AIDEA approves deal with gas utility for Interior Energy Project

The Interior Energy Project is finally on its way to Fairbanks.

After nearly five years of analysis, negotiations, debate and a wholesale route change, the Alaska Industrial Development and Export Authority on Dec. 7 transferred control of the project to the Interior Gas Utility.

The IGU is owned by the Fairbanks-North Star Borough and will take over the plan to expand natural gas use in the area.

Transfer of the unfinished project mostly means handing off the responsibility to fulfill the $331.2 million development plan the two organizations jointly crafted to complete the IEP.

It also includes the $54 million sale of Pentex Alaska Natural Gas Co., which, through Fairbanks Natural Gas and its other subsidiaries, is already trucking Cook Inlet-sourced LNG to supply its group of customers in the core of Fairbanks; the IEP builds on that model.

The AIDEA board of directors previously approved the IEP plan and Pentex sale Oct. 26, but technical changes to the finance agreement meant the AIDEA leaders had to approve the amended document again. The Interior Gas Utility board approved the deal Dec. 5.

The two first signed a memorandum of understanding establishing the framework of the deal about a year ago. While the MOU first set a deal deadline date of March 31, 2017, it was extended to allow negotiations to continue and give AIDEA project officials time to secure a new gas supply contract needed to support the other aspects of the plan.

AIDEA announced success on the gas contract in September.

“This represents the culmination of nearly a year of in-depth due diligence and negotiations between ADIEA and IGU. AIDEA welcomes this approval of the sale and financing package that we anticipate will create a unified, locally controlled gas utility for the Interior by next spring,” AIDEA board chair Dana Pruhs said in a formal statement.

The Regulatory Commission of Alaska must still approve the agreement by May 31, at which point AIDEA and IGU can officially close the deal.

Until then, AIDEA’s lead IEP manager Gene Therriault said the authority will continue to advance the plan under the terms of the MOU while getting concurrence from IGU on all decisions. When the deal closes the authority will resume its more normal role as a financier and loan administrator, Therriault said, adding, “AIDEA will be involved (in the IEP) if and when IGU needs to access bonds.”

Additional gas is expected to start flowing from the expanded LNG trucking plan sometime in 2020.

AIDEA and Gov. Bill Walker absorbed criticism from some Republican lawmakers in the state when the authority worked out a deal to buy Pentex from its private investors in January 2015.

Critics argued it was inappropriate for a state entity to buy the one private utility that had managed to do what the IEP proponents wanted — albeit on a smaller scale and at a higher cost to customers — and ostensibly killed the prospect of a private sector-generated solution to Fairbanks’ energy problems.

However, AIDEA leaders contended the move was intended to facilitate consolidation of Fairbanks Natural Gas and IGU to avoid duplicative costs and achieve the operational efficiencies possible through running one utility versus two in a relatively small service area.

Some also noted the call for a private solution to Fairbanks’ energy needs had gone unanswered for decades and AIDEA’s purchase of Pentex was the state’s attempt to fix what was for years a problem of high-cost fuel oil and has morphed into primarily an air quality quandary.

Fairbanks Natural Gas CEO Dan Britton has long said his utility repeatedly tried to expand its service but could not secure a long-term gas supply contract from Inlet producers to do so.

In 2013, leaders of the utilities sparred in front of the RCA over service territory rights for the areas surrounding FNG’s existing business in the core of Fairbanks. The RCA ultimately sided with IGU; setting up the scenario where two gas utilities would operate in the Fairbanks area.

Also in the spring of 2013, the Legislature approved a $332.5 million package of grants, loans and bond financing to spur the IEP and tasked AIDEA with managing it. The legislation included a requirement for North Slope-sourced natural gas.

At the time there were fears of a gas shortage in Cook Inlet, which drove gas prices higher and left no gas available for the Interior at a viable price.

Through much of 2013-14, AIDEA evaluated the feasibility of a North Slope LNG plant to capture potential savings afforded the IEP by cheaper Slope feedstock natural gas.

However, the high cost of building on the Slope forced AIDEA to scrap the plan late in 2014 and falling oil prices — a mixed blessing for the project — gave Fairbanks-area residents a reprieve from high fuel oil prices and project leaders additional time to review alternatives.

They eventually turned south for a solution as the Southcentral natural gas market stabilized into 2015 and lawmakers agreed to open the IEP financing legislation to an Inlet-sourced option.

The pending deal between ADIEA and IGU is the culmination of the second try at the IEP. The structure of the financing exemplifies the complex nature of the project and the unavoidably challenging economics it must overcome.

