a  possible                                                              
substantive solution.                                                                                                           
                                                                                                                                
1:11:43 PM                                                                                                                    
TED  LEONARD, Executive  Director,  Alaska Industrial  Development                                                              
and Export Authority (AIDEA), introduced himself.                                                                               
                                                                                                                                
MARK  DAVIS,  Chief Officer,  Infrastructure  Development,  Alaska                                                              
Industrial Development and Export Authority, introduced himself.                                                                
                                                                                                                                
DANA  PRUHS, Chairman,  Alaska Industrial  Development and  Export                                                              
Authority  Board,  was  introduced  by  Mr. Leonard,  as  was  Mr.                                                              
Therriault.                                                                                                                     
                                                                                                                                
MR. LEONARD  stated AIDEA's  goal to bring  low-cost energy  to as                                                              
many  customers as  possible.  He said  that  the Interior  Energy                                                              
Project (IEP)  intends to  supply natural gas  at the  lowest cost                                                              
to  as many  people as  possible  as soon  as possible.  Secondary                                                              
goals include  that IEP's  investments will  compliment a  natural                                                              
gas pipeline  from the  North Slope and  will lower  fine particle                                                              
matter (PM2.5) in the nonattainment areas of the Interior.                                                                      
                                                                                                                                
1:13:41 PM                                                                                                                    
CO-CHAIR MICCICHE asked if there would be an overview on AIDEA.                                                                 
                                                                                                                                
MR. LEONARD  understood he was  to do an  overview on the  IEP. He                                                              
offered to provide information on AIDEA.                                                                                        
                                                                                                                                
CO-CHAIR  MICCICHE requested  a  verbal explanation  of AIDEA  and                                                              
examples  of investment  that have  encouraged  projects that  may                                                              
not have occurred without state support.                                                                                        
                                                                                                                                
1:15:17 PM                                                                                                                    
MR.  LEONARD  explained  that AIDEA  is  the  state's  development                                                              
finance  authority and  its mission  is to  promote, develop,  and                                                              
advance  economic   growth  and   diversification  in   Alaska  by                                                              
providing various  means of financing  and investment.  AIDEA does                                                              
this by actively  partnering with the private  sector, businesses,                                                              
and  communities. AIDEA  provides  access to  low-cost capital  in                                                              
order to  make projects  affordable. It  looks at how  investments                                                              
through  project ownership,  investment,  and  loans will  promote                                                              
economic development  through Alaska. It  is about a  $1.5 billion                                                              
corporation  and  is one  of  the  top three  development  finance                                                              
authorities  in   the  country   in  size,  capacity,   and  tools                                                              
available with  working with the  Legislature over the  past five-                                                              
to-six years.                                                                                                                   
                                                                                                                                
MR.  LEONARD  said  since  FY 2000,  AIDEA  has  made  about  $1.5                                                              
billion  in investments,  projects, and  loans and  in the  use of                                                              
its conduit  bond authority. He noted  that AIDEA is proud  of the                                                              
fact that  the state's investment  of about $333  million start-up                                                              
money has  been paid  back in the  amount of  $355 million  by the                                                              
end of 2015, and it has grown assets over $1.5 billion.                                                                         
                                                                                                                                
1:17:40 PM                                                                                                                    
He noted  that AIDEA  has not had  to write-off  a project  in any                                                              
incremental  amount since FY  2000. He  maintained that  AIDEA has                                                              
been a good steward  and has worked very hard to  promote economic                                                              
development.                                                                                                                    
                                                                                                                                
He listed  key assets owned by  AIDEA that have  promoted economic                                                              
development as  follows: Skagway Ore Terminal,  Ketchikan Shipyard                                                              
operated  by Vigor Alaska,  Snettisham Dam,  AEL&P partnership  in                                                              
Juneau, Federal  Express Hanger  in Anchorage, Coast  Guard Armory                                                              
in  Anchorage,  and  DeLong Mountain  Transportation  System  -  a                                                              
flagship  asset since  the early  90's. He said  since that  time,                                                              
AIDEA   has  provided   $744   million   in  loans,   and   issued                                                              
approximately  $1.5 billion  in  conduit bonds  to businesses  and                                                              
projects in Alaska.                                                                                                             
                                                                                                                                
1:20:08 PM                                                                                                                    
CO-CHAIR  MICCICHE  noted  the job  of  the  committee is  to  ask                                                              
questions.  The Legislature  is proud  of AIDEA's  accomplishments                                                              
and  none of  the questions  is  a challenge  to any  of them.  He                                                              
thanked Mr. Leonard for his presentation.                                                                                       
                                                                                                                                
