SENATE BILL NO. 23 "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." Co-Chair Meyer MOVED to ADOPT the proposed committee substitute for CS SB 23 (FIN) Work Draft 28-GS1738\C (Bailey, 2/16/13). Senator Olson OBJECTED for the purpose of discussion. 9:10:23 AM AT EASE 9:11:41 AM RECONVENED Senator Olson wondered what changes were proposed in the committee substitute. Co-Chair Kelly replied that the changes were mostly technical changes. Senator Olson WITHDREW his OBJECTION. There being NO OBJECTION, the proposed committee substitute was ADOPTED. SARAH FISHER-GOAD, EXECUTIVE DIRECTOR, ALASKA ENERGY AUTHORITY, DEPARTMENT OF COMMERCE, COMMUNITY AND ECONOMIC DEVELOPMENT, introduced herself. NICK SZYMONIAK, PROJECT ECONOMIST, ALASKA ENERGY AUTHORITY, introduced himself. TED LEONARD, EXECUTIVE DIRECTOR, ALASKA INDUSTRIAL DEVELOPMENT AND EXPORT AUTHORITY, introduced himself. Ms. Fisher-Goad discussed the PowerPoint, "SB 23 AIDEA Development Project Financing for a Liquefied Natural Gas Production and Distribution System." She highlighted slide 2, "Interior Energy Plan." -Opportunity to provide Alaskans with low-cost North Slope natural gas and propane -Governor's finance package acts as a catalyst, bringing together LNG and propane customers with the private entities that will construct and operate the system -AIDEA is investigating project feasibility and will only utilize their authorized finance tools if the project makes economic sense -AIDEA will take an equity stake in project but will not outright build or operate the LNG plant or distribution system -Governor's finance package is targeted at funding the initial capacity with future expansion funded by private/community investment Ms. Fisher-Goad looked at 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 highlighted 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 andre-gasified in Interior Alaska -Natural gas distribution system with storage to supply natural gas for heating 9:18:20 AM Mr. Szymoniak looked at slide 6, "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 Mr. Szymoniak highlighted slide 7, "Heating Energy Supply Comparison." 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 Mr. Szymoniak looked at slide 8, "Plant Use and Expansion." Plant Expansion -LNG plant will expand as the demand for natural gas increases -Size or timing of expansion is driven by demand -Customer count includes residential and commercial users -Second expansion is possible based on pipeline timing 9:24:55 AM Vice-Chair Fairclough wondered if there was a consideration of the University related to future demand. Mr. Szymoniak responded that there were discussions with the University regarding the use of LNG, and was not included as an explicit line item. Ms. Fisher-Goad furthered that there were discussions with the University of Alaska Fairbanks (UAF) about replacing the combined power plant, but the project was merely a possibility. Vice-Chair Fairclough remarked that she was looking for a holistic plan to address the energy needs in the area, and the state was approached for a significant amount of money for the co-generation plant at UAF. 9:28:05 AM Ms. Fisher-Goad remarked that AIDEA was incorporating what UA's issues and their potential plans into the discussion. She agreed that there should be a holistic approach, but felt that it was not as simple to address. Senator Dunleavy wondered if the high end cost was incorporated into the gas the costumer purchased. Mr. Szymoniak replied in the affirmative. Senator Dunleavy looked at slide 9, and wondered if there was going to be a gas conditioning plant on the slope that was not included in the plan. Mr. Szymoniak replied that the plant proposal was included in the LNG. Senator Dunleavy wondered if the plant was located as a sub-set of the LNG. Mr. Szymoniak responded in the affirmative. Mr. Szymoniak looked at slide 9, "Capital Cost Breakdown." -Based on "Mid Cost" scenario -Economies of scale achieved in LNG plant as additional 4.5 Bcf trains are added -Costs for expansions are cumulative -Does not include trucking capital Mr. Szymoniak highlighted slide 10, "Household Heating Savings." Typical Home Heating Savings -$2,900 -$3,750 annually -43 percent -55 percent 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 9:33:40 AM Mr. Szymoniak discussed slide 11, "Reduce Fuel Price Uncertainty." Reduced price variability -Small portion of delivered LNG price is natural gas cost -Fuel oil prices are much more volatile than trucked LNG -Trucked LNG is cheaper even when oil prices drop Key Assumptions -Fairbanks fuel oil price is based on linear regression analysis -Natural gas price uses publicly available information on LNG supply contracts Mr. Szymoniak looked at slide 12, "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 -Alaska 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 9:38:00 AM Mr. Szymoniak highlighted slide 13, "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 Senator Hoffman remarked that there should be a demonstration project for the river and highway system. Senator Bishop felt that there were people in Fairbanks that needed propane soon. Senator Dunleavy remarked that the LNG concerns were across the state. He wondered if the cost dealt with the main or to a residence. Mr. Szymoniak responded that the cost included from the main, but did not include the meter at the residence, and he agreed to provide that information. 9:45:58 AM Senator Dunleavy surmised that there could be a main, but the resident may not be able to afford to get the gas. Mr. Szymoniak replied that it was an aspect that AIDEA was examining, and announced that there were a variety of different programs that could help fund that. Mr. Leonard stated that a proposal declared that a hookup would cost $300 to $400 for the family, with a conversion of the appliances at an additional cost. He felt that there would be an overall savings. 