Elwood Brehmer

Gov. Walker has ‘treatable’ form of cancer

Gov. Bill Walker stood with his family and Lt. Gov. Byron Mallott to explain his prostate cancer diagnosis to Alaskans during a Friday afternoon briefing at his Anchorage office. The governor said he got the news about two weeks ago after a routine check-up. “(The diagnosis) takes a while to absorb,” he said to reporters. “I join a group of Alaskans that have cancer and I look forward to joining a group of Alaskans that survive cancer.” Walker made the news public a couple hours earlier in a written statement from his office that emphasized the cancer is very treatable. He will have surgery to remove the cancer in mid-December, he said, and if all goes well will not require follow-up treatment. “I want to be done with this as soon as possible,” Walker said. “I’m feeling fine.” First Lady Donna Walker said he has not had a single symptom related to the diagnosis. “We have every confidence for a complete and full recovery,” she said. Walker also said he was assured by Attorney General Jahna Lindemuth that Mallott has full authority to act as governor if need-be during the roughly three-hour surgery without a formal action based on the parameters laid out by the state Constitution. The recovery should be brief and not interfere with handling the responsibilities of leading the state, according to the Walkers. After consulting with other public officials, including other governors, who have gone through similar situations, Walker said he decided to be open about the situation to avoid letting rumors “grow it into something that it’s not.” The biggest takeaway, he added, should be for all Alaskans to get regular cancer screenings so any issues can be handled early and quickly. Donna said the surgery will be conducted outside of Alaska by a surgeon recommended by the governor’s primary physician. Sen. Lisa Murkowski released a statement shortly after the press conference wishing the Walker’s the best. “While the news of cancer is always troubling, I am glad that Gov. Walker’s doctors caught his illness early, when it is treatable, and that he chose to share what he faces with the people of Alaska,” Murkowski said. “My thoughts are with Bill, Donna, and their family as they walk through this challenge together.”

Owners of vacated LIO appeal $37 million claim denial

The owners of the now-vacant former Anchorage legislative information office contend state Sen. Gary Stevens “rewrote history” in denying their $37 million contract claim over the building. 716 West Fourth Avenue LLC filed an appeal Oct. 31 to Stevens’ denial, asking for a hearing in front of the full Legislative Council to address the matter. The lengthy appeal signed by 716 attorney Jeffrey Feldman argues that Stevens not only misconstrued the facts of the long-running public saga over the building, but also failed to address the basis for 716’s original claim. In the original claim, submitted to Stevens in July by the building owner group that includes Alaska developers Bob Acree and Mark Pfeffer, 716 insists that under state law the Legislature cannot put the financial burden of the $44.5 million building project on the developers because a court found the Legislative Council violated state procurement law when it approved the project in 2013. Legislators moved out of the Downtown Anchorage building in late September and into Midtown office space purchased for $11.8 million via the state capital budget. In March a state Superior Court judge ruled the Legislature’s 10-year, $3.3 million per year lease invalid for the six-story offices custom-built for the legislators because the redevelopment project was beyond the scope of a remodel or a simple lease extension, and therefore needed to be competitively bid. 716 also asserted in the original claim that state courts recognize “promissory estoppel,” a legal principle based on the notion that a promise is legally enforceable when a party relies on that promise to its eventual detriment. Stevens addressed the estoppel grievance by stating 716 was aware of issues with the procurement before it spent $37 million on the building and that applying estoppel in this instance would reward 716 for participating in the invalid procurement. Additionally, Stevens wrote that awarding state money based on the estoppel claim would contradict public interest. “The public interest is best supported by (the Legislature) terminating the lease and exiting the building after having paid all rent owed,” he wrote. To that end, Stevens mostly focused on the Legislature’s ability to walk away from the deal because the lease — as is the case with most state business contracts — includes a “subject to appropriation” clause that terminates it if the Legislature does not fund it. Several of Alaska’s finance industry leaders have warned legislators about the potential damage to the state’s credibility in future business dealings that invoking the clause could inflict. To the contrary, 716’s appeal notes that the Legislative Affairs Agency, which handles business matters for the Legislature, wrote to 716’s long-term project lender Florida-based EverBank in May that the Legislature would be forced to vacate the property in the absence of a valid lease. The building owners also dispute the timeline Stevens laid out in claiming Jim Gottstein, who owns an adjacent property and brought the procurement suit against 716 and the Legislature, warned he would take the issue to court in early October 2013, shortly after the project was approved by the Legislative Council. Stevens was off by at least three weeks, a long time for the fast-moving project they contend, also arguing Gottstein’s comments from years ago carry no weight to the issues at hand. “As a matter of law, fact and logic, a third party’s threats to sue or his general opinion on the lease cannot provide ‘notice’ in any meaningful manner that would be relevant to 716’s estoppel claim,” the appeal states. “Indeed, the decision cites no legal authority for this remarkable proposition.” Further, the appeal rejects the narrative in Stevens’ decision that 716 should also have been aware of the potential for the Legislature to defund the lease. “The relationship between the Legislature and 716 was based upon a written contract. Reliance on legislators’ informal statements to the press or even statements made during proceedings that did not result in legislative action do not rise to the same level of quality of notice as direct communications between the parties and their counsel,” 716 attorney Feldman wrote. The full Legislative Council has 30 days to address 716’s appeal in a hearing. If it is not addressed, Stevens’ decision stands. In the end, the claim is almost assuredly headed for Superior Court as a lawsuit, given the council overwhelmingly supported purchasing the Midtown Anchorage offices earlier this year. Council member Rep. Sam Kito of Juneau was the only vote against buying the other space on the 14-member committee and has repeatedly stated his belief the Legislature will likely be liable for at least part of the Downtown building costs. EverBank also indicated in May that it is likely sue the state for violating the subordination, non-disturbance and attornment, or SNDA, agreement signed by the bank, then Council chair Anchorage Rep. Mike Hawker and others in December 2014. An attorney for the bank wrote to Legislative Affairs officials that EverBank lent 716 $28.6 million based on the SNDA, which the bank contends is a contract with the state that binds it to its obligations associated with the building regardless of extenuating circumstances. Elwood Brehmer can be reached at [email protected]

Meet the first B Corps in the state

A good day’s work is about more than simply turning a profit for a couple Alaskan small business owners. Arctic Solar Ventures in Anchorage and Cordova’s Alaska Glacial Mud Co. are the first Alaska businesses to be certified as Benefit Corporations — B Corps for short. The B Corp certification is often described as “Fair Trade coffee, but for everything else.” It obligates business leaders to not only focus on running a financially successful company, but also have demonstrable social and environmental benefits. Arctic Solar Ventures founder Stephen Trimble said the decision to become a B Corp was an easy one for his company’s small team of three lifelong Alaskans. “You actually modify your bylaws to say you don’t just have a fiduciary responsibility to your stakeholders, but also to your community, the place you live,” Trimble said. “For us, it’s like, of course that makes sense. We should all think like that.” Opened in March 2015, Arctic Solar Ventures is a one-stop-shop for anyone interested in turning the Midnight Sun into electricity. It received its B Corp certification in June. Lauren Padawer started Alaska Glacial Mud in 2006 after quickly falling in love with the salmon-centric lifestyle in Cordova. She harvests the mineral-rich glacial sediments that wash downriver and form the tide mud that is the Copper River Delta for use as skin care products. Her products have been featured in numerous women’s magazines and Padawer pitched Alaska Glacial Mud to investors in a January 2014 episode of ABC’s Shark Tank. She decided to get her company certified in 2014 because it already met many of the B Corp principles. “My business was born more out of a desire to be a philanthropist than it was to be — I wanted to have a business that could work as an economic driver and give back to the organizations that I’d be otherwise working for if my time weren’t spent running a business,” Padawer said. Those organizations are ones that work to protect and enhance the Copper River watershed. Alaska Glacial Mud donates 10 percent of its profits to groups like the Prince William Sound Science Center, the Eyak Preservation Council and the Copper River Watershed Project. “Part of our brand having integrity is supporting the place that provides abundant resources,” she said. “Our raw material comes from the Copper River.” When not harvesting mud, Padawer joins in the more popular Copper River harvest. She commercial salmon fishes in Prince William Sound from her boat, the F/V Canvasback, each summer. B Lab, the Philadelphia-area nonprofit behind the B Corp label, was founded in 2006 by Andrew Kassoy, a private equity investor, Jay Coen Gilbert and Bart Houlahan. Coen Gilbert and Houlahan founded and led AND1, a basketball shoe and clothing company before turning to B Lab. Over the past 10 years, more than 1,600 businesses — Ben & Jerry’s ice cream, Patagonia Inc. clothing and King Arthur Flour to name a few — in 42 countries from 120 industries have been certified as B Corps, according to B Lab. Padawer described the certification process as “very rigorous and detailed,” noting that the assessment not only delves into business practices but also product sourcing, packaging, energy consumption and sourcing, even the practices of suppliers. Trimble said the certification doesn’t provide any financial advantages, but “it’s just another tool for businesses to try to differentiate themselves and align their mission with what they do.” It does, however, offer entry into a diverse business network that has its own benefits. Arctic Solar Ventures has been able to reach out to other certified solar panel companies with technical questions. Additionally, Trimble said he believes it will be a growing marketing opportunity as B Corp status continues to gain recognition. Thirty-one states have also passed legislation establishing a B Corp tax designation. Alaska is not one of them, yet. Rep. Paul Seaton, R-Homer, submitted a bill in 2015 to set up an Alaska B Corp tax designation that would not provide tax breaks, but give business leaders more flexibility to meet non-traditional corporate goals. “Corporate law generally requires a corporation to consider the financial impact to their shareholders as the top priority when making decisions. Under the benefit corporation structure, owners and boards have the freedom to take actions which positively impact their communities without fear of violating a fiduciary duty,” the House Bill 49 sponsor statement reads. Trimble said he has been working with Seaton’s office on new legislation for the upcoming legislative session. Padawer hopes her work can inspire other business owners, who hold a significant vehicle for good, to use their companies to give back to their communities and the environment. “It’s important for us as we protect people’s skin that we also — it really sounds cheesy, but protect the earth’s skin too,” she said. “We don’t really have a lot of integrity if we’re not working outside of our business to do good work in the world.” Elwood Brehmer can be reached at [email protected]