CO-CHAIR  BISHOP asked  for the  amount of  AIDEA's last  dividend                                                              
payment to the treasury.                                                                                                        
                                                                                                                                
MR.  LEONARD  replied  the  last   dividend  of  $10  million  was                                                              
slightly  less than  usual due to  market conditions.  In  FY 2016                                                              
the  dividend will  be $17.5  million. The  average dividend  over                                                              
the last  12 to  15 years  has been approximately  $20  million to                                                              
$21 million a year.                                                                                                             
                                                                                                                                
CO-CHAIR MICCICHE  requested information  about the SB  23 finance                                                              
package.                                                                                                                        
                                                                                                                                
MR.   LEONARD  described   the  Interior   Energy  Project   (IEP)                                                              
financing  as $125  million in  SETS  [stock exchange]  financing,                                                              
$57.5  million  in  a  capital   budget  appropriation,  and  $150                                                              
million in  AIDEA bonds. Under the  current SB 23,  the definition                                                              
of  financing  is to  provide  financing  for  a North  Slope  LNG                                                              
facility  and to  finance distribution  and affiliated  structures                                                              
in  Fairbanks  and  the  greater  Fairbanks  area;  that  includes                                                              
natural gas  supply and  liquefaction, transportation  - trucking,                                                              
LNG storage  and regasification,  and a  natural gas  distribution                                                              
system.                                                                                                                         
                                                                                                                                
1:23:44 PM                                                                                                                    
He summarized  the IEP's  current status. He  said that  AIDEA had                                                              
been  pursuing the  development  of a  North Slope  supply of  LNG                                                              
with a private  partner. It is now evaluating  alternative sources                                                              
of natural gas.                                                                                                                 
                                                                                                                                
CO-CHAIR  MICCICHE  asked  whether  the  IEP  "full  supply  chain                                                              
focus" is currently occurring.                                                                                                  
                                                                                                                                
MR. LEONARD  answered  yes. In an  attempt to  provide the  lowest                                                              
cost for supply  and transportation, AIDEA is now  also looking at                                                              
alternative   sources   of   supply   and   transportation   while                                                              
concentrating on a distribution system in Fairbanks.                                                                            
                                                                                                                                
CO-CHAIR MICCICHE  commented that the business model  is occurring                                                              
without  AIDEA,  but as  a  private firm  both  in  supply and  in                                                              
distribution.                                                                                                                   
                                                                                                                                
1:27:58 PM                                                                                                                    
MR. LEONARD  continued to explain  that AIDEA is still  working on                                                              
the financing  of the  build out  of natural  gas distribution  in                                                              
Fairbanks and the North Pole.                                                                                                   
                                                                                                                                
CO-CHAIR  MICCICHE   announced  the  presence   of  Representative                                                              
Colver.                                                                                                                         
                                                                                                                                
MR.  LEONARD  addressed  AIDEA's  financing  route  of  the  North                                                              
Slope.  AIDEA  utilized  a private/public  partnership  through  a                                                              
concession  agreement where  AIDEA  provided  financing and  would                                                              
own  the asset  and the  concessionaire  would provide  financing,                                                              
and  would build  and operate  the LNG  plant. Several  conditions                                                              
were required for  financial close: AIDEA had to  agree to project                                                              
costs and  commercial terms, the  project developer  would provide                                                              
construction  and   operating  agreements,  would   negotiate  and                                                              
secure LNG  supply with utilities,  and develop a  financial model                                                              
with an agreed LNG price.                                                                                                       
                                                                                                                                
1:30:25 PM                                                                                                                    
CO-CHAIR  MICCICHE noted  there  were two  private firms  involved                                                              
with Pentex  [Alaska Natural Gas  Company, LLC]. He asked  for the                                                              
timeline  of AIDEA's  interactions with  Pentex -  where the  idea                                                              
came  from  and  the  timing  of   the  other  entities  who  were                                                              
considering the purchase of the project.                                                                                        
                                                                                                                                
MR. LEONARD  explained that  when AIDEA  went through  the public-                                                              
private  partnership   evaluation,  there  were   three  potential                                                              
project  developers:  FNG,  Spectrum,  and MWH  Global  with  GVEA                                                              
(Golden Valley  Electric Association).  There were no  discussions                                                              
during  the public-private  process about  purchasing Pentex.  Two                                                              
companies were looking  at purchasing Pentex, but he  did not know                                                              
their names.                                                                                                                    
                                                                                                                                
