AIDEA approves sale of LNG plant to Fairbanks gas utility

A comprehensive plan to get more natural gas to the Interior is halfway home.

The Alaska Industrial Development and Export Authority board of directors unanimously approved a $331.2 million financing plan authority leaders hope will enable the Interior Gas Utility to bring the Interior Energy Project to fruition.

Included in the deal is the sale of Fairbanks Natural Gas and its Titan LNG plant on Point MacKenzie in Southcentral for $59.5 million, as well as passing of the gas supply contract AIDEA secured in September with Cook Inlet producer Hilcorp Energy.

The three-year gas contract, which starts Jan. 1, essentially underpins the whole project.

AIDEA officials had been trying to reach a gas supply deal with Cook Inlet producers since early 2016 but the fact that the ultimate demand for gas is still unknown hampered progress.

Under the financing plan, Fairbanks Natural Gas, which currently serves a relatively small group of customers in the core of Fairbanks, will be rolled into the Interior Gas Utility to capture the efficiencies of running one entity versus two, as has been the plan since AIDEA bought Fairbanks Natural Gas and its sister companies in 2015.

Additionally, Fairbanks Natural Gas leadership is the only group involved in the project with experience operating a gas utility, particularly one with the unique challenge of having to liquefy, truck, and re-gas its fuel supply before delivering it to customers.

Most of the $331.2 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.

If all goes as planned — construction of LNG storage, LNG plant expansion and numerous other variables — more natural gas should start flowing to the Fairbanks area in 2020.

However, what appeared to be a day ripe for the celebration of a long-sought milestone being reached — AIDEA leaders have been consumed with making the challenging project work since being handed it by the Legislature in 2013 — turned somewhat contentious when it became clear IGU leaders are not keen on parts of AIDEA’s final offer.

IGU General Manager Jomo Stewart told the board that the deal has troubling loan covenants and other terms that were inserted late without the consent of the start-up utility’s leaders.

According to Stewart, it requires the utility to raise rates on customers as the only option to raise revenue or manage expenses should unforeseen circumstances arise, or it could potentially be in default of the state loans and bonds the Legislature authorized AIDEA to manage for the project. That could pose problems if the Regulatory Commission of Alaska doesn’t agree with a rate increase, he said.

Stewart also questioned terms that would put IGU in default of the $125 million in low-interest loans the utility would borrow from the state under the deal if the Fairbanks North Star Borough, which formed and thus has ultimate oversight of IGU, were to somehow impair the utility from repaying the money.

He asked the board to allow AIDEA Executive Director John Springsteen to negotiate changes to the covenants and default provisions.

The Legislature gave AIDEA the authority to manage the Sustainable Energy Transmission and Supply, or SETS, loan funds as part of the $332 million, 2013 Interior Energy Project financing package.

The loan is for 50 years with a 0.25 percent interest rate deferred for the first 15 years. Should IGU default on the loan the interest rate increases to 3 percent, according to the loan documents.

The favorable financing terms are generally seen as necessary for the project that carries significant public benefits but also has unavoidably challenging economics.

Stewart additionally criticized the AIDEA board for lowering the rates charged to Fairbanks Natural Gas customers shortly after it purchased the utility in June 2015.

“When you took ownership of Pentex you reduced the rates to the consumer for political and (public relations) purposes, not charging interest or principal,” Stewart commented to the seven-member board.

The rate cut of about 13 percent was explained at the time to be justified by operational savings reaped by the utility going from private to public ownership — no longer paying taxes, for instance.

According to Stewart, AIDEA is instead trying to recoup the 5 percent return target it has for its revolving loan fund investments by upping the price for IGU to buy Pentex and Fairbanks Natural Gas.

Pentex was to cost IGU $58.2 million when the deal was first tentatively reached in late December. The price for Pentex is now listed at $59.5 million in the latest documents.

AIDEA bought Pentex for $52.5 million.

In a follow-up interview Stewart said he’s concerned the IGU board of directors will reject the deal or be incurring unreasonable risks it has no ability to mitigate if it accepts the deal. IGU’s requests would simply add flexibility to the financing agreement that would allow the utility to better manage operational challenges that are likely to arise, he said.

“I want documents that facilitate that (flexibility), not hamper it,” Stewart said.

At the same time, though, he stressed that everyone is still working towards the same goal of lower-cost, cleaner energy in the Interior. He also thanked AIDEA and Pentex staff for helping the junior utility get on its feet.

“My board as well as the AIDEA board are all fatigued and frustrated that it’s taken as long as it has” to get the deal done, Stewart said.

He countered fears that IGU is not ready to take over the project by noting that several members of the utility board of directors have extensive experience in the energy utility realm, mostly with Golden Valley Electric Association.

The AIDEA board ultimately approved the financing plan after an executive session and amended the corresponding resolution to allow Springsteen to make technical corrections to the loan and purchase documents.

The authority directors strongly urged their IGU counterparts to approve the deal in comments leading up to their vote.

AIDEA board member and Deputy Commerce Commissioner Fred Parady noted that the state funding in the deal is far better than any support the Legislature would give the project now.

“At some point it’s time to bring (the Interior Energy Project) to the finish line, bring it to a close and that time is now. This is a 50-year loan at 0.25 percent.” Parady said. “We’ve done this work together so we could bring it to reality together. Tick-tock we’re on the clock. The time is now.”

AIDEA board Chair Dana Pruhs said the authority is hoping the deal can get expedited consideration from the RCA, but said waiting for better loan terms also means the price of Pentex will go up so AIDEA can meet its internal return targets on the investment.

“Six months is a million bucks,” Pruhs said.

AIDEA board member Gary Wilken of Fairbanks said he is still concerned that the IGU board is comprised primarily of elected members, which worries him because of fears that elected leaders will choose the popularity of holding customer rates down over making necessary investments in the utility.

AIDEA’s lawyer, Assistant Attorney General Jerry Juday also noted the deal can always be amended with mutual agreement at any time for any reason should the unforeseen circumstances worrying IGU officials arise. He added that the loan covenants are not unusual.

“AIDEA’s remedies are similar to what a lender would have to protect collateral,” Juday said.

Stewart said after the meeting that it would take several days for him to confer with his management team to decide if the deal is workable for IGU. The IGU board is expected to take up the matter at its Nov. 7 meeting.

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

Updated: 
11/01/2017 - 10:41am

Comments