CS FOR SENATE BILL NO. 23(FIN) "An Act relating to development project financing by the Alaska Industrial Development and Export Authority; relating to the dividends from the Alaska Industrial Development and Export Authority; authorizing the Alaska Industrial Development and Export Authority to provide financing and issue bonds for a liquefied natural gas production system and natural gas distribution system; and providing for an effective date." 3:13:30 PM SARAH FISHER-GOAD, EXECUTIVE DIRECTOR, ALASKA ENERGY AUTHORITY, DEPARTMENT OF COMMERCE, COMMUNITY AND ECONOMIC DEVELOPMENT, stated that the interior energy plan proposed in SB 23 would provide low cost, North Slope natural gas and propane. She testified that the bill was a finance package that offered by the governor to act as a catalyst to bring the liquefied natural gas (LNG) and propane customers together with the private entities that would construct and operate an LNG delivery system. She relayed that the partnership and project would be good for the Alaska Industrial Development and Export Authority, (AIDEA) and the Alaska Energy Authority (AEA). She shared that SB 23 would provide AIDEA with the opportunity to invest in the project. She stated that AIDEA was currently investigating full project feasibility and would only utilize the authorized tools written into the legislation if the project proved to make economic sense. She said that the intention was that AIDEA would take an equity stake in the project, but would not outright operate or build an LNG plant or distribution system. She relayed that the project was typical of other public/private partnerships that AIDEA had been involved in for decades. She furthered that the governor's finance package was intended to fund the initial capacity of the project with future expansion to be funded by private and community investment. Co-Chair Stoltze hoped that an explanation of HB 74 could be integrated into the presentation. Ms. Fisher-Goad began the presentation, SB 23 AIDEA Development Project Financing for a Liquefied Natural Gas Production and Distribution System." She discussed Slide 3, "Project Goals": • Provide lowest-cost energy to Interior Alaska consumers as soon as possible • Get gas first to the Interior while assuring long- term access to gas and propane from liquefaction plant for all Alaskans • Utilize private sector mechanisms as much as possible Ms. Fisher-Goad continued to Slide 4, "Project Description": • Natural gas will be liquefied on the North Slope and trucked to Interior Alaska • Propane will be produced and delivered to Interior and Rural Alaskans • Primary LNG demand anticipated to be Fairbanks and North Pole • LNG will be temporarily stored and re-gasified in Interior Alaska • Natural gas distribution system with storage to supply natural gas for heating 3:20:12 PM TED LEONARD, EXECUTIVE DIRECTOR OF AIDEA, discussed Slide 5, AIDEA Project Analysis Process: Due Diligence." He said that the funding under SB 23 would come from the Sustainable Energy Transmission and Supply Plan (SETS) created by the legislature. He spoke to the chart on the slide which included 4 phases of the project: Phase 1 - Project Suitability Assessment Project Sponsor Submittals · Proposed information · Sponsor information · Estimated costs and timeline AIDEA Process · Is project consistent with AIDEA initiatives? · What is project feasibility? · What is the proponent's experience and Capability? · Is AIDEA right source for financing? Output · Project Information Form · Suitability Report AIDEA Decision Making · Project Evaluation Committee o Authorization to go to Feasibility Analysis Mr. Leonard relayed that AIDEA had completed Phase 1. He shared that in December 2012 AIDEA issued a request for information (RFI) for working on the project, and had received 16 responses. He said that the project was suitable for AIDEA. He shared that the mission of AIDEA was to promote economic development through investment and financing, and the project would do both for interior Alaska. He believed that the project would provide for statewide development as the benefits of LNG rippled across the state. 3:24:17 PM Mr. Leonard relayed that AIDEA was in Phase 2 of the process: Phase 2 - Feasibility Analysis Project Sponsor Submittals Business and financing plan Preliminary schedule Execution/development plan AIDEA Process Is there a complete and attainable business and financing plan? Is there public support? What is the timing and status on project? What are the risks? Output Reimbursement Agreement Term Sheet Risk Analysis AIDEA Decision Making Investment Committee Authorization to go to Deal Structuring and Due Diligence AIDEA Board Approve Reimbursement Agreement Mr. Leonard said that AIDEA had comprised a team of experts on permitting and site assessment from engineering firms, as well as MEI Technologies, experts in building