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AIDEA approves new IGU bonding, conduit bonds up to $78 million
Alan Bailey for Petroleum News
On March 4 the board of the Alaska Industrial Development and Export Authority approved the issuance of up to $78 million in conduit revenue bonds for the Interior Gas Utility. IGU supplies gas to customers in the Fairbanks area, using liquefied natural gas manufactured at the Titan LNG facility near Point Mackenzie on Cook Inlet. The bonding comes as part of the Interior Energy Project, an AIDEA sponsored project designed to bring increased affordable supplies of natural gas to the Fairbanks region, to alleviate the cost of energy in the region and to address severe air quality problems during the winter - part of the concept is to encourage residents to use gas furnaces rather than wood stoves to heat their homes. A plentiful supply of gas can also encourage businesses to switch from the use of fuel oil to gas for heating buildings.
No state or AIDEA risk Under the conduit bonding arrangements, AIDEA will authorize the issue and sale of the bonds, in effect as government bonds, while IGU will be fully responsible for all of the costs of servicing the bonds, including interest payments to bondholders - neither AIDEA nor the State of Alaska will have any financial obligation relating to the bonds.
The $78 million in authorized bonding represents a maximum bonding amount, to allow some wiggle room to account for financial uncertainty. Essentially, IGU is seeking $60 million in funding, up to $10 million of which would be used for connecting new gas customers to the gas distribution system in the Fairbanks North Star Borough, with the remainder being used for the construction of an initial expansion to the Titan LNG facility. Adding in some costs associated with the bonding arrangements would likely push the total bonding requirement to around $72.5 million.
Staged Titan expansion The current Titan plant is referred to as Titan 1. IGU envisages a potential two-stage plant expansion: Titan 2 and Titan 3. The utility has commissioned a front-end engineering and design project for the expansions and has yet to make a final investment decision for Titan 2. The question of whether to proceed to Titan 3 will then depend on gas demand growth in Fairbanks. The newly approved bonding arrangements will encompass the funding of Titan 2, including a new 100,000 gallon per day LNG production system, two 75,000-gallon LNG storage tanks, an LNG loading rack and an integrated power generation plant.
Dan Britton, IGU general manager, told the AIDEA board that currently Titan 2 is at around a 65% design level and that AIDEA is conducting a budget and estimate review for the project.
In December IGU completed the construction of a new 5.25 million-gallon LNG storage tank in central Fairbanks and put the tank into operation. The utility is also constructing LNG storage facilities at North Pole, to enable a gas feed into a previously constructed gas distribution network there. The establishment of greatly expanded LNG storage capabilities in Fairbanks will enable the warehousing of summer produced LNG, thus supporting some expansion of the IGU customer base prior to any Titan expansion.
State funding During the AIDEA board meeting Britton reviewed the AIDEA related funding for the IEP, as approved in 2015 by the state Legislature. The Legislature approved a $57.5 million capital appropriation for the project, $15 million of which was subsequently spent investigating an initial concept involving the manufacture of LNG on the North Slope. Most of the remainder of the appropriation was used for part of the purchase cost of Pentex Natural Gas Co., which IGU purchased from AIDEA in 2018. Pentex owns the Titan plant, the trucking operation for shipping LNG to Fairbanks and gas utility Fairbanks Natural Gas - the purchase has allowed IGU and FNG to combine as a single Fairbanks gas utility.
The Legislature also approved the issue by AIDEA of $125 million in Sustainable Energy Transmission and Supply, or SETS, bonding, a little over $20 million of which was used to cover the remainder of the Pentex purchase cost. Some SETS funding was used to expand the gas distribution networks in central Fairbanks and North Pole in 2015, and for the completion of the new LNG storage tank in Fairbanks. Some remaining SETS funding will be used for expansion of the gas supply facilities in North Pole, Britton explained.
Bond funding limits Last year AIDEA authorized an additional $14 million in SETS funding, to allow for the completion of LNG storage facilities at North Pole and for the installation of gas supply services for new customers. However, since the Legislature’s original enabling legislation set an upper limit of $275 million in SETS and other bonding, the additional SETS funding has caused a counterbalancing reduction in the amount of other bonding that can be raised, reducing the bonding limit from $150 million to $136 million, Britton explained. The bonding now approved by AIDEA presumably represents the first tranche of that potential $136 million.
Britton expressed his confidence in projected rates of conversion to gas use by potential IGU customers. The conversion rate forms a critical component of the project economics. A prime purpose of state assistance with the project is to enable some financial breathing room, while Fairbanks gas demand grows, Britton commented.
“This action taken by AIDEA is an important step to the realization of the Interior Energy Project and bringing cleaner, more affordable energy to Alaskans in Fairbanks and North Pole,” said Gov. Mike Dunleavy, in response to the AIDEA announcement.
And AIDEA board chair Dana Pruhs expressed his support.
“We are very pleased to authorize this bonds issuance in continued support of the Interior Energy Project,” Pruhs said. “This reflects AIDEA’s ongoing dedication in working with the Legislature and the Administration to bring affordable natural gas to Interior Alaska.”
- ALAN BAILEY
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