Elwood Brehmer

As AGDC makes deals, details remain confidential

Those leading the state’s effort to commercialize its North Slope natural gas resources have touted recent agreements with key potential players in the $43 billion Alaska LNG Project as proof the project is viable and ever closer to coming to fruition, but what is in those agreements and how it impacts the state remains largely unknown. Gov. Bill Walker and Alaska Gasline Development Corp. President Keith Meyer signed the Nov. 9 joint development agreement, or JDA, with the government-owned Chinese mega corporations of Sinopec, an oil and gas company, the Bank of China and China Investment Corp. While a nonbinding agreement meant to set the framework for further negotiations, Walker and Meyer have characterized it as a watershed agreement because — in addition to being signed in front of the leaders of both countries — it brought entities into the fold that could finance a majority of the project in exchange for purchasing most of its end product, liquefied natural gas. Specifically, the JDA outlines the prospect of Sinopec signing up for up to 75 percent of the project’s liquefaction capacity with the Bank of China and China Investment Corp., the country’s sovereign wealth fund, providing a corresponding level of debt and equity financing to fund it. It also sets a soft May 31 deadline for the parties to have better defined the roles of each before finalizing those roles with binding deals later this year, as it notes Sinopec could also potentially participate in engineering, constructing or managing the project. It expires Dec. 31. As envisioned, the Alaska LNG Project would produce 20 million tons of LNG per year at full production, but Meyer has said the project could be built in phases if the market, financing or gas supply prevents full up-front development. Other, similar nonbinding agreements with potential Asian LNG buyers Korea Gas Corp., or Kogas, PetroVietnam Gas Corp. and Tokyo Gas have been announced ahead of and after the China JDA, but the details of those deals remain sealed. Walker said at the time that he insisted the JDA be made public despite objections from Chinese officials. On March 27, AGDC announced it had secured two of the world’s largest banks, again, the Bank of China, and Goldman Sachs, to assist the state-owned corporation in raising multiple rounds of debt and equity investment for the project. AGDC officials denied records requests for the memorandums with the other potential LNG purchasers and the contracts with the Bank of China and Goldman Sachs, citing the commercially sensitive information the documents contain. Spokeswoman Rosetta Alcantra wrote in a prepared statement that “Both Goldman Sachs and Bank of China will serve as AGDC’s financing arrangers, underwriters and placement agents for Alaska LNG. Bank of China will focus on raising funds from Chinese sources and Goldman Sachs will focus on U.S. and other international investors.” Additionally, Alcantra wrote, “The two companies will be paid a reasonable fee for services provided. Additionally, they will receive a success fee upon procuring necessary financing for Alaska LNG.”. The Legislature provided the public corporation exceptionally broad authority to withhold documents and information for commercial reasons in Senate Bill 138, the legislation that established an operational path for AGDC to participate in the prior, producer-led iteration of the project, and passed with broad bipartisan support in 2014. However, AGDC has released other contracts it has signed to media outlets, including agreements with Washington, D.C.-based consultants providing services as liaisons between Congress and the Trump administration. In an interview following the Bank of China-Goldman Sachs announcement, Meyer said the corporation works hard to be as transparent as possible through its board of directors meetings and legislative hearings in which AGDC officials testify and update the Legislature on Alaska LNG progress. “We’re dealing with public money and the money is to get a project done and we’re operating in a very, very competitive arena and we’ve got to recognize that. We’ve got to recognize that we’re somewhat handicapped because of this need to be so public,” Meyer said. “We’ve got people who can take pot shots at us in the public arena — having all of our commercial agreements out there posted on the internet by the press. We’ve got to recognize there’s some justification for that, no doubt, but at the same time it hinders us in this very, very competitive landscape and it’s getting increasingly competitive.” Working as a public entity in the closed-door oil and gas realm where success is measured in billions of dollars, Meyer said he welcomes the critiques and comments from Alaskans in positions of power or the public at-large and wants to be responsive whenever possible. “It pains me to get a request for information and not be able to comply. In spite of what you may have been led to believe we’re trying to be as transparent as we can at every turn,” he said. AGDC leaders have been willing to conduct interviews when their schedules allow. Additionally, Meyer noted he instituted a strict policy of following best business practices when he took the helm at the corporation in June 2016. “To me, and I’ve told the folks here, we’ve got to make decisions based on business fundamentals and they’ve got to be scrutinized on that basis. We don’t do a single thing here that has a political motive or has some appearance of something like that. It is strictly focused on execution. We’re trying to build America’s largest energy export project; that’s what we’re focused on; that’s what we’re doing and we’re fighting lots of people bigger than ourselves,” he said. The bank contracts have been withheld at the request of the banks, which didn’t even want their deals with AGDC shared between the two, according to Meyer. He further stressed that when it comes time to spend significant amounts of state money — during a time when the state is running budget deficits — the commitments the corporation makes will be “quite open.” “In terms of the banker deals, those guys get paid when they bring in third party money, not Alaska money; they don’t get paid for Alaska money,” said Meyer, who added they won’t get paid with State of Alaska money, either. “They get paid with a slice of the third party funds they bring in. If they don’t bring in funds there’s no slice that they get.” Most recently, AGDC announced May 7 it had inked a binding agreement with BP on the primary terms of a gas sales contract including price and volume to supply the Alaska LNG Project. As expected and generally understood, the key terms of that deal are confidential given — beyond BP’s desire that they remain classified permanently — AGDC would not want to compromise the similar negotiations it is still in with ConocoPhillips and ExxonMobil. Meyer and Walker said in separate interviews that the gas supply terms, which presumably commit AGDC to buy BP’s produced gas just before it enters the project’s North Slope gas treatment plant, are likely to be made public eventually, but neither could say exactly when. Legislators who have followed AGDC’s progress closely said they are most concerned about the project’s netback to the state treasury and how that might be impacted by the gas supply agreements. Anchorage Democrat and House Resources co-chair Rep. Andy Josephson said he expects AGDC will be required to disclose the terms of the major commitments it makes closer to when the corporation is ready to make its final investment decision, but he wouldn’t want those disclosures to run afoul of any agreements to the contrary. AGDC has pegged its final investment decision for early 2020 to coincide with when the Federal Energy Regulatory Commission has said it will rule on the Alaska LNG environmental impact statement. Meyer has said the state should expect at least $250 million per year in revenue from the project based on high-level financial modeling, while some legislators are wondering what happened to consultant reports that pegged the state’s annual income from Alaska LNG in the billions of dollars when the producer companies were directly involved in the project prior to 2017. A major change in the revenue estimate is largely to due global natural gas and LNG spot market prices that were twice as high in 2014 as they are currently, with delivered LNG prices to Asia now in the $7 per thousand cubic feet range, according to FERC. Senate Resources chair Sen. Cathy Giessel, R-Anchorage, said she appreciates why the gas sale terms are kept close to the vest, but said she wants to know how those terms relate to oil and gas taxes in addition to also having questions about state revenue from Alaska LNG. “What if the state of Alaska during this (project) raises production taxes? Will those added tax liabilities by passed on to AGDC or the LNG buyer?” she questioned. Giessel is the only legislator to have signed a confidentiality agreement with AGDC to review sensitive documents, but she did so prior to the state entity taking control of the project in early 2017 and said it’s her understanding that agreement is not valid for the current iteration of Alaska LNG and the documents produced to support it. She also noted the state taking over the project is not what the Legislature agreed to when it passed SB 138 and may not have given AGDC such broad authority to withhold information. “I believe had we ever envisioned it becoming a state-led project like this we would have structured it differently,” Giessel said. “In (Meyer’s) hands is the sole authority to commit the state and its resources for decades.” ^ Elwood Brehmer can be reached at [email protected]

Final budget deletes receipt authority for state gasline corp.

The Legislature left plenty of items in Gov. Bill Walker’s budget and added to others, but it took out a key provision in the Alaska Gasline Development Corp.’s effort to bring the Alaska LNG Project to fruition. Lawmakers pulled language allowing the gasline agency to accept outside funds from investors, known as receipt authority, for the $43 billion project in the 2018 and 2019 fiscal years. AGDC President Keith Meyer said in a statement to the Journal that he and his team look forward to working with the Legislature on the important aspects of the project as it advances. But lacking a substantial injection of new money could potentially challenge the ability of the corporation to stay on its desired schedule. AGDC leaders expect to have $52.5 million at the start of the 2019 state fiscal year that starts July 1, according to documents from its May 10 board of directors meeting. The state-owned corporation took over control of the Alaska LNG Project in January 2017 with $106 million remaining from prior gasline appropriations. An austerity program instituted by AGDC leaders at that time has helped them under-spend on their budget by $35.7 million since, Finance Manager Philip Sullivan said at the meeting. As a result, the corporation should be able to continue operating on its existing funds through June 2019, according to Sullivan. Senate Resources chair Sen. Cathy Giessel said in an interview that she believes AGDC can continue to advance the project’s environmental impact statement being drafted by the Federal Energy Regulatory Commission. Senate Republicans by and large have been the most skeptical legislators about the administration’s plan for the state-led gasline. FERC is expected to issue a record of decision on the project in March 2020. Meyer said May 10 — before the final operating budget was passed — that the corporation would soon initiate work drafting contracts for engineering, procurement and construction, or EPC, management firms to finish designing and build the project. The different aspects of the complex project — a North Slope gas treatment plant, 807 miles of buried, 42-inch pipeline, a very large LNG plant and marine terminal — will likely require multiple firms with varying areas of expertise to complete, according to Meyer. He has said AGDC has been in discussions with EPC firms for some time. Additionally, AGDC will soon be getting ready for an equity offering, Meyer said May 10. Giessel said she wouldn’t expect the corporation to secure EPC firms with its remaining funding, adding that third-party receipt authority shouldn’t be confused with financing for the corporation. “AGDC has plenty of revenue to continue on with the FERC process,” she said. “That’s what they need to focus on.” With AGDC seeking non-recourse debt and equity to finance the vast majority of Alaska LNG from banks and third-party investors, many legislators are concerned granting the corporation the ability to accept those funds would be ceding most of lawmakers’ oversight of the project. Giessel said AGDC leaders have yet to answer questions regarding how much equity ownership the state will have to give up and for how substantial an investment return among others. “These questions have to be answered before the Legislature gives up its appropriation authority on this project,” she said. The Legislature could revisit funding the project when it convenes next January if AGDC can provide more details on it, Giessel suggested. AGDC spokesman Jesse Carlstrom wrote that as corporation officials work with Goldman Sachs and Bank of China to arrange third party funding they will continue to keep legislators informed on all aspects of the project. “AGDC understands Alaska’s lawmakers are committed to making decisions that are in the best interest of all Alaskans,” Carlstrom said via email. “Throughout the remainder of 2018 and into 2019, AGDC will continue to present the Legislature with the information lawmakers need to make appropriate decisions for the responsible development of Alaska’s vast amounts of proven, stranded, North Slope natural gas.” The House originally limited the receipt authority to $1 billion per year rather than the open-ended language in Walker’s budget. However, some in the Legislature were still concerned the administration could use a procedural maneuver to request unlimited receipt authority through the Legislative Budget and Audit Committee outside of the regular session — a request the Legislature would have no authority to deny. Giessel also noted the Legislature did approve AGDC to use $12 million previously committed to the smaller, in-state Alaska Standalone Pipeline, or ASAP, project for the larger Alaska LNG export plan as the corporation had previously requested. House Resources co-chair Rep. Andy Josephson, D-Anchorage, said he shares AGDC’s concerns about the appearance of the Legislature’s hesitancy to support the project. “Markets and investors may be squeamish that we wont even agree to accept someone else’s money,” Josephson said. “I’ve been told it puts AGDC in a light they don’t want to be in.” He said Walker could call a special session to resolve the matter if he feels it warrants such an action, but Walker said after the session ended May 13 he had no intention to do so for any reason. Josephson noted further that if the Legislature would have acted before this year to implement a fiscal plan and drastically reduce the multibillion-dollar budget deficits it covered with the state’s savings for four years, lawmakers would have more flexibility to control the project. “With $10 billion in savings we could’ve done it ourselves,” Josephson added. Elwood Brehmer can be reached at [email protected]