liquefication facilities. He stated that financial advisors had been brought in to determine the financing of the project facility and to examine the distribution system. He believed that AIDEA and ADA's ability to offer a finance package for the project was the reason they were asked to participate. He said that the demand would be ready that would support a production facility, and that the production facility would guarantee that gas would be there once it was time to finance the distribution system. He reiterated that AIDEA was in Phase 2 and that Feasibility and Due Diligence stage would take approximately two to three more months. He noted the additional phases on Slide 5, which illustrated that the board would have the final approval to move the project forward based on the due diligence that AIDEA and AEA would present. He shared that the slide was intended to illustrate how important the due diligence process is to AIDEA and AEA. Co-Chair Stoltze recognized that Representative Isaacson had joined the gallery. 3:27:10 PM Mr. Leonard discussed Slide 6, "Governor's Finance Package": He noted that the appropriation to the fund included three separate legs: $150 million in AIDEA bonds, $50 million in capital appropriation from the General Fund and $125 million in SETS capitalization. 3:28:01 PM Mr. Leonard discussed slide 7, "$50 Million General Fund Appropriation": •Purpose •Give AIDEA the needed equity ownership share in the North Slope LNG plant to ensure project is executed •Directly reduce the price of natural gas to utility customers •How it Works •AIDEA owns $50 million share of the plant. This ownership stake will be an AIDEA asset •AIDEA will not charge a return on its owned share from LNG sales to utility customers •AIDEA can earn a return from LNG sales to non- utility customers or a sale of the asset 3:29:25 PM Mr. Leonard discussed Slide 8, "$150 Million AIDEA Bond Authorization": •Purpose •Provide low cost capital for the build out of the natural gas distribution system •Make sure the utility demand for LNG is created in order to ensure the North Slope plant is fully utilized •How it Works •AIDEA floats $150 million in bonds as the distribution system is built out •The bond payments are incorporated in the natural gas utility's rates •The State of Alaska's moral obligation and the capital reserve fund reduces the bond's interest rate, directly lowering the utility price of natural gas •3% to 4.5% interest rate (depending on tax- exempt status of component financed and market rates) 3:31:40 PM Mr. Leonard discussed Slide 9, "$125 Million SETS Capitalization": •Purpose •Provide flexible, low cost financing for the North Slope LNG plant and/or the natural gas distribution system •The SETS fund provides flexible repayment terms, allowing AIDEA to pursue the best business structure for utility customers •How it Works •The existing SETS fund is capitalized with an additional $125 million •The non-AIDEA owner(s) of the infrastructure are directly loaned the funds with an agreed upon payment plan •The cost of repaying the SETS loan is included in the price of the LNG •3% interest rate (set by SB23) 3:32:34 PM Mr. Leonard discussed Slide 10, "$30 Million Storage Credit": •Purpose •Reduce the cost to build natural gas/LNG storage •Directly reduce the price utility customers pay for natural gas •How it Works •$15 million tax credit for each qualifying storage tank •The project is expected to have two qualifying tanks totaling $30 million •The storage credit was created through previous legislative action 3:33:33 PM Mr. Leonard discussed Slide 11, "Potential Finance Options for Initial Buildout." The slide presented a pie-chart that broke down potential finance options for initial buildout. He noted that the capital structure was similar to other projects. He pointed out that there were two sections to the project; the first was the LNG plant and would require $220 million, the second portion would be $205 million and would cover regasification, storage and distribution. 3:36:37 PM Ms. Fisher-Goad presented Slide 12, "LNG Lowers Energy Costs": Expected Utility Price per Mcf •Wholesale LNG: $10.15 •Natural Gas to home: $13.42-$17.00 per Mcf •Delivered price is equal to $1.79 - $2.27 per gallon of fuel oil Key Assumptions •Initial costs associated with a 9 Bcf plant at start up •Snapshot in time, costs change with expansion •LNG plant bifurcated into two sections (industry and utility) •$50 million capital cost reduction applied to 6.5 Bcf utility section Ms. Fisher-Goad explained that AEA had worked with the Fairbanks community and various stakeholders in order to determine the best targeted rate for bringing gas to Fairbanks. She said that some of the assumptions provided by private partners had been considered as well. She noted that the slide showed that the anticipation was that the LNG would lower energy costs. She stated that the plan would be bifurcated into two sections; industry and utility, with the assumption that the equity investment that was in the capital budget would be applied to the 6.5 Bcf utility section of the plant, which would savings to residential heating customers. She clarified that although AEA was working through the cost assumptions and as the engineering teams continued to refine their work, there was the slight chance that the cost margin could go up, but actual costs would not increase and there would still be a 50 percent decrease in the cost of heating homes in the community. 