AIDEA buying Pentex; board approves $54 million acquisition

The Alaska Industrial Development and Export Authority will buy a Fairbanks natural gas distribution utility in the hopes of streamlining efforts to bring gas to the Interior.

The board of the public corporation approved a resolution June 11 allowing AIDEA to invest $54 million to acquire Pentex Alaska Natural Gas Co. LLC. The sale includes assets of the company, including its distribution subsidiary Fairbanks Natural Gas LLC.

Although AIDEA is touting immediate cost savings, the intention of the purchase is to quickly “transition” Fairbanks Natural Gas to a “local control entity,” such as the municipal Interior Gas Utility or the cooperative Golden Valley Electric Association.

The acquisition is expected to close by the end of July.

As part of the deal, AIDEA intends to sell the Pentex subsidiaries Titan Alaska LNG LLC and Arctic Energy Transportation LLC to the Hilcorp subsidiary Harvest Alaska LLC for $15.5 million. The sale is expected to close sometime in the third quarter.

“We expect the Pentex acquisition to be a short-term strategic investment that can play a significant role in helping achieve long-term success for the Interior Energy Project,” AIDEA Executive Director John Springsteen said in a statement. “This acquisition will promote an integrated gas distribution system that can be built and operated in a more efficient manner for the benefit of Interior Alaska residents and businesses.”

AIDEA made a point of describing the acquisition as a “temporary” measure that will better integrate existing efforts to expand the gas distribution grid throughout the Interior.

With its access to cheaper capital unavailable to private companies, AIDEA believes it can reduce costs for existing Fairbanks Natural Gas customers by some 13.3 percent this coming winter. AIDEA believes a consolidated distribution system could eventually save as much as $1.8 million annually in operational efficiencies. “The ultimate goal of this transition will be a single, locally controlled utility serving the Interior,” Springsteen said.

AIDEA expects to complete this transition within two years and earn approximately $2.91 million in the process. That would translate to a 5.06 percent rate of return.

The deal will cut the existing Pentex operation in half.

Currently, through its various subsidiaries, Pentex liquefies Cook Inlet natural gas at a facility in Point MacKenzie and trucks it to Fairbanks for storage and distribution.

If all the components of the deal close as expected, Harvest Alaska will take over the liquefaction and trucking operations through its acquisition of Titan and Arctic Energy Transportation, leaving AIDEA to focus on storage and distribution in Fairbanks.

As a public utility, Fairbanks Natural Gas will no longer be subject to regulation by the Regulatory Commission of Alaska. Instead, AIDEA will adopt rate-setting procedures.

This further zigzags the twisted history of the Interior natural gas market.

After a contracting hiccup in Cook Inlet nearly cut off supplies to Fairbanks in late 2006, regulators required Fairbanks Natural Gas to find an alternative source of natural gas.

The utility negotiated a gas supply agreement with a North Slope operator in 2008. But to make use of the contract, the utility needed to build an expensive liquefaction plant.

Fairbanks Natural Gas sought public assistance to fund the project. Instead, the Parnell administration launched the Interior Energy Project. The public-private partnership would use grants, bonds and loans to finance an LNG trucking operation from the North Slope.

As the lead agency in the project, AIDEA ultimately selected the international infrastructure firm MWH America Inc. to be its private sector partner for the Interior Energy Project. In doing so, it passed over bids by Pentex and by Spectrum Alaska LLC.

At the same time Pentex was facing competition for the upstream portion of its project, Fairbanks Natural Gas also faced competition for the downstream portion of the project.

Fairbanks Natural Gas asked regulators to expand its existing service area in the city of Fairbanks to include much of the Fairbanks North Star Borough. Expecting to soon become a large monopoly, the utility voluntarily accepted rate regulation. The Regulatory Commission of Alaska had previously exempted the company from rate regulation to help it better compete against the unregulated fuel oil companies so dominant in Fairbanks.

Annoyed with the slow pace of Fairbanks Natural Gas expansion in the region, the three municipalities in the Fairbanks North Star Borough jointly formed a competing utility, called the Interior Gas Utility. They asked regulators for a competing service area. The debate between the two utilities was unusually heated and at times veered into ugliness.

The RCA ultimately rejected the Fairbanks Natural Gas application in favor of the Interior Gas Utility application. That left Fairbanks Natural Gas without a liquefaction plant, without an opportunity to expand and with an expensive rate case to swallow.

For a time it seemed the Fairbanks North Star Borough would be served by two utilities.

Through the grant-making portion of the Interior Energy Project, AIDEA funded Interior Energy Project distribution pipelines and an expansion of Pentex’s storage capacity.

Toward the end of 2014, Pentex announced plans to sell its liquefaction subsidiary to Harvest Alaska. It also sought regulatory approval for a 10-year contract with Hilcorp, which would limit the amount of natural gas Fairbanks Natural Gas needed from the North Slope.

In early 2015, the deal between AIDEA and MWH fell through. The problem was largely about cost. MWH questioned whether it could hit the pricing target AIDEA desired.

AIDEA saw the acquisition of Pentex as a way to braid the various frayed threads of the Interior Energy Project by making it easier to create an integrated grid in the Interior.

- Eric Lidji