He said  the current  process did not  begin until January  10-15,                                                              
2015. It was  initiated based on the fact that  the public-private                                                              
partnership on  the North Slope  did not meet the  community goals                                                              
in the IEP.   AIDEA then looked at how it might  bring the parties                                                              
together  and  move  forward.  During   last  year  there  was  no                                                              
discussion regarding purchasing Pentex as part of the plan.                                                                     
                                                                                                                                
1:33:46 PM                                                                                                                    
CO-CHAIR  MICCICHE  noted  that  Harvest  Alaska  entered  into  a                                                              
purchase and  sale agreement to  purchase the facility  from Titan                                                              
- Pentex  on November  5, 2014.  He noted  AIDEA entered  into the                                                              
discussion  two   months  later.  He  opined  that   the  purchase                                                              
agreement was an  attractive offer and requested  more information                                                              
about  the process.  He said the  committee's  job is to  evaluate                                                              
the project, but  also to ask questions about value  for the state                                                              
and the rate payers.                                                                                                            
                                                                                                                                
MR. LEONARD  explained that  more information  is forthcoming.  He                                                              
related  as  AIDEA  looked  at  optimizing  the  Pentex  sale,  it                                                              
concentrated  on the sales  of certain assets  of Pentex,  such as                                                              
FNG,  which are  related to  the distribution  system in  Interior                                                              
Alaska.                                                                                                                         
                                                                                                                                
CO-CHAIR MICCICHE said he understands.                                                                                          
                                                                                                                                
1:36:00 PM                                                                                                                    
MR. LEONARD  turned to the  concession agreement results.  He said                                                              
in looking at the  North Slope process, AIDEA worked  with MWH and                                                              
the   project  component,   but  the   concession  agreement   was                                                              
terminated due  to higher capital  cost than projected.  Also, low                                                              
oil  prices were  a challenge  to  the project  and the  utilities                                                              
could  not  commit  to buy  sufficient  LNG  at  commercial  terms                                                              
presented  to  them.  Finally,   the  delivered  projected  prices                                                              
didn't meet community price goals.                                                                                              
                                                                                                                                
He  highlighted  positive progress  achieved  on  the North  Slope                                                              
project. He  noted that there  is now a  detailed design  and cost                                                              
for a  North Slope  LNG facility.  He detailed  that an  LNG plant                                                              
operations team  was formed, costs for transportation  and storage                                                              
were  refined,  and  progress  was made  on  system  planning  and                                                              
utility work in the Fairbanks area.                                                                                             
                                                                                                                                
1:39:41 PM                                                                                                                    
He  said, based  on the  North Slope  public-private solution  not                                                              
being  able  to  meet  the  requirements  of  SB  23  and  to  the                                                              
community,  AIDEA  has  taken the  approach  to  re-evaluate  what                                                              
would  be  the best  source  of  gas, type  of  liquefaction,  and                                                              
transportation method to the Interior, at the lowest cost.                                                                      
                                                                                                                                
SENATOR STEDMAN  requested that  Mr. Leonard convert  the targeted                                                              
cost of $13 to $14 per Mcf to kilowatt equivalents.                                                                             
                                                                                                                                
MR. LEONARD agreed to provide that information.                                                                                 
                                                                                                                                
CO-CHAIR MICCICHE  noted the decrease  in cost of heating  oil and                                                              
diesel  fuel  from  $30  per million  Btu  to  $13-$14  since  the                                                              
beginning  of the project  evaluation.  He said  it has to  impact                                                              
the project as well.                                                                                                            
                                                                                                                                
MR.  LEONARD  agreed.  He  said it  affects  projects  across  the                                                              
country.  He noted  that the  project's  goal is  for a  long-term                                                              
solution.  It  is  a  challenge  to the  project,  to  the  people                                                              
converting to gas, and to the build out.                                                                                        
                                                                                                                                
CO-CHAIR  MICCICHE  opined  that  the cost  situation  bought  the                                                              
state some time.                                                                                                                
                                                                                                                                
1:44:28 PM                                                                                                                    
SENATOR STEDMAN  requested  the addition  of an efficiency  factor                                                              
to the conversion information he requested.                                                                                     
                                                                                                                                
CO-CHAIR BISHOP  pointed out  that in Fairbanks,  fuel oil  is not                                                              
at $2.74  today, at  least not at  the burner  tip. The  number of                                                              
degree days are substantial.                                                                                                    
                                                                                                                                
