Elwood Brehmer

FAA releases draft unmanned aircraft rules

Unmanned aircraft operators were given an outline for flight standards Feb. 15 when the Federal Aviation Administration released its proposed rules for drone flights. The draft regulations are a major step towards integrating widespread commercial use of unmanned aircraft in the national airspace. Also known as UAS, unmanned aircraft system flights have been approved by the agency for several years on a case-by-case basis. The Small UAS Notice of Proposed Rulemaking expands on the commonalities of approved flights. Currently, UAS flights are allowed only for nonprofit ventures for research and educational purposes and a very select group of commercial entities, primarily film companies. “Technology is advancing at an unprecedented pace and this milestone allows federal regulations and the use of our national airspace to evolve to safely accommodate innovation,” Transportation Secretary Anthony Foxx said in a formal statement. Common UAS would be limited to craft less than 55 pounds with flights restricted to line-of-sight operations, constraints found in most certificates of authorization, or COAs, issued by the FAA for flights today. ConocoPhillips obtained the first commercial COA in 2013 for research in the Chukchi Sea and BP got the first overland commercial authorization from the FAA in May 2014 for North Slope surveillance. “We have tried to be flexible in writing these rules. We want to maintain today’s outstanding level of aviation safety without placing undue regulatory burden on an emerging industry,” FAA Administrator Michael Huerta said in a release. Congress mandated the FAA to draft regulations for commercial UAS flights by the end of this year when it passed the FAA Modernization and Reform Act in 2012. UAS pilots, referred to as operators by the FAA, would have to pass an agency aeronautical knowledge test and be at least 17 years of age. Subsequent recurring operator tests would be required every two years. After vetting by the Transportation Security Administration, operators would receive a permanent certificate with a “small UAS rating,” much the same as the existing certifications pilots receive, according to the proposed rule. While many UAS guidelines such as size and flight distance regulations were predictable based on standards found in most COAs, requirements for operators were a big unknown in the industry. Airworthiness certification would not be required under the proposed rule, a departure from most COAs. However, UAS will likely need to be registered by the FAA similar to general aviation aircraft. Elwood Brehmer can be reached at [email protected]

Walker unveils Medicaid expansion plan

Increasing Medicaid access to 41,000 more Alaskans will save the state several million dollars per year according to Gov. Bill Walker’s administration. In the first year of expansion, fiscal year 2016, the State of Alaska will save $6.1 million based on figures in a Department of Health and Social Services report. “Medicaid expansion helps Alaskans and healthy Alaskans is a healthy economy,” Walker said during a Feb. 6 press conference. “It’s not about just bringing revenue and jobs; it’s about doing what’s the right thing to do.” The savings are expected to come from shifting health care costs the state currently pays that could be covered by federal Medicaid dollars. For instance, the Alaska Department of Corrections should save $4.1 million next fiscal year by having federal Medicaid funds pay for inpatient treatment of inmates done outside of a correctional institution. Those services are covered if the inmate is otherwise eligible for Medicaid, according to the DHSS report, “The Healthy Alaska Plan: A Catalyst for Reform.” Walker said he hopes to launch the plan sometime in July; the state fiscal year begins July 1. More than 20,000 new enrollees are expected in the 2016 fiscal year and the number should plateau at about 26,500 by 2018. The Alaska Mental Health Trust Authority will “graciously” cover about $1.3 million in administrative costs, including staff to cover enrollment and expanded payments, in the first year, Health and Social Services Commissioner Valerie Davidson said. That will allow the DHSS to develop a plan to either take on the work internally or contract it out. “Thanks to the Mental Health Trust Authority; they have funded the opportunity for us to engage stakeholders and look at what other states are doing so we can develop an Alaska plan,” she said. The federal government will cover all of the expansion cost projected at $145.4 million in fiscal year 2016 other than administrative expenses. In 2017, a $3.8 million state match will be required to get $170.6 million from the federal government. By fiscal year 2021 the match approaches 10 percent; the state will contribute $19.5 million of the overall cost estimated at $224.5 million, the report states — if the Legislature signs off. As the state’s appropriators, legislators must approve the receipt and expenditure of all funds, regardless of their source. Some legislators hesitant about expansion are also eager to reform the current state system and the two “go hand-in-hand,” Davidson said. Technical changes are needed to state statutes to keep Medicaid in line with the Affordable Care Act, she said, providing an opportunity for larger changes once the expansion is in place. Medicaid expansion will increase access to health insurance for an estimated 41,910 low-income Alaskans. These are adults from 19 to 64 years of age who are currently not eligible for Medicaid — those not caring for dependent children, not disabled or pregnant, and who earn at or below 138 percent of the Federal Poverty Level, or FPL, for Alaska. The Alaskans who will be eligible for Medicaid through the expansion live in all areas of the state. Expansion will benefit single Alaskans without dependent children earning up to $20,314 a year, and married couples without dependent children earning up to $27,490 per year. Once these Medicaid recipients in the expansion population achieve a higher income they will be able to transition to the Health Insurance Marketplace and receive a subsidy to help afford coverage until their income reaches 400 percent of the FPL. Davidson said she has been told most legislators could be on board if the administration can show that expanding Medicaid would be net revenue neutral to the state general fund; the plan laid out Feb. 6 indicates there will be savings. A statement from the Alaska Chamber said the business group conditionally supports the plan, and Medicaid expansion must be tied to reform. The state’s current system covered $481 million of services in 2013 not required by the federal government, according to the Alaska Chamber. “Alaska businesses will pay for uninsured Alaskans through the proposed Medicaid expansion or through increased health care costs. The Alaska Chamber supports Medicaid expansion for this reason,” the statement read. “The Chamber’s support for Medicaid expansion ends when the federal funding ends or falls below its initial promise. Our support also ends if expansion exacerbates the state’s fiscal situation.” A push for Medicaid expansion during his campaign was a key contrast between Walker, a Republican turned independent, and former Republican Gov. Sean Parnell, who rejected expansion. Even in 2021, when the state could be paying $19.5 million in match funds and covering staffing and paperwork fees, The Healthy Alaska Plan report projects nearly $3.3 million in overall savings because of increased federal grant opportunities and savings in the Department of Corrections alone growing to $7 million annually. Expansion will come as the state’s current Medicaid payment system is in shambles. The state is under contract with Xerox Corp. to process roughly $1.3 billion of Medicaid payments through its Medicaid Management Information System, but problems in the system have delayed payment and forced the state to advance payment to some health care providers, although this most likely to ultimately paid by the federal government so that the state’s outlay is refunded. According to Department of Law, Xerox has failed to solve the Medicaid information system problems and as of August the State of Alaska had paid more than $154 million to doctors and other health care providers in need of payment for their services. Walker said he thought about changing Medicaid payment provider but determined enough improvements are being made to keep Xerox in place. The governor gets updates on the situation through weekly reports, he said. “Every indication I’ve received is that we’re on the improvement side of the problems,” Walker said. “We are very focused on, and we have zero tolerance for any unnecessary delays.” Davidson said the belief is the payment delays and other application backlogs should be resolved by the July rollout. Elwood Brehmer can be reached at [email protected]

Railroad cuts PTC ask, aims to finance remaining need

The Alaska Railroad Corp. is using some strategic financing to cut its fiscal year 2016 capital request to $18 million as it looks for ways to finance Positive Train Control. Before the legislative session, the railroad was preparing to ask the Legislature for $53.5 million over three years, with a $21.8 million request for the 2016 fiscal year. Refinancing debt accrued in 2006-07 should allow the railroad to bond for $37 million if it gets $18 million this session, Alaska Railroad President and CEO Bill O’Leary told the Joint Transportation Committee Feb. 3. Refinancing the debt and pushing its bond maturity out from 2021 to 2025 would give the railroad enough financial headroom to make the deal work if the Legislature funds the plan, O’Leary said. All $18 million is needed this session so the entire financing package can be taken to the bond markets, he said. Gov. Bill Walker’s initial capital budget did not include funding for Positive Train Control. The Legislature appropriated $34.1 million over the last two years to what O’Leary calls, “the mother of all unfunded mandates.” To date, the railroad has spent nearly $70 million on what is expected to be a $160 million endeavor. Positive Train Control is a safety system designed to eliminate human error accidents on railroads. The Federal Railway Administration currently has a December 2015 deadline for implementation, but Alaska Railroad officials have long said they expect a multi-year extension to the deadline; it’s likely no railroad in the country will meet the current timeline, O’Leary said. Not complying with the requirement really isn’t an option. Railroad leadership could face heavy corporate and even personal fines and the Alaska Railroad could ultimately lose its right to operate passenger service without Positive Train Control. The mandate came down in 2008 after several serious accidents involving passenger trains in the Lower 48. Passenger service produces more than $25 million per year for the railroad, but the statewide impact is much greater, according to a McDowell Group study. It’s estimated passenger service generates about 2,000 jobs and $50 million of direct and indirect wages annually in the state. Additionally, spending from non-resident railroad passengers tops $20 million per year. Approximately 3,700 motor coach trips would be added to Railbelt highways each year in order to keep comparable service volumes without rail passenger service, O’Leary noted. The railroad will be safer with Positive Train Control, but spending money on the system will pull funds away from infrastructure upkeep, he said. If he had his way the $160 million would go into rails, ties, ballast and bridges, he said. “The cost-to-benefit ratio on (Positive Train Control) doesn’t provide a classic return on investment,” O’Leary said. The system will likely cost between per year $5 million and $7 million to maintain, he said, a cost the railroad will work to absorb. Over the past several years the Alaska Railroad’s net income has been in the $15 million range. Elwood Brehmer can be reached at [email protected]