Progress slow, but ongoing, for Interior Energy Project

The state’s effort to get more natural gas to the Fairbanks area is admittedly moving painfully slow, but Interior Energy Project leaders insist key milestones are within reach. IEP manager Gene Therriault reported to the Alaska Industrial Development and Export Authority board of directors at its Oct. 27 meeting that his team is advancing all aspects of the gas supply chain despite delays in inking deals imperative to the success of the project. AIDEA has negotiated a term sheet that is pending with a Cook Inlet natural gas supplier, Therriault said. However, the inherent challenges the project is facing have prevented finalizing the deal. Low oil prices have at least temporarily brought financial relief to Interior residents and businesses that rely in fuel oil for heat, but have also slowed the expected rate at which prospective gas customers will convert to actual gas customers compared to when the project was funded by the Legislature in 2013. At that time, fuel oil in the Interior was roughly $4 per gallon, twice the energy equivalent cost of AIDEA’s goal to provide the region with trucked natural gas at $15 per thousand cubic feet, or mcf. Therriault, a resident of the area himself, said he recently purchased fuel oil for $2.22 cents per gallon, which nearly matches natural gas at $15 per mcf. As a result, AIDEA has been forced to ask potential gas suppliers for an unusually flexible gas supply contract. Therriault described it as asking a developer to build a building for lease to a single tenant that does not know how quickly it will lease the full space. “We are asking somebody to have a reserve of gas at a price that works for the project, but we are unsure of how quickly we will be able to lock the gas in under take or pay obligations,” he said. AIDEA board chair Dana Pruhs said he would expect asking for natural gas to essentially be held in reserve would be “a fairly big hurdle” for the gas supplier. Nevertheless, there really isn’t another option, as saddling the initial customer base with paying for excess supply would kill the project’s economics. On a positive note, Therriault said Fairbanks Natural Gas, which currently supplies natural gas to a small base of about 1,000 customers, has ordered three additional large-volume LNG trailers after tests with the first trailer went well. The larger, 13,000-gallon LNG trailers built in Seattle by Western Cascade could immediately reduce trucking costs from the Mat-Su LNG plant to the Interior by more than 20 percent over the 10,500-gallon trailers the Fairbanks Natural Gas is currently using through simple economies of scale. Therriault added that AIDEA, which purchased FNG in 2015, has had productive meetings with Interior Gas Utility officials on combining the two utilities. The expectation is to have a deal for the AIDEA board to consider by the end of the year, he said. The plan to meld the borough- and state-owned utilities has been in the works since AIDEA bought FNG to maximize operational efficiencies but also to aggregate gas demand. “It would be very difficult to start with a very small (IGU) customer base out in North Pole and control that cost,” Therriault said. “But by combining the two utilities we’re able to start to develop that broader system at an affordable cost to the customer.” The biggest unknown remains how many people will actually convert, but the Therriault described Fairbanks North Star Borough Mayor Karl Kassel as “bullish” on utilizing every tool available to the local government to help ease conversion costs that can reach $10,000 if a completely new, natural gas capable home heating boiler is needed. The most likely mechanisms are “on-bill” financing for residential customers, which would allow natural gas customers to make monthly payments for their gas heating system as a surcharge on their regular utility bill, and PACE financing for businesses wanting to make the switch. Property Assessed Clean Energy, or PACE, financing provides an avenue to pay for energy efficiency or cleaner fuel upgrades as an assessment on regular property tax bills. It requires state legislation to allow local governments to set up PACE programs; a widely supported PACE bill pushed by Gov. Bill Walker’s administration passed the House but died in the Senate last session as legislators dealt with larger budget issues. It’s expected the administration will resubmit the PACE legislation in the upcoming session. “We are still making progress,” Therriault summarized. “Is it slower than we had hoped? Absolutely, it is. Do we think we are still on track to achieve the goals of the IEP? We believe we are.” Elwood Brehmer can be reached at [email protected]

$50 oil helps BP turn $1.6B profit

BP turned in a $1.6 billion profit in the third quarter as oil prices stabilized and it continues to reconcile costs from the 2010 Deepwater Horizon spill. The London-based major reported its quarterly results early Tuesday. Vastly improved upstream earnings at nearly $1.2 billion led the way for BP, which lost $109 million in its production sector in the second quarter. A downstream profit of $978 million in the third quarter also helped offset $441 million in costs including those related to the spill. It reported more than $5.5 billion in similar costs in the second quarter. For the year, BP still reported a $382 million loss so far despite the relatively strong quarter. However, that is a vast improvement over 2015, when spill-related costs largely resulted in $3.1 billion in losses during the first nine months of the year. “We continue to make good progress in adapting to the challenging price and margin environment. We remain on track to rebalance organic cash flows next year at $50 to $55 a barrel, underpinned by continued strong operating reliability and momentum in resetting costs and capital spending,” BP Chief Financial Officer Brian Gilvary said in a formal statement. “At the same time we are investing in projects, businesses and options to deliver growth in the years ahead.” The company’s near-term price forecasts show oil stabilizing below $60 per barrel. BP executives said shortly after the second quarter that it had identified its cumulative cost for the Deepwater spill would be $61.6 billion. Gilvary updated that to $61.8 billion, or $43.5 billion after tax, in the third quarter earnings call. To date, BP has spent $41.7 billion resolving claims from the disaster. The company’s 2016 capital spend should end up at about $16 billion, according to Gilvary, down slightly from prior forecasts, and 2017 should be about the same. Those figures are about one-third below peak spending in 2013, he noted during the earnings call. Through the third quarter BP has cut its controllable costs by $6.1 billion compared to 2014. The company has a goal of reaching $7 billion in savings next year versus 2014, when oil started to dive from its $100-plus per barrel peak. BP will divest assets totaling between $3 billion and $5 billion this year and continue selling off up to $3 billion per year for the foreseeable future, which will help support future Deepwater Horizon commitments, Gilvary said. In 2014, BP sold a suite of producing and prospective North Slope assets to Hilcorp for $1.25 billion. Elwood Brehmer can be reached at [email protected]