MR.  THERRIAULT  addressed the  full  supply  chain now  that  the                                                              
concession  agreement  with  MWH  has timed  out.  There  are  two                                                              
supply  contracts on  the North  Slope  for natural  gas. The  new                                                              
effort  allows for  a  look at  purchasing  low  price Cook  Inlet                                                              
natural gas. The  capital cost of an LNG plant on  the North Slope                                                              
is known and now  costs of new LNG capacity in  Cook Inlet will be                                                              
explored.                                                                                                                       
                                                                                                                                
He said  known trucking transportation  costs can now  be compared                                                              
with  railroad costs.  Depending  on location,  both trucking  and                                                              
rail may  be needed. The  railroad provided  an update a  year ago                                                              
to  the  AIDEA  Board  and  continues  to  refine  their  numbers.                                                              
Conversations   continue   with   the   railroad   regarding   low                                                              
transportation costs.                                                                                                           
                                                                                                                                
1:48:50 PM                                                                                                                    
He  said  AIDEA is  working  with  FNG  on  a storage  project  in                                                              
Fairbanks  that  was  cancelled.   Through  new  efforts,  service                                                              
territories  will be coordinated  to optimize  and expand  storage                                                              
that will serve both utilities at the lowest possible cost.                                                                     
                                                                                                                                
He  addressed   distribution  noting   that  AIDEA   has  provided                                                              
financing in  the last calendar year  that was used by  FNG to put                                                              
an additional  30 miles of  pipe in the  ground. The  Interior Gas                                                              
Authority (IGU)  used their  original loan money  to do  the final                                                              
design work  on their build out  starting in North Pole.  IGU also                                                              
used  a portion  of their  funds  to order  miles of  pipe and  is                                                              
working with  AIDEA on  an expanded loan  package that  will allow                                                              
them to  cover the construction  of the Phase  1 build out  in the                                                              
core of North Pole.                                                                                                             
                                                                                                                                
1:51:36 PM                                                                                                                    
He explained  that the  conversion working  group that  was formed                                                              
in  July  2014  is  a combination  of  the  Fairbanks  North  Star                                                              
Borough,    the   two    distribution    facilities,    mechanical                                                              
contractors,  and boiler  manufacturers  looking  at a  conversion                                                              
assistance program at the local level for local households.                                                                     
                                                                                                                                
CO-CHAIR BISHOP  asked whether the  mechanical contractors  in the                                                              
conversion  working  group have  any  concerns about  meeting  the                                                              
demand for natural gas.                                                                                                         
                                                                                                                                
MR.  THERRIAULT  replied that  there  is  some concern  about  the                                                              
ability to  ramp up; however, the  contractors say they  are up to                                                              
the  job  and will  have  quite  a  bit of  forewarning  that  the                                                              
project  is   moving  forward.   AIDEA  worked  with   the  boiler                                                              
manufacturers  to  determine  how  many households  will  need  an                                                              
energy  system  replacement  versus   those  that  can  be  easily                                                              
converted.                                                                                                                      
                                                                                                                                
1:55:14 PM                                                                                                                    
CO-CHAIR MICCICHE  used Homer  as an example  of a community  that                                                              
could be  weighed for its rate  of gas conversion. He  suggested a                                                              
valuable  effort  by  AIDEA  would  be  to  determine  lower  cost                                                              
assistance for the residential level.                                                                                           
                                                                                                                                
MR. THERRIAULT noted  the collection of valuable  information from                                                              
the Homer  conversion. He added that  for the volume rate  that is                                                              
needed,  an estimated  conversion rate  in Fairbanks  would be  70                                                              
percent to  75 percent. Local lenders  have said they may  be able                                                              
to  provide assistance  to converting  homeowners in  the form  of                                                              
loans.                                                                                                                          
                                                                                                                                
He  addressed the  next  steps to  providing  natural  gas to  the                                                              
Interior, such  as evaluating alternative  sources of  natural gas                                                              
supply in a deliberate  and public process, led by  AIDEA and AEA.                                                              
There is  a new Project Charter  that includes Interior  utilities                                                              
and  communities.  He  stated  that  potential  LNG  sources  will                                                              
include both the North Slope and Cook Inlet.                                                                                    
                                                                                                                                
1:58:30 PM                                                                                                                    
He reviewed  the members of  the Conversion Working  Group, noting                                                              
that  Alaska  Housing   and  Finance  Corporation   (AHFC)  is  an                                                              
important   member.  Through   AHFC's   Retrofit  Energy   Rebate,                                                              
consumers can  qualify for  a rebate. He  concluded that  the goal                                                              
is  to have  a comprehensive  program using  existing programs  to                                                              
assist people in the conversion of their homes.                                                                                 
                                                                                                                                