Former UA Regent sues state over tax credit bonding plan

(Editor's note: This story has been updated from its orginal version to include comments from Eric Forrer, who filed the lawsuit, and his attorney Joseph Geldhof.) Questions regarding the constitutionality of the Walker administration’s plan to pay off the state’s $800 million-plus oil and gas tax credit obligation will likely be answered sooner than later. Former University of Alaska Regent Eric Forrer filed suit against the administration May 14 in Juneau Superior Court, just two days after the Legislature passed House Bill 331 authorizing the Department of Revenue to sell bonds to pay the credits. The lawsuit, filed in Juneau Superior Court, alleges the bond sale would commit the state to debt outside of the restrictions the Alaska Constitution puts on the Legislature’s ability to incur financial liabilities. Administration officials, including Attorney General Jahna Lindemuth, contend the plan is legal because the 10-year bonds would be “subject to appropriation” by the Legislature, which the bond buyers would be aware of, and therefore would not legally bind the state to make the annual debt payments. Department of Revenue officials testified in hearings on the matter that the arrangement has been used in the past to fund other projects. However, Forrer’s complaint argues that “Failure by future legislatures to make funds available to repay the ‘subject to appropriation’ bond scheme contained in HB 331 will have a negative impact on the credit rating of the State of Alaska,” just as not repaying more traditional general obligation bonds would. “The implied promise in HB 331 that future Alaska legislatures will make appropriations to satisfy the ‘subject to appropriation’ bond scheme contained in the legislation essentially amounts to an impermissible dedication of funds contrary to the Alaska Constitution,” the complaint continues. The state Constitution generally limits the Legislature from bonding for debt to general obligation, or GO, bonds for capital projects, veterans’ housing and state emergencies. In most cases the voters must approve the GO bond proposals before the bonds are sold. State corporations can also sell revenue bonds, but those are usually linked to a corresponding income stream and only obligate the corporation to make payments, not the State of Alaska as a whole. Legislative Legal Division attorneys in an April 13 opinion questioned whether the Alaska Tax Bond Corp. that HB 331 authorizes Revenue Commissioner Sheldon Fisher to set up would truly have a revenue stream that could pass legal muster given it would rely on annual legislative appropriations to fund the debt payments. Sen. Bill Wielechowski, D-Anchorage, raised the potential constitutionality issues in the first hearing on the plan in February. Fisher said in testimony on the bill that the department planned to sell roughly $800 million in bonds sometime in late July or August and another, much smaller bond sale would be needed in a couple years to pay off the remaining credits that companies have earned but not yet claimed from the state. The Walker administration hopes that paying off the credits in a lump sum would restart investment by small producers and explorers in Alaska’s oil and gas fields that has been slowed by three years of less-than-full credit payment amounts while the Legislature and the administration debated how to resolve the state’s large budget deficits, according to Fisher and supporters of the plan in the Legislature. The 72-year-old Forrer said in an interview that he filed the lawsuit in the public's interest, adding that "atta boys are pouring in over the transom" since it became public. It's clear the state owes the credit money, he said, but noted it has also lived up to the law by making annual appropriations in line with the statute that spells out the calculation for the oil-price driven minimum credit payment formula in the past two budgets. "The pressure point is coming, we presume, from the banks and the oil companies holding credits," Forrer said. He suggested the Legislature and the Walker administration should have put the bonds up to a vote of the people, as is required for GO bonds, and that they should've expected a court challenge in the absence of additional measures to quell the constitutionality questions surrounding the plan. An amendment to HB 331 by Rep. Scott Kawasaki, D-Fairbanks, that called for a public advisory vote on the bonds was rejected during debate on the House floor. Questions to the Department of Revenue regarding how the suit might impact the bond sale were responded to by the Department of Law. Spokeswoman Maria Bahr said the Revenue Department will review the issue with its legal counsel and, as is general practice, the Law Department would not comment further on the active litigation. One matter state attorneys will likely analyze is whether or not the issue is “ripe” for a challenge given Walker has yet to sign HB 331 into law. The complaint notes that given it is the administration’s bill “the likelihood that HB 331 will become law is as certain as anything can be in the political context.” Forrer's attorney Joseph Geldhof acknowldeged there is a pottntial ripeness issue in filing the suit before HB 331 is officially the law of the land, but said they wanted to give Walker an opportunity to veto the bill and call the Legislature into a special session to address at least this year's credit payments. He said there is "a strong moral obligation" for the state to pay the tax credits, but turning that into a debt that could impact the state's credit rating is not the proper, or legal, way to do it. The suit also alleges a provision in the bill attempting to limit legal challenges to a period within 45 days after approval of a resolution to authorize a bond sale is an unconstitutional restriction on citizens’ abilities to seek judicial review. The provision was added to the bill by the Legislature after the constitutionality issues were raised. "It shows we're running the state like a clubhouse gang and not a real state," Geldhof said. The administration has 40 days to respond to the complaint. Elwood Brehmer can be reached at [email protected]

Hilcorp again lone bidder in Cook Inlet sale

For the second consecutive year Hilcorp Energy had free rein over the state’s annual Cook Inlet oil and gas lease sale. The Houston-based independent producer was again the only company to bid on tracts in the basin, which was revealed Wednesday morning when Division of Oil and Gas officials opened the bids. Hilcorp, the dominant natural gas supplier in the Inlet, spent about $298,000 on eight lease tracts over 16,636 acres, according to the preliminary results tallied by the division. Its bids ranged from $16 to $25 per acre. Most of the leases are on the southern Kenai Peninsula in the Anchor Point area near the onshore Nikolaevsk and Deep Creek units. Those units are mostly gas plays, according to Oil and Gas Director Chantal Walsh, but the company also bought two tracts near BlueCrest Energy’s Cosmopolitan development on the shores of the Peninsula. The near shore Cosmopolitan unit holds both oil and gas, but BlueCrest has focused on developing the oil resource first. Hilcorp also acquired two more leases between the offshore Trading Bay and Kitchen Lights units in the middle Inlet, which is another area with both oil and gas potential. “We’re excited that Hilcorp is still exploring in Cook Inlet,” Walsh said after the sale. In 2017 Hilcorp spent $3.95 million on 20 tracts over both state and federal acreage in the basin. The state’s 2016 Inlet lease sale drew no bids and industry representatives said that was due in large part to the state Legislature debating whether or not to end its oil and gas tax credit program for work in the basin at the time, which it did. Companies used the credits to offset their exploration and development costs. There is also limited interest in Inlet natural gas, as production from the basin supplies the relatively small demand from Southcentral gas and electric utilities and low global LNG prices have killed the economics of exporting Inlet gas. The plans for the Donlin and Pebble mine projects in Western Alaska include piping Inlet-sourced gas to the mines as feedstock for their on-site power plants. Those projects, as well as the possible reopening of the former Agrium, now Nutrien, fertilizer plant in Nikiski could provide new gas demand and trigger more gas development in the basin, but those plans are all uncertain and at least several years away. Elwood Brehmer can be reached at [email protected]

House approves tax credit bonds in split vote

Tangible action in Juneau is ramping up as the session winds down in the final week before legislators bump up against the 121-day constitutional limit. Amidst passing one of the most momentous pieces of legislation in the state’s history May 8 to use the earnings of the Permanent Fund for government services, the Legislature continued to plug away at the other big bill from this year’s session: the Walker administration’s plan to sell bonds to pay off the state’s $800 million-plus oil and gas tax credit obligation. House Bill 331 didn’t gain traction until late into the session but it has been moving along promptly in the past several weeks. It is largely seen as a substantial piece of end-of-session budget negotiations. The House passed its version of HB 331 May 3 on a 22-16 vote that split members of both the Democrat-led majority and Republican minority. The lion’s share of concern with the bill among those who voted against it related to questions about its constitutionality raised by Sen. Bill Wielechowski, D-Anchorage, about Senate Bill 176, its companion legislation . Others voting against the plan argued it would pit the need to make the debt payments against other funding priorities like education and public safety. HB 331 would create the Alaska Tax Credit Certificate Bond Corp. within the Department of Revenue to sell the bonds and pass the proceeds of the sales on to the bondholders, of which there are 37, according to Deputy Revenue Commissioner Mike Barnhill. The bonds would be “subject to appropriation,” meaning the revenue to pay for them would be contingent upon the Legislature appropriating money to pay the debt service each year. The legislation would also require credit holders to accept up to a 10 percent discount on the amount they’re owed to cover the cost of the state’s borrowing and avoid spending additional state money on the all-but defunct tax credit program. Credit holders could also opt for a lesser discount rate in the 5 percent range if they agree with the Department of Natural Resources to negotiate a higher state royalty in future oil and gas production or commit to reinvest a portion of the payment back in Alaska projects. The bonds would be paid off over 10 years. The annual debt payments would be up to $115 million, according to the Revenue Department, and would be smaller than the largest projected payments the state would make paying off the debt under the current statutory formula. Another roughly $200 million bond sale will likely be needed in a couple years to pay off a few remaining credits that are expected to be claimed before the remaining LNG storage and Interior basin credits sunset in 2020, according to Revenue officials, bringing the total bond amount to about $1 billion. Wielechowski, with the support of an April 13 opinion from Legislative Legal Services attorneys, contends the plan could violate the state Constitution, which generally restricts the Legislature from taking on debt outside of voter-approved general obligation bonds for capital projects and times of emergency. The administration, backed by its own legal opinion from Attorney General Jahna Lindemuth, argues the “subject to appropriation” nature of the debt makes it constitutional because it requires annual approval of the debt payments by the Legislature. And while failing to service the debt would undoubtedly damage the state’s credibility among financial markets, there would be no legal requirement to make the payments. The House Finance Committee attempted to address the possibility of a legal challenge by adding a provision to HB 331 requiring any challenges be made within 45 days of a bond sale, the first of which is expected to happen in late summer if the bill becomes law, according to Revenue officials. Additionally, Fairbanks Democrat Rep. Scott Kawasaki pushed an amendment during floor debate to hold a public advisory vote before the bonds are sold in an attempt to mirror the vote needed to sell general obligation bonds. “I think at the very least we owe it to the people of Alaska when we’re passing such large legislation with such a large fiscal impact that will be seen 10 to 15 years to come that we have an advisory vote basically to assert that it is something the people would like to see,” Kawasaki argued on the House floor. The amendment failed 10-28. House Resources co-chair Rep. Andy Josephson, D-Anchorage, suggested that not passing the bill and paying the credits to the small companies that have earned them could lead those companies to sell the credits to the large producers at a steep discount and further “basin control” on the North Slope by the major producers, which was one of the primary things the credit program aimed to change. Eagle River Republican Rep. Dan Saddler said the bonds would provide a predictable payment plan for the Legislature that in recent years has not known what the credit obligation would be in any given year until the Revenue Department published its Spring Revenue Forecast. This year the statutory minimum credit payment would be $184 million, according to the administration. The interest-only debt payment would be $27 million. “These credits are a cloud hanging over our economy and this allows us to clear those clouds up. It’s a practical business deal,” Saddler said in floor debate. A May 1 financial analysis of the plan by former Department of Natural Resources commercial analyst and economist Ed King found that back loading the debt payments, as is Revenue’s plan, could save the state nearly $680 million compared to following the statutory formula repayment schedule that would require payments of nearly $400 million in the next two fiscal years. That’s because it would leave investment return-bearing money in the Permanent Fund Earnings Reserve longer and allow that money to grow. King is the principal at King Economics Group. However, that assumes the Permanent Fund’s investments continue to earn strong returns over that time, and that the legislature does not spend down the savings. Revenue Commissioner Sheldon Fisher has said repeatedly that the administration back loaded the debt payments to give the state several years to get on better financial footing before having to make $100 million-plus annual payments to service the bonds. As of early May 9, HB 311 was in the Senate Finance Committee awaiting amendments from the committee before heading to the Senate floor for a vote. Elwood Brehmer can be reached at [email protected]

Fund value increases in 3Q

The $64 billion Alaska Permanent Fund again earned strong returns in the third quarter of the state fiscal year and going forward its performance is likely going to be scrutinized like never before. Fund managers saw their investments grow by 8.86 percent in the quarter. The Permanent Fund ended the quarter up $4.8 billion for fiscal year 2018 at $64.6 billion, according to a quarterly report released May 2. The Permanent Fund is up 7.65 percent over the prior three years and 8.35 percent over the last five. All of those figures are better than the corporation’s passive index benchmark by at least 1.5 percent. On May 8, the Alaska Legislature quickly and quietly took the long anticipated step of passing legislation to utilize a 5.25 percent of market value draw from the Fund to support government and pay dividends. How much will go to either long-term is still unclear. It is a move the APFC Board of Trustees has advocated for to provide stability in the expectations of Fund managers for long-term investment strategies. The draw in fiscal year 2019, which starts July 1, is expected to be about $2.7 billion. And while the POMV has a nameplate of 5.25 percent, it is done on a five-year look back of the Fund’s average value over that time. That will make it an effective 4.35 percent draw, legislators noted. Those draws will come out of the Earnings Reserve Account, which held $15 billion in net income and $2.6 billion in unrealized gains as of March 31. At 41 percent of the Fund’s total assets, the corporation’s $26.8 billion public equities portfolio returned 11.42 percent fiscal year-to-date, 16.31 percent over the past year and 8.65 percent over the previous three years. The $7.6 billion of private equity and special opportunities investments have done exceptionally well, returning 18.94 percent over the past nine months and 22 percent over the past five years. The success is due in part to the Fund’s co-investment program of 23 investments averaging $46 million each and has netted a 64 percent internal rate of return since it was started five years ago, according to the report. Elwood Brehmer can be reached at [email protected]