All but one claim against CH2M dismissed in port lawsuit

The global engineering firm CH2M is almost out of Anchorage’s lawsuit to settle liability for the municipality’s failed port expansion project after a Monday federal court ruling. U.S. District Court of Alaska Judge Sharon Gleason found the Municipality of Anchorage has little financial recourse against the company that, at least initially, seemed to play a very small role in updating the aging docks at the Port of Anchorage. Gleason wrote in a 31-page order that the municipality cannot link CH2M — which through a company it purchased was a consulting subcontractor in the layered and complex project — to the damages it has since incurred. Colorado-based CH2M, formerly CH2M Hill, works extensively as a contractor in Alaska’s oil and gas industry. It purchased VECO Alaska in 2007 shortly after VECO issued a report stating the preliminary dock design met seismic stability criteria for the project. First, the municipality hasn’t proven how CH2M’s simple involvement in the failed construction project makes it potentially liable for damages, according to Gleason. Alaska law generally restricts awards outside of contract claims to instances of personal injury and secondary damages incurred to property that should have been outside of the scope of work. Liability for other claims is determined by contractual obligations. Gleason notes that CH2M “is four times contractually removed from (the municipality)” in regards to the port suit. In March 2013 Anchorage sued the port project management firm Integrated Concepts and Research Corp., or ICRC, the dock design company PND Engineers, and CH2M for their roles in the project that began way back in 2003. Work on the project stopped in 2010 after PND’s patented Open Cell Sheet Pile began to fail before it was fully installed. PND has long contended damage to the sheet pile dock — a design that has been used extensively throughout Alaska — was the result of improper installation by Quality Asphalt and Paving and MKB Constructors, the construction companies hired by ICRC. CH2M also authored a study released in 2013 and commissioned by the municipality that found the sheet pile design did not meet seismic requirements for the Anchorage port. That study was released shortly before the lawsuit was filed and was oft cited in the municipality’s claim. Since, CH2M has been hired by the city to oversee the second attempt to update the port infrastructure that serves as a nerve center for fuel and goods headed nearly everywhere in Alaska. CH2M estimates it will likely cost upwards of $480 million to remove much of the damaged sheet pile and other earlier work and replace the existing pile-supported dock that is in place. Municipal attorneys have said they are looking to recover up to $340 million between this lawsuit and another filed in 2014 against the U.S. Maritime Administration, which oversaw the project for the city and hired ICRC. In her order, Gleason ruled the municipality could not recoup money for the damaged port “backlands” because the 35 acres of land created by filling in the area behind the sheet pile because the land would not have existed if not for the project. Anchorage has settled for $12.6 million this year with QAP, MKB and Terracon Consultants for their roles in the project. Terracon also consulted on the dock design and soil stability issues in the early stages of the project. Additionally, the municipality cannot get back the roughly $33 million it has spent to remove fill that poured out on the seafloor after the sheet pile ruptured — causing it to violate its U.S. Army Corps of Engineers permits — because the State of Alaska owns the seafloor of Cook Inlet, not the municipality. Finally, the municipality was unable to prove anyone working on the project relied upon VECO’s March 2007 analysis. The analysis done for PND was used mostly as “quality control,” according to testimony from PND principal Dennis Nottingham. Reviewers from other subcontracting firms further testified they put little stock in the VECO report, the order stated. As such, the municipality’s professional negligence claim fails, Gleason determined. The only negligence claim keeping CH2M in the suit that will be heard at trial scheduled for next April is whether PND and others involved in the expanded port design relied on a two-page May 2006 letter from VECO principal geotechnical engineer Kurt Stangl to PND in their decision-making. Stangl’s letter gave a positive review of the design team’s study of the soil formations at the port. Nottingham testified the letter supported other findings that ultimately led PND to believe the geotechnical work done on the project was sufficient at the time, Gleason noted. “All that is required of (the municipality) at this stage in litigation is to show a genuine dispute of fact, and the court finds that the May 2006 letter, in conjunction with Mr. Nottingham’s deposition testimony, establishes a triable issue of fact as to whether the requisite proximate casual connection exists,” she wrote. Elwood Brehmer can be reached at [email protected]

For Livengood project, smaller is better

A smaller, simpler plan for developing the Livengood gold prospect has greatly improved the project’s economic viability. Vancouver-based International Tower Hill Mines Ltd., or ITH, released an optimized pre-feasibility study for the Livengood project Oct. 24 that determined a mine about half the size of what the company originally planned could reduce development costs by about $950 million and operational expenses by 28 percent. As proposed, Livengood would be a conventional, open-pit mine near the Dalton Highway about 70 miles north of Fairbanks. First investigated as a 14-year mine processing 100,000 tons of ore per day with a $2.8 billion capital cost in a 2013 feasibility study, the latest report downsized the operation to a $1.8 billion development handling 52,600 tons of ore per day over 23 years. “Livengood’s fundamentals are compelling, with a substantial gold resource, favorable jurisdiction, proximity to infrastructure and great leverage to the gold price,” International Tower Hill's CEO Tom Irwin said in a release. “We are committed to advancing our basic engineering and metallurgical work to further de-risk the project and prepare for future permitting.” A smaller, longer-lived Livengood would produce slightly less gold, about 6.7 million ounces of the precious metal as opposed to the original estimate of nearly 7.9 million ounces. Annual production of 294,100 ounces from the smaller mine would be 52 percent of the initial plan, closely mirroring the reduction in ore processing, according to the study. The Livengood prospect holds more than 8.9 million ounces of proven and probable reserves at an average resource grade of 0.71 ounces of gold per ore ton. While running a smaller operation for longer seemingly butts against the traditional notion of achieving economies of scale, ITH spokesman Richard Solie said the junior mining company took a holistic look at its plan to ultimately reduce the ore processing cost from more than an esimated $10 per ton to $7.48 per ton. The corresponding cost of production dropped from $1,481 per ounce of gold to $1,247 per ounce under the scaled back scenario. Gold is currently selling for about $1,270 per ounce. For much of 2011 and 2012 it sold for between $1,600 and $1,800 per ounce but prices dropped to a recent bottom of about $1,050 late last year. For starters, Solie said the latest study led ITH to move to a coarser initial ore grind, which would require less power and save money. “Part of why you grind it up smaller is so you can get more gold out of it. But we didn’t lose much recovery when compared to how much we gained in cost (savings),” Solie said. Along that same vein, employing a secondary crushing of the ore before sending it to the mill to be ground would allow for a more efficient use of power, he added. Increasing the grade of the slopes in the mine pit and cutting the leach circuit time from 32 hours to 24 hours after gaining a better understanding of the ore in place reacts to the chemical processes were cost savers as well, according to Solie. ITH also discovered it could save about $100 million up front by forgoing the construction of water reservoirs that were initially thought to be needed for mine start-up. “As it turns out we have enough water in the actual aquifers to meet the need,” Solie said. Being within a two-hour drive of Fairbanks also persuaded ITH to move ahead without a significant cost of doing business that is common to other remote Alaska mines, an operations camp. The smaller Livengood mine is modeled as a commuter mine, in which employees would congregate each day at a muster point in Fairbanks and take “a nice cushy ride up to the site” via bus each day, Solie said. While it adds to the length of the workday, he noted ITH also prefers the ability of its future employees to stay more engaged in their community and spend additional time with their families. “It’s a different culture when your people are living in a town rather than living out at a camp and there’s elements of that we like,” Solie said. “We like the idea of people sleeping in their own beds. We think that’s positive.” Elwood Brehmer can be reached at [email protected]

Business diversity buoys Exxon earnings

ExxonMobil reported third quarter earnings of more than $2.6 billion Friday, profits drawn largely from the Texas-based oil giant’s foreign operations. The $2.6 billion quarterly profit was a $950 million improvement over the prior quarter, but a far cry from the $4.2 billion the company earned in the third quarter of 2015. ExxonMobil absorbed a $477 million quarterly loss from its upstream domestic business, while at the same time earning nearly $1.1 billion from its upstream operations elsewhere. Its worldwide downstream and chemical business lines each generated about $1.2 billion. Its year-to-date earnings of $6.2 billion is down 54 percent from $13.4 billion in 2015. “ExxonMobil’s integrated business continues to deliver solid results. While the operating environment remains challenging, the company continues to focus on capturing efficiencies, advancing strategic investments and creating long-term shareholder value,” company Chairman and CEO Rex Tillerson said in a release. The earnings broke down to 63 cents per share. ExxonMobil stock closed trading Friday at $84.78, down 2.4 percent for the day. The company generated $5.3 billion in cash flow from operations during the third quarter, which was supported by an additional $1 billion garnered from asset sales. It ended the period with $5.1 billion in cash on-hand, up from $4.4 billion at the start of the quarter. ExxonMobil’s capital and exploration program spending, at $4.2 billion, was down about 45 percent year-over-year and down nearly 20 percent from the second quarter. The company’s upstream oil and gas liquids production, at 2.2 million barrels per day, was also down 5.1 percent quarter-to-quarter and year-over-year. Its sellable natural gas production increased 0.8 percent over 2015. Elwood Brehmer can be reached at [email protected]

ConocoPhillips earns $59M in Alaska but $1B in the red worldwide

ConocoPhillips netted $59 million in Alaska despite losing $1.04 billion worldwide in the third quarter, according to the company’s quarterly financial report released Thursday. Year-to-date, ConocoPhillips has earned $204 million in the state, but absorbed $3.58 billion in losses overall. Comparatively, the company lost $978 million through the first 9 months of 2015. An exploration and production-based company, ConocoPhillips has been hit particularly hard by the prolonged depression of energy prices because it does not have the downstream and refined products business lines of some other oil and gas companies to offset losses from production when commodity prices are low. Income from Alaska has been one of the few consistent positives for the company over the past year. Outside of Europe and North Africa, where ConocoPhillips made $163 million, Alaska was the only region with positive cash flow in the third quarter. The company lost $491 million in the Lower 48 during the quarter and has absorbed more than $2 billion in losses from its Lower 48 operations year-to-date. The average realized price for Alaska North Slope crude was $43.43 per barrel for the quarter. In spite of the gloomy earnings figures, ConocoPhillips Chief Financial Officer Don Wallette Jr. is optimistic about the company’s overall outlook. “Financially, we are very well positioned,” he said during a Thursday conference call with investors. Wallette noted that ConocoPhillips generated $1.23 billion in operating cash flow during the quarter, enough to cover capital expenses and dividend payments made over that time. It also sold out of offshore holdings in Senegal and Indonesia in the third quarter, part of the company’s overall exit from deepwater operations, according to Wallette. ConocoPhillips paid a dividend of 25 cents per share to investors June 1. Another 25-cent per share dividend payment is scheduled for Dec. 1. Company stock sold for $44.97 per share at the end of trading Friday. The third quarter financials translated to a loss of 84 cents per share. Further, Wallette said ConocoPhillips has reduced operating expenses 18 percent year-over-year during the quarter through “structural” changes. The company ended the quarter with $4.3 billion in cash, up from $2.4 billion at the start of 2016 and expects to end the year with about $27 billion in debt, he added. Its debt-to-capitalization ratio stood at 44 percent at the end of the quarter, according to an investor presentation. On the capital side, ConocoPhillips spent $199 million in Alaska on capital projects during the quarter, down from $304 million in 2015. Year-to-date, it has spent nearly $702 million on capital projects in the state, part of $3.9 billion in capex companywide so far this year. ConocoPhillips Alaska leaders said late last year that the company’s 2016 capital budget would be about $1.3 billion. The company has cut its worldwide capital budget significantly since then. Alaska crude production averaged 148,000 barrels per day during the third quarter, a 2.7 percent year-over-year improvement. In late September ConocoPhillips announced its production from its CD-5 project, the company’s latest development in the North Slope Colville River Unit, was averaging about 20,000 barrels per day, exceeding its original production target by 25 percent. Elwood Brehmer can be reached at [email protected]