He reviewed  highlights of items  AIDEA financed in 2014.  He said                                                              
the AIDEA  Board approved  IGU's application  for $30  million for                                                              
Phase 1 construction  in the North  Pole area. In 2015,  FNG plans                                                              
to build out approximately 26.2 miles of pipe in Fairbanks.                                                                     
                                                                                                                                
2:00:56 PM                                                                                                                    
CO-CHAIR MICCICHE  commented that some of the  processes expressed                                                              
by Mr.  Therriault  sound like they  don't occur  every day,  when                                                              
they  do,   by  firms   in  the   private  sector  that   produce,                                                              
distribute,  and market  natural  gas. He  said he  sees value  in                                                              
integrating  the   utilities  and   in  AIDEA's  assistance   with                                                              
conversion,  but  he  is  trying  to see  value  in  purchasing  a                                                              
liquefaction. He  expressed frustration  to see the  separation of                                                              
private  sector   investments  that   are  fully  functional   and                                                              
operating at capacity to a public entity.                                                                                       
                                                                                                                                
MR. THERRIAULT  replied that  Mr. Leonard may  be able  to clarify                                                              
that under the Letter  of Intent and the purchasing  of the Pentex                                                              
assets,  AIDEA  has also  entered  into  a  contract to  sell  the                                                              
liquefaction plant to Hilcorp.                                                                                                  
                                                                                                                                
2:02:50 PM                                                                                                                    
CO-CHAIR MICCICHE thanked Mr. Therriault for the information.                                                                   
                                                                                                                                
SENATOR  GIESSEL asked  about the  need for a  federal permit  for                                                              
the Alaska  Railroad. She  noted that  it is currently  challenged                                                              
with  positive train  control  costs. She  inquired  how much  the                                                              
permit would cost and how long it would take to obtain it.                                                                      
                                                                                                                                
MR. THERRIAULT  replied that it is  not a permit, but  an approval                                                              
process.  The  railroad  has been  working  closely  with  federal                                                              
agencies who  believe the approval  can be secured in  about three                                                              
months at a minimal cost.                                                                                                       
                                                                                                                                
2:04:17 PM                                                                                                                    
MR. LEONARD  turned to  the Pentex  acquisition proposal.  He said                                                              
on January 26, 2015,  AIDEA signed a Letter of  Intent to purchase                                                              
Pentex  Alaska Natural  Gas Company,  LLC.  He noted  it was  non-                                                              
binding  and would  allow framework  for  evaluating the  proposed                                                              
purchase  through a  public process.  He said  there is a  private                                                              
entity that is  providing a small distribution system  and a small                                                              
gas  supply to  Fairbanks. Based  on the  Interior Energy  Project                                                              
(IEP),  AIDEA is looking  at how  to rapidly  expand that  system,                                                              
get low cost gas into the system, and meet the goals of the IEP.                                                                
                                                                                                                                
He  assured the  committee that  AIDEA would  continue to  provide                                                              
information to  the legislature  and would go  through a  full due                                                              
diligence  process  to  look  at   how  the  acquisition  promotes                                                              
economic  development, the  risks  involved, if  it meets  AIDEA's                                                              
rate-of-return and investment requirements.                                                                                     
                                                                                                                                
2:07:18 PM                                                                                                                    
He  reiterated AIDEA's  intent to  reduce  the total  distribution                                                              
costs  in the  Fairbanks  area by  creating  an integrated  system                                                              
which will  accelerate expansion  and reduce  operating costs.  He                                                              
noted that  AIDEA has tools that  can be used in  partnership with                                                              
the  private sector.  He pointed  out that  the AIDEA  Board is  a                                                              
private  sector entity;  their mission  is to  assist the  private                                                              
sector  with  access  to  capital  and  to  provide  for  economic                                                              
development for communities.                                                                                                    
                                                                                                                                
CO-CHAIR  MICCICHE  recalled when  the  Port Authority  wished  to                                                              
purchase FNG  a few years ago. He  said there was an  offer on the                                                              
table to purchase  Harvest Alaska, LLC. He discussed  the value of                                                              
integrating  the  utilities. He  detailed  the 10-year  LNG  sales                                                              
agreement. He  spoke of the potential  to expand the  LNG facility                                                              
had  the sale  gone through.  He said  he is  struggling with  the                                                              
purchase of the  liquifaction when there was  an experienced buyer                                                              
on hand. He  inquired at what point  AIDEA decided to  go with the                                                              
current option.                                                                                                                 
                                                                                                                                