Legislature approves draw from Permanent Fund

It took three years, eight iterations of legislation and countless hours of debate filled with both meaningful questioning and pandering rhetoric, but the Legislature was finally able to send the centerpiece of a fiscal plan to Gov. Bill Walker Tuesday afternoon by employing one of the oldest adages known to mankind: keep it simple. A House and Senate conference committee on Senate Bill 26 introduced and passed a bare-bones version of the legislation to establish a percent of market value, or POMV, draw from the Earnings Reserve Account of the $65 billion Permanent Fund in a seven-minute meeting Tuesday morning. By 2 p.m. it had passed the House and Senate on 23-17 and 13-6 votes, respectively. Sen. Anna MacKinnon, R-Eagle River, who has led the push in the Legislature for utilizing the earning power of the Permanent Fund to greatly reduce the state’s ongoing budget deficits, called the day “a historic moment in Alaska’s future” during the brief committee hearing. “Today, (May 8) legislators from across the political spectrum came together for a historic vote to protect Alaska’s Permanent Fund. This bill stabilizes our revenue stream, providing reliable funding for Alaskans who rely every day on state troopers, educators, and health care providers,” MacKinnon further said after the votes. Democrat House leaders noted the approved version of SB 26 is closer to what the Republican-led Senate passed last year, but noted it will help ensure the prosperity of the Fund into the future by discouraging ad hoc appropriations from the Fund that the Alaska Permanent Fund Corp. cannot plan for. “Last year our coalition took charge and responded to the fiscal crisis and ongoing recession. We passed a comprehensive fiscal plan to the Senate that included a POMV draw as part of a larger plan but not the only part of the plan. We felt our plan was fairer because we didn’t want to burden one group over another,” said House Majority Leader Chris Tuck, D-Anchorage, referring to the House inclusion of an income tax to raise about $700 million in addition to the POMV draw. “However, our plan was rejected, which is why many of us voted against SB 26 today. Despite our differences on this bill, today’s vote was an example of lawmakers voting their conscience. The Alaska House Majority Coalition is a nonbinding caucus and today was a good example of that.” Tuck voted against the bill. House Speaker Bryce Edgmon voted for it. The vote similarly split the House Republican caucus as well as members of both parties in the Senate. Walker said in a statement from his office called SB 26 “landmark legislation” that goes a long way towards ensuring the perpetuity of the Fund and the dividend program as well. “By stabilizing revenues, we secure Permanent Fund dividends for our children and grandchildren, and ensure services provided by the Alaska State Troopers, road maintenance crews and teachers will continue for generations,” Walker said. “SB 26 lays the foundation for our economy to grow and prosper. It provides for efficient investment of the Permanent Fund, improves the state’s position in financial markets, and perhaps most importantly, allows Alaskans to be fully confident in the future of their households and their communities.” Alaska Permanent Fund Corp. CEO Angela Rodell joined Walker in commending the Legislature for passing the framework of a structured draw from the Permanent Fund, which aligns with what the corporation’s board of trustees has long advocated. “SB 26 is an important milestone for the Permanent Fund and (the) APFC,” she said. “It gives us the target we have been asking for in order to craft our investment strategy and will ensure the Fund is a resource Alaskans can rely on now and in the future.” While each body passed a version of SB 26 last year, it languished on the sideline of budget debates for more than a year as the contrasting contingencies put on a POMV draw by the House and Senate made it a particularly touchy subject. The House called tied a $600 million-plus income tax and oil production tax increases to a Fund draw and directed one-third of the amount to PFDs. On the other hand, the Senate insisted upon a spending cap and lowered the draw dollar-for-dollar as oil revenues increased to ensure the state did not end up with excess money available to grow the budget in high revenue years. The Senate also set PFDs at 25 percent of the larger POMV draw. The SB 26 about to become law does none of that. It sets a 5.25 percent of market value draw for three years, which drops to 5 percent per year thereafter. It also explicitly states the Legislature shall not appropriate money from the Earnings Reserve in excess of the yearly POMV amount. That’s it. No spending cap, tax talk or dividend split — the last of which will surely elevate PFD politics in the coming years, but at least the budget deficit will be a lot smaller. Legislators supporting the bill also stressed that the draw amount is based on a five-year rolling average of the Fund’s value, which will make the effective 2019 fiscal year draw on July 1 closer to 4.35 percent. Such a rolling average “look back” is common among endowment draws to mitigate the effects of any single year of very high earnings or very high losses. The upcoming 2019 fiscal year draw is pegged at roughly $2.7 billion, which, with the $1,600 per Alaskan PFD established in the operating budget, should leave the state with a deficit of roughly $500 million to $600 million. Without SB 26, the deficit would be in the $2.2 billion range. Anchorage Democrat Rep. Les Gara acknowledged the current SB 26 is far from the fiscal solution he hoped for but noted it is the biggest piece to ending the five-year run of billion-dollar plus deficits that have drained $14 billion from state savings accounts. “Even if it’s not the first thing I would’ve done to solve the fiscal gap I have to do it because the budget deficit is a math problem and this is part of dealing with that math problem,” Gara said on the House floor. He also noted that not addressing the PFD in SB 26 means the entirety of the POMV draw could go towards dividends in high revenue years, however unlikely that is to happen. A $2.7 billion draw would equate to PFDs in the $4,300 per person range this year, Gara added. Sen. Bill Wielechowski, D-Anchorage, said in floor debate that leaving the existing formula in place — that was disregarded by Walker and the Legislature in 2016 and 2017, respectively — means the Legislature will continue to bypass the PFD in law in favor of providing more cash to government agencies. “One statute will inevitably be violated and my prediction is it will probably be that statute that provides for a full dividend,” Wielechowski said. “In fact, that’s what’s happening this year, in this budget. That’s what’s happened the last two years.” Wielechowski is among a bipartisan group of lawmakers that has pushed to put the PFD in the Alaska Constitution. He also challenged Walker’s 2016 veto of half of the PFD all the way to the Supreme Court before losing the case. That case established the precedent that Walker’s veto authority (used in 2016) and the Legislature’s appropriating authority (used to set an $1,100 dividend in 2017) — both enshrined in the state constitution — are superior to any law subsequently passed, including the PFD formula. Staunch conservative Rep. David Eastman, R-Wasilla, argued SB 26 reverses the Legislature’s historic priorities by putting government funding ahead of the PFD and inflation proofing the Fund. “By enshrining this in statute we are putting the value and the longevity and the survivability of the Permanent Fund in third place,” Eastman said. Retiring Juneau Democrat Rep. Sam Kito, who voted against it, said he simply doesn’t trust the Legislature will follow SB 26 any more closely than it has followed the PFD formula or any of the other business and fiscal principles and laws it has bypassed in recent years. With the passage of SB 26, the major items left for the last week of the current session before the Legislature bumps up against its 121-day constitutional limit are the operating budget, which appears close to being resolved, and the capital budget, which should not be controversial. A bill authorizing the sale of bonds to immediately pay off the nearly $1 billion backlog of oil tax credits is also pending. Elwood Brehmer can be reached at [email protected]

BP, AGDC reach deal on North Slope gas

BP and the Alaska Gasline Development Corp. announced May 7 that they have reached agreement on the primary terms of a gas sales contract to supply the $43 billion Alaska LNG Project. The major North Slope producer and the state-owned corporation in charge of bringing a long-sought North Slope natural gas project to fruition signed a binding gas sales precedent agreement May 4, which includes gas price and volume figures, according to an AGDC release. BP holds a 26 percent interest in and is the operator of the Prudhoe Bay oil and gas field. It also holds a 32 percent stake in the Point Thomson gas field, which is operated by majority owner ExxonMobil. With roughly 28 trillion cubic feet, or tcf, of gas in Prudhoe Bay and another 8 tcf of gas available in Point Thomson, BP has rights to about 9 tcf of gas from the fields. The company has also assisted AGDC behind-the-scenes in advancing the Alaska LNG Project since the state took control of the project from the producers in January 2017. BP has regularly noted that its North Slope gas holdings are the largest undeveloped asset in its global portfolio. “BP has a long history in Alaska and Prudhoe Bay,” BP CEO Bob Dudley said in a release issued by AGDC. “We are very pleased to be part of the state’s vision to bring Alaskan natural gas to new and expanding markets globally. We think this is good for the state, good for BP and good for the environment.” In a statement from his office, Gov. Bill Walker said he thanked BP for its commitment to Alaska LNG in a call with Dudley. “This agreement means Alaskans are one step closer to finally monetizing the vast reserves of natural gas on the North Slope. The end result will be thousands of jobs, a significant reduction in energy costs to power homes and businesses, and cleaner air. Having BP — one of our longtime participants in this project — commit its share for the gas on the sale underscores the progress we continue to make to build a stronger Alaska,” Walker said. AGDC President Keith Meyer noted the gas sales agreement, the details of which are expected to be finalized later this year, is another important aspect of the project the corporation has succeeded in advancing over the past year. “We have secured the customers; we have progressed on the pipeline build with regulators and the finance community and now we have a commitment that there will be gas to sell and put through the pipeline,” Meyer said. “I look forward to continued negotiations to secure supply from other North Slope producers.” Meyer and Walker said in separate interviews that without forgetting the Nov. 9 signing of a nonbinding joint development agreement with three Chinese-owned mega corporations for potential project financing and LNG sales — a signing in Beijing witnessed by both President Donald Trump and China President Xi Jinping — reaching firm North Slope gas sale terms is a momentous achievement for the project because it means another fundamental aspect of Alaska LNG is coming together. “Not to disparage the meeting between the two presidents, which was quite significant; however, in Alaska, for sure this is the biggest deal,” Meyer said. “This is the first time I think in the history of talking about a (gasline) project, any project, that the producers have actually committed gas to a particular project. So, to me, this is a very, very significant milestone.” With resolution on the major issues of price and volume, further negotiations with BP will revolve around the details of the definitive agreement, “but none of those, I don’t think, will be deal killers,” he added. The terms of the deal are confidential, but it would have AGDC purchasing gas from BP just prior to it entering the North Slope gas treatment plant at the head of the 800-mile pipeline and marketing it globally as LNG in Nikiski. Smaller quantities of utility-grade natural gas would also be marketed to Alaska communities and industrial customers along the pipeline corridor, or as small-scale LNG for use in other areas of the state. Meyer has repeatedly said the corporation has set a benchmark price of about $8 per thousand cubic feet, or mcf, of gas delivered to Asia to be competitive with Gulf Coast LNG projects that have much lower capital costs but higher transport expenses on each LNG shipment to East Asia markets. With Alaska LNG financing, operational overhead, returns and shipping to Asia tidewater expected to total about $7 per mcf, that would leave roughly $1 per mcf of gas available for producers’ gas sales. Under that scenario, BP would be poised to make up to $9 billion in revenue on its share of North Slope natural gas resources if the Alaska LNG Project is built. The governor and AGDC head also said the gas sale terms will certainly remain confidential until negotiations with ConocoPhillips and ExxonMobil are complete. After that, what the state has been committed to might be made public eventually. “I’m not going to say that (the terms) won’t (be made public). My expectation is that they will, but sitting here today I don’t know the exact avenue that they will come to know that,” Meyer said. Walker added that he hopes the deal is fully disclosed, but again said he doesn’t know when that might happen. He also noted that he was the one to push for the joint development agreement to be made public, despite concerns from Chinese officials. “I want to make sure that Alaskans are comfortable with the transaction, not at the expense of the transaction, but at some point I think it would reach a point where it is appropriate,” Walker said. “Certainly, when it reaches a point that requires legislative involvement and approval on some of the pieces, then, at that point I think that could be a time when things are more public. I’m very sensitive to that.” BP expects the terms of the agreement will remain confidential, but it will be noted in the company’s annual report to the Securities and Exchange Commission once it is finalized, according to spokeswoman Dawn Patience. ExxonMobil spokeswoman Julie King wrote in an email that the company appreciates its recent gas sale agreement meetings with AGDC. “We hope to continue these discussions, and remain fully committed to working with AGDC to negotiate gas sale agreements under mutually agreed, commercially reasonable terms,” King wrote. ExxonMobil led the project’s $600 million-plus preliminary front-end engineering and design, or pre-FEED, effort from 2013-2016 before slumping global oil and gas markets pushed the producers to suggest either slowing the project or offering the state to take the lead. The state, BP, ConocoPhillips and ExxonMobil each contributed funding to pre-FEED based on their ownership shares of North Slope gas. ExxonMobil had previously insisted on “fiscal certainty” regarding gas production taxes for the life of any gas sales agreement in order to sell its gas, which would require amending the state constitution specifically for Alaska LNG. However, administration officials have said the companies are not owed such a concession if they are no longer substantial investors in the Alaska LNG Project. Meyer said the fiscal certainty provisions are addressed in the agreement in a way that does not require the lengthy and contentious constitutional amendment process, noting at least BP is comfortable with the undisclosed plan and he expects ConocoPhillips and ExxonMobil to sign off on it as well. “Basically, it’ll be able to insulate the deal from changes in the tax structure or fiscal terms for this particular sale. This sale is for a particular gas supply from a particular reservoir being Prudhoe Bay, but also Point Thomson, so it covers both reservoirs but it’s for a particular gas sale,” he explained. “We’re not trying to fix all the tax issues across the state; we don’t have the authority to do that, but we think we’ve got the pricing provisions covered such that the producer gets the benefit of their deal. It’s all part of the gas purchase and the LNG sale structure.” Walker was hesitant to discuss how production taxes play into the deal, but said, “This is an area I’ve had some strong positions on in the past and I’ll just say I’m comfortable with this contract.” ConocoPhillips Alaska spokeswoman Amy Burnett wrote in an email that the largest producer of North Slope oil is actively engaged in negotiations with AGDC on a wellhead gas sale agreement. “We remain supportive of a state-led project because of the state’s opportunities to pursue options that are not available to a commercial entity that could significantly lower the cost of service,” Burnett wrote. Meyer has also said the corporation is trying to reach a final investment decision on the project in the first half of 2019, contingent upon a favorable regulatory decision from the Federal Energy Regulatory Commission, which is expected to come in March 2020. On March 27 AGDC announced it had hired the Bank of China — one of the three companies in the joint development agreement — and Goldman Sachs to solicit debt and equity investors for Alaska LNG. Elwood Brehmer can be reached at [email protected]