9:51:03 AM Mr. Leonard looked at slide 15, "Governor's Finance Package." $50 million General Fund appropriation -Directly reduces the cost of LNG $150 million AIDEA bonds -3 percent to 4.5 percent interest rate (depending on tax-exempt status of component financed and market rates) -$125 million SETS capitalization -3 percent interest rate (set by SB23/HB74) -Flexibility to provide optimal commercial structure $325 million total 2013 package $30 million natural gas storage credit -$15 million tax credit per qualifying storage tank -Created through previous legislative action -$355 million total Governor's package Co-Chair Meyer asked for a description of the SETS program. Mr. Leonard responded that the SETS program was the Sustainable Energy Transmission and Supply Development Fund. 9:57:50 AM Co-Chair Meyer noted that the money to fund the program came out of the general fund. Mr. Leonard responded that. the original loan participation fund started with an original amount that had grown 200-300 and was to grow the fund as more loans were issued. He stated that the interest back from the loan went to the state. Co-Chair Meyer noted that there was a charge association with the debt service and inquired how it was factored into the loans. Mr. Leonard replied that if they issued bonds on loan participation there would also be interest revenue from the Co-Chair Meyer stated that he understood the program itself and noted that the fiscal note did not show all the financing that as being proposed. Ms. Fisher-Goad agreed to provide more information. 10:03:49 AM Co-Chair Meyer felt that the fiscal note should reflect the different financing. Mr. Leonard responded that // He stated that slide 16 reflected that concern. 10:07:46 AM AT EASE 10:07:58 AM RECONVENED Co-Chair Kelly handed the gavel to Co-Chair Meyer. Vice-Chair Fairclough looked at slide 2, and then slide 9. She surmised that the low cost startup was projected at $368 million, and the high cost startup was $481 million. Mr. Leonard agreed, and furthered that he hoped that the number would be narrowed soon. He explained that the numbers were based on the proposals from the letters of requests for interest. 10:10:51 AM Vice-Chair Fairclough assumed that, if the state was providing $355 million at a low cost scenario, carrying 95 percent of the risk. Mr. Leonard agreed, but looked at slide 16. He shared that there would be $70 million from the private sector. He stressed that AIDEA had provided an explanation of their process and analysis that is undertaken to determine the different phases. Vice-Chair Fairclough remarked that there needed to be equal insurance between the public sector contribution and the state's investment. Mr. Leonard responded that the state would be involved in the initial build out and distribution. He explained that AIDEA's risk would only be involved in the original startup. 10:19:48 AM Vice-Chair Fairclough noted that the state would have an equity interest at 86.4 percent, and a private sector investment of 3.7 percent. Mr. Leonard replied that one must look at the difference of the distribution system. He explained that AIDEA would not have an equity position in the distribution system, but it would have an equity position in the plant. Vice-Chair Fairclough wanted the interior of Alaska to have low-cost energy, but remarked that the state was going "all in" on this investment. She pointed out that it was mitigated through bond packages and state structures. She queried the qualifications of the private investors, because their risk was mitigated by the state's investment. Mr. Leonard responded that AIDEA conducted a due diligence, to verify that the investors had the financial capacity to maintain their side of the deal with expertise to run a proposed plant. Co-Chair Meyer commented that the state's storage credit was $30 million, the state appropriation was $50 million, and the SETS loan was $125 million, with total general fund capital at $205 million. He felt that those numbers should be outlined in the fiscal note. 10:25:49 AM Senator Hoffman looked at slide 7, and commented that the risk should be analyzed based on what the users were currently paying with the probability of the cost of oil in Fairbanks exceeding $5 or falling below $2. He felt that the economy and the Fairbanks residents would suffer, if action was not taken quickly. Mr. Leonard looked at slide 17, "SETS Loan Interest Rate." SETS Loan interest rate has minimal impact on LNG Price -Assumes 30-year loan term -Reduces natural gas price by $0.25 per Mcf 10:34:01 AM Mr. Leonard discussed slide 18, "Project Timeline and Milestones." He stated that AIDEA was embarking on the feasibility phase of the project, and planned to have that phase complete by June 2013. He explained that the end goal was to provide gas by the second quarter of 2015. Vice-Chair Fairclough surmised that AIDEA could take no more than one-third equity interest. Mr. Leonard explained that the SETS program had a limitation that stated that without legislative approval, AIDEA could not participate in direct financing of a project under SETS. He remarked that AIDEA could participate in direct financing in other projects from between 23 percent to 100 percent ownership. Co-Chair Meyer handed the gavel to Co-Chair Kelly. 10:39:35 AM MERRICK PIERCE, SELF, NORTH POLE (via teleconference), testified in support of SB 23. He furthered that the bill should be amended to ensure that AIDEA was required to complete full due diligence in the best possible method for delivering natural gas to Fairbanks. He felt that LNG trucking was not the best method. He stressed that LNG had many problems including high out backs, it was the most dangerous method for transporting LNG, gas contracts would link the gas to the price of oil, and there was no propane availability. LUKE HOPKINS, MAYOR, FAIRBANKS NORTH STAR BOROUGH (via teleconference), testified in support of SB 23. He commented that AIDEA had approached the legislation appropriately. He remarked that the legislation was important, because it backed a project that had viability. He remarked that the build out of the LNG plant and distribution was important to the community of Fairbanks. 10:45:13 AM BRIAN ROGERS, CHANCELLOR, UNIVERSITY OF ALASKA FAIRBANKS, explained that UAF had a 50-year-old power plant that provided most of its heat and electricity. He stated that there were approximately 250 universities in the country that had similar combined heat and power plants, and most of them were gas. He explained that UAF spent $9.8 million on heat and power for the campus. Vice-Chair Fairclough was concerned about the operating costs and remarked that there would be $0.5 million in operating costs annually. She stressed that she wanted to find an overall solution, rather than an incremental solution. Vice-Chair Fairclough stressed that the federal government tended to postpone coal plant permits. Chancellor Rogers understood that risk. He stressed that the plant would be a replacement plant, so it would reduce emissions. He also pointed out that it was lower than the regulatory limit. SB 23 was HEARD and HELD in committee for further consideration. 10:50:24 AM RECESSED 1:34:24 PM RECONVENED