2:11:17 PM                                                                                                                    
MR.  LEONARD explained  that AIDEA  is  not saying  that the  sale                                                              
will  not go  through. Looking  at  Pentex's distribution  system,                                                              
AIDEA would be  purchasing the membership in the  holding company,                                                              
if the  sale goes through. He  specified that the  holding company                                                              
owns  FNG, Titan  - the owner  of the  LNG facility,  AET -  which                                                              
owns the  trucking and fueling  stations, and Cassini  Storage. He                                                              
emphasized  that the  buying of  Pentex  also includes  satisfying                                                              
existing  contracts or  obligations  Pentex may  have; that  would                                                              
include the sale of LNG facilities in Point McKenzie.                                                                           
                                                                                                                                
2:13:17 PM                                                                                                                    
CO-CHAIR MICCICHE  said he does not want to  seem confrontational.                                                              
He noted the legislature  found out at the same  time all Alaskans                                                              
were told. He suggested better communication in the future.                                                                     
                                                                                                                                
MR.  LEONARD  said  he  appreciated   being  able  to  answer  the                                                              
questions.  He understood  the  concerns  and agreed  AIDEA  could                                                              
have  done a better  job on  the timing.  He said  AIDEA would  do                                                              
better in the future.                                                                                                           
                                                                                                                                
2:15:10 PM                                                                                                                    
He  addressed  key points  to  the  Pentex acquisition.  AIDEA  is                                                              
looking for a  strategic investment that can play  a critical role                                                              
in achieving  the long-term  success  of the  IEP and promote  the                                                              
mission of  economic development.  The investment  is expected  to                                                              
provide  immediate  price relief  to  existing FNG  customers.  It                                                              
will  allow  integration  of  the   existing  system  by  ensuring                                                              
coordination  between  existing  utilities.  The  investment  will                                                              
allow AIDEA to  restart construction of LNG storage  in Fairbanks,                                                              
which  is  critical  in  creating   an  integrated  and  efficient                                                              
distribution  system. He noted  the storage  would take  about two                                                              
years to build.                                                                                                                 
                                                                                                                                
2:18:08 PM                                                                                                                    
CO-CHAIR  MICCICHE asked  if a small-diameter  LNG pipeline  would                                                              
negate the need for LNG storage.                                                                                                
                                                                                                                                
MR. LEONARD  replied that AIDEA  does not believe so.  The storage                                                              
could be used as a supply backup for the pipeline.                                                                              
                                                                                                                                
MARK DAVIS  noted the added  demand in winter  and the need  for a                                                              
pipeline to have LNG storage.                                                                                                   
                                                                                                                                
MR.  LEONARD  added that  the  storage  would provide  an  interim                                                              
solution until a  pipeline to Fairbanks is built,  either from the                                                              
south or north.  He stated a belief that there is  a critical need                                                              
to supply gas to customers as quickly as possible.                                                                              
                                                                                                                                
He offered AIDEA's assistance on a pipeline evaluation.                                                                         
                                                                                                                                
CO-CHAIR MICCICHE asserted that "we all have the same goal."                                                                    
                                                                                                                                
2:20:35 PM                                                                                                                    
MR.  LEONARD  stressed  that  the investment  would  be  of  short                                                              
duration  with  the   goal  of  working  with   the  community  to                                                              
transition to a  single utility serving the Interior.  AIDEA would                                                              
not directly operate the utility.                                                                                               
                                                                                                                                
CO-CHAIR  MICCICHE  pointed  out  that Fairbanks  is  a  lucrative                                                              
market.  He  asked  how  much  government  interference  has  kept                                                              
typical providers  out of the market. He suggested  the government                                                              
could get  out of the  way. He used Homer  as an example.  He said                                                              
the more  the government intervenes,  the less chance there  is of                                                              
"lowest cost solutions." The RCA can regulate the gas.                                                                          
                                                                                                                                
2:24:29 PM                                                                                                                    
MR. LEONARD agreed  in normal circumstances the  private sector is                                                              
the answer.  AIDEA is involved in  providing capital to  assist in                                                              
the  promotion of  private sector  growth and  economy in  Alaska.                                                              
Under today's  environment, the private  sector has not  been able                                                              
to  provide  the  needed  capital   and  storage  system  for  the                                                              
distribution system  in Fairbanks. The private sector  has been in                                                              
Fairbanks since  1997 and  consists of  about 1,100 customers  and                                                              
two  distribution systems.  The  price  of gas  is  at $23.70  and                                                              
AIDEA has  been charged  with bringing that  cost down.  He opined                                                              
that AIDEA's  involvement will help  the private  sector, overall,                                                              
as it has done in the past.                                                                                                     
                                                                                                                                