Final environmental review released for Donlin, but without preferred alternative

The U.S. Army Corps of Engineers Alaska published a final environmental impact statement for the Donlin Gold mine Friday, but what regulators think of the complex development plan is still unclear. Donlin Gold’s proposal is for a large open-pit mine near Crooked Creek in the upper Kuskokwim River drainage. The mine would extract roughly 33 million ounces of gold over its initial 27-year life. Substantial support infrastructure for the mine would also be built, including a 315-mile natural gas pipeline from near Beluga on the west side of Cook Inlet to the mine site to provide a fuel supply for the 227-megawatt power plant at the mine site. Donlin’s plan also calls for a 30-mile access road from the Kuskokwim to the mine as well as expanding the Bethel barge dock and constructing additional fuel terminals in Dutch Harbor. Donlin Gold estimates the mine and associated infrastructure that includes a natural gas pipeline from west Cook Inlet and fuel storage all the way in Dutch Harbor, will cost $6.7 billion based on its plan from a 2011 feasibility study. Corps of Engineers Alaska District regulatory officials wrote in an email that the agency is still working through the Clean Water Act Section 404 analyses and will identify the least environmentally damaging practicable alternative through the culmination of the EIS process. The agency is expected to select its preferred alternative plan and issue the subsequent record of decision for the Donlin Gold mine sometime this summer. The alternatives identified by the Corps for the project outline the prospect of diesel fuel pipeline that could parallel the gasline to drastically reduce the need to barge additional diesel up the Kuskokwim, thereby cutting the risk of a fuel spill related to the mine. The longer diesel pipeline would likely start at either Port MacKenzie in the Matanuska-Susitna Borough or at the Village of Tyonek on the west side of Cook Inlet and then link up with the gasline. Another option to reduce diesel shipments that is considered in the final environmental impact statement, or EIS, is to mandate Donlin employ LNG-fueled haul trucks at the mine. The EIS also contemplates a dry stack tailings facility instead of the more traditional tailings pond and dam. Using the dry stack method would avoid a potential tailings waste release from behind the dam, but also require a filter plant that would produce a partially saturated “compactable filter cake,” according to the EIS, that would trucked to the storage facility and then be spread and compacted by bulldozers. Donlin is proposing a 2,300-acre fully lined wet tailings storage facility. The mine site is on lands owned by The Kuskokwim Corp. and Calista Corp., the area village and regional Native corporations, respectively. Donlin spokesman Kurt Parkan said in addition to the record of decision the company still has to secure numerous other state and federal permits, among them approvals for water discharge, waste management and a tailings dam safety permit that will eventually require additional geotechnical drilling. After the permits are secured company leaders will reevaluate the project’s economics, which they acknowledge are subject to the volatility of gold prices, and begin the search for financing if the project pencils out. Donlin Gold leaders acknowledge the project is more sensitive to gold prices than even other Alaska prospects simply because of its associated infrastructure costs. Elwood Brehmer can be reached at [email protected]

Habitat initiative gets day in Supreme Court

The Alaska Supreme Court heard arguments Thursday afternoon over an initiative that would likely be the most contentious choice for Alaskans on the 2018 ballot outside of the governor’s race. State attorney Joanne Grace, on behalf of Lt. Gov. Byron Mallott and the Division of Elections he oversees, argued that the Yes for Salmon ballot initiative is unconstitutional because it implicitly prohibits large development projects in the state that cannot avoid disrupting salmon habitat. A de facto prohibition on such activity violates the Alaska Constitution, which gives authority to allocate state resources — in this case salmon habitat — to the state Legislature, according to state attorneys. “Because (the Yes for Salmon initiative) bans any activity that displaces the habitat, that takes it out of the realm of regulation,” Grace said to the court. Yes for Salmon is what the ballot initiative drafted by the Stand for Salmon organization has been dubbed. Grace contended it gives the Department of Fish and Game, which issues development permits for anadromous fish habitat, no discretion in its decision because all activities determined to have a “significant adverse effect” on the habitat and in turn the fish are explicitly prohibited. Chief Justice Craig Stowers asked Grace if the proposed change in law maintains the Legislature’s discretion by allowing lawmakers to define the meaning of “significant adverse effect” and other terms to Fish and Game. Grace responded that the plain language of the initiative gives the department no discretion to grant permits for activities that will by their very nature permanently disrupt salmon habitat. The initiative does allow for the habitat to be disturbed as long as mitigation countermeasures are on the same water body, in close proximity to the development and the habitat can be restored within a “reasonable period.” “Mining projects routinely dewater and relocate streams, according to our affidavits,” Grace said, referring to documents submitted prior to a Superior Court hearing on the matter. On Oct. 9, 2017, Superior Court Judge Mark Rindner overturned Mallott’s Sept. 12 rejection of the initiative petition, which was based on the Department of Law’s determination that it is unconstitutional. Affidavits from Fish and Game and Department Natural Resources permitting officials asserted large mines, such as the large Donlin Gold mine proposed for the upper Kuskokwim River drainage that is at the end of a five-year environmental review, would likely not be allowable as planned under the Yes for Salmon language. (More: Fish and Game outlines current best practices  for habitat permitting) “If the habitat is never going to recover or be restored then ‘reasonable period’ has no meaning,” Grace said further, noting large mine tailings facilities that can cover hundreds of acres often remain after a mine is closed. Valerie Brown, legal director for the Anchorage-based nonprofit environmental law firm Trustees for Alaska, rebutted the argument that the language of Yes for Salmon sets high permitting bars for project proponents to clear, but would not preclude any specific project or type of development from being allowed in the state. “It’s a permitting scheme that allows the use of public resources without permitting harm,” Brown said in her opening remarks. She said under the multi-tiered habitat permitting process the initiative would establish Fish and Game would first have to determine if an application necessitates the most scrupulous assessment under the “major permit” review tract. After that, the department would decide whether or not the proposed project would cause the significant adverse effects that are central to the debate. If so, then onsite mitigation measures would have to be employed or the plans for the project would have to be amended, according to Brown. She said it could force re-siting or the employment of new technologies to get below the significant adverse impact threshold, but “it wouldn’t ban all of anything.” “It’s all about the amount of harm. The size of the project is irrelevant,” she added. Justices questioned Brown on why the initiative includes impact mitigation restrictions if it is all about preventing harm and whether or not a project in the exploration or pre-development phase would be grandfathered in under the current law if the initiative passes in November. Brown acknowledged the mitigation provisions are the most controversial parts of the law change, but said the mitigation sideboards are meant to protect the water body being disrupted. “If you rehabilitate a wetland that’s 400 miles away you’re not really correcting the harm you’ve done,” she said. Brown also speculated that a project in the works now, such as Donlin, would likely be under the new habitat laws when it moved to full development if Yes for Salmon passes. The Court also has the option of striking specific provisions of the initiative as long as they maintain the spirit of the measure, an alternative Grace rejected and Brown deemed acceptable. Grace contended the language of the complex bill is to intertwined to successfully pull apart and that removing the impact restrictions would leave a new but hollow permitting process. On the other hand, Brown said that while that would be unfortunate, it would still put more structure and opportunity for public input into what Stand for Salmon alleges is currently an ad hoc process without public notices or comment periods. Stowers questioned whether doing so would still meet the intent of the 40,000-plus Alaskans that signed petitions to get Yes for Salmon on the fall ballot, regardless of what the sponsors are ok with. Both sides agreed a ruling by Sept. 1 would be acceptable. The Division of Elections has until Sept. 5 to print the ballot books for the November election. Elwood Brehmer can be reached at [email protected]

ConocoPhillips nets $445M in Alaska to start 2018

ConocoPhillips’ first quarter earnings report issued Thursday was full of good news for the company as it generated $888 million of profits with oil prices in the $70 per barrel range. Houston-based ConocoPhillips grossed more than $8.9 billion in the first three months of 2018, which is its highest revenue quarter since oil prices collapsed in the fall of 2014. The company netted $445 million in adjusted earnings in Alaska during the quarter, also its highest income quarter in the state since the oil market reset. In fact, the $445 million of Alaska income is more than four times greater than its first quarter 2017 earnings in the state and nearly 70 percent of its total 2017 Alaska earnings of $652 million. ConocoPhillips paid $298 million in state royalty and tax payments during the quarter, according to spokeswoman Amy Burnett. As an upstream production-driven company, ConocoPhillips’ financials have been subject to oil and gas market prices far more than other major producers in Alaska that also have substantial refined product business operations. “We continue to differentiate ourselves by executing our strategic, financial, and operational plans. We remain focused on creating value for our shareholders by maintaining discipline, following our priorities and staying committed to our returns-focused value proposition,” CEO Ryan Lance said in a formal statement. “We safely delivered our plan again this quarter, while generating a strong improvement in free cash flow, reducing our debt and returning over 30 percent of cash from operations to shareholders through our dividend and buyback program.” The $888 million profit breaks down to 75 cents per share of common stock. ConocoPhillips stock traded for $66.85 per share shortly before the close of trading Thursday, up slightly from Wednesday’s closing price of $65.07 per share prior to the earnings release. The company increased its dividend payment by 7.5 percent to 28.5 cents per share during the quarter as well. After oil prices crashed the company reduced its dividend from 75 cents to 25 cents per share. ConocoPhillips spent $263 million of its $1.5 billion quarterly capital budget in Alaska. It produced an average of 190,000 barrels per day of oil and natural gas liquids from the state, which was about 15 percent of its daily worldwide oil and gas equivalent production during the quarter. However, that Alaska production may be set for a substantial increase down the road based on the six winter exploration drilling successes ConocoPhillips announced earlier this month. Three wells intended to delineate the company’s Willow prospect in the National Petroleum Reserve-Alaska largely confirmed the initial estimate that the prospect in the National Petroleum Reserve-Alaska holds at least 300 million barrels of recoverable oil. Additionally, the wells indicate the Willow oil resource could support its own processing facility, meaning it has the potential to produce up to about 100,000 barrels per day, according to Alaska spokeswoman Natalie Lowman. Other exploration results from wells to the south and east on state land also proved what industry experts in the state suspected: the Nanushuk formation oil play is going to be a major target in the western portion of the North Slope for years to come. While this year’s discoveries are five years or more from production, ConocoPhillips is scheduled to bring its Greater Mooses Tooth-1 project in the NPR-A — with up to 30,000 barrels per day of peak production — online this fall. Elwood Brehmer can be reached at [email protected]