Shefchik takes lead on IEP; $37.7M AIDEA loan in place

Former Interior Gas Utility chair Bob Shefchik has taken the reins of the Interior Energy Project. Shefchik notified IGU leadership and the Legislature Feb. 9 that he would be resigning from his post as the head of the utility board Feb. 10. With Shefchik as the project leader, Alaska Industrial Development and Export Authority Energy Infrastructure Development Officer Nick Szymoniak, Alaska Energy Authority Energy Policy and Outreach Director Gene Therriault and AEA Railbelt Energy Infrastructure Engineer Kirk Warren will join Shefchik’s team. All three have worked extensively on the Interior Energy Project behind the scenes, Shefchik said. Authority spokesman Karsten Rodvik wrote in a statement that the reorganized team is designed to move quickly with Shefchik at the helm. “We believe that Bob’s experience combined with his roots in Fairbanks will be an asset to the team, and will help move the project forward,” Rodvik wrote. AIDEA Executive Director Ted Leonard was originally set to retire at the end of January but has stayed on with the authority to assure the project progresses. On Feb. 5 the Interior Gas Utility got approval for a $37.7 million construction loan from the AIDEA board at a special Feb. 5 meeting. With several members attending via teleconference, the board unanimously approved the loan for development of the utility’s natural gas distribution system. AIDEA will fund the loan from the $332.5 million Senate Bill 23 Interior Energy Project financing package it was authorized to use towards getting natural gas to the region. The Sustainable Energy Transmission and Supply Fund loan package is an expansion of an $8.1 million loan AIDEA approved to get IGU’s distribution system work started last April. It will cover the cost of initial distribution construction in North Pole and installation of temporary gas storage. Engineering of subsequent build out phases beyond Downtown North Pole is also included. The Fairbanks North Star Borough formed IGU in November 2012 to spur additional natural gas use in the borough. With little cash or collateral to back it and favorable terms — 1 percent interest and a 48-year payback — the loan to the utility is outside of AIDEA’s normal lending practices because it is SB 23 money. “(SB 23) pretty much says, do what you need to do to meet the Legislature’s intent,” Leonard said. Originally, the $8.1 million was approved in April as a 20-month fixed line of credit intended to convert to a term loan in conjunction with AIDEA’s financing of the utility’s 2015 build out, which has now happened. With approval of the $29.6 million to fund construction and further engineering, the entire $37.7 million will be loaned as a 24-month line of credit. After two years, interest will capitalize at 1 percent over an eight-year deferment period, when up to 40 years of repayments would begin. AIDEA staff said authority approval would be required for IGU to make draws on the line of credit. AIDEA’s proposed purchase of Fairbanks Natural Gas, the other gas utility in the area, and its parent company, has put the Interior Energy Project back on a late-2016 timeline for first gas, according to those familiar with the project. As IGU board chair, Shefchik said getting natural gas to the utility by the fall of 2016 will give it a customer base and subsequent revenues with which it can pay off the loan. Shefchik said in an interview he felt his utility could secure such favorable terms after reviewing the now-expired concession agreement the authority signed with its former private project partner MWH Global Inc. “If we would have presented (those terms) earlier in the year we probably would’ve been confronted with a different response,” he said. Temporary storage capacity equivalent to three days of peak demand for both IGU and Golden Valley Electric Association — numerous LNG tanks of about 50,000 gallons — is planned for a lot adjacent to Golden Valley’s North Pole power plant. To make sure demand grows, Shefchik said a natural gas conversion working group is in discussions with area banks to investigate ways to finance home conversions from oil to natural gas heating systems. Converting to natural gas could cost homeowners anywhere from $1,500 to $10,000 or more depending on their current oil or wood-burning systems. That conversion cost is seen as an impediment to signing up new gas customers, a lynchpin to success for the overall project. He said he is hopeful for a program where the gas utility’s provide a “backstop for defaults” on home conversion loans. The banks would treat the conversion loans as they would any other, but not bear the entire burden of non-payment. With the utilities taking on a portion of the loan risk Shefchik said he foresees terms in the 10-year range at 3 percent to 4 percent interest. “Because banks have a lot of money right now and they’re sitting on that is really drawing very little, the attractiveness of low-risk investment that’s going to help the community — we’ve had three or four banks step up and talk about participating in this,” Shefchik told the board. Senate hears about utility purchase Soldotna Republican Sen. Peter Micciche continued to offer skepticism over AIDEA’s proposed purchase of Pentex Alaska Natural Gas Co., the consortium of entities that make up Fairbanks Natural Gas and its LNG supply chain, during a Feb. 5 Senate Energy Committee hearing. He shares the authority’s goal of getting affordable energy to the Interior, Micciche said multiple times. He also repeatedly questioned AIDEA’s plan to buy Titan Alaska LNG, the operating company for Pentex’s LNG plant at Point MacKenzie, when Hilcorp already agreed to purchase the plant under its subsidiary Harvest Alaska LLC. “I’m still trying to understand the value of purchasing the liquefaction,” Micciche said. Each time, AIDEA Executive Director Leonard said the authority had no plans of impeding the sale that is pending approval by the Regulatory Commission of Alaska and Attorney General Craig Richards. He said AIDEA is focused on the assets Pentex holds as Fairbanks Natural Gas and that company ownership wished to sell its holdings in one lot. The authority announced its intent to purchase Pextex for $52.5 million Jan. 28. “AIDEA is not making this investment to directly operate a utility. AIDEA would be taking this (ownership) role in essence as the investor in Pentex that would still, in our belief, utilize FNG to operate this company,” Leonard told the committee. “In our view it would allow us to change the structure from just profit to ensure that we have coordination with the utilities to bring the best distribution system to the Fairbanks area.” Micciche also said he sees value in integrating Fairbanks Natural Gas and IGU. At the same time, he wondered philosophically whether state intervention through AIDEA has deterred a private solution to the Interior’s energy and clean air crisis. “Fairbanks is a lucrative market; how much government interference has kept the typical providers out of the market?” Micciche wondered. “I can’t believe that if we (the state) just got out of the way something wouldn’t have happened sooner.” Further, he noted that Hilcorp subsidiary Harvest Alaska has agreed to supply LNG to Fairbanks on a 10-year contract at the equivalent of $15 per thousand cubic feet, or mcf, of natural gas. With added regasification, storage and distribution costs quoted extensively by local utility leadership the final “burner tip” cost of that gas would be in the $20 per mcf range, similar to what was projected the North Slope-focused version of the Interior Energy Project could deliver. The stated goal of the project is get gas to residential consumers at a price near $15 per mcf, about half the energy equivalent cost of fuel oil at $4 per gallon. Fairbanks Natural Gas currently sells to its customers at about $23 per mcf as an unregulated utility. Tariff proceedings for the utility are ongoing in the RCA. Leonard said he agrees that the state should stay out of the way of private enterprise to the extent possible, but also noted that Fairbanks Natural Gas has served about 1,100 commercial and residential customers since the late 1990s without significant expansion. Fairbanks Natural Gas President and CEO Dan Britton has long said the small utility could not secure the long-term gas supply contract it would need to expand. Its agreement with Harvest Alaska is to supply its existing customer base. Elwood Brehmer can be reached at [email protected]

Logistics program breathes life into state transportation

Transportation in Alaska is a lot more than just planes, trains and automobiles. Add cargo ships, pipelines, ferries and any number of other modes of movement and you’ve got a complex network — a logistical nightmare to some. To University of Alaska Anchorage Professor Darren Prokop, it’s a network where challenge meets opportunity. “The state of Alaska either thrives or declines on the basis of how it handles its logistics and supply chain management,” he likes to say. Prokop is the face of UAA’s Logistics Department. He has been with the department nearly since its inception in 1999. The department has grown into a suite of programs offering everything from undergraduate certificates to a master’s degree in global supply chain management. It is the only initiative at the university to offer classes from the high school to the graduate level, Prokop said. Alaska’s unique challenges of distance — from the Lower 48 and across the state — sparse population, environment, and climate fit into his definition of logistics and what the program emphasizes. Logistics is “the art and science of dealing with time, space and location,” he often says. He likens supply chain management to a body’s skeleton, the base of the operation, while logistics is the blood and oxygen that give it life. It’s a science field because data can be measured and analyzed, and an art because it’s constantly improved in previously unforeseen ways, he said. No matter what specific field of business someone is in, logistics and supply chain management is a discipline they should be familiar with, Prokop emphasizes, because it affects every aspect of business. UAA Global Logistics Association President Taylor Mitchell agrees. “It’s a lot more than just getting 50 widgets to somewhere,” Mitchell said. “It’s really a wide open field.” The courses reflect that. Upper class undergraduate students take courses in purchasing, materials management, marketing and international logistics. They are also required to work a 225-hour paid internship. “It gives us the feedback to see whether or not their classroom tools make sense on the job,” Prokop said. The individual classes are small, typically about 20 students. At any time there are only about 50 students in the overall program, he said. The state’s complex of supply chains and transportation affords students the opportunity to see first hand how the shipping web works. Students touring the Port of Anchorage witness first-hand the intricacies of managing a shipment of construction materials headed for a North Slope construction site that came on a Horizon Lines containership and are hauled to Fairbanks by the Alaska Railroad. From there the goods are sent up the Dalton Highway behind a semi-truck and reach their final well pad destination via ice road. Members of the student club also get more chances to absorb problem-solving outside the classroom. Mitchell said the club tries to plan at least one field tour a month. “You get the academic exposure in class and the club provides how-to logistics in the real world,” she said. Mitchell, a Lynden International employee, has her bachelor’s in global logistics and supply chain management and is working on a global supply chain management master’s. She said the tours also serve to expose students to the job opportunities available to them. Club vice president Andy Watts, working on an associate’s degree, said it helps students immensely just to get out and “get our faces recognized” in the industry. The club is holding a public panel discussion March 6 on campus featuring leaders from the Port of Anchorage, Alaska Railroad and Ted Stevens Anchorage International Airport. It’s the first such event the club has put on and Watts said the goal is to fill every one of the 130 seats available in the lecture all. “It’s a really big deal for us as a club,” Mitchell said. Further, Prokop’s students regularly have the opportunity to hear from and question industry leaders who could well be a boss of theirs someday soon. A glance at a syllabus from one of his senior level last fall semester shows nine guest lecturers from the likes of ConocoPhillips, FedEx, Naniq Global Logistics and Alaska Communications. Linda Leary, one Prokop’s guests, is a past vice president of sales at Alaska Communications, a founding member and former president of Carlile Transportation Systems and one of his former students. Leary graduated from UAA in 2004 with a global supply chain management master’s from a program Prokop is particularly proud of. “It’s designed for those with upper management and executive aspirations,” he said. When she enrolled Leary had been in the transportation business for 20 years, but wanted to expand her knowledge base outside of business in Alaska, she said. “(Prokop) tries to bring in a broader, more global perspective to everything, which is really good for Alaskans to have,” Leary said. It’s hard to talk to him for more than a few minutes without hearing about the state’s global position — less than 10 hours from 90 percent of the industrialized world — and the business opportunities the location provides. A big positive of the master’s program for Leary was that she was able to take courses at UAA while living in Seattle, and not remotely. Classes meet one weekend a month for 20 months, 12 hours on Saturdays and eight hours on Sundays, with lunch and dinner catered. Leary was able to fly to Anchorage once a month for school, as a few other students have done, and not have it affect her work schedule. Prokop’s fervor for the field is undeniable, and helpful when pushing through a three-hour class, Mitchell said. “He’s very infectious and the way he’s always so excited makes it enjoyable to go to class,” she said. Leary added, “He’s very smart and very enthusiastic and very curious, which makes it fun.” To Prokop, Alaska is an ideal lab for his field of research and he’s always looking for businesses with problems for his students to solve. “We are a very interesting mix of both domestic and international trade flows that present very interesting opportunities and challenges in logistics,” he said. “For all those reasons it makes sense to do these courses here. This is an area that’s ripe for academic research.” He’s not likely to stop. Elwood Brehmer can be reached at [email protected]

AIDEA approves $37.7M Interior Gas Utility loan

The Interior Gas Utility got approval for a $37.7 million construction loan from the Alaska Industrial Development and Export Authority board at a special Feb. 5 meeting. With several members attending via teleconference, the board unanimously approved the loan for development of the utility’s natural gas distribution system. AIDEA will fund the loan from the $332.5 million Senate Bill 23 Interior Energy Project financing package it was authorized to use towards getting natural gas to the region. The Sustainable Energy Transmission and Supply Fund loan package is an expansion of an $8.1 million loan AIDEA approved to get IGU’s distribution system work started last spring. It will cover the cost of initial distribution construction in North Pole and installation of temporary gas storage. IGU was formed by the Fairbanks North Star Borough in November 2012 to spur additional natural gas use in the borough. With little cash or collateral to back it and favorable terms — 1 percent interest and a 48-year payback — the loan to the utility is outside of AIDEA’s normal lending practices because it is SB 23 money. “(SB 23) pretty much says, do what you need to do to meet the Legislature’s intent,” AIDEA Executive Director Ted Leonard said. AIDEA’s proposed purchase of Fairbanks Natural Gas, the other gas utility in the area, and its parent company, has put the Interior Energy Project back on a late-2016 timeline for first gas, according to those familiar with the project. IGU board chair Bob Shefchik said getting natural gas to the utility by the fall of 2016 will give it a customer base and subsequent revenues with which it can pay off the loan. Elwood Brehmer can be reached at [email protected]