Anchorage settles for $12.6M with port contractors

Anchorage has settled out of court for $12.6 million with three subcontractors in the city’s failed port expansion project while a lawsuit against other players in the complex drama continues. Most recently on Oct. 19, Terracon Consultants Inc. and the Municipality of Anchorage filed a motion in U.S. District Court of Alaska notifying the court that Terracon had agreed to pay the municipality $1.95 million. Terracon reviewed a 2008 evaluation report of the Open Cell Sheet Pile dock design that the municipality claims was faulty. The settlement document notes that CH2M, which filed a third-party complaint against Terracon in November 2014, has not filed a claim of fault or breach of contract by Terracon. On Aug. 30, Quality Asphalt Paving, or QAP, agreed to pay the municipality $5.15 million to resolve its role in the lawsuit. QAP was hired along with its project partner MKB Constructors in 2008 by the Port of Anchorage Intermodal Expansion Project manager and former Koniag subsidiary Integrated Concepts and Research Corp. to install the Open Cell Sheet Pile dock support structure at the port. The Open Cell Sheet Pile is a proprietary design of the Anchorage engineering firm PND Engineers, which is also a defendant in the municipality’s suit filed in early 2013. PND contends the dock design failed due to faulty installation by QAP and MKB, while the contractors and the city argue the design wasn’t suitable for the Anchorage port from the outset. Judge Sharon Gleason dismissed QAP from the suit Oct. 17. Similarly, MKB settled with Anchorage for $5.5 million in June. All three settlements release the subcontractors from liability to the municipality, but not fault in the lawsuit trial, set for next April. ICRC and PND did not oppose QAP’s dismissal from the suit based on that understanding. PND filed a third-party complaint bringing MKB and QAP into the legal tangle in April 2015. CH2M, an international engineering firm which has dropped “Hill” from its name, is an original defendant in the lawsuit along with ICRC and PND through its purchase of VECO, a consulting firm that also evaluated the port design. In January 2014, the municipality hired CH2M to manage the ongoing and smaller scale $480 million Anchorage Port Modernization Project, which will eventually lead to the installation of a more traditional pile-supported dock structure, similar to what is currently in place. The $12.6 million in settlement funds will be split, with $7.6 million going towards the modernization project costs and $5 million being reserved for future port litigation expenses, according to Anchorage Port Director Steve Ribuffo. To date, the municipality has spent $25.4 million on the second port project from the $126.7 million left over from the nearly $439 million in local, state and federal funds raised for the expansion project. CH2M also issued the study in February 2013 that determined the Open Cell Sheet Pile was unsuitable for use at the Port of Anchorage. PND has repeatedly rebutted that study. In January Gleason ruled that MKB and QAP were subject to the lawsuit despite a 2012 settlement in which ICRC agreed to pay the U.S. Maritime Administration, or MARAD, $11.1 million to resolve a $17 million contract dispute. Because ICRC hired MKB and QAP, the subcontractors unsuccessfully claimed they were released from liability through ICRC’s settlement with MARAD. The municipality, however, was unaware of the 2012 deal at the time it was made, according to an October 2012 letter from then-Anchorage Mayor Dan Sullivan to MARAD Administrator David Matsuda in which Sullivan wrote he was “surprised and disappointed” to learn of the $11.1 million agreement. MARAD, a federal Transportation agency, was brought into the project in 2003 by the municipality to manage construction and be a vessel to acquire federal funding. Anchorage also sued MARAD in early 2014 in Federal Claims Court. Municipal attorneys have said the city is hoping to recoup up to $340 million from the two lawsuits. Originally intended to update and expand the Port of Anchorage’s aging docks, the expansion project was fraught with control and communication issues nearly from its outset. Those issues were manifested in construction problems and led to work being stopped partway through in 2010, which was never resumed. Elwood Brehmer can be reached at [email protected]

2016 is a milestone year for miners

Alaska’s miners will have an opportunity to look back at the progress of three of the state’s flagship mines at the annual Alaska Miners Association convention that kicks off Nov. 6 in Anchorage. This year is a milestone year for the mining industry in Alaska; it marks the 10th anniversary of operations at the Pogo underground mine and the 20th year of production at the Fort Knox surface mine. Both located near Fairbanks, they are the state’s premier gold mines. In addition, Hecla Mining Co., which owns the underground Greens Creek silver mine near Juneau, just celebrated its 125th birthday. At 26 years old, Greens Creek is not a young mine, but with record production of 8.5 million ounces of silver in 2015, it remains the largest active silver mine in the country and one of the most productive in the world under Hecla’s guidance. Alaska Miners Association Executive Director Deantha Crockett said she is particularly looking forward to Nov. 11, a day of the convention that will be devoted to highlighting the achievements of the trio and reminiscing about stories and events that have led to the anniversaries. “On the day that we talk Pogo, Fort Knox and Hecla we’re actually only having one (discussion) track because we know that the vast majority of our attendees are all going to want to go to that,” Crockett said. A few days prior, new Alaska Attorney General Jahna Lindemuth will headline the convention’s speakers on Nov. 8 with an hour-long dialogue likely on a host of topics. Crockett said the Alaska Miners Association was “incredibly excited” to hear of Lindemuth’s appointment as Alaska’s top attorney by Gov. Bill Walker in late June because she came to the position from the private sector and has significant experience handling resource development matters. Lindemuth’s talk will undoubtedly include the state’s decision to establish a framework for transferring land owned by Alaska Native tribes into federal trust status. Walker has directed her to lead the state’s involvement in the complicated and sensitive issue that could have far-reaching implications for resource work in the state. “How resource development projects are impacted by decisions that come out of the Native lands into trust issue and the status of those lands — it’s a major issue to watch for us and so finding out how the state plans to navigate that will be useful for pretty much all Alaskans,” Crockett said. She added, “The attorney general is so instrumental in the litigation that comes against resource development permits and the consistent federal overreach that we’re dealing with that I don’t expect to have any shortage of topics for her to address.” Following Lindemuth by a day will be Murray Hitzman, head of the Energy and Minerals division of the U.S. Geological Survey, discussing the future of the agency in the state. Crockett noted that anyone interested in resource development should want the USGS to be active in Alaska — continuing to map the vast state and delineate its resources — fundamental activities that the State of Alaska cannot afford to support as it deals with multi-billion dollar budget deficits. Finally, miners cannot gather without talking about their prospects. While exploration for large projects in the state has dipped in recent years for several reasons, one of the bright spots for the industry is Constantine Metal Resources’ Palmer project in Southeast Alaska near Haines, a high-grade copper, zinc, silver and gold deposit that would be an underground operation if developed. Constantine announced in September that it began construction of a 2.5-mile road to the project as it wrapped up its 2016 exploration drilling program that included seven drill sites. “(Constantine’s) healthy drilling season should provide a lot more results and we should get an update as to what we can expect out of that project, so that’s very exciting,” Crockett said. Elwood Brehmer can be reached at [email protected]