Legislature quietly brings back Permanent Fund legislation

Legislators continue to plug along in Juneau as the calendar approaches May and their constitutional deadline to finish their work in the middle of that month. Much of the activity in the past couple weeks has been on relatively minor bills and resolutions as House and Senate leaders quietly negotiate the state’s finances. The Republican-led Senate on April 18 joined with the Democrat-led House in unanimously passing House Joint Resolution 21 by Fairbanks Democrat Rep. David Guttenburg urging the federal government to stay out of the state’s recreational marijuana business. A couple days later, on April 20, when levity would’ve suggested passing the marijuana resolution, legislators again unanimously passed a resolution aimed at the feds; this time asking for help in developing an Arctic deepwater port in Western Alaska. Sen. Peter Micciche’s Senate Bill 4, legislation to reduce requirements for occupational license requirements for barbers, hairdressers and others with student loans, was approved April 24. While those matters are undoubtedly important to those they impact, the last legislation approved with broad implications was House Bill 287, Rep. Paul Seaton’s proposal to fund the K-12 education early. It was sent to Gov. Bill Walker’s desk April 18. While it didn’t pass the Legislature early in the session as intended, HB 287 is still ahead of the operating budget, which remains unresolved as part of the ongoing discussions over a longer-term fiscal solution. A key aspect to the passage of HB 287 is that the Democrat-led House approved the Senate’s version of the bill. It calls for flat education funding in the upcoming 2019 fiscal year, but also provides for a $30 million increase to the primary school funding mechanism, the base student allocation, in fiscal year 2020 (the school year that begins in 2019). The House Majority coalition had been pushing for a $25 million increase for fiscal year 2019 after several years of flat BSA funding, which Democrats have noted has forced school districts to absorb fixed annual cost increases, namely health care. However, the Senate’s version of HB 287 also included a contingency that the extra money in 2020 is dependent passing Senate Bill 26, the seemingly forgotten bill passed by both chambers last year that would formally establish an annual percent of market value, or POMV, draw from the Permanent Fund Earnings Reserve Account to pay dividends and support government services. Senate leaders did an about-face by making the extra education funding dependent on the passage of SB 26 after repeatedly criticizing the House Majority and the Walker administration for leveraging one issue against another, but the fact that the House agreed to the proposal is a sign of progress on the centerpiece of any plan to resolve the state’s multibillion-dollar budget deficits. Subsequent to HB 287 passing, the House and Senate Finance Committee co-chairs held a April 21 conference committee meeting on SB 26. While the meeting lasted all of two minutes, it initiated the process of resolving the differences in the versions of the legislation each body passed last year. The House’s SB 26 tied approval of a Permanent Fund draw to passage of an income tax, while the Senate made it contingent on a reducing the government’s spending cap to a more substantive level. Meanwhile, formal conference committee negotiations over the operating budget have been put on hold. But given the House and Senate budget plans are more similar than they are different — each side has fiscal year 2019 unrestricted General Fund spending in the $4.5 billion range — a major hang-up over the budget seems unlikely. Finally, the capital budget has received no attention since the administration submitted it to the Legislature in January, which indicates legislators could pass a minimal and noncontroversial capital budget that spends little more state money than is needed to secure more than $1 billion in federal matching transportation construction grants in a day or two after other big issues are resolved as they did last year. Such “bare bones” capital budgets have become the norm since 2015 despite the fact that the state’s deferred maintenance liability continues to grow to upwards of $2 billion, according to the Department of Administration. ^ Elwood Brehmer can be reached at [email protected]

Merger expense, increased labor costs reduce Alaska Air income

Growing costs trimmed Alaska Air Group’s first quarter 2018 net income to $4 million, company executives reported April 23. The Seattle-based parent company to Alaska Airlines and regional carrier Horizon Air reported $18 million in profits excluding costs related to its 2016 acquisition of Virgin America airlines, a $1,000 per-employee bonus tied to federal tax cuts and fuel hedging accounting adjustments, among others. For comparison, Alaska Air Group netted $93 million in the first quarter of 2017 and $184 million in the first three months of 2016 — also the last first quarter of operations before it purchased Virgin American in a $4 billion deal that closed in December 2016. Alaska Air Group CEO Brad Tilden said Alaska Airlines is in the midst of the most important parts of its merger with Virgin America and the company is starting to plan for the time after the airlines are fully blended during a conference call with investors. The complex merger is “reaching a crescendo tomorrow night (April 24) as we transition to a single passenger service system,” Tilden said in the April 23 call. “This event will mark our shift to a single brand and customer experience everywhere our guests interact with us,” he said further. Alaska Air Group has been directing Virgin America bookings to Alaska and performing other operations as a single airline for some time to assure a smooth transition, according to Tilden, which means the remaining passenger service system integration will mostly be limited to what customers see and not integral behind-the-scenes processes. He emphasized that the company is encouraged about its prospects despite the immediate sharp decline in profitability. “Our platform, which is 33 percent bigger than it was just 16 months ago and 100 percent bigger than it was five years ago, maintains the same competitive advantages it always has,” Tilden said. The $4 million profit translates to 3 cents per diluted share. Alaska Air Group paid a first quarter dividend to its shareholders of 32 cents per share. The company’s stock closed trading April 23 at $69.11 per share, up 5.7 percent from its April 20 closing price despite the lukewarm financial results. First quarter revenue was up 5 percent year-over-year to more than $1.8 billion; however, operating costs were also up 14 percent, which led to an 82 percent drop in operating income to $29 million. Tilden said company leaders expect the merger to result in $280 million of new revenue in 2019 and that the company plans to grow its capacity by just 4 percent by 2020, choosing instead to leverage the benefits of its previous growth. “We are absorbing substantially all of the merger-related cost increases this year,” he added. Chief Financial Officer Brandon Pedersen said the executives are not happy with the first quarter financials and are taking steps to improve the profitability of the company. “Our near breakeven result came during a time of new merger integration activities, significant new market development, rising fuel prices, new labor agreements and continuing areas of competitive pressure in our network,” Pedersen said during the earnings call. A new labor agreement with Alaska Airlines flight attendants increased labor costs by $9 million for the quarter and when combined with a pilot contract signed in late 2017 amounted to eat up about two-thirds of the 5 percent revenue growth, according to Pedersen. Air Group’s wage and benefit costs increased $84 million, or 19 percent, in the first quarter. Additionally, total fuel costs were also up $93 million, or 29 percent, paralleling increased oil prices. Despite that, Pedersen said without the new, more fuel-efficient Boeing 737s Alaska continues to receive as it phases out older aircraft, the company’s fuel costs would have been $5 million more. Alaska Airlines’ fuel efficiency improved 1.5 percent year-over-year. He also noted the company has hedges on 47 percent of its expected fuel consumption for the remainder of the year. Overall, the company expects its full-year unit costs to be up about 3.5 percent. “In general, I’m seeing examples of great back-to-basics cost management across much of the company,” Pedersen said. “The credit goes not only to our leaders but also to our frontline employees for embracing the need for productivity gains.” Alaska Air Group recently lowered its expected capital expenditures in 2018 to $1 billion, with further plans to spend about $750 million per year on capital investments in 2019 and 2020. The company also restructured its new aircraft delivery schedule over the next three years to help lower capital costs and increase free cash flow, according to Pedersen. He thanked Boeing and the other airline manufacturers it has purchase agreements with for being amenable to the changes. Alaska Air Group generated $310 million in operating cash flow during the quarter and spent about $235 million of it on capital expenses, the earnings report states. The company, with $10.8 billion in total assets, held roughly $1.5 billion in cash at the end of the quarter. “Our balance sheet continues to get stronger with total on-balance sheet debt declining another $120 million since year-end,” Pedersen said. Company executives have long-stressed their desire to maintain an “investment-grade balance sheet” and with its aircraft leases the company’s debt-to-capitalization ratio held flat 53 percent for the quarter. Pedersen said the debt-to-cap ratio should drop to 50 percent by the end of the year, while at the same time returning about $200 million to Air Group shareholders through dividends and share buy-backs during 2018. Tilden also thanked Alaska Airlines employees for moving the merger along “in record time” in his comments during the earnings call. “I couldn’t be more excited about our future,” Tilden concluded. ^ Elwood Brehmer can be reached at [email protected]

