HB 74-AIDEA: LNG PROJECT; DIVIDENDS; FINANCING  9:53:28 AM CHAIR OLSON announced that the final order of business would be HOUSE BILL NO. 74 "An Act relating to development project financing by the Alaska Industrial Development and Export Authority; relating to the dividends from the Alaska Industrial 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." 9:53:35 AM SARA FISHER-GOAD, Executive Director, Alaska Energy Authority (AEA), Department of Commerce, Community & Economic Development (DCCED), informed the committee that her PowerPoint presentation will update the committee on the proposal to bring liquefied natural gas (LNG) to the Fairbanks area. She said HB 74 would develop a catalyst and financing package with the strength of the Alaska Industrial Development and Export Authority (AIDEA) to provide low-cost North Slope natural gas and propane to Interior Alaska. This package provides an opportunity for the project to happen, but passage of HB 74 does not necessarily mean the project would move forward since numerous assumptions have been made and lots of work is happening to determine feasibility. This presentation will show the status of the project development and where a significant difference can be made with the financing package to provide lower cost heating fuel to Interior residents. She reiterated the project provides the catalyst and gives AIDEA additional tools, although she noted HB 74 is primarily a financing package [slides 2-3]. She described the LNG project as one that would help build out the LNG to Interior Alaska by trucking gas to consumers while assuring the private sector is used as much as possible. The natural gas would be liquefied on the North Slope and trucked to Interior Alaska and propane would be delivered to the Interior. Although the initial phase would serve Fairbanks and the North Pole area, gas would also be made available for other parts of Interior Alaska. The LNG would be stored and degasified in the Interior and the distribution system would be built out to provide natural gas for heating. Additionally, the distribution system would lay the foundation when a gas line comes to Interior Alaska and the LNG customers could transition to have their gas distributed from the pipeline [slide 4]. Ms. Fisher- Goad pointed out the LNG trucking value chain [slide 5]. The AEA and AIDEA have been working to develop the proposed LNG project. In fact, AIDEA has worked with the proposers and sent a letter of interest out to help develop the package and initiate the due diligence. 9:57:36 AM MS. FISHER-GOAD explained what's been happening with the cost of heating fuel and what this project could do to make a significant difference for many customers in Interior Alaska [slide 6]. She explained the graph, noting fuel oil is roughly $4 per gal and this project proposal has the wholesale LNG cost at approximately $3.50 per thousand cubic feet (Mcf). This figure was based on information from project proponents who anticipate natural gas contracts will be available from the North Slope to provide gas at that price. She explained that the blue part of the graph is the liquefaction plant, the green part of the bar charts is trucking, and the yellow portion is the regas storage and distribution portion which brings natural gas to the home. Thus, this graph demonstrates the cost savings in using natural gas versus fuel oil, which could reduce costs, which start at $4, by nearly 50 percent for Interior residents. She referred to an earlier question by the committee, which was to ask why an electricity future wouldn't be considered as an alternative. She turned to slide 7, entitled, "Heating Energy Supply Comparison," which shows that electricity costs would need to be $.04 - $.06 per kilowatt per hour (kWh) in order to be competitive. She said she appreciated the economist's development of the slide since it demonstrates the heating costs for electricity in Fairbanks is currently at $.22 per kWh. She pointed out the significant difference between electricity and fuel oil costs, which also demonstrates the reason AIDEA is considering the LNG trucking proposal to Fairbanks. 10:00:11 AM MS. FISHER-GOAD turned to plant use and expansion which begins to discuss the startup costs in district [slide 8]. The initial plant would be a 9 billion cubic feet (Bcf) plant that would provide 4.5 Bcf for space heat, 2.0 Bcf for electricity, and 2.5 Bcf for industrial use. At start up, the eligible customers are estimated at 7,800 LNG and 1,800 propane customers. As the distribution system expands, the LNG plant would serve 15,900 LNG and 2,700 propane customers. 10:01:01 AM MS. FISHER-GOAD discussed the capital cost breakdown [slide 9]. The estimated cost of the LNG plant is $220 million, with the regas, storage, and redistribution for a total startup cost of $425 million. She explained that the estimates are based on project proponents who developed this project last year. This concept is not a new concept, but is one that has developed in the past few years to provide an affordable fuel source to the Fairbanks area. She reiterated that these assumptions are being vetted and the due diligence is starting with Mr. Leonard's team on the technical discussion of the project. 