SENATE BILL NO. 125 "An Act relating to the financing and issuance of bonds for a liquefied natural gas production system and natural gas distribution system; and providing for an effective date." 10:12:36 AM SENATOR PETE KELLY, SPONSOR, discussed SB 125. He read from a prepared statement: For the record, I am Senator Pete Kelly, district A covering the City of Fairbanks and Fort Wainwright. Madam Chair, members of the Senate Finance Committee, thank you for hearing SB 125. Senate Bill 125 extends the time for AIDEA to issue bonds for the Interior Energy Project (IEP) by five years to June 30, 2023. The Interior suffers from the most volatile energy costs of any community on the Railbelt. As a result of the cold winters and high prices residents also burn a lot of wood and coal, exacerbating the high prices with air quality issues. It is due to these issues: We, Governor Sean Parnell and the legislature put a package together in the form of SB 23 creating the Interior Energy Project. SB 23 was a funded(ING?) package The funding package for the IEP included: 1. $57.5 million dollars in a capital grant, all of which has been spent or obligated 2. $125 million dollars in Sustainable Energy Transition and Supply (SETS) Loans of which $52.8 million dollars has been spent and $45.5 million had been obligated 3. And $150 million dollars in AIDEA Bonding Authority, the subject of the bill before you, none of which has been used to date The distribution system we have in place due to limited liquefaction and storage infrastructure, has never exceeded 70 miles of pipe. With I think no more than about 1200 customers, Many of the current customers are commercial in nature, and many of them have interruptible service due to the lack of sufficient local backup LNG storage capacity. This structure made it challenging to create an expanded distribution network for other interior residents and businesses. For a community that supports two major military installations and many commercial entities, the volatility of energy prices has presented a significant economic impediment. Madame Chair, the AIDEA team overseeing the IEP has been advancing the original financing package, But just as they were ready to deploy the $150 million-dollar bond component, we have essentially run out of time on the legislative authorization. This bonding is absolutely necessary for the project as it will be used to Increase the production capacity of the LNG plant at Point MacKenzie and further the expansion of the distribution network. I want to emphasize that this bonding authorization can only be used for the purposes of the Interior Energy Project due to amendments to the financing package created in 2015 through the passage of HB 105. The bonding can also only be used to finance investment-grade grade utility infrastructure due to covenants included in the agreements signed between AIDEA and the IGU. TO DATE: 1. The 2014 and 2015 build-out of a natural gas distribution system covering nearly all of Fairbanks and core-North Pole 2. The 2015 AIDEA purchase of the Pentex assets including the LNG production facilities at Pt. MacKenzie, LNG trailers, and local distribution infrastructure 3. The passage last spring of PACE legislation to assist in commercial conversions to natural gas 4. Last September, AIDEA secured a gas supply agreement with Hilcorp. 5. This was followed in December, with the signing of agreements to consolidate the Fairbanks Natural Gas (FNG) and the Interior Gas Utility (IGU) systems into a single, investment-grade gas utility through the sale of the Pentex assets to IGU. 6. And, this month, construction is now underway on a large-scale 5.2 million gallon LNG storage facility in south Fairbanks that will support the future customer growth of the combined utility system. Even with the recent fall in the price of heating oil in the past few years, the need for a long-term, clean, and affordable energy alternative for the Interior remains a high priority. On its present schedule, first expanded gas availability with the potential to move interruptible customers to full service is expected in the winter of 2019. And ... 2020 will see the first full scale efforts to convert properties with access to the existing distribution system to gas. Madame Chair, Extending the sunset for AIDEA's bonding authority for this project will ensure continued success of the IEP and will help the interior realize the vision of clean and affordable natural gas in the Fairbanks/North Pole area. Vice-Chair Bishop commented that the fuel that was delivered to his Fairbanks home the week prior was $2.86 per gallon. He felt that the prices were increasing. Senator von Imhof wondered whether there was a long-term contract with the gas supplier in Southcentral Alaska. Senator Kelly deferred to Mr. Therriault. 