Walker cuts $170M, 300 positions in budget

Gov. Bill Walker released a proposed fiscal year 2016 operating budget with $5.2 billion in general fund spending. The governor’s budget plan released Feb. 5 also eliminates 300 state positions next fiscal year that begins July 1. The unrestricted general fund amount is $4.6 billion, about $170 million less than the current fiscal year 2015 unrestricted spend, a 3.6 percent cut. Walker said state employee layoffs would be minimized to the extent possible through eliminating vacant positions and not filling others as they open up. “There are cuts in here, and some will be painful. Our state right now has a $3.6 billion budget deficit, leading us to draw about $10 million every single day from savings,” Walker said in a release. “I want to be up-front with Alaskans throughout this process.” His overall proposed operating budget is just more than $12.1 billion, a 1.9 percent increase over fiscal year 2015, primarily because of a 7.7 percent increase in federal funding. The general fund cuts are not a surprise; Walker talked continually about cutting state spend in his campaign and during his first two months in office. However, they are not as significant as had been speculated. The governor asked state commissioners to review how 5 to 8 percent budget cuts to each department would impact operations. He floated the possibility of cutting state government by 25 percent over four years in his State of the Budget address to the Legislature Jan. 22. Office of Management and Budget Director Pat Pitney said agencies will combine services wherever possible to maximize efficiency and minimize the impact of cuts. “I cut 11 percent of my executive office (budget) through leaner staffing and operations,” Walker said. On Jan. 22 he released a $1.4 billion proposed capital budget, which cut the state unrestricted general fund portion by 91 percent from the fiscal year 2013 level. Now it’s the legislators’ turn — the state appropriators — to meld a final budget over the remaining 10 weeks of the legislative session. Elwood Brehmer can be reached at [email protected]

CIRI settles long-running dispute over Kenai Loop gas fees

The fight over Kenai Loop natural gas appears to be over. Attorneys for all four parties currently involved in the dispute — Cook Inlet Region Inc., the Alaska Mental Health Land Trust Authority, the Department of Natural Resources, and AIX Energy LLC — signed a joint request for dismissal Jan. 23 of the ongoing hearing in the Alaska Oil and Gas Conservation Commission related to the case. CIRI Vice President of Land and Energy Development Ethan Schutt said the Southcentral Native corporation had an agreement in place with AIX for a couple weeks. “We’ve been waiting for a resolution between AIX and the other parties,” Schutt said Jan. 23. AIX won an October auction to purchase assets of the bankrupt Buccaneer Energy Ltd., which developed the Kenai Loop pad on Mental Health Land Trust property.  Of four wells on the pad, two began producing natural gas in early 2012. Since, CIRI, which owns an adjacent parcel, filed suit against Buccaneer in state court and sought relief through the state commission for gas royalties it was owed for gas drained from its part of the reservoir. Schutt has said CIRI owns 20 percent of gas produced from the wells and that Buccaneer’s contract was for approximately $7 per thousand cubic feet, or mcf, of gas. Based on AOGCC production records, the gross value of gas owed to CIRI could be in the neighborhood of $10 million or more. Mental Health Trust Land Office Executive Director Marcie Menefee wrote in a Jan. 28 email to the Journal that her office is still in the process of finalizing lease terms with AIX. However, she wrote that the Mental Health Trust Land Office’s agreement with AIX is independent of DNR and CIRI. DNR represents the State of Alaska’s interest in the case as the primary owner of the resource. The department also often represents the Mental Health Land Trust. When Australia-based Buccaneer filed for bankruptcy May 31, 2014, it owed DNR about $605,000 for a combination of Cook Inlet oil and gas lease payments and production royalty payments. Overall, the company owed more than $2.1 million to unsecured creditors in Alaska. The bankruptcy proceedings are continuing in U.S. Bankruptcy Court for the Southern District of Texas, located in Houston. South Texas Bankruptcy Court Judge Marvin Isgur approved a settlement order between CIRI and Buccaneer Jan. 27. The settlement released the two from potential liabilities and evaporates CIRI’s $5.75 million proofs of claim filed against Buccaneer in September. The proposed court settlement was filed Jan. 8. Schutt declined to go into detail about the agreement with AIX, but said CIRI would be in a “more traditional role as a lessor” to AIX. He said where the money comes from is less important to CIRI than whether or not the company is paid what it is owed. Previously, he had said CIRI could seek payment from the Mental Health Land Trust for royalties it received from CIRI’s gas. Representatives from AIX would not discuss the deal and said it is confidential. AIX is a shell subsidiary of Meridian Capital International Fund, which financed some of Buccaneer’s Cook Inlet work. Last April AIX purchased much of Buccaneer’s debt. In late May, the AOGCC ordered Buccaneer to open an escrow account at an Alaska financial institution and to segregate its Kenai Loop production revenue into the account monthly. That money would be held until either a settlement was reached outside of the commission or an order was handed down by the commission doling out appropriate allocations. While Buccaneer delayed in setting up the account, by November it had transferred about $8 million into the escrow account, according to court filings. It put $399,639 into the account for December. The dismissal petition requests the escrow funds be dispersed to AIX in accordance with the multiple settlements between the parties. Elwood Brehmer can be reached at [email protected]

Construction forecast positive in short term with 3% dip

The state budget may be grim but Alaska’s construction industry as a whole should have another good year, according to a University of Alaska Anchorage Institute of Social and Economic Research forecast. The 2015 construction outlook predicts a total spend of more than $8.5 billion statewide. That would be a 3 percent decline from the revised 2014 projection of $8.8 billion worth of construction activity in Alaska. “Our short-term outlook is positive,” Associated General Contractors of Alaska Executive Director John MacKinnon said in a formal statement. “We’ve seen dips in the price of oil and dips in the economy before, and they both come back up. At this point in the cycle we don’t know what the bottom will be or how long before it trends up; it will go back up.” MacKinnon also noted that there is typically a lag between when public money is appropriated and when it actually “hits the street” in the form concrete being poured or buildings going up, so prior year bonds and capital spends will undoubtedly have an impact in 2015. ISER prepares the forecast for AGC of Alaska every year. Employment in the industry is expected to dip slightly from the 17,600 jobs last year, which was a 6 percent increase over 2013. Those projections do not include self-employed contractors in Alaska, estimated to number 9,000 in 2011. “Our annual forecast underscores the importance of the construction industry in Alaska. It’s not just about the jobs and the economic value of the current construction projects — the one-time expenditures,” MacKinnon said. “It’s really about how what we build becomes a part of the ongoing economy of Alaska for years and often, generations.” Private spending is expected to be more than $5.5 billion of the total and down about 6 percent. Leading the way per usual will be the oil and gas industry with about $3.8 billion of work, a slight decline from 2014. ConocoPhillips has several large oil projects on the Western North Slope and ExxonMobil is continuing work on its large Point Thomson gas development. Forecast authors Scott Goldsmith and Pamela Cravez wrote that low oil prices have a greater impact on how much producers have in the bank than what they want to do because projects are planned based on conservative price models. “Some of the largest operators in Alaska are quite strong financially, and others have funding sources not tied to the oil price. Furthermore, in Cook Inlet, activity is more sensitive to the price of natural gas than of oil, and the state, through its tax credit programs, has also provided a funding source not directly tied to the price of oil,” they wrote. “Finally, the industry is under political pressure to show that the new state production tax, SB 21, has stimulated new investment.” At $210 million, mining work is projected to be up 19 percent despite some lower metal prices. The state’s six major producing mines have larger capital expenditures planned for the year, according to the report. A subcategory that could go under public and private spending, utilities should spend about $680 million this year, down 20 percent. That is due mainly to the completion of Matanuska Electric Association’s Eklutna plant. The largest project left is Anchorage’s Municipal Light and Power $275 million replacement plant scheduled for completion in mid-2016. Health care spending will be pretty steady, at $240 million in the coming year, based on federally supported projects by Alaska Native health organizations. The Alaska Native Medical Center in Anchorage is building a 200-room patient housing facility. Public sector spending should be about flat, at more than $2.9 billion, according to Goldsmith and Cravez. Residential construction is pegged to be down 14 percent at $415 million. The activity continues to center on the Matanuska-Susitna Borough; however, land shortages in Anchorage, high heating costs in Fairbanks and overall stagnant economic and population growth will likely slow the construction segment. Public sector spending should be about flat, at more than $2.9 billion. Work on transportation infrastructure — highways, airports, ports, and railroad — should be up slightly and total more than $1.2 billion. Defense spending, which includes U.S. Army Corps of Engineers environmental work along with military construction, should be $435 million, up about 10 percent. Fort Greely is expected to get $50 million for its missile defense program, a recent addition to the federal budget, the authors wrote. Other federal spending, done largely by the Interior Department in Alaska, is expected to be off 15 percent to $255 million. Elwood Brehmer can be reached at [email protected]

Alaska Air Group has 5th straight record year, profit up 49%

Quarterly or yearly, record-breaking profits are officially old hat at Alaska Air Group Inc. During a Jan. 22 call with investors, executives of the parent to Alaska Airlines and Horizon Air reported a record full-year profit of $571 million in 2014 and a fourth quarter record profit of $125 million. The net income figures exclude special items. It is the fifth consecutive record-breaking year for Alaska Air Group and the 10th record quarter in the last 11. It is also the 23rd consecutive profitable quarter for the company. Per share, the profits break down to 94 cents for the quarter and $4.18 for the full-year. The yearly net income is a 49 percent increase over a record $383 million in 2013 and a 62 percent year-over-year improvement on a previous fourth quarter record. The pretax margins are even better. Pretax profit for the quarter was $206 million, a 67 percent improvement over 2013; and full-year pretax profit was up 50 percent at $922 million. “We had a record year on almost every front, even as we approach the end of the second year with much more competition in Seattle,” Alaska Air Group President and CEO Brad Tilden said on the call. Tumbling fuel prices during the second half of 2014 helped many major carriers have strong years, but Tilden said Air Group’s full-year margins grew 3 percent even when lower-cost fuel is excluded. Jet fuel averaged $1.57 per gallon for domestic carriers on Jan. 9, down nearly 50 percent from a year ago, according to the International Air Transport Association. Air Group Chief Financial Officer Brandon Pederson said the company saved $42 million on fuel in the fourth quarter because of lower prices. Alaska Air Group purchases fuel call options that act as an “insurance policy” and hedge against sudden price spikes but allow it to take advantage of price declines, he said. “Our monthly profit when compared to the same month in 2013 was higher in every single month,” Tilden said. “These results affirm that we’ve built a business that performs when challenged and that works well throughout the cycle.” Alaska Airlines’ competition at its home hub of Seattle has come primarily from Delta Air Lines, a mileage plan partner, which has pushed more into the Pacific Northwest market over the last couple years. Alaska Air Group’s total operating revenue was up 4 percent for the year at $5.3 billion; for the quarter it was up 8 percent at $1.3 billion. Overall 2014 passenger revenue grew 7.3 percent on a 7.1 percent growth in capacity. A drastic improvement was also seen in the company’s return on invested capital, or ROIC. Air Group had an ROIC of 18.6 percent in 2014, up a full 5 percent. Alaska Air Group leadership has expressed a desire to hold a debt-to-capital ratio of less than 40 percent, based on research done of other companies within the S&P 500. It ended 2014 with a debt-to-capital ration of 31 percent, down 4 percent for the year. Some investors asked if it would be prudent to borrow against its capital given the low interest rates afforded it based on the company’s position. Pederson said using debt to leverage returns to shareholders could be of interest, but the company has worked hard to put itself in the position it is today. At the end of 2011 Air Group held debt equal to 62 percent of its capital. “We do a lot of things to emulate high-quality industrials, including where we set our capitalization level in the mix between debt and equity,” Pederson said. Alaska Air Group stock traded for $68.65 per share on the New York Stock Exchange at the end of trading Jan. 23. The stock price has risen about 45 percent since a June two-for-one stock split. Just before the split it traded in the $95 range. During the call, Tilden announced Alaska Air Group would increase its quarterly dividend payment to shareholders by 60 percent per share. The dividend began in the third quarter of 2013 at 20 cents per share. It is back to 20 cents per share after the stock split. Alaska Airlines’ new Boeing 737s — the only aircraft the company flies — and their increased fuel efficiency has helped the company invest in long-term cost savings. Pederson said fuel burned per mile has improved 22 percent over the past 10 years. Alaska Airlines took delivery of 10 Boeing 737-900ER, or extended range, aircraft in 2014 and will get another 11 this year. It had a fleet of 137 aircraft at the end of the year and expects to have 147 by 2017. Alaska Air Group owns 77 percent of its fleet. “For Alaska, these great results come amidst unprecedented competition in our markets, and the folks throughout our company are rising to the occasion to make us a great airline every day for our customers,” Tilden said. The roughly 13,000 Air Group employees earned $116 million in incentive pay last year, according to Pederson. With a new five-year agreement with Alaska flight attendants approved in December, Air Group has average agreements in place with all its employees nearly four years out, Tilden said. Continuing into 2015 Alaska Airlines capacity will likely grow 11 percent in the first quarter and about 8 percent for the year, Air Group Vice President of Revenue Management Andrew Harrison said. Comparably, other airline capacity is expected to be up 15 percent early in 2015. Harrison said lower fuel prices would not lead to lower ticket prices on Alaska Airlines. “When pricing tickets, we look at the supply and demand in each of our markets and adjust prices to balance the two,” he said. “Approximately 90 percent of our flying is in the United States domestic market, and the U.S. economy continues to be strong.” Elwood Brehmer can be reached at [email protected]