10:02:09 AM MS. FISHER-GOAD then turned to [slide 10] with regard to household heating savings, which compares the current monthly fuel oil costs in the Interior with the potential range of fuel oils with the natural gas future. She highlighted that this demonstrates AEA's mission to reduce the cost of energy for Alaskans. The aforementioned coupled with the fact that AIDEA is the development financing agency for the state results in a very good marriage of sister agencies to develop a project to help pursue gas for Interior Alaskans. There would also be significant savings in heating costs if LNG can be trucked to Fairbanks at this point. Furthermore, changing from oil heat to LNG also provides a reduction in the uncertainty of the price [slide 11]. She pointed out that there is a direct correlation between crude oil prices and fuel oil prices. In 2008, Alaskans using diesel fuel began to see a significant increase in heating costs. Of course, Interior Alaska and rural Alaska are the colder parts of the state. With the LNG future, the swing between low and high prices is reduced. However, as crude prices fluctuate, a significant difference exists. Additionally, use of natural gas can reduce overall emissions, which has been a significant concern in Interior Alaska [slide 12]. Thus natural gas could help increase public health benefits substantially. 10:04:55 AM MS. FISHER-GOAD moved on to the long-term use of LNG [slide 13]. She recalled concern was raised in terms of what would happen to the infrastructure as a pipeline is developed. However, all the existing entities can be served by the pipeline, including the existing space heating and electrical generation, she said. The pipeline would replace the trucking system; however, the liquefaction plant is moveable and could continue to serve areas in which a pipeline would not serve. Thus AEA and AIDEA believe a real significant industrial development can be done post pipeline. Additionally, this can assist with further expansion of rural Alaska river system and highway system in order to continue to supply LNG and propane to other areas of the state. 10:06:28 AM CHAIR OLSON asked for the project's timeframe. MS. FISHER-GOAD projected that if everything pencils out and AIDEA is able to develop the financing package that it would like, first gas would flow into the system in the last quarter of 2015 [slide 14]. 10:07:06 AM TED LEONARD, Executive Director, Alaska Industrial Development and Export Authority (AIDEA), Department of Commerce, Community & Economic Development (DCCED), stated that HB 74 would provide authorization for AIDEA to participate in the financing through two separate streams of funding. One stream would be AIDEA's direct financing of $275 million to the project through AIDEA's issuance of $150 million in bonds. The rate on the direct financing would be the bond rate plus 25 basis points that AIDEA will have for managing the project. The second revenue stream would be direct financing of $125 million at 3 percent, which is set in statute [from the Sustainable Energy Transmission and Supply Fund established last year] [slide 14-15]. Additionally, the Governor's proposed FY 14 capital budget proposes another $50 million in general fund dollars for the purpose of reducing direct costs to consumers in Interior Alaska. This would be an equity investment by the state using some type of public-private partnership (P3) agreement. 10:08:24 AM MR. LEONARD explained the funding sources for the initial distribution system build out totals $355 million. Additionally, based on existing statutes, credits can be used in distribution and production phases. More specifically, the credits are available for providing LNG storage. He anticipated LNG storage on the North Slope and in Fairbanks for regasification. 10:09:22 AM MR. LEONARD highlighted the potential financing tools potential finance options for initial build out [slide 16]. The financing AIDEA is requesting for the initial distribution system build out would consist of $425 million with communities and utilities providing full financing for the expansion of a 9 Bcf to a 13.5 Bcf plant. He described the funding, which includes a direct loan for the production facility for $125 million, with the general fund appropriation providing the investment for the equity portion for the state, with funding including the storage credit. In order for the project to work, private investment must occur, estimated at approximately $70 million of the $425 million. 10:10:43 AM MR. LEONARD explained the different costs to bring gas to Fairbanks, excluding the distribution system [slide 17]. He detailed the interest at $.25 for the $10.28 per Mcf. The principal on the loan would be $.46 per Mcf; and the return on equity would be $.21 per Mcf. He pointed out that the majority of the cost to bring gas to Fairbanks is in the trucking, the natural gas contract, and a small amount of actual operations [as depicted on the colored bar graph on the right of the slide.] 10:11:34 AM MR. LEONARD related the project timeline and milestones [slide 18]. He explained that the feasibility stage is currently happening, from February to August 2013. The plant and storage is anticipated to start in June 2013, with gas delivery anticipated in the last quarter of 2015. The build out of the distribution system would happen in 2014-15. He reported that AIDEA and AEA have had a team in Fairbanks meeting with proponents - the project sponsors. Last week three days of meetings were held. AIDEA has two engineering firms on board to begin analyzing the two turnkey proposals from project sponsors, including HDR, Inc. and MEI, LLC. He advised that MEI is an expert on building liquefaction plants and to date the company has built approximately 300 plants around the world. Additionally, AIDEA also has financial advisors who have begun to review the financial feasibility of the plant, which will continue through June 2013. He reiterated the goal to have first gas delivered during the last quarter 2015. 