Alaska Air Group nets $256 million in third quarter

All good things must come to an end, even for Alaska Air Group Inc. The $256 million third quarter net income turned in by the Seattle-based parent to Alaska Airlines and regional Horizon Air broke a streak of 12 quarters with record profits, but not by much. Alaska Air Group netted $274 million in the third quarter of 2015. Company CEO Brad Tilden said in an Oct. 20 conference call with investors that as a whole 2016 is still shaping up to be a record year with net income up 6.5 percent over 2015, also a record year, through three quarters. It would make 2016 Air Group’s seventh consecutive year of record profits. The $256 million quarter also accounted for $14 million in expenses to further Alaska Airlines’ ongoing merger with San Francisco-based Virgin America. Air Group announced a $4 billion deal to buy its West Coast competitor in April. Alaska Airlines leaders said when the deal was struck they hoped it would have regulatory approval by now. Tilden said a Justice Department review of the merger is taking slightly longer than anticipated, but that Alaska Air Group is still very confident the deal will be approved. “This is a pro-consumer merger of two smaller airlines that will bring new, low-fare competition, industry-leading service and innovative new product offerings for the customers we serve,” Tilden said Oct. 20. Concurrent to the Justice Department review, a group of 41 individuals, primarily travel agents, filed a lawsuit to stop the merger on antitrust grounds Sept. 7 in Northern California U.S. District Court. Judge William Alsup, presiding over the case, ruled Oct. 19 that the suit will go to trial “as soon as the Department of Justice makes its decision on the merger,” likely by December, the court order states. The plaintiffs in the suit contend the two currently profitable airlines can aptly compete with the “big four” domestic airlines — American, Delta, Southwest and United — without joining forces. Alaska Air Group has said purchasing Virgin America would give the company just 6 percent of the overall domestic market, compared to the nearly 70 percent combined domestic market share held by the four largest airlines, according to the U.S. Department of Transportation. The merger would make Alaska Airlines the fifth-largest domestic carrier, according to Air Group officials. As for Alaska Air Group’s performance, the third quarter ended with a 12-month rolling return on invested capital, or ROIC, of 24 percent and a pretax profit margin of 27 percent, which Tilden said he expects to be among the best in the industry. The $256 million third quarter translated to diluted earnings per share of $2.07. Alaska Air Group Inc. stock closed Oct. 24 trading at $73.61 per share. For the quarter, Air Group’s operating revenue was up 3 percent to $1.56 billion year-over-year. Year-to-date revenue was up 4 percent to nearly $4.41 billion on 6.6 percent passenger growth. Operating expenses grew as well, up 8 percent for the third quarter at $1.16 billion and 4 percent year-to-date to $3.29 billion on a 10.7 percent increase in capacity. Per gallon fuel costs continued to fall for Air Group, which hedges its fuel, down 13.2 percent to $1.58 per gallon during the third quarter. At the same time, fuel consumption grew 6 percent with the capacity increase, despite a 2 percent increase in fuel efficiency garnered by adding newer Boeing 737s to Alaska Airlines’ fleet, according to Air Group Chief Financial Officer Brandon Pedersen. Alaska Airlines has taken delivery of 21 Boeing 737-900ERs over the past year and will add another 13 before the end of 2017 as it retires its older 737-400s through next year as well, Pedersen added. “These new aircraft are 37 seats larger, they are more comfortable, they are more reliable and sip fuel like a Prius with wings,” he said Oct. 20. “A 900ER burns less than 910 gallons per flight (hour) compared to 940 gallons per flight hour burned by the smaller 737-400.” Alaska Airlines is also building a $50 million maintenance hangar at Ted Stevens Anchorage International Airport to accommodate the larger aircraft, along with investing about $30 million in its 11 rural Alaska terminals, the airline announced earlier this year. Alaska Air Group ended the third quarter with $3.2 billion in cash on-hand, including $1.5 billion raised in preparation for closing the Virgin purchase. Pedersen said the average interest rate on the $1.5 billion, a mix of fixed and floating rates, is currently 2.37 percent. “The borrowing rate and the fact that we have so much remaining collateral are both a testament to the great balance sheet that we have built and the incredible amount of cash flow we have been able to generate over the last five years,” he said. Concurrently, its debt-to-capitalization ratio, which was down to 27 percent at the end of 2015 — a point of pride for company executives — grew to 45 percent at the end of the third quarter. Air Group leaders have long said they strive to have an investment-grade balance sheet despite being in a volatile industry. Pedersen said the company expects to have a debt-to-cap in the 60 percent range when the deal closes, with a goal to return to the mid-40 percent range within about three years. Elwood Brehmer can be reached at [email protected]

Walker stops short of selling pension bonds

The Walker administration has put its plan to sell up to $3.3 billion in pension obligation bonds on hold. Gov. Bill Walker said Tuesday in a statement from his office that concerns from the members of the Senate Finance Committee about the proposal led him to hit the pause button. “While we believe the financial benefits of issuing state pension obligation bonds significantly outweigh the financial risks, we recognize the need for legislative input. I invited the Senate Finance Committee to meet with administration officials and me this week to discuss the transaction,” Walker said. “Given their lack of support, I have decided not to proceed with the issuance at this time. Building a collaborative relationship with the Legislature will be necessary to reach our primary goal, which is a long-term fiscal plan for our state. In this time of fiscal uncertainty it is critical that both branches of government work together to address all the difficult decisions that stand before us.” Senate Finance held a meeting Sept. 29 to hear from Revenue Commissioner Randy Hoffbeck and other department leaders about the proposal to sell between $2.3 billion and $3.3 billion in appropriation bonds to help fund the state’s $24.5 billion Public Employee and Teachers’ Retirement systems, which are currently underfunded by about $6 billion. House Finance members also attended that meeting and the legislators were generally skeptical, with some outwardly opposed to the idea. Pension obligation bonds are sometimes sold by state and local governments in an attempt to capture the difference in the interest rate the bonds are sold at and the returns the invested bond monies can generate. The state Revenue officials said they were hoping to sell the bonds at a fixed interest rate of no more than 4 percent and subsequently invest the bonds to get an 8 percent return, which would be equal to the return already projected for the PERS and TRS funds. Doing so would gradually reduce the state’s annual pension obligation payments, which are projected to grow from about $215 million this year to more than $860 million in 2039 when the defined benefit retirement plans are projected to expire. The idea of selling pension bonds was first floated in January during the legislative session, but higher interest rates and a general disinterest in the idea from legislators focused on other pressing financial issues dissuaded the administration from taking action then. On Oct. 7, the state received opinions from the three major credit ratings agencies saying the bonds would likely be rated at AA or AA-, or slightly below the state’s general obligation rating. That would be normal for bonds that require annual legislative appropriations for debt service payments. S&P Global Ratings also placed the State of Alaska back on its CreditWatch program and said the bond sale would likely force the agency to lower the state’s current AA+ rating to AA because of the increased debt load. All three ratings agencies lowered Alaska’s formerly sterling general obligation AAA credit rating last winter as legislators and the Walker administration tried to close the state’s budget deficit, which at the time was projected to be close to $4 billion. The bonds were expected to be priced on Oct. 26 and closed on the first week of November had the administration proceeded with the sale. Elwood Brehmer can be reached at [email protected]

Armstrong Energy seeks to expand unit

Armstrong Energy is asking the state to expand its prospective Pikka North Slope oil and gas unit, which the company already believes holds upwards of 1.5 billion barrels of recoverable oil. The expansion application, submitted to the Department of Natural Resources Sept. 19, requests the department add 14,400 acres to Pikka in leases adjacent to the southern portion of the current unit. Pikka was approved in June 2015 as a 63,300-acre unit situated between Caelus Energy’s Oooguruk Unit to the east and ConocoPhillips’ Colville River Unit to the west. Armstrong Energy, a Denver-based independent, is the Pikka operator on behalf of its working interest owner partners Repsol, a Spanish major, and GMT Exploration, a small Denver-based independent. Armstrong took over as the operator of Pikka and the 51 percent majority owner of the Nanushuk project in late 2015 after the company agreed to swap ownership stakes with Repsol. The leases in the first expansion are held solely by Armstrong. The state and Arctic Slope Regional Corp. hold joint mineral and royalty interests in the expansion leases. Armstrong acquired them in May 2015. Bill Armstrong, founder and CEO of his namesake company, said in a September interview with the Journal that he believes the Nanushuk development in Pikka could eventually support production upwards of 120,000 barrels per day. Getting there, however, will likely require about $5 billion of investment over the next five-plus years, according to Armstrong. The company is currently working through the early stages of the environmental impact statement process with the U.S. Army Corps of Engineers for the Nanushuk project in Pikka. According to the expansion application, Pikka needs to be expanded to fully develop the Nanushuk project. The additional area could support up to 88 wells targeting the Nanushuk, Alpine and Kuparuk formations. Since 2011, Armstrong and Repsol have drilled 16 wells and sidetracks, which all produced, in what is now the Pikka Unit, he said. Armstrong has applied to drill two delineation wells, Pikka No. 1 and Pikka No. 1A within the proposed expansion area. The company also plans to drill an exploration well on state leases about 25 miles to the south of Pikka this winter into similar formations based on a seismic data shoot conducted last year, according to Armstrong. The Division of Oil and Gas is seeking public comments on the Pikka expansion application through Oct. 31. Elwood Brehmer can be reached at [email protected]