State funds in slashed capital budget down 91% from 2013

Gov. Bill Walker’s capital budget is short, but not very sweet. The total proposed capital spend would be $1.4 billion under the governor’s proposal; of that, $150 million would be unrestricted state general funds. While federal dollars always make up a large share of the state capital budget, general fund spending is the real indicator of the state’s situation. The $150 million in Walker’s initial budget is a 71 percent decrease from the current 2015 fiscal year unrestricted capital spend of $510 million. Just a few years ago in fiscal 2013, the unrestricted general fund spend was about $1.7 billion. Plunging oil prices have put the state upwards of $3.5 billion in debt for fiscal year 2016, according to the Revenue Department. Walker released his budget shortly after his State of the Budget address Jan. 22. He said in a press conference the following day that the special speech detailing the state’s fiscal situation was a critical and tough one to relay. “Alaskans just need to know where we are,” Walker said. More than a third of the general fund spend in his current budget — $62.9 million — will be used to match federal Transportation Department program funding. Federal funds comprise more than $1.2 billion, about 84 percent, of the entire capital budget. Walker said the state needs to cut its overall annual general fund spend between the operating and capital budgets by 25 percent in the coming years. Such a prospect assuredly means minimal capital budgets in years to come. In his speech he said proven programs such as the Alaska Housing Finance Corp.’s. Weatherization and Home Energy Rebate programs would be funded in the future. The energy efficiency enablers received a combined $9.6 million from Walker, with a $1.5 million federal match. An $8 million allocation to the University of Alaska Fairbanks for construction of its engineering building made its way into the governor’s budget. In November, the University of Alaska Board of Regents asked for $31.3 million from the state to complete the $111 million project as part of its fiscal 2016 capital request. The regents also requested $50 million for deferred maintenance and repair work and got another $8 million in Walker’s budget. The Alaska Energy Authority’s Susitna-Watana Hydro project; the Alaska Industrial Development and Export Authority’s work towards an environmental impact statement for an industrial-use Ambler Mining District road; Department of Environmental Conservation wetlands permitting revision; Fish and Game’s Chinook Salmon Research Initiative; and a new Blood Bank of Alaska building in Anchorage are notable exclusions from the capital plan. Former Gov. Sean Parnell had a total of $39.8 million in his partially completed capital budget for the five projects. The Alaska Railroad Corp. is also requesting $21.8 million to keep its Positive Train Control development on track. Combined with prior appropriations, the federally mandated and unfunded safety system for passenger railroads will ultimately cost the state and the railroad about $156 million to implement through fiscal year 2018. In his Jan. 22 speech, Walker said he wants the state to invest more in resource development infrastructure through financing as it did with the Red Dog Mine road in Northwest Alaska more than 25 years ago. While a contentious issue among area residents and environmental groups, the roughly 200-mile Ambler road proposal would be a very similar project, and would provide access to copper deposits that could possibly support one or several mines just south of the Brooks Range. AIDEA needs $6.8 million to complete an EIS for the road, according to an authority report. Walker said in a press conference the road would be looked at along with the other large state projects he put on hold to see which made sense to pursue. The key, he said, is making sure a company can commit to a mine before spending more money. “Are there companies that are ready to step up today and say they are ready to pay and step up today and be a participant financially?” he said. “That’s what we’re looking for to take it to another stage of permitting; is there a company that wants to come in and take that process over? That’s the kind of discussion we will have.” The most likely participant is NovaCopper, which has been exploring the Ambler Mining District for years. Company CEO Rick Van Nieuwenhuyse said NovaCopper has spent nearly $85 million acquiring and exploring the Arctic and Bornite deposits in the region and is hoping to have a feasibility study on Arctic done by in 2017. “We’ve got skin in the game,” he said. Van Nieuwenhuyse said he understands the state’s fiscal situation, but noted that no general funds would be used for road construction. State investment in permitting the road would encourage other deposits in the 75-mile long district to be developed by other companies, he said. Whether the road construction is financed by AIDEA loans or bonds or paid for directly by private money is still up for discussion. He said NovaCopper financing the EIS is something the company would consider, but not before its feasibility study is complete. Elwood Brehmer can be reached at [email protected]

AIDEA begins broadening Interior gas search

The transformation of the Interior Energy Project has begun. This time, a Cook Inlet gas source is a real possibility. With the Alaska Industrial Development and Export Authority back on its own in the endeavor to get natural gas to the Fairbanks area, the AIDEA board passed a resolution Jan. 14 authorizing staff to spend $700,000 to investigate a new path forward for what was, and still could be, a plan to truck liquefied North Slope natural gas south. AIDEA formally terminated its agreement with project consultant MWH Inc. Jan 5. MWH was hired to pull together the web of stakeholders and private financing needed to bring the public-private partnership version of the project to fruition. Time ran out on the concession agreement between the authority and MWH at the end of the year and the parties declined an extension. The resolution authorized $500,000 of Sustainable Energy Transmission and Supply Fund money available to AIDEA be spent to further investigate Interior Energy Project solutions. Another $200,000 would come from the AIDEA’s Economic Development Fund, “to pay for the cost of the authority’s own personnel and facilities in evaluating means of supplying energy to Interior Alaska,” the resolution states. Using its own money also allows AIDEA to look at gas sourcing options other than the North Slope. Senate Bill 23, which gave AIDEA $332.5 million in loans, bonds and grants, required the financing be used to develop a North Slope supply. As of Jan. 5 AIDEA had spent $15.3 million of the $57.5 million direct appropriation in SB 23, leaving $42.2 million available for future work. An $8.1 million loan to the Interior Gas Utility for distribution work from the $125 million in SETS funds left $116.9 million in project loans available. The remaining $150 million bond authorization has not been touched, according to AIDEA’s financial records. Board member and former state senator from Fairbanks Gary Wilken said in an interview that he hopes the Legislature will give AIDEA more tools to draft a financially viable gas plan. “The thing at hand right now is to determine what changes we need in SB 23 to move forward. Now we need to look south and explore elsewhere, and that will require a change in the law,” Wilken said. He said he has discussed the project with several members of the Fairbanks delegation. One legislator Wilken has not talked to is Rep. David Guttenberg, who has criticized the authority’s handling of the Interior Energy Project. Guttenberg told the Journal in early January that AIDEA should stick to its role as a finance agency and not manage the Interior Energy Project. The public-private partnership, or P3, plan drafted by former Gov. Sean Parnell and passed without opposition by the Legislature was “doomed from the start,” Guttenberg said. According to Wilken, Guttenberg, who was excused from the House vote on SB 23, has not offered any suggestions to him on how to improve the project. Despite a failure to finalize financial terms to build and operate a North Slope-sourced gas truck operation, Wilken said the AIDEA-MWH team made great strides during 2014. Coincidentally, the Jan. 14 board meeting where discussion was had on how to continue without MWH was one year to the day after the board chose MWH to be its project partner. “I think everyone from the beginning knew it was a challenging project,” Wilken said. “I don’t think it was time wasted nor money wasted. We have a yardstick by which to measure every other project.” MWH developed an intricate modeling program that could take in detailed cost variables — construction, operation, financing — and compute out a final gas price. The work also narrowed down what it would cost to build a 6 billion cubic feet, or bcf, per year LNG plant on the North Slope. In its early proposal, MWH estimated the cost for a 9 bcf plant to be $180 million to $220 million. Those ballpark figures turned out to be optimistic, as the last refined estimate company representatives gave was $228 million for a plant with 6 bcf annual processing capacity. “If we made a mistake we probably didn’t give (MWH) enough time,” Wilken said. He added that he admired their willingness to tackle the multi-faceted task. Wilken noted that the energy “landscape” of the state has changed significantly since SB 23 was passed early in 2013. The price of oil is less than half of what it was during all of 2013 and much of 2014, shrinking the project’s feasibility margin; and a renaissance in Cook Inlet gas production has secured a once-tenuous market. Fairbanks Natural Gas now has a 10-year supply agreement with Hilcorp to feed its existing customer base in the heart of Fairbanks. Such a contract would have been unthinkable just a couple years ago. As the Legislature and Gov. Bill Walker’s administration move further the Interior Energy Project, Wilken said he sees AIDEA continuing to play a significant role. The authority is open to partner with any party that brings forth a well-developed plan to add cleaner and cheaper options to Interior’s energy portfolio, he said. Layered agreement strained IEP Reflecting on the year of Interior Energy Project work at the Jan. 14 board meeting, AIDEA Chief Infrastructure Development Officer Mark Davis said a long-term energy solution for the Interior ultimately led to the project’s demise as it was structured. The gas trucking project, always intended to be an interim solution, required LNG plant financing be spread over a 30-year plant life to make it viable. “When the project started we thought a joint development agreement would be used — AIDEA acting as a finance arm of it,” Davis said. The plant would be owned by MWH and its investor, Toronto-based Northleaf Capital Partners, the two would also operate it. The prospect of a gas pipeline created a financial risk “sticking point,” he said. If a pipeline was built within the 30-year plant lifetime, the investor would need loan forgiveness if it was to accept the alternative supply risk. However, Davis said AIDEA’s forgiving of the SETS loans would then create an unacceptable tax liability. Thus, the concession agreement formula was adopted. That model had AIDEA forming a limited-liability company with MWH — Northern Lights Energy LLC — which was then bound to a series of conditions and precedents that had to be met before financial close of the whole project, Davis said. AIDEA would own the plant and MWH would operate it for 30 years, after which it would revert back to AIDEA. Those conditions included an overall target gas price and an engineering, procurement and construction plant price. When those prices, which AIDEA had no control over, didn’t come in low enough it all fell apart. “We think the focus going forward needs to be on the product that’s going to be delivered,” Davis said. “Instead, the concession agreement focused on a complex relationship between AIDEA and MWH, or Northleaf, that really didn’t have complete buy-in from the customers and that proved to be a problem.” Elwood Brehmer can be reached at [email protected]