10:13:15 AM REPRESENTATIVE REINBOLD recalled Fairbanks households would convert to gas. She asked for an estimate of the time frame and the approximate cost per household for conversion. MS. FISHER-GOAD estimated that the costs would range from $300 to $500 per household. However, due to the significant annual savings AIDEA believes some incentives exist for conventional financing to help handle the necessary conversion costs. Since AIDEA is currently working through the due diligence, she did not anticipate Fairbanksans to do so until due diligence is completed and when the project and cost-savings figures are proven up. 10:14:58 AM REPRESENTATIVE REINBOLD asked for clarification on the private investment of $70 million as part of the potential finance options. MR. LEONARD answered that money would come from the project sponsors, which is likely going to be one of the utilities. Additionally, on for storage side the investment would come from the various utilities investing in the distribution system, including Fairbanks Natural gas, and the new utility, Interior Gas Utility. He pointed out that this type of project is one in which AIDEA is currently involved; as AIDEA invests its money, the project sponsor is also expected to invest, which creates a combination of funds to perform the build out and the project construction. 10:16:19 AM REPRESENTATIVE REINBOLD, referring to the moveable facility, asked where the facility would move and the cost to move it. CHAIR OLSON also asked whether the LNG facility would be skid mounted or if it would be dismantled and rebuilt. MR. LEONARD answered that he doesn't have the cost to move the facility; however, it is a modular facility. It is built in parts and constructed so it would be moved in the same way. One possibility would be to move it to Fairbanks next to the proposed pipeline and "it would be a customer to utilize... gas coming off the pipe to make LNG," which would be trucked to mining operations, for example. He noted the Ambler mine is scheduled to come on line in 2019 and other mines have indicated a preference for LNG, if possible. Further, the LNG would be trucked down the Richardson Highway; however, he does not currently have the cost for that trucking. He related this would be part of the due diligence undertaken by the agency. He offered his belief that the cost of moving the plant would not be a significant cost for the plant. 10:18:08 AM REPRESENTATIVE CHENAULT said he noticed one slide did not include trucking capital. He asked whether any estimate existed. He anticipated it would be reasonable but wondered why the trucking estimates were not included. MS. FISHER-GOAD answered that trucking is obviously a part of cost to get to Fairbanks. The financing that will be made available by AIDEA and the potential $50 million would not be used in the development of the trucking cost. She related her understanding from discussions with the utility proponents mentioned earlier that the trucking portion would be contracted with a company to provide this service. She agreed the cost exists, but the financing package would not be used to finance the trucking cost. 10:19:47 AM REPRESENTATIVE CHENAULT commented that although he understands the need for the project and supports the project, he has some questions. He asked whether AIDEA is considering any financing distribution for other communities. MR. LEONARD answered yes; that under the SETS program AIDEA has been contacted by small community outside of Anchorage for an air gas propane system and distribution system for it. He related that AIDEA is beginning to receive requests through the SETS program. 10:21:12 AM REPRESENTATIVE CHENAULT related that the state funded a gas pipeline to Homer, which will be repaid, in part, through an assessed fee on rates. However, Homer has assessed its [property owners] in the amount of about $3,900 per parcel in order to get a gas distribution system. He was curious as to whether other communities have contacted AIDEA as he anticipated other communities will expect to have distribution systems and ask for funding. Therefore, he expressed hope the state is ready and willing to assist other communities in that endeavor. Representative Chenault then said he hoped to move the bill forward once questions are answered. 10:23:08 AM REPRESENTATIVE JOSEPHSON remarked this seemed inexpensive considering the alternatives. He recalled one slide would serve 15,000 customers; however 100,000 reside in the Fairbanks North Star Borough. He asked how this would serve the additional 85,000 people. MR. LEONARD answered that instead of people the number of customers is estimated. He said a full build out is estimated to serve 19,000 customers, although currently there are 22,000 to 25,000 total units. 10:24:14 AM REPRESENTATIVE JOSEPHSON asked about $105 million for distribution system and asked whether that refers to trucking not retrofitting homes. MR. LEONARD answered that the $105 million distribution is to get the pipeline to the neighborhoods and the mains to the neighborhoods. After the mains are completed, a hookup from Fairbanks Natural Gas or IGU - which is estimated from the main to the house at $300 to $500 per household - would need to happen. [HB 74 was held over.]