AIDEA backs first loans for LNG trucking plan

The Alaska Industrial Development and Export Authority board approved $23.1 million in loans for the Interior Energy Project April 3 — money that will be used to build the first part of the complex natural gas supply chain for Fairbanks-area residents.

A $15 million loan was awarded to Fairbanks Natural Gas, which currently serves about 1,100 customers in the city’s core, and the borough-owned startup Interior Gas Utility was approved for $8.1 million.

FNG President and CEO Dan Britton told the AIDEA board that the $15 million would be used to add about 30 miles of pipe to its existing infrastructure in the next two years and allow the utility to serve up to 2,500 new customers in its service area.

 “We’re happy to be expanding and getting more gas to more customers versus just talking about it,” Britton said.

Gary Wilken, AIDEA board member and a former state senator from Fairbanks, said FNG’s plan is “aggressive and welcome.”

FNG, which currently trucks about 1 billion cubic feet, or bcf, of Cook Inlet gas  per year to Fairbanks, was criticized during Alaska Regulatory Commission hearings last fall for not growing its customer base on its own within the service area that was ultimately awarded to IGU. Britton has long contended that the utility’s small size made it difficult to secure long-term gas contracts needed to back expansion.

Britton said FNG has its design and permits ready and has been working with the Department of Transportation to coordinate its digging with road projects scheduled for this summer.

IGU board chair Bob Shefchik said the utility would use the money to design, permit and secure right-of-ways for its extensive gas distribution system to be started in North Pole. By 2021 IGU has said it plans to lay nearly 670 miles of gas pipeline in an effort to reach more than 11,600 customers.

He said IGU would be “in the dirt in the summer of 2015.”

While the utilities work at the southern end of the Interior Energy Project, AIDEA will be working with its North Slope gas liquefaction plant partner Colorado-based MWH Americas Inc. The trick will be melding the ends of the project and setting up a trucking network to begin hauling LNG down the Dalton Highway by early 2016, AIDEA’s stated goal.

“This is the biggest puzzle I think I’ve ever worked on in my life,” AIDEA Executive Director Ted Leonard said.

Poor winter air quality and the fact that some residents pay up to $5,700 annually for fuel oil to heat their homes has driven the initiative to get natural gas to Fairbanks. AIDEA projects that trucked North Slope gas will be about half the cost of fuel oil in the Interior.

The loans to the utilities are from the state’s Sustainable Energy Transmission and Supply fund and act as essentially as 20-month, no interest lines of credit, AIDEA Deputy Director Mark Davis said.

Passed last year, Senate Bill 23 initiated the Interior Energy Project and authorized AIDEA to use up to $125 million in loans from the SETS fund for the North Slope plant and distribution systems.

The end of 20-month grace period roughly coincides with when AIDEA hopes to get first-gas to Fairbanks, which would give the utilities a revenue stream to pay for the debt.

 “This is designed to get them jumpstarted. We don’t want customers paying for unused pipe,” Davis said.

FNG’s loan was approved unanimously, while IGU’s was approved on a 4-2 vote with board members Crystal Nygard and Wilson Hughes dissenting. Board member Russell Dick was absent.

Hughes and Nygard expressed concerns over whether IGU could repay the loan and if it should instead be a grant from the $57.5 million capital appropriation as part of SB 23.

“This (IGU loan) is a little unique because usually AIDEA loans are for hard assets like the one to Fairbanks Natural Gas for pipe,” Davis said.

He continued: “If IGU is unable to pay this at the end of 20 months then there would really be a discussion as to whether IGU was really in existence.”

IGU’s distribution system design, permits and right-of-ways would become AIDEA’s if the utility cannot repay its loan, he said.

According to Shefchik, IGU had about $450,000 available at the end of March. On March 27 the Fairbanks North Star Borough approved the utility for a $7.5 million line of credit available through 2021, when full build-out of its system should be wrapped up. The borough credit is not a loan backstop, he said.

The loan “represents a compromise between us and the AIDEA management rather than utilizing the capital money now is to have it be a loan,” Shefchik said.

How the loans are structured once repayment begins will depend on how much gas the utilities commit to buy from the North Slope plant, according to Davis.

As gas distribution expansion continues beyond 2015 the utilities will have the option of purchasing gas from other places but would then have to look for other financing too, Leonard said.

Board member Wilken asked about AIDEA’s ability to drive demand to the North Slope plant.

“I love competition but I hate stranded assets,” Wilken said.

Leonard said “take or pay” agreements with the utilities for gas are essential for the viability of the plant.

“Our position has been that any funding or financing that (AIDEA) provides has to be tied to utilizing gas from the North Slope plant.

In accordance with SB 23, interest rates on the SETS loans can be up to 3 percent, and will be worked out in the future along with further gas purchase contracts.

FNG will purchase up to 500 million cubic feet from the North Slope plant as part of the current loan terms to supply the customer base served by expanded infrastructure and paid for with the $15 million, Leonard said.

The final design for the 9-bcf North Slope plant that could cost up to $180 million, is still up in the air. In the coming months AIDEA must decide whether to build the entire plant at once or to build a 4.5-bcf module initially that can have a second added as demand increases.

Leonard noted that the Interior Energy Project has never been viewed as a long-term solution for Fairbanks energy, and that if a gas pipeline ever bisects the state the utilities would be able to draw cheaper gas from it. By then, he said, it’s possible other demand from customers such as mines could arise for trucked LNG, keeping the North Slope plant viable.

After full build out, FNG is projected to have another 3.5 bcf worth of demand added to its 1 bcf now. IGU’s end demand is expected to total 4.5 bcf as well; the difference being the vast majority of its customers will be residential and require less gas than some of FNG’s commercial customers in the heart of Fairbanks.

Britton said about 50 percent potential customers are expected to switch to gas within the first two years of it being available, with 20 percent converting in year three, and 15 percent in year four.

Leonard said that Golden Valley Electric Association’s purchase of gas will be essential to the success of the project.

Golden Valley President and CEO Cory Borgeson said in an interview the cooperative is ready to purchase about 2 bcf per year of gas for electricity generation.

“We’re in on this very important project,” Borgeson said.

Regardless of how the gas demand washes out, Leonard said backing the gas infrastructure is a good thing.

“We are building out distribution with these funds that does provide distribution either for our plant or for the larger pipeline or for alternative gas on the plant side,” Leonard said. “These loans provide low-cost financing for the citizens of Fairbanks for their distribution system.”

Elwood Brehmer can be reached at [email protected].

11/21/2016 - 9:26am