Anchorage office market hesitant, retail future bright

Commercial realtors, like many folks in Alaska, are waiting to see how slumping oil prices will affect their industry in the coming year. “Everyone’s anxious; there’s a lot of nervousness. But, the truth is, you don’t just close your business down because oil prices slip,” Reliant LLC manager Ted Jensen told members of the Building Owners and Managers Association Anchorage Jan. 9. He noted that while the current price drop does not bode well for an economy as heavily dependent on the petroleum industry as Alaska, the duration of the drop is much more important than its severity at any one point. Building owners with long-term leases in place likely have little to worry about, he said. However, those with short-term tenants or leases set to expire could have a harder time keeping space occupied. “Six months from now, I think we’ll be in a better position to see,” Jensen said. “We still won’t know how long (low oil prices) are going to last and how low they’re going to go, but the market will have had a chance to respond.” A big positive is that even if the commercial real estate market takes a hit over the coming year or two, it is in a strong position right now. In Anchorage, Class A office vacancy increased, but only slightly, over 2014 from 4.3 percent to 4.6 percent today. Class B space increased a little more from 5.7 percent to 6.5 percent. Jensen said the “very healthy” office market should be able to soften with minimal impact. “We’ve got a lot head room which is good.” Recent construction of office space has contributed to the modest increase in vacancy rates. New Class A vacancy jumped from about 4 percent to 6.4 percent over 2014, according to Jensen, while only 3.8 percent of existing space is open. As recently as 2011, new Class A vacancy was as high as 15 percent, he said. Overall office vacancy in Anchorage is currently at 5 percent. Industrial vacancy stayed at about 2 percent in 2014, after being as high as 6 percent in 2010, according to Pacific Tower Properties broker Brandon Walker. JL Properties’ new office building at International Airport Road and C Street has Calista Corp. as its main tenant, but also has about 25,000 square feet remaining to be leased. Midtown’s 188 West Northern Lights office complex also has about 40,000 square feet available, Jensen said. Rent for both office classes held steady over last year, with average Class A staying at about $2.60 per square-foot and Class B going for $1.95 per square-foot. Jensen said he expects rents decrease slightly in 2015 if they change at all. State Economist Neal Fried is predicting an overall job loss in Anchorage of about 800 positions in 2015 after losing about 400 jobs last year. He emphasized that the numbers are small — a 0.5 percent loss for 2015 on an average employment base of 156,300. The losses in 2015, as they were last year, will be attributable primarily to government contraction with a net loss of 500 government jobs. While almost all of those positions require office space, Jensen said the effect on the office market would be minimal. “If you’ve got the federal building and you lose someone through attrition or retirement and you don’t rehire, there may be an empty desk. That doesn’t mean you squish everyone over and try to lease out 500 square feet to the private sector,” he said. Even with high oil prices it would be hard for the Anchorage economy to grow at this point. The Anchorage and Matanuska-Susitna region’s population grew less than 0.5 percent over the past year, according to the state Labor Department. When that is combined with an unemployment rate of about 5 percent — considered full employment — there is little room to expand. Fried said the stagnant population growth is due largely to a burgeoning economy in the Lower 48, meaning less people are coming north looking for work. Retail remains strong What’s happening to the south will also impact the state’s retail market, Commercial Real Estate Alaska Vice President Lottie Michael said. What large chain retailers do nationwide is often reflected in what happens to their stores in Alaska, despite how the Alaska market is faring. “Nationally, the big boys, the big retailers, are anticipating 2015 and 2016 to be years of expansion,” Michael said. “Because they’re driving our car I think we’re going to have a really big year in the retail market.” She said no big stores are anticipated to leave; several chains are investigating Anchorage; and others have made commitments for 2015. Men’s Warehouse, Pier 1, and cosmetic-salon chain ULTA Beauty are all moving into Tikahtnu Commons in Northeast Anchorage this year. Michael said ULTA Beauty is the only national chain she’s aware of that has ever opened in Fairbanks — just recently — before Anchorage. “What we are seeing now is what we will continue to see: repositioning of tenants, restacking of tenants, and resizing of tenants,” she said. Overall retail vacancy in Anchorage was at 2 percent last year with about 500,000 square feet of space available. She said the five-year vacancy average is about 3 percent. Average retail space is going for about $1.65 per square-foot triple net; new space costs $2.25 or more. Michael will be watching what happens with JL Properties’ 200,000 square-foot outlet mall development on C Street in South Anchorage, as well as Dimond Center’s The Outlets of Alaska, she said. New space will also become available as Sears and Home Depot resize their stores as part of national plans. Home Depot usually occupies about 30,000 square feet and will be cutting its stores in half. Alaska locations are looking for tenants to lease the new space, she said. A remodel in the Midtown Mall at Sears is allowing Nordstrom Rack to move in as Sears downsizes. Michael said marijuana legalization will almost undoubtedly be felt in the state’s retail markets based on what’s happened in other states that now allow recreational use of the drug. “Regardless of your view, the marijuana industry is going to affect us. It’s going to affect all of retail,” she said. “Look at Colorado and Washington space in retail centers, especially the older retail centers; those prices just shot up and demand just outpaced available space. I think we can see that.” She said where dispensaries locate will depend greatly on whether lease conditions permit such a business and the attitudes of neighboring tenants. Elwood Brehmer can be reached at [email protected]

Walker fires DOT commish after road report

Gov. Bill Walker fired Alaska Transportation Commissioner Pat Kemp Jan. 12 after he urged Walker to move forward with the Knik Arm bridge and the Juneau access road projects, or face repaying up to $98.6 million to the federal government. Walker spokeswoman Grace Jang wrote in a statement to the Juneau Empire that the governor wants department commissioners aligned with his priorities. Status reports on three of the state’s biggest and controversial road projects were released Jan. 9 by Walker’s office. Kemp was appointed by former Gov. Sean Parnell and had been with the department since 1971. The Empire reported that Kemp planned to retire at the end of November, but Walker asked him to remain on month-by-month basis. The former state commissioner told the Empire that he was surprised to learn the projects weren’t in line with Walker’s priorities. “That memo I sent out was just a factual memo, there wasn’t any editorial stuff in there. We just gave facts, so that was a little surprising,” he said to the Empire. “(The Juneau road) project’s been around for a while and all the previous governors supported it and this one apparently doesn’t and that’s just what happens when someone takes over.” DOT Deputy Commissioner Reuben Yost was also asked to step down. Deputy Commissioner John Binder, who oversees the state airport system, will replace Kemp on an interim basis. Jang said the governor plans to name a permanent DOT commissioner by the end of January. Walker suspended spending on six large state projects, all in the pre-construction phase, with a Dec. 27 administrative order. The governor plans to investigate which, if any, of the projects should be continued as the state faces an ever-widening budget deficit currently topping $3.5 billion. He has long said the state needs to prioritize its infrastructure spending. Walker requested the agencies leading the projects submit the reports to him by Jan. 5. “Perhaps the most significant issue is that each project must be evaluated in total, as the many specific contracts and reimbursable service agreements with other agencies are intended to advance the project,” Kemp wrote in the report to Office of Management and Budget Director Pat Pitney, who is overseeing the reviews for the governor. “Halting or even suspending any one of these activities is essentially delaying the overall project, and as such would likely trigger a financial penalty.” The State of Alaska would not save money on the federal funds allocated to these projects if they are stopped because the required state match amounts would simply be shifted to other projects along with the Federal Highway Administration dollars, according to Kemp. Transportation projects that receive federal funding must be matched by state or local sources. Federal Highway Administration, or FHWA, allocations typically require an overall project match of 10 percent to 20 percent. The state would likely have to repay $72.9 million spent on the Knik Arm bridge and $25.7 million spent on the Juneau road — a 48-mile extension of the Glacier Highway north of the capital — if the projects are killed for what are deemed political reasons, according to Kemp’s report. To date, $74.3 million of federal money has been spent on the Knik Arm Crossing by the Knik Arm Bridge and Toll Authority and state DOT, and $28.9 million on the Juneau project. The expected repayment amounts are slightly less than the federal project expenditures due to an FHWA formula used to calculate what needs to be paid back, state DOT spokesman Jeremy Woodrow said. “The Federal Highway Administration wants to know what the direction of the department is. They want to know whether we are moving forward or stopping the projects,” Woodrow said. Further, quickly reallocating the “use it or lose it” federal dollars would be a challenge because transportation projects are planned years in advance, he said. KABATA was allocated $55 million for its work and DOT got $35 million for the Juneau road in the fiscal 2015 capital budget. Both allocations included $5 million state matches. The Knik Arm bridge construction responsibility has since been shifted to DOT, and project lead Judy Dougherty has said the $55 million would get the state to the early construction phase scheduled for late 2016. Additional state match funds would be included in the overall $300 million needed from the state and FHWA for the project’s three-pronged, $900 million financing plan. The $574 million Juneau access road would be paid for state-matched federal allocations. Putting the Juneau project on hold would be easier once it has a record of decision, or ROD, according to the status report. “Delaying the project prior to issuance of the ROD for more than a year or two would result in the requirement to later restart the process with agency and public scoping, and revising or replacing the draft (environmental impact statement) as appropriate,” the report states. A supplemental draft EIS was released for the project in September. In 2006 the FWHA issued a ROD in support of the road. However, a 2011 federal Appeals Court ruling required additional alternatives to the road be investigated. Arctic director for The Wilderness Society Lois Epstein called the reports “confusing and misleading” in a formal statement released Jan. 9. “Alaska’s now-limited revenues should go not to controversial mega-projects with known community harms, but to higher priority needs such as upgrading bridges and maintaining existing state infrastructure,” Epstein said. Public debate over the Juneau access road project has been renewed after the release of the latest draft EIS. On the Knik bridge, the report states that as long as DOT is making progress on a project: “Reasonable requests for time extensions are allowed. Due to the total cost of the project exceeding $500 million, FHWA requires that a financial plan be approved by the administration’s Major Projects Office. The financial plan must provide reasonable assurance that sufficient funds will be available to meet the proposed construction schedule.” The Alaska Industrial Development and Export Authority’s look into a 220-mile industrial road off the Dalton Highway to the Ambler Mining District is the third proposed thoroughfare on the governor’s chopping block. Walker cut an $8 million appropriation to the project from Parnell’s proposed capital budget in early December. AIDEA has $9.7 million from prior appropriations to continue work on the project’s EIS and would need another $6.8 million in the next two fiscal years to complete the work. The state has spent more than $52 million $26 million on the project since fiscal year 2011. AIDEA had hoped to submit an EIS application by the end of 2014, prior to Walker’s order to stop work, according to spokesman Karsten Rodvik. Construction of the industrial gravel route would be privately financed through the authority. NovaCopper, the primary explorer of the copper deposits in the large area of Northwest Alaska has said it needs the road to make final exploration and construction of one or more mines feasible. Villages along the route have expressed great concern over how it could impact migrating caribou relied upon for subsistence hunting. Epstein said a claim by AIDEA that “No appropriated funds would be used for the construction or maintenance of the road” cannot be substantiated. Giving AIDEA the opportunity to move forward with the EIS would better allow the agency to gauge public sentiment and address concerns. It would also validate to industry that the state is willing to develop infrastructure for resource development that brings value to the state, according to the authority. Elwood Brehmer can be reached at [email protected]

