FAIRBANKS NORTH STAR BOROUGH ORDINANCE NO

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1 By: Luke T. Hopkins, Mayor Introduced: 03/13/2014 Advanced: 03/13/2014 Amended: 03/27/2014 Adopted: 03/27/2014 Immediate Reconsideration Failed: 03/27/2014 Adopted: 03/27/2014 FAIRBANKS NORTH STAR BOROUGH ORDINANCE NO AN ORDINANCE AUTHORIZING A LINE OF CREDIT OF UP TO $7.5 MILLION TO THE INTERIOR ALASKA NATURAL GAS UTILITY FROM THE GENERAL FUND WHEREAS, in Ordinance No , the Interior Alaska Natural Gas Utility (IGU) was created by the Fairbanks North Star Borough (Borough) as a wholly-owned entity of the Borough effective November 15, 2012 and IGU is a discretely-presented component unit of the Borough for purposes of financial reporting in accordance with generally accepted accounting principles; and WHEREAS, in April 2013, IGU applied for a certificate of public convenience and necessity to distribute natural gas to the North Pole and medium-density population areas of the Borough; and WHEREAS, on December 20, 2013, the Regulatory Commission of Alaska granted IGU s application for a new certificate of public convenience and necessity to distribute natural gas to the North Pole and medium-density population areas of the Borough, with the condition that IGU maintain a minimum five-day liquefied natural gas storage reserve in Fairbanks based on the projected daily demand of non-interruptible customers; and WHEREAS, on January 14, 2014, the Alaska Industrial Development and Export Authority (AIDEA) Board of Directors (Board) selected a group headed by MWH Americas, Inc. (MWH) as the commercial participant to develop a North Slope liquefaction plant to produce liquefied natural gas (LNG) for delivery to the Fairbanks North Star Borough via trucking, with partial public financing made possible by Senate Bill 23 of the 2013 Alaska State Legislature; and WHEREAS, in the report on its commercial participant selection, the AIDEA Board stated that in order for the LNG plant to be financially viable, the core space-heating demand market must be developed and market viability of the plant is markedly improved by securing other utility and industrial customers before construction, including the ability of Page 1 of 5

2 the commercial participant (MWH) to secure long-term LNG take-or-pay sales agreements with Fairbanks Natural Gas (FNG), IGU, and Golden Valley Electric Association (GVEA); and WHEREAS, near-term capitalization requirements to be met by the Borough range from $3.0 million to $7.5 million, but it is anticipated that IGU will not require all of these funds in a lump sum in advance, but rather over a period of time as needs arise; and WHEREAS, the citizens of the Borough pay some of the highest utility costs in the nation; and WHEREAS, current modeling predicts air quality in the Borough s nonattainment area can reach the U.S. Environmental Protection Agency s (EPA) 24-hour PM 2.5 standard between now and 2019 (presuming EPA grants deadline extensions) with the expansion of natural gas usage for space heating into the North Pole and mediumdensity population areas of the Borough; and WHEREAS, it is in the best interest of the citizens of the Fairbanks North Star Borough for the Borough government to financially assist its wholly-owned entity, IGU, in carrying out its purpose of facilitating and providing affordable natural and/or manufactured gas to the largest number of people in the Borough in the shortest amount of time; and WHEREAS, at June 30, 2013, the audited, unassigned fund balance of the Borough s General Fund - Operating was $21,874,921; after Assembly appropriations since July 1 and with the anticipated receipt resulting from the recent Supreme Court ruling on the 2006 TAPS valuation, the estimated balance will be $26,500,000; unassigned fund balance is used for cash flow requirements and can be reduced by future Assembly actions; and WHEREAS, the Borough has the financial capacity to establish a line of credit to IGU to supply a portion of IGU s capitalization needs, subject to certain conditions; and WHEREAS, while funds are loaned to IGU, the Borough will be unable to invest those funds in interest-bearing accounts or instruments until the loaned funds are repaid; hence, IGU should pay the Borough a rate of interest approximately equivalent to what the Borough will forego, which will vary in response to market conditions over the period of the line of credit agreement; and WHEREAS, the federal funds rate is a readily available and publically disseminated interest rate that is approximately equivalent to the rate of interest the Borough would forego; and WHEREAS, in approving this ordinance the Assembly recognizes that, even with protections in place, risk of non-repayment exists with any loan; and Page 2 of 5