Anatomy of the deal

IGU will buy Pentex for the $54 million AIDEA spent on the utility company in 2015, but the purchase also includes the interest ADIEA is required by law to recoup on its in-house investments. Therefore, the final price will be closer to $59.6 million, according to the financing agreement.

AIDEA bought Pentex with funds from its own Revolving Fund and did not use the state IEP funds it was given management of in 2013.

Currently a start-up utility with no customers or revenue, IGU will use $42.4 million of state IEP grants and other low-interest project loans, which AIDEA now holds and will supply the utility, to buy Pentex.

Buying the working utility will also give IGU a revenue stream it can leverage to finance the gas supply and distribution infrastructure buildout set forth in the agreement.

The infrastructure financing will also come from the state through AIDEA in the form of about $83 million in Sustainable Energy Transmission Supply Fund loans and $150 million of state-backed bonds. The 50-year loans will be used more as an active line of credit IGU can call upon when needed and defers interest and payments for 15 years after which a 0.25 percent interest rate kicks in.

According to AIDEA, IGU can also defer principle payments on the SETS loans if future gas demand doesn’t meet expectations.

AIDEA leaders have also been criticized for continuing ahead with a project that needs such favorable financing terms to work.

While lower oil prices eased heating fuel prices for Interior consumers, it also meant lowering expectations about how many residents and businesses would make the personal investments needed to convert from fuel oil to natural gas heating systems.

It should also be noted that AIDEA — with it expertise in financing and investing in projects above managing them — is complying with its directive from the Legislature in keeping the IEP alive.

Doyon offers gas alternative

On Nov. 28, Doyon Ltd., the Alaska Native corporation for the Interior region, announced via press release its plans for next summer to drill another oil and gas exploration well in the Nenana area it has been exploring for a decade.

A significant gas find near Nenana could be a long-term energy solution for Fairbanks because it is only about 60 miles from the city. Doyon leaders noted as much in their press release, calling it “unfortunate timing” for IGU and AIDEA to commit to their IEP plan.

Doing so straps IGU to the $46 million Southcentral LNG plant expansion, $52 million Fairbanks LNG storage and regasification facilities and associated LNG tankers and trucks at least until the state loans on the infrastructure are paid off decades later, Doyon Natural Resources Vice President Jim Mery said in an interview.

That, in turn, discourages IGU from buying gas from other sources in the future that could include a North Slope gasline or Nenana if a discovery is made, he said.

An AIDEA spokesman noted the gas supply contract recently inked with Hilcorp only runs through 2020 at the request of IGU leadership on the hope the utility can secure a more favorable contract once the is system proven and in place.

Doyon has drilled three exploration wells in the Nenana basin with mixed results. While the company is targeting oil first, a 2013 well hit substantial zones of gas-saturated reservoir rock and if not for a faulty geologic trap could have been a commercial find, according to Doyon leaders. Most recently, a well drilled in the summer of 2016 was unsuccessful.

IGU General Manager Jomo Stewart said in an interview that the utility wants Doyon to be successful; he emphasized the notion that the LNG trucking portion of the IEP is a placeholder until another gas source is available.

“This was always envisioned as a starter project meant to get more gas here. You’re building infrastructure so people could access gas, but then create the utilization of that infrastructure through expanded deliveries of gas,” Stewart said.

More than $140 million of planned expenses in the overall project are for gas distribution infrastructure — street-level gaslines for residents and businesses to tie into — regardless of supply source, according to the financing document.

Stewart also said the refined designs of today’s small LNG plants makes them mobile enough to be relocated to where they are needed most.

“It’s not as simple as backing up tractor-trailers, unbolting and driving away, but it is modular enough that it could be relocated,” he described. “Under a large volume scenario, particularly via pipeline, the expectation is that you could be able to take this LNG facility — you would move it to Fairbanks — the gas to the consumer would go directly into the pipelines that feed the consumer, but you would also have a line that would go to this LNG facility and you would use this LNG facility as peaking capacity and (gas) security.”

It could also be used in conjunction with the 5.2 million-gallon LNG storage tank planned for Fairbanks to supply other road system communities that are out of economic reach of a large gasline, Stewart noted, in much the same way the smaller Southcentral plant is currently used for Fairbanks.

AIDEA leaders have discussed the possibility of such a scenario, but it is still a hypothetical one.

Finally, Stewart said the IEP plan, even if the infrastructure stays put, only feeds the most densely populated areas of Fairbanks and North Pole and additional gas from any source could supply many more customers in the region.

Elwood Brehmer can be reached at [email protected].

12/21/2017 - 2:57pm