3:40:17 PM Ms. Fisher-Goad discussed slide 13, "Heating Energy Supply Comparison." She believed that the slide helped to demonstrate the cost structure of using different resources for home heating. She pointed out that electricity would need to cheaper in Fairbanks in order to be considered a heating source: Trucked LNG is the lowest-cost option for Interior Alaska heating •Electricity would need to be $0.04 - $0.06 per kWh to compete with trucked LNG •Electricity would need to be much cheaper to compete with fuel oil Co-Chair Stoltze requested further details on the possible savings to public utility costs for state and local agencies. Ms. Fisher-Goad replied that she would provide the information. 3:41:59 PM Ms. Fisher-Goad mentioned slide 14, "Household Heating Savings": Typical Home Heating Savings • $2,900 - $3,750 annually •43% - 55% reduction in cost Key Assumptions •Typical Interior Alaska household will use 225 Mcf of gas per year (equivalent to 1,700 gallons of fuel oil) •Does not account for expected improvement in heating efficiency with natural gas 3:42:48 PM Ms. Fisher-Goad discussed slide 15: "Air Quality": Conversion to natural gas should reduce air pollutant emissions in Fairbanks and North Pole •Will reduce overall emissions of PM 2.5 •Fairbanks is presently a non-attainment area for PM 2.5 •Potential public health benefits of natural gas is substantial Impact on Federal funding and economic development •The non-attainment area risks losing Department of Transportation and Public Facilities funding if State fails to submit an attainment plan to EPA •Federal projects in the area face funding hurdles while area is non-attainment •Cleaner, healthier air in Fairbanks will promote economic development Ms. Fisher-Goad relayed that the project would help reduce air pollutant emission in Fairbanks and the North Pole area. Currently, Fairbanks was in a non-attainment area, which put federal funding at risk. She stated that the dollars that had been gathered from the northern region DOT included $8-10 million in FMATS that could be lost and an additional $6-8 million of funding in the non-attainment area that was not in the FMATS area. Ms. Fisher-Goad continued to slide 16, "Savings for Public Buildings": •Fairbanks North Star Borough School District expects immediate and significant school heating cost savings •Expect schools to pay back cost of converting in less than two years •8 schools will have immediate access to natural gas, with more switching as the distribution system builds out •The first 8 schools will immediately save $25- $60 thousand dollars a year in heating costs •Other State and municipal buildings should experience similar heating cost reductions 3:44:53 PM Ms. Fisher-Goad turned to slide 17, "Long Term Use of LNG Plant": LNG Plant will be used after gas pipeline •Plant can serve Rural Alaska before gas pipeline is constructed •Expect opportunity to sell LNG to new industrial users both before and after pipeline •Information in chart is for demonstration only She explained that the users on the left of the graph would be served by the pipeline; however, additional users could have gas trucked or provided on the river system, new industrial development was also anticipated. She noted that the facility was modular and could be re-located in a more convenient location. She noted that AEA was working through the rural energy program to determine micro-LNG possibilities. She hoped that the fuel source could be expanded to serve as many communities as possible. 3:47:05 PM Ms. Fisher-Goad discussed slide 18, "Project Timeline and Milestones." She believed that first gas could be delivered by then end of the calendar year 2015. She mentioned that HB 74 included a direct financing program of AIDEAs, unrelated to the interior energy plan. Co-Chair Stoltze requested further detail about the linking of the two bills: SB 23 and HB 74. Mr. Leonard stated that there was no true linkage between the direct financing portion of HB 74 and the interior gas project in SB 23. He said that the direct financing was one of the final tools that could be used by AIDEA. 3:49:04 PM Co-Chair Stoltze asked if SB 23 contained the tools necessary to deliver gas by 2015. Mr. Leonard replied in the affirmative. 