Hilcorp Energy is here to grow

Hilcorp Energy is one of the companies bucking the trend among those in Alaska’s oil business. The Houston-based independent is pursuing projects to add production from both its Cook Inlet and North Slope assets, Hilcorp Senior Vice President of Alaska Dave Wilkins said Oct. 13 to the Alaska Support Industry Alliance. Despite oil prices that can’t seem to get above $50 per barrel, Hilcorp, which entered Alaska through Cook Inlet acquisitions in 2012, “is here to grow,” according to Wilkins. “2016 is the year of surviving and thriving,” he said. “We have had no layoffs in Hilcorp to date and we’re not going to have any layoffs in Hilcorp.” The company is drilling more wells this year than it did last and plans to drill more wells next year than it will this year, Wilkins noted. On the North Slope, Hilcorp is working towards building a new drill pad on the western edge of its Milne Point field. Construction of the “Moose Pad” is scheduled to start early next year, Wilkins said. The timeline for the project is variable, but it could be done in less than three years if overall economics improve, he added. Ultimately, the Moose Pad will have up to 40 wells — 24 horizontal production and 16 injection wells — into the Kuparuk and Schrader formations. Peak production from the Moose Pad is estimated at between 10,000 and 15,000 barrels per day, Wilkins said. Hilcorp operates the Milne Point as an equal partner in the unit with BP. It bought into Milne Point, as well as the Endicott, Northstar and prospective Liberty offshore developments, in a 2014 acquisition from BP. The company also recently built a very mobile, modular drill rig it is calling the “Innovation” rig, which arrived at Milne Point in September and can drill at Endicott and North Star as well. Wilkins said the Innovation can drill up to 16,000 feet and access wells on a 10-foot spacing pattern. Hilcorp is also continuing through the National Environmental Policy Act process to secure federal permits for its large Liberty prospect. If developed, Liberty would be a manmade island about six miles offshore in the Beaufort Sea and slightly to the east of Prudhoe Bay. It has the potential to produce upwards of 60,000 barrels per day over 10 to 15 years for a total of about 50 million barrels, according to Hilcorp. Wilkins said Hilcorp is using development techniques proven at other manmade North Slope oil islands. “Our approach at Liberty is not to reinvent the wheel,” he said. “Endicott and Northstar are great examples of how this can be done, done well and done environmentally soundly.” Hilcorp expects to have its draft environmental impact statement back from the Bureau of Ocean Energy Management in May, but it does not have a definitive development timeline. Cook Inlet To the south in the Cook Inlet basin, Wilkins said the company is “very excited” about a redevelopment program for oil it is working on for the offshore Granite Point field. Plans there are to start horizontal drilling sometime next year. Hilcorp is also in the midst of processing 3-D seismic data of the Middle Ground Shoal field in the center of the Inlet it shot in 2015. Hilcorp is very positive about what that data is revealing as well, according to Wilkins. “It’s a very complex geology area and it needs some careful looks at it but I think coming out of Middle Ground Shoal we will see multiple drill projects and new horizons,” he said. The company purchased the two operating “A” and “C” platforms in the field, one of the oldest in the basin, from XTO Energy in July 2015. XTO is a subsidiary of ExxonMobil Corp. Wilkins said Hilcorp has projects lined up to reactivate to shut-in platforms at Middle Ground Shoal, but is just waiting for project economics to improve. Onshore, the company is shooting seismic in the hunt for large natural gas fields on the Kenai Peninsula, which, if discovered, would be very long-term plays. Hilcorp has also reinstituted a gas flooding program at the Swanson River Field north of Nikiski. The Swanson River oil field is credited with providing Alaska with enough revenue to justify statehood in the late 1950s. “The Swanson River field, it turns 60 next year and it is very much tied to the State of Alaska and we’re currently producing 2,760 barrels of oil equivalent per day,” Wilkins noted. He said Hilcorp will drill a gas well at Swanson River next year and is anticipating drilling five to 10 additional wells into the legacy field in the coming years. “In the Kenai area there’s still lots to do,” Wilkins concluded. Elwood Brehmer can be reached at [email protected]

Oil prospect gets even bigger

The Icewine oil prospect on the southern North Slope keeps growing. Australia-based 88 Energy Ltd. said in an Oct. 18 release that it has identified five conventional “leads” on its Slope leases that could hold 758 million barrels of recoverable oil. The mean resource estimate is based on seismic data acquired this year and last, according to the company release. 88 Energy is the majority owner in the Icewine project, a continuous tract of 271,000 acres of state leases about 35 miles south of Deadhorse bisected by the Dalton Highway. A small Houston-based independent, Burgundy Xploration, is 88’s minority partner at Icewine. The companies are operating the prospect as Accumulate Energy, a wholly owned subsidiary of 88 Energy. Icewine’s initial target was oil in the HRZ shale zone, an unconventional Brookian play. The partnership finished drilling the Icewine No. 1 exploration well in December 2015, focusing on unconventional plays with great success. The international reservoir appraisal firm DeGoyler and MacNaughton has assessed the Icewine unconventional oil resource at 985 million barrels. An internal 88 Estimate put a 90 percent probability of at least 1.6 billion barrels, according to a September presentation to investors. 88 Energy Managing Director David Wall said in a release that the HRZ shale remains the partnership’s primary target, but the conventional seismic results “significantly exceeded our expectations.” Accumulate plans to drill a second Icewine well to better delineate the unconventional prospect early in 2017. “We expect the two recent billion-barrel discoveries in the Brookian sequence by both Armstrong Oil and Gas and Caelus Energy to be a catalyst for increased industry interest in the region,” Wall said. “Whilst not strictly analogous to the Brookian play potential at project Icewine, these discoveries highlight the significant conventional oil resource on the North Slope yet to be discovered through utilization of modern seismic technology.” Wall referenced Caelus Energy’s Smith Bay prospect in a remote portion of the western North Slope, which Caelus recently announced as a 6 billion-barrel prospect. Armstrong is working to develop its 1.5 billion-barrel Nanushuk prospect near the Colville River delta. Icewine is particularly attractive because of its location. Year-round access to the Dalton Highway could simplify development and ease the cost burden compared to other Slope projects. Anchorage-based Great Bear Petroleum is also exploring shale prospects just north of Icewine. Elwood Brehmer can be reached at [email protected]