Legal opinions diverge on constitutionality of tax credit bonding bill

An opinion from the Legislature’s attorneys has called into question the constitutionality of Gov. Bill Walker’s plan to pay off the state’s outstanding oil and gas tax credit obligation that is currently in excess of $800 million. Legislative Legal Services Deputy Director Emily Nauman wrote to Sen. Bill Wielechowski, D-Anchorage, April 13 that the administration’s proposal to sell bonds to pay down the tax credits in one lump sum may fall outside the Alaska Constitution’s tight restrictions on allowing the state to contract debt. Wielechowski raised the issue regarding the legislation, SB 176, during the initial Senate hearing on it Feb. 21. At the time he said he would be seeking a legal opinion on the matter. His office released the legal opinion April 18. “Although the outcome is difficult to predict, this office is concerned that a court reviewing SB 176 may find that, for purposes of bonding under (Article IX, Section 11 of the Alaska Constitution) revenue of a corporation does not include appropriations from the traditional sources of state income, such as taxes and other receipts received by the General Fund. Therefore, there is a substantial risk that a court may determine that SB 176 is unconstitutional,” Nauman wrote. Legislative leaders in both parties have mostly gone quiet as end-of-session budget negotiations are underway but there is a general indication that they are not worried about the legality of the bonding plan. However, there is the possibility that the questions from Wielechowski and Legislative Legal Services could raise the interest rates the state would have to accept to sell the bonds, at least slightly. They are subject-to-appropriation bonds, and the state’s financial reputation has taken hits in the last several years for a combination of not fully paying the tax credits each year starting with two vetoes by Walker in 2015 and 2016; the ad hoc setting of the Permanent Fund dividend without regard to the statutory formula either through veto (in 2016) or legislative action (in 2017 and 2018); and the Legislature using the subject-to-appropriation clause to leave Anchorage developers on the hook for a $28 million loan by abandoning the Legislative Information Office they commissioned and occupied for less than two years. The state’s failure to adopt fiscal measures to deal with annual deficits topping $2 billion has also led to the once perfect AAA credit rating being downgraded to the third lowest in the country. Wielechowski said in an interview he does not plan to challenge the legislation in court if it passes, but rather that he simply wanted to bring the issue to light. “We went back and read the Constitutional Convention minutes. This is the exact kind of thing they were trying to stop. They didn’t want the Legislature and the administration racking up debt for future generations,” Wielechowski said. The state Constitution prohibits lawmakers and state agencies from selling bonds except in the cases of an emergency; if they are general obligation bonds for capital projects; or housing loans for veterans and approved by voters statewide. State corporations may also sell revenue bonds but they are the obligation of that corporation and not the state as a whole and are backed by some segment of the corporation’s revenue. SB 176 and its mirror House Bill 331 — both in their respective Finance committees — would create the Alaska Tax Credit Certificate Bond Corp. within the Department of Revenue to sell the bonds and pass the proceeds of the sales on to the bond holders, of which there are 37, according to Deputy Revenue Commissioner Mike Barnhill. The bonds would be “subject to appropriation” meaning the revenue to pay for them would be contingent upon the Legislature appropriating money to pay the debt service each year. “This bill seeks to avoid the constitutional ban (on bond debt) by creating a pass-through state corporation whose sole purpose is to put the state in debt to pay the oil companies,” Wielechowski said. “Oil tax credits are clearly not an allowable state debt prospect, but the bill also jeopardizes the state’s credit rating without asking for the people’s say.” He also noted the state corporation would have no employees, revenue or assets in a statement from his office. Alaska Attorney General Jahna Lindemuth offered a quick counter to the Wielechowski and the Legislative Legal memo, contending in a statement from the Department of Law that the bonds proposed in the legislation are not general obligation bonds and the department has no constitutional concerns with the proposal because it is “consistent with long-established bond issuance practice in Alaska,” the Law release states. “We’ve carefully reviewed the legal issues and are confident that these bonds are lawful under Alaska law,” Lindemuth said. Attorneys with the Department of Law have stressed the subject-to-appropriation provision would make the bonds constitutional because it prevents the state from being totally bound to the debt. “It’s an important obligation but if you buy a subject-to-appropriation bond and the authority that issued it did not make a debt payment — unlike a general obligation bond where the court would order a payment — if you went to a court the court would say ‘It says right on your bond it’s subject to appropriation;’ that’s sort of the dividing line for us,” Assistant Attorney General Bill Milks testified to the House Finance Committee April 21. Nauman, who wrote the Legislative Legal opinion, testified on the other hand that because the revenue to pay for the bonds would strictly be tax revenue appropriated from the General Fund they are not traditional revenue bonds. As a result, the proposal creates legal ambiguity and the division can’t advise that the plan is constitutional until there is precedent, which there isn’t. State Debt Manager Deven Mitchell said during the Feb. 21 Senate Resources hearing that the situation would be similar to how the state financed the Goose Creek Correctional Facility in the Matanuska-Susitna Borough. In that case the borough issued revenue bonds on the state’s commitment to pay through its lease of borough lands. According to an April 16 letter from Mitchell to Revenue Commissioner Sheldon Fisher, the state currently has $237 million of outstanding subject-to-appropriation bonds related to the Mat-Su prison and the Alaska Native Tribal Health Consortium residential housing facility. It’s worth noting that someone with standing must challenge the constitutionality of a law or state spending for the legality of the issue to be determined; it is legal until someone decides to expend the resources and energy needed to prove it’s not. Administration officials have also pointed to a 1995 Alaska Supreme Court ruling in the case of Carr-Gottstein Properties v. the State of Alaska in which the court determined that a lease-purchase agreement was not unconstitutional debt because the obligation to pay was again subject to appropriation by the Legislature. However, Wielechowski contends the case ruling is irrelevant to the bond issue because it centers on a property lease, which is different than selling bonds in financial markets. The administration is touting the plan as a way to pay off the tax credits, which are expected to reach a roughly $1 billion bill in another year or two once the last of the credit certificates from the terminated program are submitted to the state for approval. The credits went to small producers, explorers and seismic data companies to subsidize a portion of their work on the hope the state help could spur more oil and gas production more quickly as payback for the state. Paying off the obligation quickly could also restart work slowed or stalled by small producers and explorers that have cited the lack of payments as a primary reason numerous companies have had to hold off previously planned investments. Adding to the issue is the fact that several banks provided loans to companies with the credit certificates as collateral; and when the credits were not paid as expected the banks stopped lending to the Alaska oil and gas sector, according to multiple companies, banks and Department of Revenue officials. Lender gives thumbs up at House hearing Despite the swirling issues of the constitutionality of the legislation, the House Finance Committee continues to work on HB 331. The committee heard broad support for the bill April 23 from oil and gas and finance industry representatives who said it could reinvigorate investment in the state. ING Managing Director Thomas Ryan said the large international bank lent against credit certificates to two oil companies working in the state in 2015. ING’s Peter Clinton said the process the state has gone through in dealing with the tax credit program since oil prices collapsed in late 2014 is not unlike what often happens elsewhere. “This is a fair and balanced proposal. It is consistent with the types of proposals you would see in private industry where you take an obligation that you recognize that you have and you try to get a solution to that problem where everybody participates,” Clinton testified. He said the legislation would likely enhance the state’s reputation in the finance realm greatly over doing nothing, as it would provide path to a solution. “Private lenders are not put off by situations like this where something unexpected happens and you have to figure out a way to deal with it,” Clinton said further. “Ultimately, at the end of the day what they look for in the solution is the ability for there to be a predictable payout.” The difference is that the state deals with its problems over years, in which one aspect of the issue is often handled each legislative session, as opposed to weeks or months it takes to resolve problems between private parties, he added. Passing either SB 176 or HB 331 would resolve a difference of opinion between the Democrat-led House and Republican-dominated Senate over how much to spend on the credits this year in the budget. The House budget appropriates $49 million to the Oil and Gas Tax Credit Fund, while the Senate would have the state put $184 million into the fund based on differing interpretations of the production tax-derived formula that is used to generate the statutory minimum production tax credit payment. The House amount is based on a calculation that uses the amount of production taxes the state is actually expected to receive in 2019, while the Senate’s calculation is based on the wholesale production tax amount before deductible credits are applied. The administration is backing the Senate, as its calculation is the formula that has been used the past two years. Elwood Brehmer can be reached at [email protected]

Long-awaited final EIS for Donlin nears release

The U.S. Army Corps of Engineers will publish its recommendations for the large Donlin Gold mine project in Western Alaska next Friday, April 27, Alaska District officials said Thursday. The Corps of Engineers has been working on the environmental impact statement, or EIS, for the open-pit gold mine proposal in the upper Kuskowkim River drainage since December 2012. A schedule for the EIS on the agency’s website for the project states the Corps hoped to have the final version of the massive environmental review document published sometime in March. Donlin spokesman Kurt Parkan said the company has been working on the mine for 22 years since initial exploration work began. “It’s a good day. We’re happy that we’ve reached (the final EIS). That’s a big milestone,” Parkan said in a brief interview. Corps of Engineers Alaska District officials who oversaw the drafting of the Donlin EIS held a media availability and a scoping meeting in Anchorage at the Dena’ina Civic and Convention Center on Thursday to solicit comments on the EIS for the Pebble gold and copper mine. Unlike a draft EIS — Donlin’s draft was published in November 2015 — a final EIS includes the oversight agency’s recommendations on how a project can be adjusted to minimize its environmental impacts. A “no action alternative,” or a recommendation to not approve the project, can also be selected. Donlin Gold estimates the mine and associated infrastructure that includes a natural gas pipeline from west Cook Inlet and fuel storage all the way in Dutch Harbor, will cost $6.7 billion based on its plan from a 2011 feasibility study. Parkan said the next steps will be getting a record of decision from the Corps later this year as well as securing numerous other permits, among them approvals for water discharge, waste management and a tailings dam safety permit that will evenually require additional geotechnical drilling. After the permits are secured company leaders will reevaluate the project’s economics, which they acknowledge are subject to the volatility of gold prices, and begin the search for financing if the project pencils out. “That is the plan and we’re working on ways to reduce the capital cost,” Parkan added. A true mega-project, Donlin Gold’s is for a conventional open-pit mine 1.5 miles across and up to 1,200 feet deep about 10 miles north of the village of Crooked Creek in the Upper Kuskokwim River drainage. A tailings facility, large power plant, workers’ camp and 5,000-foot airstrip would accompany the mine. As planned by Donlin, a joint venture between Barrick Gold Corp. and NovaGold Resources Inc., the mine would produce about 1.1 million ounces of gold per year over a 27-year mine life for a total of about 33 million ounces of the precious metal, making it one of the largest open-pit gold mines on Earth. The mine site, on lands owned by The Kuskokwim Corp. and Calista Corp., the area village and regional Native corporations, respectively, would also include a fully lined, 2,300-acre tailings facility to store the processed ore. Support infrastructure would include a 315-mile, 14-inch diameter natural gas pipeline originating on the west side of Cook Inlet needed to supply fuel to the 227-megawatt capacity power plant at the mine site. The pipeline has also been viewed as a first, indirect step to getting lower cost natural gas to numerous villages in Western Alaska that currently rely on fuel oil their primary heat and electricity sources. A 30-mile road would connect the mine to a new barge port on the Kuskokwim. Further down the Kuskokwim, port cargo facilities would be expanded in Bethel, and new diesel storage tanks would be needed Dutch Harbor to supply fuel for equipment at the mine. In all, the direct supply chain in Donlin’s proposal from Cook Inlet to Dutch Harbor would cover approximately 1,050 miles. Donlin Gold leaders acknowledge the project is more sensitive to gold prices than even other Alaska prospects simply because of its associated infrastructure costs. Company officials have said the project would not be economic at gold prices of about $1,100 per ounce. Gold was selling for about $1,355 per ounce in spot trading on Thursday. Elwood Brehmer can be reached at [email protected]

Labor Dept. prepping for AK LNG job demand

Building a $43 billion project naturally requires a lot of labor. More specifically, the Alaska Gasline Development Corp. estimates its $43 billion Alaska LNG Project will generate upwards of 18,000 new jobs in the state over about six years of construction. Nearly 12,000 of those jobs will be directly dedicated to the project itself: 1,300 heavy equipment operators; 1,500 pipefitters and welders; 2,300 general laborers; and 3,500 truck drivers to move countless types of materials, modules and construction equipment — not to mention the 807 miles of steel pipe. Hundreds more electricians, carpenters, ironworkers and engineers will also be needed, as well as 1,600 people to feed, house and otherwise support those swinging hammers and welding pipe, according to AGDC. With Alaska LNG construction ramping up in a big way in 2020 based on the gasline corporation’s timeline for the project, the direct workforce should peak in 2023 at the aforementioned roughly 12,000 workers and fade to about 6,000 during the last major year of work in 2025. While certainly not all of the $43 billion will be spent in the state, another 6,000 or so indirect jobs could be generated as a side effect to all of the Alaska LNG Project dollars flowing through the state economy, AGDC predicts. The project will also require roughly 1,000 personnel to keep it up and running, with 85 jobs at the North Slope gas treatment plant; 330 pipeline maintainers; up to 400 individuals at the project’s Anchorage headquarters and 240 people manning the LNG plant in Nikiski. The new Gasline Workforce Plan outlines how the state Department of Labor and Workforce Development will make sure all of those jobs can be filled. Department of Labor Commissioner and AGDC board member Heidi Drygas acknowledged that Alaskans aren’t likely to fill all of those positions — there simply aren’t enough people in the state — but said one of her top priorities these days is assuring all Alaskans who do want to work on the project have the opportunity to do so. And that starts with the message that a gasline, the Alaska LNG Project, is real this time. “Yes, it’s been 40 years since we first started talking about a (gasline) project like this, but we finally have a team in place that can bring it to fruition and it’s exciting,” Drygas said in an interview. She noted that those already employed in the construction trades and the oil and gas industry should be able to easily transition to the Alaska LNG Project if they so choose, but individuals without that experience should be looking into training opportunities now. To that end, AGDC President Keith Meyer has stressed the message of “get ready” to those who want to be a part of the project. Alaska’s current recession would seemingly have expanded the workforce available to work on the project as most of the roughly 11,000 jobs lost over the last two years have been in the oil and gas and construction sectors. According to Labor Department data, the closely tied industries have contracted by a combined 7,100 jobs since 2015. However, Drygas said the lack of jobs in those industries in the state today is actually a challenge to assuring the needed labor force is in Alaska when work on the gasline gets going. “(Construction workers) have to have some jobs available leading up to the pipeline project. That is a barrier that we face right now when we are lacking the capital budget that we have seen in years past come out of the Legislature,” she said. Oil and gas and construction workers displaced by Alaska’s economic downturn could have gone elsewhere for work in the active Lower 48 economy or shifted to a different industry to find employment. Alaska’s robust network of technical education institutions, from the renowned state-run Alaska Vocational Technical Center, or AVTEC, in Seward to the unique Fairbanks Pipeline Training Center, the Alaska Construction Academies, the university’s numerous vocational programs and other regional training centers, provides residents many more avenues to prepare themselves for a gasline than when the Trans-Alaska Pipeline System was built in the mid-1970s, Drygas emphasized. The trick is getting young people into their classes. Nearly a quarter of the state’s current workforce in gasline-related occupations are nonresident workers and more than 30 percent are beyond 50 years old, according to the Workforce Plan. “We need to reinvigorate that interest in construction jobs again and that is part of our Gasline Workforce Plan, to educate students — all Alaskans — but we are going to target students in high school to make sure they are aware of the opportunities in apprenticeships, in process technologies, engineering with the university, with any number of jobs, but we really do need to address the issue of an aging construction workforce,” she said. Adding another layer of challenge to that effort is the fact that the state’s ongoing multibillion-dollar budget deficits have pushed the Legislature and the administration to cut the Labor Department’s discretionary budget by 37 percent since 2015, and the majority of that has come out of workforce training programs, according to Drygas. The Alaska Construction Academy budget, for example, has been cut from $3.4 million to $1.8 million, she added. Started in 2006, the construction academies are meant to introduce high school students and adults to career options in the industry through entry-level training. “We’re hoping that in better economic times we’ll be able to fund some of these programs again because that will directly impact our workforce development efforts for this gasline. We have too many construction workers retiring; we have to educate young Alaskans about opportunities in the trades,” Drygas said further. “And sure, it’s not for everyone but I think a lot of young folks just don’t know about it. What they Alaska Construction Academies did so well is to discover young talent in the construction industry.” In-lieu of state funding, the department is applying for more federal Labor grants that it would administer to support training in the trades statewide. Some legislators and representatives for Alaska trade unions have expressed concern that the joint development agreement AGDC signed in November with three large Chinese companies could preclude Alaskans from many of the jobs the project will offer. The joint development agreement indicates Sinopec, a state-owned oil and gas giant with nearly as many employees as Alaska has residents, could have roles in the final engineering, design and construction of Alaska LNG and although nonbinding, the agreement appears to be the framework for a deal that could underpin the project. Drygas said she is totally confident in AGDC President Meyer’s pledge to prioritize Alaska hire on the project. “One of the best ways to ensure Alaska hire is through a project labor agreement and the governor and President Meyer are committed to utilizing a PLA on the project,” she said. Project labor agreements are a pre-hire bargaining agreement of sorts that government entities or their contractors sign with labor unions to offer work to members of those unions. “When you know more about the leadership team in place at AGDC and the governor’s commitment to ensure Alaska receives the benefits from the project — I understand those concerns and I’m glad people voice those concerns but I am not concerned about that,” Drygas said. Elwood Brehmer can be reached at [email protected]