State shifts from 404 primacy to wetlands mitigation options

State agencies are collaborating on ways to improve wetlands permitting despite funding cuts. What was once an investigation into whether or not the State of Alaska should try to assume primacy over Clean Water Act Section 404 wetlands permit reviews has morphed into a look at developing a broader “404” program. During the 2013 legislative session state lawmakers approved spending that allowed the state to explore the possibility of applying to take on 404 wetlands permitting. Those permits are now issued by the U.S. Army Corps of Engineers for the Environmental Protection Agency. Section 404 of the Clean Water Act limits the impact development projects can have on wetlands. Senate Bill 27 provided $1.5 million per year for fiscal years 2014 to 2016 to the Department of Natural Resources and the Department of Environmental Conservation for pre-primacy application work. The bill also allowed for seven new positions between the departments to focus on the initiative, DEC Program Manager Ben White said. Michigan and New Jersey are the only states to have assumed primacy over wetlands permits within their borders. States that do have to adhere to federal standards and the EPA still holds veto power over any 404 applications. In 2014, the Legislature decided to cut the funding, essentially suspending the work. White said some contracts were already in place through the end of 2014 when the funding was cut. “Unfortunately the plug was kind of pulled a little early and we weren’t able to get as far into exploration as we’d hoped,” White said. Exactly what it would take for the State of Alaska to assume the responsibility of 404 permitting is still unclear, he said. The timeline of the work called for a decision on whether or not to apply for primacy to the EPA sometime in fiscal year 2016. “At this point we’re finishing up what work we can and trying to figure out what our next steps are,” White said. “We’re also working. We’ve kind of shifted our focus from 404 assumption to areas where we as a state could improve the process, the 404 permitting process.” That shift in focus has led the state’s 404 program development team to look at options for new general development permits and ways to expedite current ones. White said the state is currently partnering with the Corps to possibly revamp general placer mine permit renewals. A complete 404 permit also requires a Section 401 water quality permit from DEC. The state was starting to explore ways to combine the two into what could be a DNR permit, making “sort of a one-stop shop for permits so an applicant can come in and talk to one group and process it,” he said. The engineering and consulting firm HDR Inc. recently issued a report to DNR and DEC that investigates options for the state when it comes to wetlands mitigation banking, which is growing in popularity nationwide. It was one of the last pieces of work done under SB 27. “At some point I think the state’s going to have to explore being involved in mitigation banking as far as assisting in the setup of banking,” White said. The EPA and Corps of Engineers issued new standards in 2008 that “promote no net loss of wetlands by improving wetland restoration and protection policies,” according to the EPA. The rules increased the use of mitigation banking, which allows a project developer to improve off-site wetlands as a compromise for possible damage that could occur as a result of the project. Mitigation banking is only allowed after avoidance and minimization of on-site wetlands damage has been exhausted. Sharmon Stambaugh, a large project coordinator for DNR said the department took the lead on compensatory wetlands mitigation efforts. She has been looking at whether state lands could provide an opportunity for mitigation. The state could potentially save, and even make money if it started a compensatory wetlands mitigation bank program or became what is known as an in-lieu fee sponsor, Stambaugh said. State transportation departments are some of the biggest customers of mitigation banks. Since 2009, Alaska DOT has spent about $8 million to meet 404 requirements and offset damage its projects have done to wetlands across the state. Nationwide, 31 states have some wetlands mitigation banking options. With roughly 65 percent of the nation’s wetlands in Alaska it only makes sense for the state to have such a program, White said. Former Fish and Game commissioner Frank Rue is currently the executive director of the Southeast Alaska Land Trust in Juneau, one such in-lieu fee sponsor. An in-lieu fee sponsor organization is certified by the Corps of Engineers to take on the responsibility of finding wetlands to preserve that will offset those damaged by a development project. “A landowner can come to us and say, ‘This is what the Corps has told me my obligation is for the wetlands impact I’m causing,’” Rue said. “They ask us, ‘What would it cost me to just pay you a fee to take on this obligation?’” The impact to wetlands is measured in terms of acres and wetland type. Once a conversation is had about the project and a price is hammered out the landowner or developer sends the trust a check and the trust in-turn sends the Corps a letter stating the obligation has been transferred. The whole process is overseen and approved by the Corps of Engineers. “Once we send that letter to the Corps, the Corps gives the green light to the project and the project doesn’t have to worry anymore about meeting their obligation for wetlands mitigation. We have to do that,” Rue said. From there, the Southeast Alaska Land Trust begins the hunt for a similar size piece of property with similar wetlands — as rated by the Corps — to purchase from a private landowner. The property will be as close to the impacted site as possible, he said. Often the parcels are virtually undevelopable, Rue said, which makes finding someone willing to sell them easier. If the situation allows, the trust will donate the property to a local government or to the state while keeping an easement that prevents development. When a landowner wants to keep the parcel private the trust can purchase an easement — essentially development rights — to keep the wetlands intact. The trust currently holds easements on 3,400 acres in Southeast. Final cost of using a mitigation bank or in-lieu fee sponsor varies greatly, Rue said, because it all depends on the value of the property. He said the state could become an effective in-lieu fee sponsor, particularly because nearly all shoreline areas are state-owned. “If you’re trying to replace or protect something equivalent to what was lost the state really has all the cards. I think they could play a big role for inter-tidal fill,” he said. Stambaugh suggested the state look south to what is being done in the rest of the country in terms of wetlands restoration being used for banking instead of strict preservation. “There are different ways that you can provide compensatory mitigation. Preservation is not used in the Lower 48 very much because there isn’t much left to preserve in many states, but here it’s the primary way,” she said. “You can avoid and minimize the impacts but then you have to compensate. Preservation is not the preferred method. Restoration of wetlands and bringing marginal wetlands into productive ecological value, that’s considered a higher priority.” She said the state has “tons of land” where compensatory mitigation and restoration could be done. Elwood Brehmer can be reached at [email protected]

Interior Energy Project on hold as MWH declines extension

After a year-and-a-half of work, time has run out on the Interior Energy Project — at least for now. MHW Global Inc., the Alaska Industrial Development and Export Authority’s partner in the plan to truck North Slope-sourced liquefied natural gas to the Fairbanks area, withdrew its request for an extension to its contract on the project in a Dec. 30 letter. The working contract, known as the concession agreement, expired Dec 31. The AIDEA board of directors discussed the option to extend the agreement up to 90 days in an executive session at its Dec. 16 meeting but did not take any action on the matter. AIDEA spokesman Karsten Rodvik said the authority formally terminated its agreement with MWH Jan. 5. “AIDEA is fully committed to the goal of bringing affordable energy to the Interior, and we appreciate the effort that MWH put into helping bring the North Slope LNG plant closer to reality,” Rodvik said. “MWH achieved a great deal during 2014, and we thank the entire MWH team for all of their hard work.” With no contract in place for a gas supply and delivered gas price estimates coming in at up to 35 percent higher than first projected, the AIDEA-MWH team was unable to meet its own deadline of the Dec. 16 board meeting to have the complex project’s loose ends tied. MWH issued a statement to the Journal Dec. 31 from its corporate headquarters in Broomfield, Colo., saying the move does not mean it is withdrawing from the project and that the engineering and consulting company is still engaged with AIDEA and the local utilities to determine its role in the future. “We believe this is the most appropriate decision for all stakeholders given that the (Interior Energy Project) does not appear to have the level of community and utility support needed to be successful as it is currently structured,” the statement reads. “Without this support, we believe a 90-day extension to continue working toward financial close would be unproductive.” MHW declined additional requests for comment. On Dec. 22, AIDEA Executive Director Ted Leonard sent a letter to MWH Vice President and Alaska Manager Chris Brown that stated AIDEA had “no desire to deviate from the existing provisions of the concession agreement,” which was set to expire Dec. 31. Leonard encouraged MWH and its joint venture with AIDEA, Northern Lights Energy LLC, to complete all work to achieve financial close without an extension to the agreement. The concession agreement was formalized in September and references Nov. 21 as the first target for wrapping up Interior Energy Project financials. Leonard’s letter to MWH said AIDEA would be open to an extension, but the concession would be non-exclusive moving forward. Leonard also conditioned an extension on the premise that contracts with the utilities be in place by Feb. 28. Further, AIDEA was liable to MWH for $1.25 million of work under the original concession agreement. The authority’s conditions for an extension would have kept that cap in place. Brown responded in a Dec. 30 letter to Leonard that while financial close was not going to be reached by the deadline, MWH had met the project’s other requirements. It had provided a North Slope gas price lower than could be achieved from Cook Inlet, where a long-term supply has not been developed, according to Brown. “Our thoroughly vetted capital cost estimates resulted in an LNG price at the North Slope — the pricing reference point established under the concession agreement — which was within the acceptable range for the Interior Energy Project as described to us by AIDEA,” he wrote. Blowback from the public at the latest AIDEA board meeting based on a perceived lack of progress, notably from Fairbanks North Star Borough Mayor Luke Hopkins, led MWH to believe it did not have the community support it needed. Brown also wrote to Leonard that the conditions of an extension would discourage private investment in the project. “These conditions would undermine the commercial integrity of the concession agreement and make it impossible for MWH and other counterparties to undertake the commercial activities that are necessary for financial close,” Brown wrote. Brown concluded the detailed, three-page correspondence by noting that MWH would work with AIDEA to support an Interior Energy Project that pursued strictly public funding options and would make its work available “for appropriate and fair compensation.” Differing opinions were raised at the Dec. 16 AIDEA board meeting on how the authority should move the project forward. Hopkins and Interior Gas Utility chair Bob Shefchik said the Interior Energy Project needed a new direction. Dan Britton and Cory Borgeson, the respective heads of Fairbanks Natural Gas and Golden Valley Electric Association, asked the AIDEA board to grant the extension to MWH if for no other reason than the lack of a better, current option. “I believe that MWH is far enough along and has enough knowledge and enough respect from everyone that they would still be a potential contractor for this project,” Borgeson said Jan. 5. AIDEA officially took over the Interior Energy Project after the 2013 legislative session when the Legislature passed Senate Bill 23, sponsored by then-Gov. Sean Parnell, which gave AIDEA the right to allocate $332.5 million in loans, bonds and grants to support the North Slope LNG trucking operation. Project leaders began estimating that a final gas price to residents of about $15 per thousand cubic feet, or mcf, of gas would be feasible shortly after AIDEA began its work and before MWH was chosen as a partner. At $15 per mcf the natural gas would be about half the cost-energy equivalent of heating oil at $4 per gallon and save many residents thousands of dollars on their annual home heating bills. The first real blow to those estimates came in October when Borgeson told the Journal he believed the early delivered gas price would be in the $20 per mcf range and fall gradually as demand ramped up. MWH and AIDEA disputed the claim at the time. However, Borgeson, and later Shefchik were proved correct at subsequent AIDEA meetings when MWH’s Rick Adcock conceded to the board that first gas would likely be between $18 and $20.50 per mcf under the project’s current financial structure. Beyond simply not hitting the initial target, higher gas prices could deter residents from converting their home heating systems to natural gas — a conversion that could cost some up to $10,000. The substantial demand increase needed to lower gas prices in subsequent years of the project likely wouldn’t occur at the rate the utilities hoped without the expected conversions. The sticking point has been the cost of the North Slope LNG plant. The plant’s capital and operations costs would be diluted directly into the final cost of gas. MWH’s latest target cost was $228 million for plant with annual capacity of 6 billion cubic feet, or bcf. In its November 2013 proposal to AIDEA, MWH told the authority a 9 bcf plant would probably cost $180 million and likely not more $200 million. AIDEA’s early estimates — before MWH’s involvement — were that gas processing and liquefaction would cost less than $3 per mcf. Adcock said Dec. 16 that processing would likely cost at least $5 per mcf from a 6 bcf plant at operating at full capacity. With demand in the first couple years of the Interior Energy Project projected at about 3 bcf, the processing cost could be up to $9 per mcf, Borgeson said. In a last-ditch effort to save the project’s feasibility, Borgeson proposed Golden Valley would purchase 5 bcf of gas demand from the North Slope plant despite only needing 2 bcf of gas to offset the fuel oil it burns to produce about 30 percent of its power. “We would be willing to pay for a five-car garage when we only need to put two cars in it,” he said. Golden Valley could still save its members $5 million to $6 million per year even while paying for 5 bcf and using 2 bcf if oil were at $105 per barrel, Borgeson said in an interview. It wasn’t enough. MWH’s initial proposal also called for $65 million of private investment into a $180 million plant. The concession agreement called for a maximum AIDEA loan and grant contribution totaling $135 million, leaving nearly $100 million to be privately financed on a $228 million LNG plant. Toronto-based Northleaf Capital Partners was MWH’s silent investment partner. On top of the private investment that would need to be repaid, the concession agreement set a 12.5 percent maximum rate of return on Northleaf’s money, further driving up the cost of the plant and ultimately the cost of the gas. The Sustainable Energy Transmission and Supply Fund loans AIDEA was authorized to issue under the Interior Energy Project legislation are capped at 3 percent interest. “The concession agreement was really a P3, a public-private partnership, and I think now that model that Parnell came up with doesn’t work — that the investor in the (P3) would make requirements that would make this too difficult and costly,” Borgeson said. “It was always my belief that this project required aid funding because of the significant investment without a known customer base and the only way to make that work is to reduce the cap-ex (capital expenditure) cost.” Rep. David Guttenberg, a Fairbanks Democrat who has voiced concern about the project, said the financial structure doomed the current iteration of the Interior Energy Project. “I was concerned with bringing MWH in to begin with,” Guttenberg said. “It’s just an investment group in the end that’s going to be guaranteed a 12.5 percent return on their money.” The state or the Interior Gas Utility, controlled by the Fairbanks North Star Borough, should own the LNG plant, according to Guttenberg. A publicly owned plant would avoid $4 million or more of property taxes to the North Slope Borough each year, another cost that would be rolled into the gas price. In discussions with AIDEA leaders, Guttenberg said he has asked the authority to come up with a proposal that works and can be presented to the Legislature. In response, authority officials have said that would be going outside the bounds of SB 23, which controls the North Slope gas project. “I think AIDEA is acting as the project manager and they should just be the banker and not the project manager. A significant restructuring is the only way this project is going to move forward,” he said. Those in Anchorage, where AIDEA is headquartered, simply don’t understand the strain of Interior energy costs, according to Guttenberg. “Let me be blunt: people in Anchorage are clueless. People in Anchorage have no idea how crippling the energy situation is in this state,” he said. Guttenberg added that a lower-cost energy solution for the Interior would benefit the whole state by opening up roughly $300 million of disposable income that is now spent on heating bills. According to Borgeson and the Interior Gas Utility’s Shefchik, the project needs more public funding directed at the North Slope LNG plant to drive down the gas price and in turn encourage conversions. In the months leading up to the passage of SB 23, he and Borgeson pursued a $200 million grant for Golden Valley to build a North Slope plant, Shefchik said. With the prospect of such a donation out the window given the state’s immediate financial situation, he said other avenues of low-cost financing need to be investigated. “I expect there will be a one- or two-month window of, ‘Let’s look at all the options that are before us and reorient on the one that’s going to get us the gas approaching 15 bucks and move forward,’” Shefchik said. Whatever it looks like, the next iteration of the project should include the utilities at its core, he said. Guttenberg said AIDEA and the utilities would be asked to come before the Legislature in the coming session to craft a new plan. “It’s a process; nothing ends the way its started,” Guttenberg said. The near-term collapse of the oil market shouldn’t affect the viability of the Interior Energy Project, according to Shefchik. With first gas once scheduled for late 2015, then 2016 and likely later now, oil prices are likely to rebound in that time. The need for a cheaper, and cleaner, energy source will not go away, he said. A natural gas pipeline, however, could change plans, given the Interior Energy Project was always meant to be an interim solution. “The question of whether there is a gas line that will be on the near enough horizon to say, ‘Well, we wouldn’t want to invest in a plant;’ that’s a tough one,” Shefchik said. Elwood Brehmer can be reached at [email protected]