Lindbeck and Young find agreement at candidate forum

There was much consensus and a surprising lack of contention during a U.S. House of Representatives candidate forum put on by the Anchorage Chamber of Commerce Oct. 17. Democrat candidate Steve Lindbeck, a former Anchorage newspaper journalist and recently the general manager of Alaska Public Media, did not pursue threads critical of longtime incumbent Republican Rep. Don Young that his campaign has highlighted in TV spots and news releases. Lindbeck’s campaign has continuously condemned Young for taking campaign contributions from the marine services company Edison Chouest and not intervening in Alyeska Pipeline Service Co’s. business negotiations as Edison Chouest prepares to take over the oil tanker escort contract in Prince William Sound from Crowley Maritime Corp., which has provided the support service out of Valdez since 1990. Rather, Lindbeck, Young and Libertarian candidate Jim McDermott, of Fairbanks, stayed on subject in what turned out to be more of an hour-long Q-and-A than a debate. He respects the 43 years of service Young has put into being Alaska’s lone member in the House, Lindbeck said, but added that people across the state are telling him Alaska needs new leadership to face its new economic and climate challenges. “Alaskans are worried about the economy; people are worried about their jobs; they’re worried about making rent, about educating their kids and we know we need to look ahead to the next 40 years to figure out how we can diversify our economy and move forward with the great entrepreneurial spirit of Alaskans,” Lindbeck said. He noted that during an eight-year tenure under his guidance, Alaska Public Media went from $2 million in debt to holding $3 million in cash reserves. “I know how to make things happen. I know how to work with people across the board to get things done and that’s the kind of leadership that I will bring to Congress,” Lindbeck said. “I pledge to work with anyone who wants to work with Alaska and get things done for our state.” The state needs to prioritize “the traditional things that make things happen in Alaska,” such as education, Arctic research and infrastructure, broadband and resource development, he insisted. Lindbeck called resource development “the birthright of statehood,” and said Alaska’s stewardship of its resources has been second to none. If elected, he would be a lonely Democrat on Capitol Hill when it comes to the issues of opening the Arctic National Wildlife Refuge and offshore Arctic areas to oil and gas production. “I have always supported exploration in the coastal plain of the Arctic National Wildlife Refuge. It’s something we should’ve taken care of long ago,” Lindbeck said. Young responded to a question about advancing North Slope oil and gas development by saying he’s done his part. “ANWR — I passed it 12 times out of the House; 12 times I’ve done the job. Eleven times it never got out of the Senate. The one time it got out of the Senate the Democratic Party vetoed it. That’s what I’ve been able to do,” Young said. At 83, Young characterized himself as “a little mature, but I don’t feel it,” repeatedly noting that major pieces of national legislation for Alaska, such as the authorization for the Trans-Alaska Pipeline System, have started in the House under his watch. “I’ve had 79 bills signed into law and I’m proud of that because I’ve focused in on Alaska issues. An individual who says, ‘I’m going to do this, I’m going to do that’ is just full of it,” Young told the audience in typical blunt fashion. “My job is to hear what you have on your minds, listen to you and then focus and have a laser beam on that issue and see if we can solve it.” Lindbeck pushed back against Young once, saying despite the accomplishments he touts, Republicans have held Congress for the majority of the last 20 years and Alaska still lacks access to its resources on federal lands; the country still needs new icebreakers and the Magnuson-Stevens Act that manages federal fisheries is long overdue for an update. “We have a lot more work to do to have Alaskans’ interests be represented (in Congress) and they need to be represented on both sides of the aisle,” Lindbeck said. Alaska Sens. Lisa Murkowski, up for reelection this year, and Dan Sullivan are both Republicans. McDermott, an Air Force veteran and business professor at the University of Alaska Fairbanks, said he supports resource development in the state, but with restraint. “If the demand is there and we’re willing to do it responsibly then I would consider the possibility of moving forward for safely harvesting our natural resources. But at the same time, if we keep getting on bended knee to big oil and big gas companies and not diversifying our economy, then we’re going to keep finding ourselves over and over again in the same dilemma we’re seeing ourselves facing right now,” McDermott said, referencing the state’s struggling economy. “We need to be putting our resources into our most important resource — human resource — small business development.” On health care, Lindbeck and Young were back in step. “The Affordable Care Act is not affordable for working Alaskans; we understand that,” Lindbeck said. He said the national health care policy needs to have coverage pools expanded beyond state lines to allow high-cost — and often low population — states such as Alaska to access lower cost services through economies of scale. Lindbeck added that the current federal marketplace needs more tiers of coverage to give individuals more choices in insurance plans. Young largely concurred, saying the country needs expanded risk pools and that the massive piece of legislation was not vetted in the medical field before President Barack Obama signed it into law in 2010. Fixing the ACA requires studying if excessive regulations have forced insurers and providers to increase costs, according to Young. He also said the future of national health care will depend a lot on the outcome of the presidential election. McDermott did not have proposals to lower health care or insurance costs. Even on the presidential race Lindbeck and Young didn’t differ as much as one might think. Unsurprisingly, Lindbeck said Republican candidate Donald Trump is “completely unfit to be the president of the United States.” However, he did not offer a ringing endorsement of his party’s nominee. “The American people have one choice, which is to elect Hillary Clinton as president,” Lindbeck said. “We’re going to need to make sure as Alaskans that we can keep her accountable, that she understands our needs in Alaska, that we will stand up to the Democratic Party on some occasions where they don’t meet the needs of Alaska, particularly around oil and gas development and other resource issues.” Murkowski and Sullivan recently called for Trump to drop out of the race. Young declined to name names. “I worked with eight presidents and I’ll work with the ninth president to make sure Alaska is properly represented — not only that but trying to encourage the importance of Arctic resource development,” Young said. “I wont be happy, particularly with one of them being elected and won’t be too happy with the other one, but I think it’s a bright spot. It’ll make Congress do the job they should be doing.” An ardent opponent to nearly everything the Obama administration has done, Young has consistently said that control in the federal government has slowly been shifting to the executive branch, which goes against the country’s founding principles. “I’m looking upon this (presidential) election, regardless of who gets elected, as a challenge, and that’s a challenge I’ll gladly accept,” he said. McDermott noted there is sill another choice. “I haven’t officially heard that (Libertarian presidential candidate) Gary Johnson has dropped out of the race, so just to let you know he may still be in there,” McDermott said. Elwood Brehmer can be reached at [email protected]

U.S. State Dept has interest in upstream Canadian mining projects

The U.S. State Department has taken a positive step to recognize the concerns some Alaskans have with upstream Canadian mining projects, but the issue is far from resolved, according to the members of Alaska’s congressional delegation. Assistant Secretary of State for Legislative Affairs Julia Frifield wrote in an Oct. 6 letter to the delegation that the State Department is actively engaged with Canadian officials to protect the watersheds that bisect the U.S.-Canada border along Southeast Alaska. “The Department of State intends to continue to work, in coordination with other U.S. government agencies, to ascertain what the Canadian federal government is doing to meet U.S. concerns about protecting this sensitive shared ecosystem from potential transboundary pollution during mine development, operation, impoundment design, and post-closure, and through bonding practices,” Frifield wrote. The Oct. 6 correspondence was in response to a Sept. 8 joint letter from Sens. Lisa Murkowski and Dan Sullivan and Rep. Don Young to Secretary of State John Kerry requesting the State Department to establish a formal way for Canadian officials to consult with U.S. federal and state agencies and Alaska Native tribes during Canada’s mine permitting process, similar to the domestic environmental impact statement process. It was the second such letter the delegation has sent to Kerry since May. Numerous Southeast Alaska environmental, commercial fishing, and Alaska Native groups have called for IJC involvement in recent years, but the commission can only be spurred by a formal call from either the State Department or Canada’s Global Affairs Department. They’re worried about the potential impacts of large metal mines in British Columbia at the heads of large rivers that support commercial and subsistence salmon harvests and flow through the province and Alaska’s panhandle. The massive 2014 Mount Polley mine tailings dam failure in the Upper Fraser River drainage validated the concerns, the groups contend. IJC intervention was originally intended only when both governments submit a “letter of referral” asking for the commission to resolve a dispute. Over time that procedure has morphed and both countries have at times singularly requested IJC involvement, which has often been granted. The commission’s recommendations are nonbinding but generally adhered to in an effort to maintain a cooperative relationship between the countries. Alaska’s delegation also asked for, among other things, the State Department to determine whether an International Joint Commission is the appropriate avenue to find out if Canadian mines are using best practices for treating wastewater and mine tailings, “especially in light of the scientific reviews of the causes of the Mt. Polley tailing disposal dam failure,” the delegation wrote. Frifield noted Canada examining its entirety of its environmental review process; results are expected early next year. Murkowski said in an Oct. 14 joint delegation release accompanying the letter that she is encouraged that the Obama Administration is taking an elevated interest in the transboundary watershed issue — including an August meeting in Alaska between the Central Council of Tlingit and Haida Indian Tribes of Alaska and a State Department-Environmental Protection Agency contingent. “That being said, I remain disappointed that the State Department refuses to address our questions and suggestions, such as to consider appointing a special representative for U.S.-Canada transboundary issues,” Murkowski said. “And it is unacceptable that Secretary Kerry has yet to meet directly with Alaskans on such a hugely important issue. The State Department’s response is a step in the right direction, but we still have a long way to go until Alaskans’ concerns are adequately addressed.” The State Department was also pleased to learn Congress may provide funding for baseline water quality monitoring in Southeast watersheds such as the Stikine, Taku and Unuk rivers, which has been a priority of the Alaska lawmakers. Young said the state and country share an interest in developing their natural resources, but open lines of communication when development in one could impact the other. “Ongoing and proposed mining activities in Canada have brought tremendous concerns to the people of Southeast Alaska -- specifically with the Tlingit and Haida people – which is why I have always engaged with the delegation to prioritize and facilitate outreach between all parties involved. Although I am pleased to hear about certain progress being made to implement portions of the memorandum of understanding and to address the concerns of Alaskans, I still believe there’s much work to be done.” Sen. Sullivan concurred, saying, “I am glad the Department of State and other Administration officials have finally initiated steps to engage key stakeholders as well as the governments of Canada and British Columbia on these pressing transboundary water issues. Yet, further progress is necessary to address the questions the delegation and Alaskan stakeholders have raised.” Also on Oct. 6, the date on the State Department letter, Alaska Lt. Gov. Byron Mallott signed a Statement of Cooperation with British Columbia to form a working group of relevant state departments and provincial ministries to improve stakeholder involvement in transboundary issues, an agreement the State Department was anticipating, according to Frifield. Elwood Brehmer can be reached at [email protected]