2:27:52 PM                                                                                                                    
MR. LEONARD showed  a map of natural gas service  areas that would                                                              
be  assisted  by   AIDEA.  He  shared  the  benefits   of  utility                                                              
coordination   and   an  integrated   distribution   system.   The                                                              
investment  would  reduce  construction cost,  O&M,  and  overhead                                                              
costs  and restart  efforts to  build  storage. There  would be  a                                                              
unified  effort  to  purchase  LNG   and  there  would  be  faster                                                              
expansion of  service to customers  through coordinated  build out                                                              
of system. He gave examples of efficiencies.                                                                                    
                                                                                                                                
2:32:29 PM                                                                                                                    
He explained  the impact  on the  pending sale  of the  Titan LNG.                                                              
AIDEA  will acquire  Pentex as  an entity,  inclusive of  Pentex's                                                              
interest  to  sell the  LNG  facility  and  trucking assets  to  a                                                              
Hilcorp subsidiary,  Harvest Inc. It  would not displace  any pre-                                                              
existing  contractual obligations  for asset  sale and LNG  supply                                                              
agreements. AIDEA  will carefully review these agreements  as part                                                              
of its due diligence.                                                                                                           
                                                                                                                                
CO-CHAIR  MICCICHE  asked  to  verify  if  there  were  two  sales                                                              
agreements  under  AIDEA: whether  AIDEA  buys the  entire  supply                                                              
chain  and sells  off  liquifaction and  trucking  to Harvest;  or                                                              
where  Harvest purchases  the liquifaction  and that  part of  the                                                              
supply chain, and AIDEA buys the remainder.                                                                                     
                                                                                                                                
2:34:57 PM                                                                                                                    
MR.  DAVIS explained  that  Pentex  wanted to  sell  all of  their                                                              
stock to  AIDEA. If  the Board approves,  AIDEA will  drive Pentex                                                              
and  any  pending contract  for  sale,  such  as the  contract  to                                                              
Harvest would  remain in place.  There are not two  contracts, but                                                              
an acquisition of shares, pending approval by RCA.                                                                              
                                                                                                                                
CO-CHAIR MICCICHE  commented that a  briefing of that  issue would                                                              
have been  very important.  He suggested that  AIDEA put  the rate                                                              
payers first and remain out of the way where they are harmful.                                                                  
                                                                                                                                
2:36:36 PM                                                                                                                    
MR.  LEONARD agreed  with that  philosophy.  He described  AIDEA's                                                              
stringent  due diligence  process that includes  a public  process                                                              
with hearings  and solicits advice  of local governments.  It must                                                              
complete  a  finance  plan  that  shows  AIDEA  will  recover  its                                                              
investments  with a  reasonable rate  of return.  It must  examine                                                              
the  existing agreements  with  Hilcorp  and ensure  the  proposed                                                              
purchase price  is reflective  of the fair  market value.  It will                                                              
go through  a full financial, technical,  and legal review  of the                                                              
purchase.  Finally,  it  will  be  vetted  through  a  transparent                                                              
process as it moves forward.                                                                                                    
                                                                                                                                
2:38:38 PM                                                                                                                    
MR. LEONARD  shared  AIDEA's next  steps in the  process.  It will                                                              
commence  a due  diligence review  to confirm  whether the  Pentex                                                              
acquisition is a  prudent investment for AIDEA and  meet the goals                                                              
of the IEP. It  will negotiate a definitive agreement  with Pentex                                                              
and then  solicit advice  from local  governments. It  will submit                                                              
due diligence  and  a finance plan  to the  Board through  AIDEA's                                                              
public  hearing process,  and the  proposed  transaction would  be                                                              
considered by the Board and voted on in a public meeting.                                                                       
                                                                                                                                
He offered to meet again for further discussions.                                                                               
                                                                                                                                
