HOUSE BILL NO. 87 "An Act extending the liquefied natural gas storage facility tax credit; and providing for an effective date." 10:04:21 AM Co-Chair Wilson referenced the document she distributed earlier in the member's packets titled "Interior Alaska Natural Gas Utility Schedule of Sustainable Energy Transmission and Supply (SETS) Loan Funds as of May 9, 2019" (copy on file). She emphasized that the SETS funds were a loan fund. She questioned where the funding to move the tanks from Fairbanks to the North Pole would come from and if the project would only supply Fairbanks if funding was insufficient. DAN BRITTON, INTERIOR GAS UTILITY, FAIRBANKS (via teleconference), reviewed the formerly cited document. He pointed to the SETS fund totaling $125 million. He read the following from the document: Uses Projects: North Pole Distribution System $29,346,778 Fairbanks Distribution System $14,806,184 Fairbanks 5.25M Gallon Storage Facility $37,026,281 North Pole Storage Facility $678,542 Pentex Acquisition $21,208,913 Total Proceeds Used $103,066,697 Remaining Loan Proceeds $21,933,303 Remaining Committed Project Uses Fairbanks 5.25M Gallon Storage $18,147,587 Fairbanks and North Pole Customer Service Connections $1,992,250 North Pole Storage Facility $993,466 Titan 2 & 3 FEED $800,000 Total Remaining Committed Project Uses $21,933,303 Remaining Loan Proceeds $0 Mr. Britton indicated that the Interior Energy Project (IEP) had the ability to issue Conduit Revenue Bonds through Alaska Industrial Development and Export Authority (AIDEA) that was backed by the moral obligation of the state of up to $150 million. The project hired a financial advisor and began the process of preparing the bond package. The initial bond issuance would total $75 million to cover the cost to construct the liquefaction plant and Fairbanks Gas Storage Facility. The IEP secured a commitment of $14 million in funding from a local bank and requested access to a $7.5 million line of credit from the Fairbanks North Star Borough who assessed whether to allow the line of credit to proceed. He concluded that the short term funds and the bond funding he described were the funds IEP would employ to fund the projects. 10:09:23 AM Co-Chair Wilson asked for verification that the project was over $200 million in debt. Mr. Britton answered in the negative. He clarified that the total indebtedness was the $125 million in SETS funding. The bond issuance would subsequently create a total indebtedness of $200 million. The SETS loans had a 15-year deferral accruing no principal payments or interest along with an additional 5 year further deferral if the conversion process was slower than anticipated. The $125 million was flexible debt put in place by the legislature to remove some of the risk associated with the conversion. Representative Knopp asked about the construction timeframe and total cost associated with the liquefaction plant. Mr. Britton answered that the liquefaction expansion cost $50 million. He explained that construction was on a two-year timeframe beginning in the fall of 2019 and an RFP was issued for liquefaction and pretreatment equipment that was part of the front end engineering and design process. 10:11:28 AM Vice-Chair Johnston MOVED to ADOPT the proposed committee substitute (CS) for HB 87, Work Draft 31-LS0619\U (Nauman, 5/9/19). There being NO OBJECTION, it was so ordered. Co-Chair Wilson asked for her staff to review the changes in the CS. LYNN GATTIS, STAFF, REPRESENTATIVE TAMMIE WILSON, reviewed the changes in the CS. She relayed that on page 1, line 7 the date was changed from January 30, 2021 to January 1, 2021 and on page 2, line 9 (a) $7.5 million was changed to $5 million. She added that on page 2, lines 10 (b) through 11 were deleted. Representative LeBon discussed that the North Pole facility tanks were currently located in South Fairbanks and were previously owned by Fairbanks Natural Gas. He asked whether he was correct. Mr. Britton affirmed the statement. He furthered that the North Pole facility would allow the tanks to be moved to that location. The relocation required the installation of vaporization equipment to vaporize liquid natural gas (LNG). Representative LeBon ascertained that the IEP had two parts: The Fairbanks component that included the 5.25 million tank that was currently under construction and the North Pole component that was not connected to the Fairbanks market. He wondered whether his statement was accurate. Mr. Britton responded in the affirmative. He elaborated that the two systems