AIDEA agrees to sell Pentex to Fairbanks utility

  • Crews install gas lines in North Pole in summer 2015 as part of the distribution build-out for the Interior Energy Project. (Photo/Elwood Brehmer/AJOC)

Pentex Alaska Natural Gas Co. is close to changing hands for the second time in less than two years in an effort to shepherd along the struggling Interior Energy Project.

The Fairbanks North Star Borough-owned Interior Gas Utility has a preliminary $58.2 million agreement in place with the Alaska Industrial Development and Export Authority to purchase the parent company to Fairbanks Natural Gas and holder of the Titan LNG plant on Point MacKenzie in Southcentral.

A memorandum of understanding released Dec. 30 between the local startup utility and the state-owned authority outlining the deal also includes preliminary terms for AIDEA to fund up to $333.6 million of natural gas infrastructure throughout the utility’s supply chain — from expanding the Titan LNG plant to constructing a 5.2 million gallon LNG storage facility to continuing build-out of the gas distribution network to homes and businesses in Fairbanks and North Pole.

The tentative agreement projects a delivered natural gas price of $15.50 per thousand cubic feet, or mcf, of gas; in line with AIDEA’s longstanding target of $15 per mcf, which roughly equals $2 per gallon heating oil. It also calls for closing the deal no later than March 31.

IGU and Fairbanks Natural Gas competed for the former’s service area before the Regulatory Commission of Alaska in 2013 shortly after the Fairbanks Borough stood up the utility.

Most of the $333.6 million will come from the $332.5 million financing package of loans, bonds and grant money approved by the Legislature in 2013 for the Interior Energy Project. To date, AIDEA has spent $14.7 million of the $57.5 million grant. About $52 million in loans were issued to the utilities for distribution build-out.

Integrating Fairbanks Natural Gas and IGU to a single, borough-owned utility has been the plan for the project since AIDEA purchased Pentex from private investors in June 2015 for $52.5 million.

The $58.2 million Pentex purchase price includes approximately $4 million in cash from operations and meets AIDEA’s internal investment return requirements, according to the MOU.

AIDEA purchased Pentex using preexisting funds and did not use the IEP financing.

IGU would roll the $58.2 million into the larger $333.6 million plan, according to the MOU.

“All of this will be paid for through revenue and cash flow that will occur as we grow this system,” IGU project manager Dave Prusak said.

The final terms of the $72.2 million in Sustainable Energy Transmission Supply fund loan — part of the overall IEP state financing — are still being negotiated according to Prusak, but AIDEA has agreed to defer the loan payments for 15 years with no interest to provide IGU time to generate sufficient revenue.

One utility can capture operational efficiencies and aggregate gas demand and financing to help further the Interior Energy Project’s mission to make natural gas available to many more residents and businesses in the region.

Some Republican legislators were critical of the decision by Gov. Bill Walker’s administration to purchase the private utility at the time.

Fairbanks Natural Gas’ operations and leadership have not changed significantly under AIDEA’s ownership. The authority captured savings from making the utility public and lowered customer gas rates by about 10 percent in 2016. This year’s rates, approved by the AIDEA board late last year, were unchanged.

Fairbanks Natural Gas currently serves about 1,100 customers in the heart of the city. The utilities’ estimate demand will reach more than 7,000 customers by 2024.

The IGU board of directors discussed the agreement at a Jan. 3 meeting and is expected to vote on the agreement Jan. 10. The AIDEA board meets the following day in Anchorage.

Progress on the Interior Energy Project has slowed as oil prices have stayed low, lessening expected gas demand and further straining already thin margins and economies of scale.

AIDEA project leaders have been negotiating with Cook Inlet natural gas producers for more than a year trying to work out a long-term deal for a small amount of gas that they hope will increase over time at a price low enough to meet the $15 per mcf target.

When the project was hatched in 2013 the goal was to give Interior residents a near-term alternative to heating oil that was approaching $4 per gallon. As heating oil prices have followed the crude curve and settled closer to the $2 per gallon range, the goal now is to provide a stable-priced, cleaner burning heating option.

Increased use of natural gas could improve air quality in North Pole by up to 25 percent, according to IGU.

AIDEA ended its informal partnership with Salix Inc., a small Washington-based utility subsidiary focused on LNG, in October. Salix was selected by IEP leaders early in 2016 to support expansion of the small Titan LNG plant after a lengthy vetting process. However, it became apparent to both parties that the investment return and other financial considerations required by the private firm’s participation in the project would further hamper the project’s economics and they amicably parted ways.

AIDEA secured in-house small-scale LNG expertise when it purchased Pentex, which has operated the Titan plant since 1998.

Elwood Brehmer can be reached at elwood.brehmer@alaskajournal.com.

Updated: 
01/05/2017 - 9:32am