CO-CHAIR  MICCICHE thanked  Mr. Leonard.  He noted  that in  order                                                              
for  the acquisition  to be  done using  funds from  SB 23,  there                                                              
needs  to  be  a  legislative  solution.  He  said  the  committee                                                              
received a  supplemental budget with  the amendment in  place from                                                              
the administration.  He said he  would push hard for  major policy                                                              
changes  to not occur  in a  budget document,  but rather  through                                                              
the  committee process.  He said  he proposed  the amendment  last                                                              
year, but is not  surprised at the outcome of the  North Slope LNG                                                              
project. He  noted that he  tried to add  the words "on  the North                                                              
Slope"  to  the  amendment  last  year, but  it  was  blocked.  He                                                              
concluded  that the  legislature would  be working  with AIDEA  to                                                              
help  find a  solution for  the rate  payers in  the Interior.  He                                                              
opined  that  the  state  has  failed   the  rate  payers  in  the                                                              
Interior.  He pointed out  that the  supply of  LNG in  Cook Inlet                                                              
has changed  in the  last few  years; that  makes the  Interior an                                                              
attractive market. He  said his dream is for natural  gas to go to                                                              
densely  populated  regions  in  the state  and  via  pipeline  to                                                              
challenging places  and coastal deliveries.  He spoke in  favor of                                                              
having  an  overall  plan  and   having  AIDEA  involved  in  this                                                              
particular project.                                                                                                             
                                                                                                                                
2:43:41 PM                                                                                                                    
MR. LEONARD  clarified that  AIDEA has  the ability  to use  SB 23                                                              
funds for  the project but  is also looking  at other  sources. He                                                              
said AIDEA would  work with the Legislature regarding  the benefit                                                              
of tools available.  A budget change would not be  needed for this                                                              
transaction.                                                                                                                    
                                                                                                                                
CO-CHAIR  BISHOP  noted  if  the   Alaska  Railroad  is  used  for                                                              
transportation, there could be less need for storage capacity.                                                                  
                                                                                                                                
MR.  LEONARD  replied  that  is  true and  it  applies  to  larger                                                              
trailer  trucks,  as  well. AIDEA  is  currently  researching  the                                                              
issue.                                                                                                                          
                                                                                                                                
2:46:32 PM                                                                                                                    
CO-CHAIR MICCICHE  asked if the Attorney General  will approve the                                                              
sale to  Harvest and what  the backup plan  is if the sale  is not                                                              
approved. He wanted  assurance that the state will  not be running                                                              
trucking and production facilities.                                                                                             
                                                                                                                                
MR.  LEONARD  answered that  the  Attorney  General has  not  been                                                              
contacted. He opined  that even if something happens  to the sale,                                                              
AIDEA would  not operate  assets. AIDEA would  look for  a private                                                              
sector company  to do so.  He stated that  AIDEA does  not believe                                                              
in running  assets, but  in financing  them. He  said they  have a                                                              
role as  a facilitator  on the distribution  side. They  would use                                                              
the North Slope model if something happened to the Harvest sale.                                                                
                                                                                                                                
2:49:07 PM                                                                                                                    
CO-CHAIR  MICCICHE countered  that the comparison  of a  potential                                                              
North  Slope model  with a  currently  fully-operating project  is                                                              
not a fair comparison.                                                                                                          
                                                                                                                                
SENATOR HOFFMAN asked if the Letter of Intent was public.                                                                       
                                                                                                                                
MR.  LEONARD  answered  yes.  He  offered to  provide  it  to  the                                                              
committee; it is on AIDEA's web site.                                                                                           
                                                                                                                                
CO-CHAIR MICCICHE requested copies of a fact sheet for members.                                                                 
                                                                                                                                
He concluded  that AIDEA  and the  legislature have common  goals.                                                              
He  reiterated concern  about  the timing  of  some processes.  He                                                              
said if AIDEA's  intent is as communicated, and  the right private                                                              
entities operate  correct portions,  and there is  movement toward                                                              
a  distributor,   he  could  "get   more  comfortable"   with  the                                                              
purchase.                                                                                                                       
                                                                                                                                
He thanked the presenters.                                                                                                      
                                                                                                                                
2:51:18 PM                                                                                                                    
There  being no  further business  to come  before the  committee,                                                              
Co-Chair  Micciche  adjourned  the  Senate  Special  Committee  on                                                              
Energy at 2:51 p.m.                                                                                                             

Document Name Date/Time Subjects
AIDEA Senate Energy 2 5 15.pptx SNRG 2/5/2015 1:00:00 PM
IEP Conversion Slide from 2013.pdf SNRG 2/5/2015 1:00:00 PM
Pentex - AIDEA LOI 2015_01_26 executed.pdf SNRG 2/5/2015 1:00:00 PM
ENSTAR Slide.PDF SNRG 2/5/2015 1:00:00 PM
AIDEA Pentex Fact Sheet 2-3-15.pdf SNRG 2/5/2015 1:00:00 PM