Retail growth signals a strong economy says AEDC

It’s no secret that Alaskans love to shop. A quick Saturday stroll through one of Anchorage’s many malls verifies that. “It is very impressive in a $50 billion or so state economy — before the collapse of the price of a barrel of oil — that we see retail is $6.1 billion out of that,” Anchorage Economic Development Corp. President and CEO Bill Popp said at the Jan. 5 Make it Monday forum hosted by the Anchorage Chamber of Commerce. Direct statewide retail sales totaled just more than $1 billion in 2013, Popp said. Sales in Anchorage accounted for more than half of the state total at nearly $529 million for the last tallied year. More evidence of the sometimes forgotten industry’s impact on the economy: 8.1 percent of Alaska’s private business earnings in 2013 were in the retail trade, according to AEDC. Anchorage 5th Avenue Mall General Manager Stephen Welch said overall sales at the popular Downtown center were up 30 percent over 2013 through November. That enthusiasm for a hot deal is finally translating into retail job growth. In 2014, the state’s retail industry added approximately 1,300 jobs through November, Popp said. That equates to about 3.5 percent growth in total industry employment. Retail positions made up roughly 18,000 of the 158,000 jobs in Anchorage last year. “We were in a great time in terms of retail job growth in what was 2014,” he said. The growth last year ended a nearly decade-long period of flat employment in the industry. Statewide, there were 37,200 retail positions in November. Alaska averaged 35,900 such jobs in 2013 and looking back further, average retail employment fluctuated between 35,500 and 36,200 jobs from 2005-12. Welch noted that nearly 20 percent of jobs in the state are supported in some way by the retail industry. The job growth is primarily a result of national retail chains entering the Alaska market, according to Popp. Outdoors sporting goods giants Bass Pro Shops and Cabela’s both opened stores in Anchorage in 2014. Between the two they required about 400 employees when they opened. With November unemployment at 4.8 percent in Anchorage, Popp said both national and local retailers are complaining about a lack of available workforce. Unemployment rates in the 5 percent range are typically considered full employment and the sign of a very healthy economy. “Many of our retailers are bringing in managers from the Lower 48,” Welch said, due to what Popp often refers to as Anchorage’s shrinking available “labor puddle.” Challenges facing the industry include Alaska’s new minimum wage requirements and, as is the case for many industries, the state’s out-of-the way location. “One of the biggest challenges for us in brining in national tenants is supply chain logistics,” Welch said. It’s there where Anchorage’s shopping centers become complimentary and not competitive for business, he said. Supply chain economics become more feasible for retailers that have more than one location in the city or the state. When it comes to a higher minimum wage, Northway Mall General Manager Mao Tosi said he believes any impact to employers’ bottom lines will be passed along in slightly higher prices. “It’s just another cost,” he said. Alaska’s minimum wage increased $1 to $8.75 Jan. 1 and will increase to $9.75 Jan. 1, 2016. Voters approved a ballot measure proposing the minimum wage hikes in the November elections. Popp said he believes the impact will be minimal because the tight labor market has for the most part driven wages beyond the mandated threshold. “If you want a good employee you’ve got to pay for it,” he said. Elwood Brehmer can be reached at [email protected]

Uncertain year for mega-projects as Walker halts spending

How little can the state afford to spend? Gov. Bill Walker halted immediate spending on six of the state’s notable pending mega-projects Dec. 27, part of an effort to scrutinize all expenditures and minimize the fiscal year 2016 budget deficit. Walker’s administrative order stopped work on a road to the Ambler Mining District; the Juneau access road; the Susitna-Watana Hydro project; the Knik Arm bridge; the Alaska Stand Alone Pipeline; and the Kodiak Launch Complex. “Our budget deficit grows deeper as oil prices go lower. These are large projects that require significantly more state investment to complete,” Walker said in a statement from his office. “I’ve requested that the state agencies not enter into any new contracts until we’ve had a chance to look at the various projects.” He said it is a way to keep the state from committing to further work on the projects that “may not be continued during this fiscally challenging time.” Walker wants the agencies in charge of the projects to submit reports outlining operating costs, current obligations and the potential consequences of delaying or terminating their work to the Office of Management and Budget by Jan. 5. Alaska North Slope crude prices in the $60 per barrel range are hitting the state coffers hard. Fiscal year 2015 revenue, once projected at about $5 billion, is now expected to be about half that, in the $2.5 billion range. For the 2016 fiscal year, which begins July 1, it gets worse; the Department of Revenue is predicted a little more than $2 billion of state revenue in its Fall 2014 Revenue Forecast released in mid-December. Associated General Contractors of Alaska Executive Director John MacKinnon said he urges caution when it comes to possibility of “killing” any of the projects the governor has brought attention to. “All of the projects are investments in the future of the state,” MacKinnon said. He noted that the by and large the funding for the six proposed developments would be financed and not come out of the state’s general fund. A negative message from state leadership can impact the public’s perception of the state’s economic future, according to MacKinnon. “My concern is that if government starts the Chicken Little — the sky is falling — syndrome, then you’re going to see private investment shrink very quickly,” he said. Speaking on budget issues before the Anchorage Chamber of Commerce Dec. 15, Walker said he is not “declaring a crisis” and Alaska can work through these tough times as it has in the past; MacKinnon said he hopes the public continues to hear that message. AGC of Alaska, in conjunction with the University of Alaska Anchorage Institute of Social and Economic Research, or ISER, releases its construction outlook in late winter each year. Going back to his campaign, Walker has said he would prioritize the state’s big projects. In an October interview with the Journal he referred to the Juneau access road as former Gov. Sean Parnell’s “road to reelection.” Parnell had said the state has sufficient funds to investigate large projects up to the point where major construction investment decisions had to be made. Walker pulled $20 million to the Alaska Energy Authority for Susitna-Watana study work from Parnell’s “in-progress” budget, and another $8 million for work on the Ambler road environmental impact statement by the Alaska Industrial Development and Export Authority. AIDEA needs about $10 million to conduct the Ambler EIS, according to spokesman Karsten Rodvik. The development authority had hoped to file the EIS application shortly, Rodvik said. AEA has $10 million in unencumbered funds for the hydro project from a $20 million fiscal year 2015 appropriation passed last legislative session. It is currently projecting Susitna-Watana to cost $5.65 billion. The state would still need to invest more than $330 million through 2018 for Federal Energy Regulatory Commission licensing and design of the large dam, according to AEA project leaders. From there, construction and program costs would likely be financed with a loan and bond package. The state has invested $192 million since 2010 in the latest attempt at building the Susitna-Watana dam. The Department of Transportation has enough money remaining from a $55 million appropriation to the Knik Arm bridge last session to take the project to construction. Knik Arm Bridge and Toll Authority Executive Director Judy Dougherty said in early December that a request for proposals on a design-build contract for the bridge and road connections would be let sometime next year to have a construction team under contract by June 2016. That process is at least temporarily on hold with Walker’s order. AEA spokeswoman Emily Ford wrote in an email that the authority is looking at FERC licensing options to preserve the investments already made in the project if it is ultimately shelved for a time. “The FERC Initial Licensing Process is very milestone driven and with no funding currently in the capital budget and the recent administrative order, there will be impacts to the overall schedule,” Ford wrote. AEA’s latest project timeline has first power coming from the dam in 2028 or 2029. The outlook for capital projects needing state money in 2015 is shaky at best. Going into the 2015 legislative session, the project topping the list in terms of immediate ask is the Port MacKenzie rail extension. The Matanuska-Susitna Borough needs $119.5 million to finish the 32-mile rail spur over the next few years, bringing the total project cost to $303.5 million. Segments one, three and six, totaling 14.4 miles are funded and rail has been laid on the 1.8 miles of segment six, the northern end of the spur. Work on a 7.4-mile segment to the east of Big Lake will be completed by the middle of next year, according to the borough. Right-of-way acquisition is in progress for 4.2 miles of future track near Houston, as it is for about 7 miles of the route to the south through the Point MacKenzie Agriculture District. Funding is needed to purchase and lay track and ballast on almost the entire route, including the rail loop at Port MacKenzie. At least in the near term, robust North Slope oil and gas activity should help offset a lack of state investment elsewhere. ConocoPhillips is in the midst of nearly $2.5 billion of capital projects to add production through 2017. New to the Slope in 2014, Caelus Energy announced a $500 million 2015 capital plan earlier this year for its two developments, Nuna and Oooguruk. And work continues to the east at ExxonMobil’s Point Thomson, where another roughly $1.5 billion is needed to get to first production in 2016. Elwood Brehmer can be reached at [email protected]

