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Crossing the in-state gas finance barrier ANGDA study is highlighting some of the natural gas procurement issues that will likely face Alaska utilities Alan Bailey Petroleum News
It’s one thing for Alaska energy utilities to need North Slope gas to maintain gas and electricity supplies for residential and commercial customers. It’s quite another thing to bridge the cash flow gap between the monthly revenue stream from customer payments and the kind of massive multi-year financial commitment needed to book gas transportation space on a future North Slope gas line.
Or at least that has been the view of the Alaska Natural Gas Development Authority for some time now.
To ensure in-state supplies of gas through off-take points on a North Slope gas line, someone will need to pony up for long-term shipping commitments in the pipeline, ANGDA CEO Harold Heinze told Petroleum News April 14. The Alaska utilities could be faced with a financial commitment as high as $5 billion, Heinze said.
“It’s going to be a big deal,” Heinze said.”Even in this state $5 billion is a lot of money.”
Aggregator role Heinze thinks that ANGDA may have a future role as a financial intermediary or aggregator, in which ANGDA would sell bonds based on the utilities’ monthly cash flow to raise financing for those long-term commitments. As a political subdivision of the state, ANDGA would enjoy a high level of creditworthiness and would as a consequence be able to sell the necessary bonds at low rates of interest, Heinze said.
On the other hand, ANGDA has suspected that individual Alaska utilities lack the financial capability to do this type of funding by themselves. And to test that theory, the authority commissioned consultants Mark Foster and Mary Ann Pease to assess the utilities’ creditworthiness, using publicly available information.
At the ANGDA board meeting on April 9 Pease presented some preliminary findings from the assessment — using actual utility data through 2006 and forecast data for 2007, the consultants have estimated utility revenues and costs.
For the electric utilities, fuel costs dominate the cost side of the financial equation. In the Cook Inlet region, gas costs equate to 5 cents per kilowatt hour of the overall electricity cost, while in Fairbanks the costs of fuels such as diesel are much higher, Pease said.
On the other hand, the gas utilities pass the cost of gas through to their customers and make a regulated return on their investments in the gas transmission network.
Costs and revenues Pease exhibited graphs of estimated revenues and costs for both the electric utilities and the gas utilities. Those graphs showed costs coming in right against revenues, with no wiggle room for extra costs factors.
Add in new capital projects such as gas storage facilities, a bullet gas line from the North Slope or Chugach’s planned new gas-fired power and costs exceed revenues. So, costs such as those would inevitably drive hikes in gas or electricity rates to maintain adequate revenue streams, the analysis suggests.
And there’s also the question of likely future increases in Cook Inlet gas prices.
“We add that component on and all of a sudden we have a huge piece of this that needs to be dedicated to additional revenue, additional rates,” Pease said.
However, Pease also commented that the fact that a utility such as Enstar is privately owned leads to uncertainty about the financing of additional costs and also leads to a tension in balancing the needs of utility investors with the aims of the government regulators.
“There’s no problem with them (the gas utilities) supposedly going and getting additional money on a business case scenario,” Pease said. But it would be interesting to know how the regulators would view that, she said.
At the same time, gas supplies in Southcentral Alaska have become tight. Supply contracts are becoming shorter in term. And Chugach Electric Association has recently told the Regulatory Commission of Alaska that it doesn’t have contracted gas supplies beyond 2010 and 2011. Projections in possible gas price hikes beyond then point to a total overall electricity cost impact of $40 million to $140 million to CEA ratepayers, Pease said.
Problem confirmed The evidence of tight gas supplies and tight financing for the utilities vindicates ANGDA’s concerns that an aggregator would be needed for future North Slope gas supplies, Heinze said.
“The creditworthiness study kind of confirmed that probably was a very reasonable view,” he said. “… One of the reasons for the credit worthiness study was ‘should we take it for granted that these people can cover that kind of (financial) commitment or not?’ And what we concluded was ‘no.’”
Heinze emphasized that this conclusion does not mean that the utilities are financially weak — the utilities are well capable of operating their current businesses and, with appropriate rate increases, could finance modest sized projects. Problems are likely, however, when it comes to the massive, long-term commitments required to obtain North Slope gas.
“They are not strong enough to take on that commitment all by themselves,” Heinze said. “… It is reasonable for us to look at ways to help them be able to finance those long-term commitments.”
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