Budget talks underway, but no fiscal plan

The end of the legislative session is shaping up to be fairly anticlimactic as House and Senate leaders have begun negotiating the finer points of the $4.5 billion operating budget this week.  The budget conference committee began meeting April 14, and while the 90th day of the session quietly came and went April 16, there is a general feeling the Legislature will wrap up soon.  It is a significant departure from the political theatrics that dominated much of the last three springs when debates over the size of the budget and how to fund it kept legislators in session well into May and June.  Republican Senate President Pete Kelly said, particularly last year, “it was a full-on war between the House and the Senate” as battles played out over the age-old issues of taxes and the appropriate amount of government spending.  This year, whether legislators have truly reached agreement on the budget or simply wish to close out the session so they can begin campaigning and fundraising, the House and Senate budgets both came in with similar overall totals in the range of $4.5 billion in unrestricted general funds.  Both versions of the budget also include language directing the Alaska Permanent Fund Corp. to pull $2.7 billion from the Earnings Reserve Account of the $65 billion Permanent Fund. Of that, just more than $1 billion would go to pay Permanent Fund dividends of $1,600 per Alaskan with the remaining $1.7 billion going to pay down the nearly $2.5 billion budget deficit.  The $2.7 billion Earnings Reserve draw is based on a 5.25 percent of market value, or POMV, draw — on the five-year average value of the Fund — included in the budget. It would leave the state with a fiscal year 2019 budget deficit in the $500 million range, with the exact deficit dependent on oil price and production figures and the size of the capital budget, which still has to be passed.  The agreement over the dividend, Earnings Reserve draw and overall size of the budget would seem to be progress in the three-year debate over long-term funding of state government, but the one-off POMV calculation just continues to leave the issue unresolved after this year.  Additionally, the Senate’s concession to not push for further substantial budget cuts, combined with the Democrat-led House Majority coalition backing off on its insistence for an income tax perpetuates the structural budget deficit — albeit at a much lower level.  Legislators are still debating a few items, however.  The main one is K-12 education funding. Early in the session it was indicated both sides agreed to keep the key base student allocation flat to avoid the perennially contentious topic.  Despite that, House Bill 339, a proposal by Anchorage Democrat Rep. Les Gara, to increase the BSA by $100 to $6,030 per student, gained momentum in the second half of the session and was passed by the House April 14. A $100 BSA increase would add approximately $25 million to the budget.  Gov. Bill Walker supported the move in a formal statement from his office.  House leaders contend several years of a stagnant BSA has amounted to a collective $70 million cut to school districts since 2014 as inflation has eroded the present value of the BSA.  Senate Republicans have countered with a revised plan to forward-fund education in fiscal year 2020 that would flat-fund the BSA in 2019 but increase it by $117 per pupil, or $30 million in the 2020 budget.  But the Senate’s BSA increase is tied to passage of Senate Bill 26, which would establish a formal POMV draw on the Permanent Fund.  Permanent Fund Corp. leaders have stressed they need to have the structure of an Earnings Reserve draw written in law to provide certainty in managing the Fund and give them an idea as to how much of the Fund they need to keep liquid for government appropriation in any given year.  That position has been championed by the administration and supported by most in the Legislature, but the political realities of the situation have kept it from happening.  How the state will deal with its $800 million-plus oil and gas tax credit obligation is still unresolved as well. Both the House and Senate budgets include appropriations to the Tax Credit Fund, although the House is at $49 million and the Senate would put $184 million into the Fund.  The difference is over varying interpretations of the statutory formula used to determine the minimum tax credit appropriation. The House amount is based on a calculation that uses the amount of production taxes the state is actually expected to receive in 2019, while the Senate’s calculation is based on the wholesale production tax amount before deductible credits are applied.  The administration is backing the Senate, as its calculation is the formula that has been used the past two years. Breaking from that precedent to pay less would further damage the state’s financial reputation that has already been tarnished on multiple levels during the period of big budget deficits.  Legislators could also avoid the tax credit appropriation by passing the administration’s proposal to sell bonds to pay off the tax credit obligation in one big payment.  Companies holding credits would have to accept a discount of up to 10 percent on the face value of the certificates — a way to prevent the state from spending more to borrow for the cash — but industry representatives and company leaders favor the plan over waiting years to pay off the obligation with small annual appropriations.  The bonding plan also has general bipartisan support in the Legislature and unamended mirroring versions of the legislation have passed out of the Resource committees in each body, yet the Finance committees have yet to take up the bills. The tax credit bonds could still be a part of a final budget deal.  The House Finance and Resource committees are also continue to discuss oil tax increases, with Finance co-chair Rep. Paul Seaton, R-Homer, pushing a major production tax overhaul similar to what the House passed last year.  The proposal for a base 25 percent production tax with income-tax like brackets as oil prices increase would raise between $600 million and $700 million in additional revenue per year.  The bill in the Resources Committee, sponsored by committee co-chair Rep. Geran Tarr, D-Anchorage, would leave the existing base production tax structure in place but raise the gross minimum tax floor from 4 percent up to 7 percent in tiers that would gradually raise the minimum tax based on oil prices.  That legislation, House Bill 288, would raise up to about $220 million per year, but that amount would fade if oil prices drastically rise, which would cut the minimum tax out of production tax calculations.  House Majority leaders have said they are considering an oil tax increase in-lieu of implementing a broad-based personal tax, which the Senate has wholly rejected, to further pay down on the state’s deficit. They also note that with the companies currently paying the minimum tax, Alaska’s production tax is among the lowest in the country and lower than it has ever been in the state’s history.  However, neither the administration nor the Senate Majority appear be willing to raise oil taxes at this point.  Elwood Brehmer can be reached at [email protected]   

AGDC chief recaps visit from Chinese delegation as funding unresolved

State officials leading the $43 billion Alaska LNG Project touted a productive visit from potential Chinese partners in the project while funding for the effort remains unresolved in the Legislature. Alaska Gasline Development Corp. President Keith Meyer told reporters during an April 12 press briefing that a six-day trip to Alaska from March 25-30 by leaders of the state-owned Chinese companies Sinopec, Bank of China and China Investment Corp. was the foreign contingent’s opportunity to see for themselves that the Arctic-sourced LNG export plan is as achievable and real as Gov. Bill Walker’s administration has insisted. Meyer said he expected the three companies to send “a couple handfuls of people” across the Pacific; 38 arrived. “We had a pretty large group,” he said. “It really shows their level of interest, activity, commitment to the project so we were really happy to see that.” Among other activities, the group toured the proposed pipeline route from the North Slope to Nikiski. AGDC signed a nonbinding joint development agreement with the three Chinese mega corporations last November. At the highest level, the agreement outlines the possibility of the companies joining forces to fund 75 percent of the project in exchange for 75 percent of the project’s planned capacity of 20 million tons per year of LNG. Sinopec, one of the world’s largest oil and gas companies, could be simply a buyer of LNG from the project or a partner in it involved in engineering, design and construction. The Bank of China and China Investment Corp. would raise debt and equity financing under the model. The development agreement calls for AGDC to have the framework of final deals with the three in place by the end of May, with firm commitments signed before the agreement expires at the end of the year. Right now, according to Meyer, AGDC and the Chinese companies are establishing roles for the project, such as how involved Sinopec will be. On March 27, AGDC announced the Bank of China, along with Goldman Sachs, have been hired to assist the corporation in raising funds for the project. Accepting funds solicited by Bank of China or Goldman Sachs will require the Legislature to approve third-party receipt authority for AGDC, which remains unresolved after the House and Senate operating budgets diverged on granting it. Meyer said the entire group toured production facilities at Prudhoe Bay and witnessed ice road construction to gain comfort in the fact that something as critical as LNG shipments needed to heat and light homes and businesses can be reliably sourced from an often-harsh Arctic environment. “They really got a sense that there’s a lot of installed infrastructure, labor and companies up there on the North Slope,” Meyer said. Experts in the different aspects of the project then broke into five groups to evaluate the pipeline route, North Slope geologic samples, the Nikiski LNG plant site, and the prospect of sending massive LNG tankers into the silty, shallow, sometimes ice-laden waters of Cook Inlet. A group traveled to Seward to test docking a roughly 1,000-foot long Q-Flex LNG tanker — the second largest series of LNG tankers on Earth and the largest that could call on the Alaska LNG marine terminal, according to Meyer — with the ship bridge simulator at AVTEC, the state’s trade school. “They got to see those simulations and they actually got to berth the ship at the Kenai facility,” Meyer said during AGDC’s board of directors meeting before the press conference. Meyer has downplayed the impact of President Donald Trump’s 25 percent tariff on Chinese steel on Alaska LNG; stressing most of the $43 billion project’s costs are in construction and pre-fabricated equipment and modules that fall outside the purview of the tariff. “The underlying issue is really trade with China and the reason that Secretary of Commerce (Wilbur) Ross really fostered the trade mission to China from the United states is for the Chinese to buy more stuff from the United States and one of those things identified was LNG,” Meyer added. He also emphasized that AGDC has not decided from where it will source steel for the 807-mile, 42-inch gas pipeline if the project gets that far, but even if it comes from China the tariff would cost the project roughly $200-$500 million. However, it’s unlikely the tariff would add to the overall cost of the project, according to Meyer, because the $43 billion estimate includes $9.3 billion of contingency reserves for unexpected costs or overruns such as the steel tariff. He also noted the U.S. has a 30 percent tariff on steel from Japan, so the issue is not China-specific. “It’s just one of the aspects of globally sourcing material,” Meyer commented. AGDC regulatory Vice President Frank Richards said during the Thursday board meeting that corporation officials — hosted by Sinopec — visited four Chinese steel mills in early March to evaluate their capabilities to produce and roll steel for the pipeline. He said U.S. mills could roll the plate steel into pipe, but are not equipped to first produce the plate to the project’s specifications. There are mills in China, Europe, India and Japan that could fill an order for Alaska LNG pipe, according to Richards. Senate budget removes AGDC receipt authority Meanwhile, the Legislature is still uncertain as to how much autonomy it wants to give AGDC in paying for the Alaska LNG Project. Gov. Walker requested open-ended authority for AGDC to receive third party funding for not only actual construction but also for the corporation’s operations in the coming years in his 2019 fiscal year budget proposal. The House capped AGDC’s receipt authority at $1 billion per year for 2018 and 2019 in its version of the operating budget. The Senate did not include Walker’s request for receipt authority in its operating budget passed late Thursday. Both bodies did allocate $10.3 million from the state’s existing Alaska LNG Fund for AGDC’s annual operating budget, which is consistent with prior budgets. According to AGDC Finance Manager Philip Sullivan, as of March the corporation had $63.2 million in previously appropriated gasline funds and expects to have $34 million left at the end of the calendar year 2018. Last year, in what was largely a political statement, the Senate quietly and unanimously approved a budget amendment that would have pulled $50 million from the Alaska LNG Project Fund and sent it to other state agencies. The funding was eventually restored in a House-Senate conference committee on the budget. Meyer said the third-party funding ability is necessary to keep the project on track for a late 2024 in-service date and that he is confident the issue will be resolved favorably. “I think now, that the state (Legislature), now that we’ve gotten all this traction, does not want to give it away too early and so it just wants to be engaged,” Meyer said at the press briefing. “I’m convinced we’re going to get support all around.” Legislators in both bodies and from both parties have indicated concern that giving AGDC receipt authority signs away the Legislature’s remaining purview over the corporation and the Alaska LNG Project — the Legislature’s fundamental appropriation authority. However, some in the Senate are particularly worried that giving AGDC any authority in the budget to accept third party funding opens the door for the administration to circumvent the Legislature. According to the Legislative Budget and Audit Committee handbook, state law allows the governor to request an expansion of existing receipt authority in the budget to the LB&A Committee after the budget is passed. The committee then has 45 days to issue a recommendation to the governor on the request, but has no formal authority to deny it. Walker used this mechanism in 2015 to accept additional federal funds for Medicaid expansion without legislative approval. FERC meeting AGDC Vice President Richards said the outcome of a March 22 meeting in Washington, D.C., between the company and Federal Energy Regulatory Commission officials was favorable in that the corporation will not have to conduct major field programs this summer to answer FERC’s latest round of 570 questions on Alaska LNG environmental impact statement data. AGDC will have to conduct fieldwork identifying cultural resource sites along the pipeline route to satisfy FERC, Richards said. The exact scope and intensity of that work is still being defined, but he estimated it will cost AGDC about $3 million to answer all of FERC’s outstanding questions by September. Many of the remaining questions — specifically those related to evaluating Valdez and Port MacKenzie as LNG plant site alternatives — can be answered with “tabletop exercises” using existing environmental data, according to Richards. FERC sent AGDC its latest data request with the 570 questions in mid-February, shortly after Richards’ team finished answering the initial round of 801 questions. Gasline Corp. leaders have repeatedly noted that such requests are common in the EIS process, but the size and public nature of the Alaska LNG Project has brought them to the forefront in this case. According to Richards, AGDC has now submitted over 100,000 pages of information to FERC on the Alaska LNG Project. Elwood Brehmer can be reached at [email protected]