3:49:34 PM Co-Chair Austerman understood that there would be a storage tank on the North Slope and another in Fairbanks. Mr. Leonard replied yes. He furthered that the Fairbanks storage would be more costly because it would allowed the production from the plant to be stable throughout the seasons. Co-Chair Austerman queried the cost of building the two tanks. NICK SZYMONIAK, PROJECT ECONOMIST WITH AEA, replied that the requested $15 million per tank would cover only a portion of the overall cost. Co-Chair Austerman asked for the total cost of building the tanks. Mr. Szymoniak responded that the tank in Fairbanks could be approximately $30 million at start up, and could go up to $70-$100 million, depending on the size of storage needed. 3:52:04 PM Vice-Chair Neuman asked whether SETS financing could be used to expand gas availability in the Mat-Su area. Mr. Leonard stated that SETS funds included transmission lines for natural gas and other facilities. He said that under the SETS fund AIDEA was limited to providing financing for 35 percent of a project. He relayed that the authorization in the bill allowed AIDEA to provide more than 35 percent financing for this specific project. 3:54:20 PM Representative Thompson requested further clarification regarding the cash grant; the $50 million that AIDEA would have had as an asset would be reimbursed, and the rest of the funding was through loans. Mr. Leonard responded that the $275 million was to provide AIDEA with the ability to provide direct financing, which would all be paid back through the purchase of the gas. He added that the $50 million was an equity investment and that return on the equity investment would occur through the industrial side of the stream. 3:56:31 PM Representative Gara testified in support of the legislation. He wondered what might prevent the subsidizing of another gasline through the legislation. Mr. Leonard stated that the intention of the bill was to create a production facility to provide LNG for interior Alaska with the ability to extend the resource to all Alaskans. He stressed that the pipeline would never be at the size needed for an in-state pipeline. Representative Gara understood the intended limitations of the project in the bill, but wondered where the bill spoke to the limitation of the plant size. 3:59:11 PM Mr. Leonard stated that the bill authorized AIDEA to invest up to $275 million into the LNG project. He said that existing statute allowed for AIDEA to provide up to one- third of the financing for a project, with a limited amount. He stressed that the bill was only a catalyst for the 9 Bcf plant, and if AIDEA wanted to be involved in a larger project it could not be funded through the SETS. He believed the intent of the legislation was clear. 4:01:23 PM Representative Gara thought that limitations could be written into the title in order to clarify intent. Mr. Leonard replied that AIDEA did not have the debt capacity to build a project the size of HB 4. 4:02:49 PM Co-Chair Austerman understood that $50 million was a capital appropriation for AIDEA to invest in the project. Mr. Leonard said yes. 4:03:32 PM Ms. Fisher-Goad pointed out that the fiscal notes included all of the funding pieces. She turned attention to the summary sheet attached to the fiscal notes, which would provide committee members with a clearer understanding of the fiscal impact of the legislation. Representative Edgmon was pleased with the rural element of the legislation. He queried the 30 year payback period for the funding. 4:05:06 PM Mr. Leonard clarified that the 30 year payback period was intended for the SETS loan and would be paid off over the estimated life of the plant. Representative Edgmon asked about the process of connecting gas to residential homes. Ms. Fisher-Goad replied that estimates had been made that had promised savings to homeowners. Representative Edgmon understood that the numbers for residential hook-up had not been considered in the 30 year model. Mr. Leonard replied no. He added that the funding would provide for the production and the pipe for the neighborhood, but not for conversion. 4:07:58 PM Representative Wilson asked about the commercial aspect and how the university would fit in to the project. Ms. Fisher-Goad replied that the university was looking into replacing their existing coal fueled, combined heat and power plant. She said that AEA would continue to work closely with the university as that project advanced. She noted that staying with coal would be cheaper for the university rather than LNG. She said that the 9 Bcf plant would not be particularly beneficial to people that were already able to enjoy lower cost fuel. 4:10:39 PM Co-Chair Stoltze noted that the public testimony would be taken during Monday's 1:30pm meeting. Co-Chair Stoltze discussed further housekeeping. SB 23 was HEARD and HELD in committee for further consideration. 4:12:25 PM