3 WHEREAS, it is the intent of the Assembly that the passage of this ordinance does not create any future liability beyond the scope of this line of credit authorization. NOW, THEREFORE, BE IT ORDAINED by the Assembly of the Fairbanks North Star Borough: Section 1. Classification. This ordinance is not of a general and permanent nature and shall not be codified. Section 2. Authorization and Purpose of the Intra-Entity Line of Credit. The Mayor is authorized to enter into a loan agreement with IGU, subject to the purpose, terms and conditions imposed by this ordinance. The proceeds of the loan may be used to pay for short-term operations, capital expenses, or to provide capital with which IGU can provide security for committing to, or make payments on, a take-or-pay agreement for LNG. Section 3. Terms and Conditions of the Intra-Entity Line of Credit Agreement. The following shall be the minimum terms and conditions of the intra-entity line of credit. A. Line of Credit Amount: The line of credit shall not exceed $7,500,000. The amounts made available to IGU will be determined by the Chief Financial Officer based on his/her judgment of the availability of funds in the General Fund Operating without jeopardy or harm to the Borough, the status and timing of the Superior Court of Alaska s release of the Borough s funds from the Court s account for the 2006 TAPS valuation, and any other directly relevant considerations. Such amounts may be increased up to the maximum amount as circumstances change and uncertainties diminish. This line of credit is revolving in nature until its expiration. Once authorized, funds will be available for use based on the terms of the line of credit agreement for the full period of that authorization. B. Financing Authorizations: Financing requests by IGU must state a specific amount, must be within the line of credit limit, and must include a description of the method of repayment. The Chief Financial Officer of the Borough, with the approval of the Mayor, may limit, delay, or deny financing from the line of credit if the authorization of such funds has the potential to negatively impact Borough operations based on the considerations listed in A., above. The Chief Financial Officer shall notify the assembly of all approved authorizations of funds. C. Interest: Interest shall accrue on the unpaid principal amounts from the date each withdrawal was actually paid to IGU, using a 365-day year and the actual number of days outstanding. The interest rate shall be the federal funds rate on the date of the withdrawal, adjusted annually on January 1 to the annual rate for the preceding year. D. Repayment: Each withdrawal amount, along with its accrued interest, shall be repaid within three (3) years following the date the withdrawal was actually paid to IGU. Payments shall be applied first to accrued unpaid interest, if any, and then to principal. The specifics of the repayment schedule shall be determined by the Chief Financial Officer of the Borough and approved by the Mayor. However, payment of unpaid balances may be accelerated without penalty. E. Pledge of IGU Resources: Timely repayment of the line of credit withdrawals and payment of accrued interest, in accordance with the line of credit agreement, shall have precedence over all other unsecured debt of IGU. IGU pledges, for as long as there Page 3 of 5

4 are outstanding amounts owed under the line of credit agreement, that it will make provision for the payment of the principal and interest in its annual budget as the same shall become due. IGU will seek approval to use anticipated State grants and long-term loans to repay the Borough and such grant and loan proceeds shall be used to pay the principal of, and interest on, the line of credit withdrawals if receipts from gas sales are not sufficient to make the required payments. F. Assignment Prohibition. The line of credit may not be assigned by IGU without the written consent of the Mayor. G. Expiration of the Line of Credit: No withdrawal requests may be made by IGU after June 30, All repayments of withdrawals and accrued interest shall be made by June 30, The Borough may cancel all or any part of the unauthorized amounts remaining in the line of credit if the financial position of IGU has, in the opinion of the Borough, suffered a materially adverse change or if continuation impairs the Borough s ability to meet its financial, legal, or fiduciary obligations. Section 4. General Fund Authorization. Up to $7,500,000 of equity in central treasury cash of the Borough General Fund Operating is authorized to be loaned to IGU, subject to the purpose, terms and conditions described in Sections 2 and 3 above and more fully described in the line of credit agreement. No appropriation is made for this balance-sheet only transaction. Equity in central treasury cash shall be reduced for each line of credit withdrawal and a receivable from IGU shall be recognized for a like amount. Section 5. Classification for Constraints of Fund Balance in the General Fund Operating. In accordance with generally accepted accounting principles: A. Committed Fund Balance IGU Line of Credit will be recorded in the amount of $7,500,000 and Committed Fund Balance Pipeline Valuation Deposit shall be reduced by a like amount. B. For each outstanding IGU withdrawal under the line of credit agreement: 1. a corresponding amount shall be recorded as Committed Fund Balance Intra-Entity Loan Receivable and 2. Committed Fund Balance IGU Line of Credit shall be reduced by a like amount. Section 6. Contingencies. This ordinance is contingent on the following: A. Participation of AIDEA in IGU s activities with at least $7.5 million in funding; B. AIDEA s approval for IGU to use its funding to repay letter of credit withdrawals and accrued interest for allowable project expenses; and C. Execution of a line of credit agreement between the Borough and IGU. Section 7. Expiration of General Fund Authorization. The authorization in Section 4 shall expire no later than June 30, Section 8. Effective Date. This ordinance is effective at 5:00 p.m. on the first Borough business day following its adoption. Page 4 of 5

5 PASSED AND APPROVED THIS 27 th DAY OF MARCH, Karl Kassel Presiding Officer ATTEST: Nanci Ashford-Bingham, MMC Borough Clerk Ayes: Golub, Sattley, Lawrence, Hutchison, Dodge, Davies, Kassel Noes: Roberts Excused: Dukes Page 5 of 5