State moves to sell pension bonds despite S&P warning

The State of Alaska is continuing the process to sell up to $3.3 billion in pension obligation bonds after receiving mixed reviews from the major credit rating agencies. On Oct. 7, S&P Global Ratings placed the state on CreditWatch with negative implications and rated the state’s appropriation-backed bonds, such as the pension bonds, as AA-. The agency indicated in a brief that it would likely lower the state’s general obligation credit rating from AA+ to AA if the bonds were sold. Appropriation-contingent bonds are often rated at least one notch lower than general obligation debt because of the need for the state Legislature to annually fund their payment. “The CreditWatch action reflects our view that Alaska’s credit profile would incrementally weaken following the issuance of the proposed $3.3 billion (in) pension obligation bonds,” S&P analyst Gabriel Petek said in a release. Moody’s Investors Service rated the bonds at Aa3, a rating equivalent to AA-, also on Oct. 7. Fitch ratings gave the potential bond sale an AA rating. Fitch and Moody’s did not indicate they would lower the state’s general obligation rating if the bonds are sold. Revenue Commissioner Randy Hoffbeck described the prospective bond sale as a “trigger” that would just move up the timing of a potential downgrade. S&P removed Alaska from its CreditWatch list in August after Gov. Bill Walker vetoed nearly $1.3 billion from the state’s operating budget in an effort to reconcile a $3.2 billion budget deficit. At the time, S&P said it would probably be forced to lower the state’s credit ratings if a long-term budget solution is not reached during the 2017 legislative session. State Revenue officials are looking to sell between $2.3 billion and $3.3 billion in bonds to help fund the state’s $24.5 billion Public Employee and Teachers’ Retirement systems, which are currently underfunded by about $6 billion. Department leaders have said the global market’s appetite for the bonds would ultimately determine the size of the sale. They are actively marketing the bonds in Asia, Europe and domestically this month with the hope of attracting upwards of $8 billion in potential buyers to drive down the interest rate on the bonds. Hoffbeck said the agency opinions are slightly better than the state was expecting, so the Revenue Department will continue moving forward with the sale. The bonds are expected to be priced on Oct. 26. “We actually thought we were going to be AA- across the board, so we actually ended up on the bonds with a little better rating than we thought we were going to end up with,” Hoffbeck said. “If we can bring in the sale under 4 percent, then we’ll take it all back to the governor and say, ‘Here’s the risk, we’ve got S&P saying they’re going to downgrade us. Here’s the benefits,’ and let the governor give it a thumbs up or a thumbs down.” The deal could potentially help the state take advantage of low interest rates if investment returns on the bond revenue exceed the interest rate they are sold. According to Hoffbeck, the state likely won’t sell the bonds if the interest rate on them exceeds 4 percent, while the state’s retirement fund investors aim for 8 percent long-term returns. Total debt service on $3.3 billion in pension bonds over 23 years at 3.8 percent interest would be just more than $5 billion. The state’s scheduled assistance payments total more than $8 billion over that time without the bonds. The savings to the state on a $3.3 billion sale would total nearly $3 billion, an average $130.2 million per year on its assistance payments to the retirement funds if the 8 percent long-term return target is met. A 7 percent return would net $1.8 billion, or an average savings of $78.2 million per year. The 2017 fiscal year retirement assistance payment was $215.8 million. That annual payment is projected to grow to more than $860 million by 2039, which marks the expected end of the closed defined benefit retirement systems and the coinciding maturity of the bonds, according to a Revenue presentation to the Senate Finance Committee. Legislators briefed on the proposal have exuded skepticism, noting market uncertainties and states and large cities that have sold pension bonds only to see their situations worsen years later. Hoffbeck and Deputy Revenue Commissioner Jerry Burnett are quick to point out problems with pension bonds in other states often arise from trying to capture the savings up front, resulting in back-loaded principal payments. Alaska’s plan calls for principal payments to peak at about $220 million in the last years of the bond terms. Additionally, states such as Illinois, Michigan and California — less than stellar financial performers — have sold bonds from a worse starting position than Alaska, making for less friendly deal terms. Also, the bonds would only be sold with a fixed interest rate, the Revenue Department has stressed. State debt manager Deven Mitchell, a nonpolitical Revenue official, has acknowledged the inherent risk in banking on an investment return, but also said the state has structured the deal as conservatively as possible. According to the department, the rolling 20-year investment return average for the retirement funds has been between 6.7 percent and 8 percent since 2009, a period that includes both the 2001 and 2008 financial market contractions. Achieving just a 4 percent investment return, or one equal to the interest on the bonds, would make the deal a wash.  In testimony to Senate Finance in September, Hoffbeck said the amount of money the state would lose on the bonds with a sub-4 percent return would be considered “a rounding error” compared to the larger problem the state would have with the overall retirement system because the bond revenue would be invested alongside the $24.5 billion currently in the funds. Elwood Brehmer can be reached at [email protected]

Anchorage LIO building claim is rejected

State Sen. Gary Stevens officially washed his hands of the political mess that is the Downtown Anchorage legislative information office building on Oct. 6 when he denied a $37 million contract claim from the building owner group. Acting as a state procurement officer in his role as Legislative Council chair, Stevens, a Kodiak Republican, cited a litany of reasons in a 21-page decision document as to why the Legislature is not liable for walking away from its 10-year, $33 million lease on the six-story office building. He also could have chosen not to act on the claim and allowed it to work its way through the administrative appeals process. First and foremost, Stevens repeatedly noted a clause in the lease — language common in state contracts — that states compliance with the terms of the lease are contingent upon the Legislature funding it. The now-former Anchorage LIO is owned by 716 W. Fourth Avenue LLC, a real estate group managed by Anchorage developer Mark Pfeffer. The group is named after the Downtown Anchorage address of the building. “In light of the state’s current fiscal situation, the Legislature exercised its constitutional right of non-appropriation with respect to the lease,” Stevens wrote. “While 716 complains that (the Legislative Affairs Agency) ‘abdicated’ its duties under the lease, termination of the lease pursuant to the Legislature’s constitutional duty and obligation to the citizenry.” The Legislative Affairs Agency handles business matters for the Legislature. He called the lease “effectively, a year-to-year arrangement” because it was contingent upon annual funding. 716 filed the $37 million claim July 8 shortly after the Legislature approved $12.5 million in the state capital budget to purchase a Midtown Anchorage office building once owned by Wells Fargo for its new LIO, a deal brokered by Stevens. Amy Slinker, a spokeswoman for the real estate group, wrote in a formal statement: “It’s not exactly breaking news that the claim was denied by the same procurement officer who oversaw the breaking of the lease in the first place. 716’s attorneys are reviewing the decision and we expect to exercise the appeal procedures that are provided by state law.” The claim will likely go before state Administration Commissioner Sheldon Fisher, but could eventually wind up in state Superior Court. To further his point on appropriation authority, Stevens referenced a “nearly identical situation" in Maine, in which the Maine Department of Human Services signed a 10-year lease with a construction firm that was to erect office space to the department’s specifications. The Maine Legislature then voted not to fund the lease after the state fell on hard times. A suit from the contractor followed, according to Stevens’ decision. “Maine’s highest court rejected that claim, noting that both the Maine Constitution and statutory law required that the lease be subject to funding by the Legislature. The court concluded by noting that governmental entities have ‘an obligation to communicate to the Legislature appropriate ways to reduce state spending’ and that the exercise of the non-appropriation authority followed from that. Other states have similarly confirmed the propriety of the Legislature’s exercise of the non-appropriation power,” he wrote. The council began to bow to public pressure last December when it first voted not to fund the lease unless a cheaper solution could be found. A lawsuit filed in March 2015 against Legislative Affairs and 716 by Jim Gottstein, an Anchorage attorney and owner of the Alaska Building adjacent to the LIO, claimed the lease did not meet state procurement laws and brought the lease to the forefront of public notice. Ultimately, the Legislature decided it couldn’t afford the $3.3 million per year lease while the state grapples with multi billion-dollar budget deficits, despite signing the deal for the office space custom-built for it less than two years prior. A state Superior Court judge ruled the lease invalid in March because the Legislative Council, when Anchorage Rep. Mike Hawker was chair in 2013, did not follow state law in drafting and approving the lease and construction plan for the $44.5 million building. In May, an attorney for Jacksonville, Fla.-based EverBank, which consolidated the two construction loans for the LIO and holds the current note on the building, warned in a letter to LAA that it would sue the state for violating the subordination and non-disturbance agreement signed in late 2014 by Hawker, the bank, and an internal attorney for the Legislature. The bank contends the SNDA is its contract with the Legislative Affairs Agency that binds the agency to its obligations associated with the building regardless of extenuating circumstances. EverBank made a $28.6 million long-term loan to 716 after work on the building was finished to reconcile the construction loan on the renovation, a common financing practice in development projects. On July 16, LAA Executive Director Pam Varni sent a notice of termination to 716, citing the non-appropriation clause in the contract and not the judge’s ruling. Legislators have until Oct. 16 to vacate the building, though most moving occurred in late September. Stevens also contends the claim for $37 million — the amount 716 invested in the project — exceeds what the group would be owed even if the state were on the hook. That’s because the Legislature paid rent for more than two years, starting in July 2014, and 716 could still find new tenants or sell the building. “If 716 is claiming that it should be entitled to $37 million in damages and still be permitted to keep the building, this would appear to be double counting,” the decision states. 716’s manager and building co-owner Pfeffer has insisted the space was built with unique features, such as soundproof walls and doors, to meet the Legislature’s needs and therefore cannot be compared to traditional office space or viably rented at normal market rates for commercial offices, a position supported by project evaluations commissioned by the Alaska Housing Finance Corp. on behalf of LAA before and during construction. The Legislature contributed $7.5 million to the project for tenant improvements. Finally, 716 should have heeded Gottstein’s warnings that the project violated state procurement code before construction began and it would likely end up in court, according to Stevens. “Immediately after the lease was signed in 2013, Mr. Gottstein informed 716 of his concern that the lease did not comply with AS 36.30.083 [state procurement law] because it was not the subject of competitive bidding and that he was considering legal action. 716 was therefore put on notice both that there was a serious question about the validity of the lease and that Mr. Gottstein, a lawyer, planned to bring suit on the issue,” he wrote. “Rather than seeking clarity about the lease’s validity through the court system, 716 chose to spend tens of millions of dollars (and take $7.5 million from LAA for tenant improvements) on renovations to the building.” Elwood Brehmer can be reached at [email protected]


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