Latest fish habitat bill goes too far, or not far enough

A new version of legislation to revamp Alaska’s salmon habitat permitting system is aimed at increasing public involvement and the ability of regulators to impose penalties for noncompliance. The bill’s author, Kodiak Republican Rep. Louise Stutes, said the second iteration of House Bill 199 is the result of months of talks with stakeholders and what she believes to be an effective balance of fish protections while still allowing responsible development projects to go forward. “I believe this draft is more in line with the request by the Board of Fish. It is a much-needed improvement to Title 16 that focuses on public notice, public comment and the ability for the public to affect the process, criteria for the proper protection of fish and providing the Department of Fish and Game with more enforcement tools,” Stutes said during a hearing of the House Fisheries Committee, which she chairs. She added that she’s confident the provisions in the new HB 199 will be workable for development industries and good news for fish advocates. The Alaska Board of Fisheries, which regulates the gamut of fishing activities in the state, wrote a letter to legislative leaders in January 2017 urging them to update the state’s anadromous fish habitat permitting law, known as Title 16, to include more opportunities for public involvement and enforceable standards to the current law that many feel is outdated and too vague. Current law directs the Fish and Game commissioner to issue a development permit as long as a project provides “proper protection of fish and game,” leaving the definition of what is acceptable up to interpretation. The original version of the bill released about a year ago would have set stringent requirements in law on construction in and around salmon habitat. Specifically, it required habitat degradation mitigation measures to be applied to the water impacted, eliminating the possibility of using habitat improvements to nearby waters as a reasonable offset to expected damages. According to Fish and Game Habitat Division officials, such off-site mitigation is one of the last options for a project proponent when damage to habitat cannot be avoided, but it is a fairly common practice for very large projects, such as mines, that cannot be moved or effectively scaled to avoid impacting salmon habitat. The old bill also would have presumed that all waters connected to the ocean are anadromous fish habitat and put the onus to prove otherwise on project proponents. The original HB 199 largely mirrored the Stand for Salmon ballot initiative, which has drawn the opposition of oil and gas, mining, logging and construction trade groups as well as most Alaska Native corporations for being a de-facto prohibition on new development in Alaska, they contend. Gov. Bill Walker also opposes the Stand for Salmon initiative, saying it is too restrictive and major policy changes should be thoroughly vetted through the legislative process rather than being subject to a simple up or down referendum vote with no opportunity for adjustments. The Stand for Salmon initiative was certified with 41,999 supporting signatures by the Division of Elections to appear on the 2018 ballot March 15, but it still faces a Supreme Court decision on its constitutionality. The state Supreme Court will hear the Stand for Salmon case April 26. The state is appealing a Superior Court ruling from last fall that overturned the decision of Lt. Gov. Byron Mallott that the initiative is unconstitutional. The initiative sponsors have said they too would prefer to make changes to Title 16 via the Legislature, but they continue to push the ballot measure to assure action is taken if the Legislature fails to pass the bill. Passing some version of HB 199 would likely render Stand for Salmon moot, as legislative law changes deemed similar to the intent of a voter initiative would preempt the initiative. However, given the late timing of the new bill in a Legislature wholly preoccupied with resolving the state’s ongoing multibillion-dollar budget deficits, it appears HB 199 will be challenged to move through several more House and Senate committees to be passed in the waning days of the current session. House Majority coalition leaders have said they expect the salmon habitat discussion to be a long process. The bill would have to start from scratch in the new Legislature next year, but that would not be a major change from its current status given HB 199 is still in House Fisheries, its first committee of referral. Stutes pulled those major mitigation and anadromous fish habitat presumption policy changes from HB 199, but the bill would still establish minor and major tiers for habitat permits, a primary provision of the first version. The Fish and Game commissioner would have the ability to issue blanket minor permits for common activities such as crossing streams with an ATV. General permits for such activities would be renewed every five years. Major permits would require publication of both a draft and final version of salmon habitat impact assessments. Public notice and comment periods would be required for the issuance of a minor permit and when draft and final assessments are published. There are currently no public notice requirements for anadromous fish habitat permits, which proponents contend is insufficient given salmon are a valuable and public resource. HB 199 would also require project proponents post bonds sufficient to restore habitat if permit conditions are not adhered to. The other major change from current law in HB 199 is a provision giving designated Fish and Game officials authority to issue on-the-spot citations or tickets for disturbing salmon habitat without a permit or not complying with an issued habitat permit. Currently, all salmon habitat violations are Class A misdemeanor offenses that require a court appearance and Alaska State Troopers act as Fish and Game’s enforcement arm. Habitat Division Coordinator and fisheries biologist Ron Benkert, who has testified extensively to House Fisheries on the issue, said in March interview with the Journal that the current enforcement system is good in theory, but it requires substantial time from often overworked prosecutors and busy judges must be willing to hear the cases. The process lends itself to very few salmon habitat violations being prosecuted, according to Benkert. Rep. Mark Neuman, R-Big Lake, suggested giving Department of Natural Resource officials similar enforcement authority for the many land use and resource activity-related permits DNR issues. Rounds of public testimony April 7 and April 9 on HB 199 elicited far more support than opposition, though numerous testifiers’ comments seemed to relate to the original version of the bill. Alaska Support Industry Alliance CEO Rebecca Logan said HB 199 does not achieve the stated goals of protecting salmon habitat while correspondingly allowing for development. “At a time when we have the highest unemployment in the nation and have lost thousands of the best jobs we have in the state — to insert uncertainty into the permitting process leads to delay and delay leads to no jobs and for those reasons and many more the Alliance is opposed to HB 199,” Logan said. Americans for Prosperity Alaska Director Jeremy Price called it “a regulatory nightmare,” in his testimony. “It only adds to the cost of a project.” Stand for Salmon Director Ryan Schryver thanked Stutes for her work on Title 16, but said the new HB 199 doesn’t go far enough to guard anadromous habitat, as did several other testifiers. “While we don’t support the bill in its current version, we will continue to work with legislative leaders to update the law and fix the fundamental problems with salmon habitat protections in our state,” Schryver said in a formal statement April 7. Elwood Brehmer can be reached at [email protected]

Pebble owners working to refine economics of smaller plan

Pebble Limited Partnership has filed with federal regulators for the key environmental permits for the company’s proposed mine, but whether or not the hotly contested project is economically viable remains unclear, at least publicly. Pebble CEO Tom Collier said in an April 9 interview that the junior mining company plans to change that by the end of the year, if not sooner, by publishing a preliminary economic assessment, or PEA, for its new mine plan. Collier said the company did not have a cost estimate for the project when he unveiled a smaller mine plan in early October, but emphasized he was confident in the project’s economics. Currently, Pebble Limited Partnership has an internal cost estimate but British Columbia’s finance laws prevent the company from disclosing it until the preliminary economic assessment is published, according to Collier. Pebble’s parent company Northern Dynasty Minerals Ltd. is headquartered in Vancouver. He said Pebble hopes to have the PEA done by the end of this quarter for release in the third quarter of the year or certainly by the end of 2018. Just by their nature large mines are among the most capital-intensive developments. In Alaska those development costs are often exacerbated by mineral deposits in remote locations with little or no infrastructure and Pebble is not immune to those challenges. Pebble requires greenfield development of infrastructure to support a medium-sized town just to gain surface access and power. The overall project plan includes a deepwater port on the west side of Cook Inlet, 65 miles of road and an icebreaking ferry across Iliamna Lake as well as a 188-mile natural gas pipeline from the southern Kenai Peninsula. The pipeline would feed a 230-megawatt power plant at the mine site, which would be among the largest power plants in the state. At the mine site there would be a 1.1 billion-ton capacity tailings storage facility to hold the mine waste, a large mill and other facilities all needed to support a 6,500-foot by 5,500-foot mine pit. Typically, mine proponents draft a preliminary economic assessment or a pre-feasibility study during advanced exploration once it becomes clear there is a resource worth pursuing. It is then often several years before a full-fledged assessment or feasibility study is produced, which informs the developers as to whether or not the project should be permitted and subsequently developed. Collier acknowledged Pebble’s process has been circuitous, but said that has largely been due to the actions taken by the Environmental Protection Agency in 2014 under the Obama administration to preemptively prohibit the project. “We were raising money to fight off attacks that were trying to kill the project,” Collier said, referring to the subsequent lawsuit the company filed against the EPA, which was settled out of court last May. “I don’t think there is much of a traditional mold in the way Pebble moves forward. We had to get ourselves into permitting as quick as we could,” he added. Per the settlement with the EPA, Pebble had 30 months to apply for its Clean Water Act Section 404 wetlands fill permit and 48 months to get a final EIS for the project before the EPA could revisit the proposed restrictions on large mining operations in the Bristol Bay region. Current EPA Administrator Scott Pruitt, in a surprise move, in January declined to rescind the proposed Section 404(c) restriction, meaning that while Pebble is not precluded from developing the mine for some time, the proposed regulatory action still hangs over the project. A 2011 preliminary economic assessment on a much larger, longer-lived mine — 3.8 billion tons of ore over 45 years versus the latest plan of 1.2 billion tons of material over 20 years — projected a 6.2-year payback of an initial capital investment of $4.7 billion with a 14.2 percent pre-tax internal rate of return, according to Northern Dynasty. The larger initial plan included similar transportation infrastructure as the current plan with the addition of slurry, water and diesel pipelines between the mine and the port. The Iliamna ferry replaces roughly 20 miles of road. However, a much larger mine would have provided revenue to support the related development. Opponents contend the smaller mine plan, which Pebble touts as part of its recognition of much of the public’s concern about the project, is just a precursor to efforts to expand the mine. Additionally, Collier has said Pebble will not use cyanide in its latest plan, cutting gold recovery by about 15 percent. Collier said the company doesn’t have plans at this point to conduct a more detailed economic evaluation in the future, as most sophisticated investors should be able to reach an informed decision with the information available in the preliminary assessment and all the other materials about Pebble. “I think (the PEA) is going to answer all the questions the markets will need answered,” Collier said. In December Northern Dynasty announced it had secured a $37.5 million payment from First Quantum Minerals Ltd., a large Canadian mining firm. First Quantum is exploring whether or not to enter into an option agreement with Northern Dynasty and put another $112 million into Pebble over the next several years. If First Quantum continues to support Pebble it will have an option to acquire 50 percent of the Pebble Partnership for $1.35 billion in the next three or four years, according to Collier. Pebble leaders have said they need such a large investment partner to put the project plans into action. Elwood Brehmer can be reached at [email protected]

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