10:19:57 AM JOE BURNS, STAFF, SENATOR PETE KELLY, noted that there was the most recent bill version in the members' packets. He stated that the only change from the original version was a title change, which cleared up some ambiguity in the original title. Co-Chair MacKinnon remarked that she may have had an impact on that change, because she wondered which entity was financing the bonds. Co-Chair MacKinnon OPENED public testimony. 10:21:07 AM GENE THERRIAULT, DEPUTY DIRECTOR, STATEWIDE ENERGY POLICY DEVELOPMENT, ALASKA ENERGY AUTHORITY, DEPARTMENT OF COMMERCE, COMMUNITY AND ECONOMIC DEVELOPMENT, referenced Senator von Imhof's question. He stated that the current gas supply that was secured from Hilcorp was for a three- year period of time. He remarked that there was offered a longer term contract, but the entity that was purchasing and consolidating the utilities asked not to lock in a longer period of time. He stated that the AIDEA board decided that three years, with potential extensions, was acceptable. He shared that it allowed for the ability to look for other potential sources outside of Cook Inlet that may lower the price of gas. He remarked that in 2015, HB 2015 was passed, and the legislature put a number of requirements on the AIDEA board. He stated that one of those requirements that the board needed to see a supply of gas, understand all the components of the infrastructure, and have an estimation of the delivered price. She stated that the supply contract allowed for no take or pay obligation to accommodate the anticipated growth, because Hilcorp had provided flexibility to the enterprise. Senator von Imhof wondered when the current contract expired. She asked whether the terms would remain the same or require re-negotiation if there was a renewal in the contract. Mr. Therriault replied that the old contract was supposed to end at the end of march. The new contract started at that time, but there was an avoidance of a 3 percent increase in the old contract on January 1. He stated that it was three years from the end of March. He furthered that in order to get increased capacity, the producer must be given 18 months advance notice. He stated that for the five-year extensions, the terms could be renegotiated. He noted that there was no current discussion about reopening those terms, but he believed the producer would be amenable to consider a possible request. Senator von Imhof observed that the current contract would expire in 2021. She surmised that, at that time, both parties would meet to discuss, terms, and other topics. Mr. Therriault replied in the affirmative. He furthered that, with existing customers, the utility must start the discussions well before the end of the contract in order to show the Regulatory Commission of Alaska. Co-Chair MacKinnon wondered whether Mr. Therriault had prepared testimony to provide to the committee. Mr. Therriault replied that he was available to primarily answer questions. 10:25:21 AM Senator Stevens wondered whether the bill provided for all of the energy needs of the two bases. He felt that it would be crucial to the security of the bases. Mr. Therriault replied that there was currently no anticipated use on the bases. He shared that Ft. Wainwright had some of the facility across the river, which was not heated, but had a distributed heat loop off their power plant. That power plant ran on coal, and remarked that it was difficult to compete with the price of oil. He remarked that there was some infrastructure that could avail itself of a pipe distribution. He stated that Eielson was approximately 7 miles from North Pole, and there was some estimation of the cost of what it would take to pipe energy. He stated that most facilities on Eielson were heated with a distributed heat loop. He remarked that until they decided to use a different source of generation for the bases, there was no anticipated use. He hoped to pick up some use for some of the facilities. He remarked that there had been responses to a request from the Department of Energy to examine the interest of changing the energy source for Fort Greely. He remarked that there was an RFP to examine who may have that capability. He understood that there would be no capability of pushing gas via pipe distribution, the Fort Greely area could source LNG out of the plant expansion. He remarked that it was all a volume enterprise: the higher the volume, the lower the per unit cost. Co-Chair MacKinnon remarked that she had asked in another committee whether there were any anchor tenants. She shared that there were people who were interested in gas, but no anchor tenants like the ones thought of for industry. She wondered whether that had changed since that committee question. She shared that there was a possibility that a retailer or small box store may be interested, but no anchor tenants like the mine or military bases. Mr. Therriault replied that there were no current anchor tenants. He shared that mining operations up the Dalton Highway had been watching the program to see the delivered price in the community at bulk LNG. He stated that once that price was seen, those operations could run the economics for continuing to drive a further distance for delivery. 