were not connected at present but would eventually be connected and the same rates would be charged. They would be managed as one service area but were currently independent. The only way to provide gas service in North Pole was to add the storage facility that would provide LNG to pipes that were currently under nitrogen pressure. Representative LeBon asked how large the North Pole piece was in comparison to the Fairbanks component. Mr. Britton answered that the IEP had installed 72 miles of the distribution system in North Pole and Fairbanks had over 140 miles of the distribution system with plans to expand the North Pole system. He elucidated that the demand primarily came from the Fairbanks area. North Pole would account for around 35 percent of the total demand versus the core area of Fairbanks at 65 percent. 10:16:47 AM Representative LeBon asked if the LNG supply lines were almost completed. Mr. Britton answered that the Interior Gas Utility (IGU) had completed most of the Phase 1 planned distribution system and the next phases of expansion for North Pole would come in future years when expansion estimates were confirmed, and the demand increased. Co-Chair Wilson asked why the two systems were separate. Mr. Britton answered that until June 2018 the two systems had been under separate ownership. They were currently under common ownership through the purchase of Pentex by IGU, which provided the opportunity to connect the two systems. The original system was not designed for expansion into the North Pole. Providing service to the North Pole required proper pressure that necessitated the storage facility in North Pole. 10:18:39 AM Vice-Chair Ortiz asked whether HB 87 extended the tax credit program for up to $15 million. He asked for clarification. Co-Chair Wilson replied in the negative. She detailed that the project was extended for one year and the cost could not exceed more than $5 million; any additional amount was not covered under the tax credit program and the project had to be completed to the point of commercialization to qualify for the credit. She clarified that that the "old program" that included the $15 million tax credit program expired on the date as planned. The bill provided a one- year extension and lowered the credit to $5 million. She added that if the IGU could commercialize its storage plants by December 31, 2019 they would still be eligible for the $15 million tax credit, failing that they would fall under the $5 million plan. Vice-Chair Ortiz appreciated the clarification. Co-Chair Wilson offered that the Fairbanks areas energy costs were not equalized with of the cost of energy in Anchorage, but she desired an eventual end of the tax credit program. She learned that areas of the Mat-Su and bush still heavily relied on diesel fuel. Representative Carpenter wondered about the length of time it would take to repay the tax credit. Co-Chair Wilson answered that the project would not generate revenue to the state. The project was a benefit to the Interior for paying a high cost for energy for many years. Vice-Chair Ortiz asked if the $5 million would be a part of the bonding option. Co-Chair Wilson answered in the negative and added that bonding would come first in order to complete the Fairbanks project. The IEP had to be ready for commercialization by the deadlines to be eligible for the tax credit. She noted that there was a chance IEU would not complete the program in time; therefore, the tax credits would be void. 10:23:47 AM Vice-Chair Johnston asked about the fiscal note. Co-Chair Wilson answered that the bill reduced the maximum amount of the credit to $5 million of the costs incurred to establish or expand the facility if the facility commences commercial operation on or after January 1, 2020 and before January 1, 2021. She explained that the tax credit depended on the timing of the projects completion and whether the Department of Revenue (DOR) bond issuance for the tax credits was sufficient to include the credits for IEP. The project would have to wait in line behind other tax credits or may never receive it, since it ultimately depended on appropriation by the legislature. 10:25:04 AM Vice-Chair Johnston MOVED to REPORT CSHB 87(FIN) out of committee with individual recommendations and the accompanying fiscal note. CSHB 87(FIN) was REPORTED out of committee with four "do pass" recommendations and six "no recommendation" recommendations and with one new indeterminate fiscal note from the Department of Revenue. 10:25:52 AM AT EASE 10:27:25 AM RECONVENED