Anchorage sues feds, requests $350M for new port design

Another year began with another lawsuit in the Port of Anchorage saga, but it ended with the promise of progress as well. The Municipality of Anchorage filed suit against the U.S. Maritime Administration, or MARAD, Feb. 28 in Federal Claims Court, an effort to recoup damages the city claims it is owed for the failed port expansion project that spanned 10 years and yielded little for the more than $300 million spent on the 53-year-old port. MARAD managed the Port of Anchorage Intermodal Expansion Project from 2003 until 2012. The municipality took oversight control of the project late in 2012 and soon after sued the original port designer, a project consultant and MARAD’s contracted managing firm. Anchorage is looking for up to $340 million from one or all of the now five adversaries it has in court, according to city attorneys. The municipality sued GeoEngineers Inc. this year, adding another design consultant to its first case in U.S. District Court. Outside the courtroom, Anchorage closed the book on the Port of Anchorage Intermodal Expansion Project and began the scaled-down Anchorage Port Modernization Project. A weeklong design scoping meeting in August led to a preliminary design revealed in November that project manager — and defendant in the first port lawsuit — CH2M Hill said would cost about $485 million. The municipality is asking for $350 million from the Legislature to finish the project in the coming years. That amount would be added to the $130 million it still has from the first round of work. 2. Knik bridge gets new plan The Knik Arm bridge project changed hands and moved forward with a new plan in 2014. House Bill 23 passed by the Legislature in April shifted funding and construction responsibilities to the state Department of Transportation and Public Facilities from the Knik Arm Bridge and Toll Authority, which led the work for more than 10 years. The change was brought about by former Gov. Sean Parnell’s new financing plan for the up to $900 million toll bridge — a three-pronged public funding plan instead of a public-private financing collaboration. KABATA will manage toll collection and maintain the bridge if it is built. The financing plan passed in HB 23 calls for $300 million each in state bonds, federal infrastructure, or TIFIA, loans and state-matched federal highway funds. In December the project team released a long-awaited socioeconomic impact study that projects minimal impacts on job and population numbers for Anchorage, Palmer and Wasilla whether or not the bridge is built. Development at Point MacKenzie is dependent on the bridge being built. The study also determined that toll revenue from bridge traffic at $5 per use for noncommercial vehicles will be sufficient to pay for the federal loans a couple years after the bridge is finished in 2020. 3. Ferry construction underway, fares to increase Work began on two new ferries and the Alaska Marine Highway System announced its first system-wide fare increase in years. A keel-laying ceremony held at Vigor Alaska’s shipyard in Ketchikan Dec. 13 marked the official kickoff of construction on the first AMHS ferries to be built in Alaska. Vigor Alaska was awarded the contract Oct. 16 to build what have been dubbed the Alaska class day boats. The 280-foot ferries were funded completely with state money — $120 million for the pair — with the idea that they would always be built in Ketchikan if Vigor and the state could reach an agreement. They are scheduled to be ready for service in October 2018. The last ferry added to the state’s 11-vessel fleet was the fast ferry Fairweather in 2005. In September, the AMHS released the design study report for the M/V Tustumena replacement, which outlines the concept design and amenities for the vessel. Replacing the 50-year-old Tustumena will likely be a 330-foot vessel — 34 feet longer — better equipped to handle the open ocean Aleutian route the “Rusty Tusty” serves. A day before the keel-laying deputy at a Marine Transportation Advisory Board meeting Transportation commissioner Reuben Yost said fares on most AMHS routes would increase 4.5 percent beginning May 1. It is the first sweeping rate hike since 2007, according to Yost. The price hike will affect travel booked after Jan. 1. Routes with fares 25 percent higher than similar-length trips will not be included in the rate increase. The ferry system also pulled a ban on travel by unaccompanied minors in November before the policy went into effect. Yost said unforeseen flak from the public caused the AMHS to scrap the idea. In the future, parents of minors traveling alone will probably have to sign a form approving their travel depending on the age of the child, Yost said. 4. Unmanned aircraft industry takes off Alaska’s unmanned aircraft industry took some leaps forward in 2014. The nation’s first overland commercial flight of an unmanned aircraft system, or UAS, as they are called in the industry, took place in the North Slope June 8. UAS manufacturer AeroVironment flew its fixed-wing Puma for BP with the mission of surveying gravel roads and pads on the Slope. ConocoPhillips was the first company in the country to receive authorization for commercial flights over Chukchi Sea in 2013. A May, a quad-rotor flight in Fairbanks marked the opening of the Alaska Center for Unmanned Aircraft Systems Integration, which is affiliated with the University of Alaska Fairbanks. The Center for Unmanned Aircraft Integration was chosen by the Federal Aviation Administration to operate one of six test sites across the country on Dec. 30, 2013. The Alaska-based Pan-Pacific test site stretches into Oregon and Hawaii as well. UAS are believed to be a prime tool for all kinds of work — wildlife counting, wildfire monitoring, oil and gas infrastructure surveying — in remote parts of Alaska once the FAA approves widespread use of the craft. A draft rule detailing how commercial UAS operations will be regulated could be made available by the FAA for public comment within several weeks, according to agency officials in Alaska. 5. A year in flux for the Alaska Railroad It was an up-and-down year for the Alaska Railroad Corp. The year began on a sour note when Flint Hills Resources announced it would close its North Pole refinery, a major freight customer of the railroad. The Alaska Railroad hauled up to 2 million tons of jet fuel from the refinery to Anchorage annually since 2008. That loss of business probably cost the railroad about $11 million, according to its CEO Bill O’Leary. The 2014 legislative session was a mixed bag for the Alaska Railroad. It got $15 million of a $20.2 million appropriation to fund its federally-mandated Positive Train Control work. The unfunded safety system requirement for passenger railroads will likely cost the railroad more than $156 million in all. Over the next three state fiscal years, the railroad will need another $53.5 million from the Legislature and it has no where else to go, spokesman Tim Sullivan said. However, increased railroad-barge service, primarily from oil and gas companies, generated $5.1 million in unexpected revenue for the railroad through November, Sullivan said. That money has been put towards funding Positive Train Control infrastructure. Elwood Brehmer can be reached at [email protected]

Judge dismisses most claims in King Cove road lawsuit

A federal judge dismissed a majority of a lawsuit brought against Interior Secretary Sally Jewell in an attempt to get a King Cove emergency access road built. U.S. Alaska District Court Judge H. Russel Holland dismissed four of the five claims Dec. 19 brought by seven plaintiffs that include the Aleutians East Borough, the City of King Cove and area Native groups. Parallel claims by the State of Alaska as an intervenor in the case were also dismissed. Jewell announced her decision to deny a swap of 206 acres of federal land in the Izembek Wildlife Refuge for about 56,000 acres of state and Native village King Cove Corp. land on the Alaska Peninsula on Dec. 23, 2013. At the heart of the issue is a planned 11-mile gravel road that would cut across what is now Izembek land and complete a connection between the villages King Cove and Cold Bay. Area residents, the state and Alaska’s congressional delegation have all pushed for the road claiming it would provide safe and reliable access to Cold Bay’s 10,000-plus foot runway — a World War II military post — from where large planes can fly patients in need of urgent medical care to Anchorage. The sole claim Holland upheld was that the plaintiffs’ health and safety concerns arising from the Jewell’s decision do fall under the National Environmental Policy Act in this case. The Interior Department argued that the concerns fall outside of NEPA because they are not related to the environment. Holland ruled that they are at least worthy of consideration under NEPA given Jewell’s ruling was based at least partly on environmental concerns. When she made her decision, Jewell said the risk of impacting habitat to certain rare species of waterfowl with the road was too great and that an alternative could be sought. The federal government has spent nearly $40 million on improvements to King Cove care facilities and alternative transportation across the marine body of Cold Bay. Still, area residents assert the road is the only permanent fix. Over the years 19 people have died in plane crashes or waiting to get medevac service out of King Cove. However, no one has died trying to leave since 1994. Holland heard oral argument on the department’s motion to dismiss Oct. 20 in Anchorage. Holland agreed with the Interior Department that the plaintiff consortium’s claim that Jewell did not need to include a public interest determination with her decision because she chose the “no action” alternative. He wrote that the 2009 Omnibus Public Land Management Act passed by Congress that approved the land transfer “expressly addressed the specific question of when a public interest determination is required.” Such a finding would be needed only if Jewell had chose to approve the deal, according to Holland’s order. Also dismissed was an argument that Jewell violated the Alaska National Interest Lands Conservation Act, or ANILCA. Holland wrote that while the road could improve subsistence access to the Izembek Refuge as two of the plaintiffs alleged, the “no action” alternative invoked did not change public land status. Therefore the threshold for an ANILCA claim was not met. Holland ruled that the Interior Department did not violate a trust responsibility owed to Alaska Natives by the federal government because neither the 1976 Indian Health Care Improvement Act, nor the 2009 land transfer legislation place such a duty on the Interior Secretary to execute the land exchange. Finally, a claim that the department violated the Administrative Procedures Act was dismissed as duplicative to the Public Land Management Act and NEPA claims. Regardless of the outcome in court, Sen. Lisa Murkowski has made approval of the land transfer one of her central issues. She has railed on Jewell at every opportunity over the past year and she regretted voting to confirm the secretary when Jewell announced her decision. After fellow Republican Dan Sullivan defeated incumbent Mark Begich, Murkowski said Jewell was probably not happy with the outcome. “Sally Jewell is probably looking at the outcome tonight (Nov. 4) with a little concern about what she may be facing because I will not only be the chairman of the Energy and Natural Resources Committee, I will also be the chair of the Interior Appropriations subcommittee that has the authority over her budgets,” Murkowski said. “I’m not going to forget those women. I’m not going to forget these families. I’m not going to forget the people of King Cove. I’m not going to give up.” Elwood Brehmer can be reached at [email protected]

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