10:28:40 AM Co-Chair MacKinnon queried the anticipated cost to consumers. Mr. Therriault replied that there was a document that showed that the delivered price was over $20 per NCF of gas, which was equivalent to $2.77 fuel oil. He believed that once there was service to residential and uninterrupted customers, the price would reduce in 2020 to $17.31 per NCF of gas. He stated that it would be down to $15.48 in 2022, which would be approximately $2.00 in fuel oil. Senator von Imhof felt that the transportation costs could increase the costs, because of liability, insurance, and labor costs. She wondered whether there was ability to revisit a fixed pipeline, which was a fixed asset that could depreciate over time. Mr. Therriault stated that AIDEA was focused on LNG delivery. Part of the difficulty was the seasonal swing in energy demand in Fairbanks. It was necessary to have pipe capacity for triple the volume in winter. 10:33:12 AM JOMO STEWART, INTERIOR GAS UTILITY, FAIRBANKS (via teleconference), testified in support of the bill. 10:33:48 AM JIM DODSON, PRESIDENT, FAIRBANKS ECONOMIC DEVELOPMENT CORPORTATION, SAN DIEGO (via teleconference), spoke in support of the bill. 10:34:30 AM JIM MATHERLY, MAYOR, FAIRBANKS (via teleconference), testified in support of the bill. 10:35:16 AM JON COOK, CHIEF FINANCIAL OFFICER, AIRPORT EQUIPMENT RENTALS, FAIRBANKS (via teleconference), spoke in support of the bill. He thought the bill was critical to his company. Co-Chair MacKinnon CLOSED public testimony. Vice-Chair Bishop discussed the fiscal note. Co-Chair MacKinnon noted on page 2 of the fiscal note, which said that the principal amount of the bonds authorized may not exceed $150 million plus the cost of capitalized interest, bond counsel fees, trustee fees, rating fees, financial investor fees, and other costs that the authority considered reasonable and appropriate. Senator Olson asked if there were private investors. Mr. Therriault stated there were not private investors involved. He detailed that AIDEA had put out an RFP, There was a request for the company to step away from the project, and it had agreed. Senator Olson considered the price of oil hovering for an extended length of time, and wondered whether there was a concern that the economy of Fairbanks would take stress to payback the bonds. Mr. Therriault replied that the numbers in HB 105 were based on only 50 percent of the potential customers. He furthered that originally there was anticipation that the price of fuel presented enough of a delta to get upwards of 70 to 75 percent of the customers. He remarked that because of the smaller delta, the expectation was reduced to 50 percent. He felt confidant that they could reach the target numbers. 10:41:26 AM Senator Olson considered the purchase in 2013 when the bill was passed. He wondered whether inflation was a concern. Mr. Therriault stated that when the consolidation of the utilities was negotiated, the contractual documents had a number of covenants. Co-Chair MacKinnon asked Mr. Therriault to explain how much money the state had invested in the Interior Energy Project. Mr. Therriault replied that the original financing plan was $57.5 million of capital grants, with allowance for $125 million of SETS financing. He stated that there was a specific appropriation for the SETS fund for that purpose. The potential for the $150 million of bonds, but the bonds had not yet been accessed. He stated that under the contractual agreements from December 2017, all of the capital money would have been deployed with $70 million to $80 million of the SETS funds. Co-Chair MacKinnon recalled that the total was $337.5 million of state support for the project. She queried the state's investment for storage. Mr. Therriault replied that storage was the "bottleneck." He stated that more customers could be served with the current small plant in MatSu, except that there was a requirement for five days of product in the community in order to serve customers in case of an interruption. 10:45:28 AM Co-Chair MacKinnon asked if the state had granted bonds for support of storage facilities in the Interior. Mr. Therriault stated that the financing for the storage was utilization of some of the SETS authorization. SB 125 was HEARD and HELD in committee for further consideration.